SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under Rule 14a-12
Radiance Medical Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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RADIANCE MEDICAL SYSTEMS, INC.
13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92618
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April ___, 2002
Dear Stockholder:
I am pleased to invite you to attend a special meeting of stockholders of
Radiance Medical Systems, Inc. on:
Thursday, [May 29], 2002
10:00 a.m.
13900 Alton Parkway
Suite 122
Irvine, California 92618
THIS IS A VERY IMPORTANT MEETING THAT AFFECTS YOUR INVESTMENT IN RADIANCE.
At this meeting you will be asked to vote on two proposals:
1. To approve the issuance of Radiance common stock in exchange for all
outstanding shares of the capital stock of Endologix, Inc. in the related merger
between RMS Acquisition Corp., a wholly-owned subsidiary of Radiance, and
Endologix. In the merger, Radiance will pay the stockholders of Endologix $0.75
in cash and one share of Radiance common stock for each share of common stock of
Endologix. In addition, each Endologix stockholder may receive a milestone
payment upon the occurrence of U.S. regulatory approval of the Endologix
product. The total number of shares of Radiance common stock to be issued to the
Endologix stockholders at the closing of the merger shall not exceed 11,159,052
in the aggregate, and the aggregate amount of cash to be issued shall not exceed
$8,369,289. Assuming the regulatory approval milestone is met on the earliest
scheduled date, we will pay an additional $5,579,526 to Endologix stockholders
in either cash or stock, at our option. If we decide to pay the milestone
payment in the form of Radiance common stock, the exact number of shares that
would be issued will depend on the value of Radiance common stock at the time
the milestone is achieved.
An independent committee of Radiance's board of directors composed of
Maurice Buchbinder, M.D., William G. Davis and Edward M. Leonard, has determined
that the merger is fair to you and in your best interests. In addition, the
independent committee has received a written opinion from A.G. Edwards & Sons,
Inc. to the effect that the merger consideration to be received by Radiance is
fair from a financial point of view to Radiance. The independent committee has
approved the merger agreement and the merger unanimously, and recommends that
you vote to approve the issuance of Radiance common stock and the related
merger.
2. To approve a change of Radiance's name from Radiance Medical Systems,
Inc. to Endologix, Inc.
Because of the significance of the merger, your participation in the
special meeting, in person or by proxy, is especially important. The issuance of
the Radiance common stock and related merger cannot be completed unless the
stockholders of Radiance approve it. Whether or not you plan to attend the
meeting in person, we urge you to mark, sign and return the enclosed proxy card
promptly in the enclosed postage-paid envelope to ensure that your shares of
Radiance common stock will be represented at the special meeting. If you do
attend, you will, of course, be able to vote your shares in person.
Thank you, and we look forward to seeing you at the special meeting.
Very truly yours,
Jeffrey H. Thiel
Chief Executive Officer and President
2
RADIANCE MEDICAL SYSTEMS, INC.
13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92618
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TO THE STOCKHOLDERS OF RADIANCE MEDICAL SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD
[MAY 29], 2002
10:00 A.M.
13900 ALTON PARKWAY
SUITE 122
IRVINE, CALIFORNIA 92618
The Board of Directors of Radiance Medical Systems, Inc. asks you to attend
this special meeting of Radiance stockholders to vote on the following:
1. Proposed Issuance of Stock and Related Merger. You will be asked to
vote on the proposed issuance of Radiance common stock and cash in exchange for
the outstanding capital stock of Endologix, Inc., in the merger between
Radiance, RMS Acquisition Corp. and Endologix.
2. Change of Name. You will be asked to vote on a proposal to approve and
adopt an amendment to the certificate of incorporation of Radiance to change the
name of Radiance from Radiance Medical Systems, Inc. to Endologix, Inc.
3. Other Business. You may be asked to consider and vote on any matters
that properly come before the meeting or any adjournments or postponements of
the meeting.
Only stockholders who hold their stock at the close of business on [April
29, 2002] are entitled to notice of and to vote at the special meeting or any
adjournments or postponements of the meeting.
By Order of the Board of Directors,
RADIANCE MEDICAL SYSTEMS, INC.
Jeffrey H. Thiel
Chief Executive Officer and President
April ___, 2002
Irvine, California
WE INVITE YOU TO ATTEND THE SPECIAL MEETING BECAUSE IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. IF YOU ATTEND
THE MEETING, YOU MAY PERSONALLY VOTE, WHICH WILL REVOKE YOUR SIGNED PROXY. YOU
MAY ALSO REVOKE YOUR PROXY AT ANY TIME BEFORE THE MEETING EITHER IN WRITING OR
BY PERSONAL NOTIFICATION.
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RADIANCE MEDICAL SYSTEMS, INC.
13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92618
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PROXY STATEMENT
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SPECIAL MEETING OF STOCKHOLDERS
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TO BE HELD [MAY 29], 2002
The Boards of Directors of Radiance Medical Systems, Inc. and Endologix,
Inc. have agreed to merge Endologix with a wholly-owned subsidiary of Radiance
("Sub"), which will result in Endologix becoming a wholly-owned subsidiary of
Radiance. Radiance will pay the stockholders of Endologix $0.75 in cash and one
share of Radiance common stock for each share of common stock of Endologix. In
addition, each Endologix stockholder may receive a milestone payment upon the
occurrence of regulatory approval of the Endologix product. The total number of
shares of Radiance common stock to be issued to the Endologix stockholders at
the closing of the merger shall not exceed 11,159,052 in the aggregate, and the
aggregate amount of cash to be issued shall not exceed $8,369,289. Assuming the
regulatory approval milestone is met on the earliest scheduled date, we will pay
an additional $5,579,526 to Endologix stockholders in either cash or stock, at
our option. If we decide to pay the milestone payment in the form of Radiance
common stock, the exact number of shares that would be issued will depend on the
value of Radiance common stock at the time the milestone is achieved.
The board of directors of Radiance is proposing one additional item for
approval by the stockholders at this special meeting, which only would be
effective upon completion of the merger. The board of directors is proposing
that Radiance adopt an amendment to its certificate of incorporation to change
its name from Radiance Medical Systems, Inc. to Endologix, Inc.
If the stockholders approve the issuance of Radiance common stock and the
related merger without also approving the change of name, the issuance and
merger will be completed and Radiance will adopt Endologix, Inc. as a name under
which it does business but its corporate name will remain Radiance Medical
Systems, Inc. If the issuance of the Radiance common stock and related merger
are not approved but stockholders approve the change of name, the approval will
not be effective and no change of name will occur.
The issuance of Radiance common stock and the related merger, and the
change of name, cannot be completed unless Radiance stockholders approve the
proposals. The board of directors of Radiance has scheduled a special meeting
for Radiance stockholders to vote on the proposals as follows:
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Thursday, [May 29], 2002
10:00 a.m.
13900 Alton Parkway
Suite 122
Irvine, California 92618
Radiance intends to mail this proxy statement and the accompanying proxy
card on or about [April ___], 2002 to all stockholders entitled to vote at the
special meeting. Radiance's principal executive offices are located at 13900
Alton Parkway, Suite 122, Irvine, California 92618. The telephone number at that
address is (949) 457-9546.
THE DATE OF THIS PROXY STATEMENT IS [APRIL ___], 2002.
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TABLE OF CONTENTS
PROXY STATEMENT......................................................................... 1
SUMMARY................................................................................. 4
The Companies................................................................... 4
The Merger...................................................................... 7
Name Change from Radiance to Endologix.......................................... 11
INFORMATION CONCERNING SOLICITATION AND VOTING.......................................... 12
Date, Time and Place of Special Meeting......................................... 12
Purpose of the Special Meeting.................................................. 12
Record Date; Shares Outstanding and Entitled to Vote; Quorum.................... 12
Vote Required................................................................... 12
Voting of Proxies; Revocability of Proxies...................................... 13
Solicitation of Proxies and Expenses............................................ 13
Forward-Looking Statements...................................................... 14
ADDITIONAL INFORMATION.................................................................. 14
PROPOSAL NO. 1.......................................................................... 15
General......................................................................... 15
Background of the Merger........................................................ 15
Radiance's Reasons for the Merger; Recommendation of Radiance's
Independent Committee of the Board of Directors................................. 18
Opinion of Radiance's Financial Advisor......................................... 20
THE MERGER AGREEMENT.................................................................... 24
Structure; Effective Time....................................................... 24
Merger Consideration............................................................ 24
Form of Consideration........................................................... 26
Other Documents Related to the Merger........................................... 26
Options......................................................................... 27
Representations and Warranties.................................................. 27
Additional Agreements........................................................... 28
Officers and Directors.......................................................... 28
Covenants....................................................................... 28
Conditions to Closing........................................................... 29
Indemnification................................................................. 29
Termination; Amendment; Expenses................................................ 30
Accounting Treatment of Transaction............................................. 31
Certain Income Tax Consequences................................................. 31
Federal Securities Law Consequences; Registration Right; Lock-Up................ 31
Nasdaq National Market Listing.................................................. 31
Appraisal or Dissenters' Rights................................................. 31
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Regulatory Approval............................................................. 31
Interests of Radiance's Officers and Directors in the Merger.................... 31
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY........................................ 34
BUSINESS OF RADIANCE.................................................................... 35
Introduction.................................................................... 35
Industry Background............................................................. 36
Market Opportunity.............................................................. 38
Products........................................................................ 39
Clinical Trials................................................................. 40
Clinical Trials of Drug Coated Stents........................................... 41
Manufacturing................................................................... 41
Marketing and Sales............................................................. 42
Patents and Proprietary Information............................................. 43
Competition..................................................................... 43
Third-Party Reimbursement....................................................... 44
Government Regulation........................................................... 45
Product Liability............................................................... 47
Employees....................................................................... 48
Research and Development........................................................ 48
Properties...................................................................... 48
Legal Proceedings............................................................... 48
BUSINESS OF ENDOLOGIX................................................................... 49
Introduction.................................................................... 49
Clinical Overview............................................................... 49
Market Opportunity.............................................................. 50
Endologix's Solution............................................................ 51
Endologix's Strategy............................................................ 53
Products........................................................................ 54
Sales and Marketing............................................................. 54
Reimbursement................................................................... 55
Competition..................................................................... 55
Patents......................................................................... 56
Facilities and Employees........................................................ 57
Legal Proceedings............................................................... 57
Market for Capital Stock; Dividends............................................. 57
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION................................. 58
Radiance Medical Systems, Inc. Selected Historical Financial Data............... 58
Endologix, Inc. Selected Historical Financial Data.............................. 60
Unaudited Pro Forma Combined Condensed Consolidated Financial Information....... 61
COMPARATIVE PER SHARE DATA (UNAUDITED).................................................. 66
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RADIANCE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULT
OF OPERATIONS........................................................................... 67
Overview........................................................................ 67
Results of Operations........................................................... 72
Liquidity and Capital Resources................................................. 75
ENDOLOGIX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 79
Overview........................................................................ 79
History......................................................................... 79
Critical Accounting Policies and Estimates...................................... 80
Results of Operations........................................................... 81
Liquidity and Capital Resources................................................. 82
Quantitative and Qualitative Disclosures About Market Risk...................... 83
SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS.................................................................. 84
VOTE REQUIRED; INDEPENDENT COMMITTEE'S RECOMMENDATION.................................. 87
PROPOSAL NO. 2.......................................................................... 87
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
FOR 2002 ANNUAL MEETING................................................................. 88
INDEPENDENT ACCOUNTANTS................................................................. 88
OTHER MATTERS........................................................................... 89
REPORT OF INDEPENDENT ACCOUNTANTS -- FINANCIAL STATEMENTS
Radiance Medical Systems, Inc................................................... F-1
Endologix, Inc..................................................................F-25
ANNEX I -- AGREEMENT AND PLAN OF MERGER
ANNEX II -- FAIRNESS OPINION
PROXY
iii
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
proposals fully and for a more complete description of the legal terms of the
issuance of Radiance common stock and related merger, you should read this
entire document and the documents we have referred you to carefully.
THE COMPANIES
RADIANCE MEDICAL SYSTEMS (PAGE )
We have developed proprietary devices to deliver radiation to prevent the
recurrence of blockages in arteries, or restenosis, following balloon
angioplasty, vascular stenting and other interventional treatments of blockages
in coronary and peripheral arteries. We incorporate our proprietary RDX
technology into catheter-based systems that deliver beta radiation to the site
of a treated blockage in an artery in order to decrease the likelihood of
restenosis. The application of beta radiation inside the artery at the site of a
blockage has proven clinically effective in inhibiting cell proliferation, a
cause of restenosis. We designed the RDX system to provide safe and effective
treatment for the prevention of restenosis without many of the disadvantages
inherent in alternative radiation delivery systems.
Recent Developments
In September and November 2001, three companies published the first
feasibility clinical study data for drug coated stents, a competing technology
to our RDX system. While our RDX system uses beta radiation to treat restenosis
resulting from angioplasty procedures, drug-coated stents have drugs that
inhibit cell proliferation to limit restenosis. Though drug-coated stent
feasibility trials were on a relatively small cohort of patients, all three
companies reported restenosis rates near or at zero percent. In addition, in
March 2002 clinical investigators for Johnson & Johnson reported positive data
involving drug coated stents that showed zero restenosis after a 12 month
period. Finally, in addition to the positive data regarding the ability of drug
coated stents to treat de novo restenosis, recently released Brazilian research
data from a small two year study of 30 patients indicates that drug coated
stents are effective in treating in-stent restenosis. Unless clinical study data
involving drug-coated stents from the pivotal, larger studies planned or in
progress show restenosis rates significantly higher than reported in pilot
studies, the market for the RDX system likely will be limited.
As a result, in order to conserve cash prior to assessing the outcome of
our BRITE II clinical study and deciding whether to make our RDX system coronary
pre-market approval, or PMA, filing with the FDA, and to position ourselves to
take advantage of strategic alternatives, we decided in September 2001 to
restructure our operations. Our restructuring plan consisted of the following:
- Discontinue marketing and manufacturing of the RDX system in Europe
and other international markets in the third quarter of 2001;
- Discontinue marketing and manufacturing of products using our Focus
technology subject to fulfillment of outstanding orders;
- Cease clinical trials for the RDX system in Japan;
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- Involuntary termination of 55 employees, which we completed in the
first quarter of 2002; and
- Search for additional commercial opportunities by evaluating
technologies outside of radiation therapy.
Future Operations
Based on the preliminary results from clinical studies involving drug
coated stents, we believe the market for our RDX system likely will be limited.
We have agreed to acquire Endologix, Inc. for the opportunity to develop an
alternative technology and to manufacture and market a medical device based on
this technology that potentially represents a more promising commercial market.
Therefore, if stockholders approve and the merger is consummated, we expect to
begin combining the operations of Endologix with ours immediately. Although we
plan to complete our remaining clinical trials involving the RDX system, unless
initial positive results from studies involving competing drug coated stent
technologies prove inaccurate, we expect that our ongoing operations following
completion of the merger primarily will be research and development of
Endologix's technology, and the production and distribution of the Endologix
product(s).
ENDOLOGIX (PAGE )
Endologix is a medical device company that designs, develops, manufactures,
markets and sells minimally invasive therapies for the treatment of
cardiovascular disease. Endologix's principal product, the PowerLink System, is
a catheter-based alternative treatment for abdominal aortic aneurysm, or AAA.
AAA is a weakening of the wall of the aorta, the largest artery of the body.
Once AAA develops, it continues to enlarge and if left untreated becomes
increasingly susceptible to rupture. The overall patient mortality rate for
ruptured abdominal aortic aneurysms is approximately 75%. AAA is the 13th
leading cause of death in the United States today.
The PowerLink System is a catheter and endoluminal graft, or ELG, system
consisting of a self-expanding stainless steel stent cage that is covered by
PTFE, a common surgical graft material. The PowerLink ELG is implanted in the
abdominal aorta, gaining access through the femoral artery. Once deployed into
its proper position, the blood flow is shunted away from the weakened, or
aneurysmal, section of the aorta, reducing pressure and the potential for the
aorta to rupture. Endologix believes that implantation of Endologix's products
can reduce the mortality and morbidity rates associated with conventional AAA
surgery.
RECOMMENDATION OF INDEPENDENT PARTIES (PAGES AND )
Because of the interest that some members of the board of directors of
Radiance have in Endologix, the board appointed a committee of independent
directors composed of Maurice Buchbinder, M.D., William G. Davis and Edward M.
Leonard, to review and approve the merger agreement and the terms of the merger.
The independent committee conducted its own analysis and considered numerous
factors in reaching its decision to recommend the merger to the board of
directors. In addition, the independent committee considered the fairness
opinion of A.G. Edwards & Sons, Inc. dated February 8, 2002. The fairness
opinion stated that subject to various matters, the consideration proposed to be
by Radiance in the merger was fair to Radiance from a financial point of view.
5
The fairness opinion of A.G. Edwards is included in this proxy statement as
Annex II, and we urge you to read it in its entirety.
INTERESTS OF RADIANCE'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE )
Several members of our board of directors and several of our officers own
Radiance common stock and/or hold stock options and, to that extent, their
interest in the merger is the same as yours. However, as set forth below, some
of the officers and directors of Radiance have interests in the merger that are
different from your interests as a stockholder. The independent committee
considered these interests in recommending and approving the merger.
- Franklin D. Brown, a director of Radiance, is also Chief Executive
Officer, and Chairman of the board of Endologix. Mr. Brown
beneficially owns 712,396 shares of Endologix common stock, 50,000
shares of Endologix Series A preferred stock, and 25,000 shares of
Endologix Series B preferred stock. Mr. Brown also holds options to
purchase 172,604 shares of Endologix common stock.
- Jeffrey H. Thiel, President and Chief Executive Officer of Radiance,
owns 16,000 shares of Endologix Series A preferred stock and
beneficially owns 8,000 shares of Series B preferred stock. Pursuant
to Mr. Thiel's employment agreement with Radiance, upon his
termination which will occur as a result of the merger, Mr. Thiel is
entitled to thirteen months' severance pay and continued benefits for
one year. Additionally, Mr. Thiel's Radiance stock options that would
have vested over the following year will vest immediately upon his
termination. Finally, Radiance also will forgive a $100,000 loan,
together with accrued interest thereon, that Radiance made to Mr.
Thiel.
- Michael R. Henson, a director and former Chairman of the board and
Chief Executive Officer of Radiance, is also a former Chairman of the
board and former Chief Executive Officer of Endologix. Mr. Henson
beneficially owns 1,123,917 shares of Endologix common stock, of which
25,000 are held by Mr. Henson's wife, 120,000 shares of Endologix
Series A preferred stock, and 10,000 shares of Series B preferred
stock. Mr. Henson also holds options to purchase 27,083 shares of
Endologix common stock.
- Gerard von Hoffmann, a director of Radiance, owns 10,000 shares of
Endologix Series B preferred stock. Mr. von Hoffman also serves as
patent counsel to both Radiance and Endologix.
- Jeffrey F. O'Donnell, Chairman of the board of directors of Radiance,
owns 40,000 shares of Endologix Series A preferred stock and 20,000
shares of Endologix Series B preferred stock.
- In recognition of their service to Radiance, the compensation
committee awarded each of William G. Davis, Edward M. Leonard and
Gerard von Hoffman an option to acquire 25,000 shares of our common
stock, which will become fully vested on completion of the merger. In
addition, the compensation committee amended an existing option to
acquire 6,000 shares of our common stock held by Mr. Davis to have an
exercise period of five years from the date we signed the merger
agreement.
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The director and officers listed above who are also stockholders and
optionholders of Endologix will receive the same merger consideration as other
stockholders and optionholders of Endologix.
All shares of Endologix preferred stock must convert prior to completion of
the merger. Also, all Endolgix options will accelerate and vest prior to the
completion of the merger, and to the extent not exercised prior to completion of
the merger, will terminate.
We urge you to read this proxy statement in its entirety for a more
complete description of the interests of the officers and directors of Radiance
in the merger. See the discussion under Proposal No. 1, "The Merger Agreement -
Interests of Radiance's Officers and Directors."
APPRAISAL OR DISSENTERS' RIGHTS (PAGE )
Stockholders of Radiance will not be entitled to appraisal or dissenters
rights.
ACCOUNTING TREATMENT (PAGE )
The merger will be accounted for as a "purchase" in accordance with
generally accepted accounting principles, which means that the assets and
liabilities of Endologix will be recorded on our books at their fair values, and
any excess of the purchase price over the fair value of Endologix's tangible net
assets, will be recorded as identifiable intangible assets and goodwill, if any.
The results of Endologix's operations will be included in our consolidated
financial statements from the date the merger is completed.
THE MERGER
We have attached the Merger Agreement to this proxy statement as Annex I.
We encourage you to read the Merger Agreement because it is the legal document
that governs the merger.
MERGER CONSIDERATION (SEE PAGE )
Radiance will pay shareholders of Endologix $0.75 in cash and one share of
Radiance common stock for each share of Endologix common stock, for an aggregate
cash consideration not to exceed $8,369,289 and an aggregate stock consideration
not to exceed 11,159,052 shares of Radiance common stock. In addition, we may
pay Endologix shareholders a milestone payment of up to $0.50 payable in cash or
stock for each share of Endologix common stock in the event U.S. regulatory
approval for its PowerLink System is received on or before March 31, 2004, for
an aggregate total possible milestone payment of $5,579,526. The total cash to
be paid to the Endologix shareholders shall not exceed 50% of the value of the
total consideration in the merger.
Options for 1,064,107 shares of Endologix common stock will accelerate and
vest immediately prior to the completion of the merger. If the options are
exercised prior to completion of the merger, the holders of the underlying
Endologix common stock will receive the same consideration for their shares as
other holders of Endologix common stock, including the applicable milestone
payment. To the extent they are not exercised prior to completion of the merger,
any outstanding Endologix options shall terminate.
7
Milestone Payment
The milestone represents an important step in the United States Food and
Drug Administration, or FDA, approval processes. The milestone is the approval
by the FDA of a Pre-Market Approval, or PMA, application filing in the United
States for Endologix's PowerLink System.
The amount of the milestone payment that Endologix stockholders might
receive for their shares depends on the date that the milestone is achieved. If
Endologix reaches the milestone on or before March 31, 2004, we will pay to the
former stockholders of Endologix approximately $0.50 for each share of Endologix
common stock, for an aggregate payment not to exceed $5,579,526. If Endologix
reaches the milestone after March 31, 2004 and on or before June 30, 2004, we
will pay to the former stockholders of Endologix approximately $0.25 for each
share of Endologix common stock, for an aggregate payment not to exceed
$2,789,763. If we decide to pay the milestone payment in the form of common
stock, the exact number of shares that would be issued will depend on the value
of our common stock at the time of the issuance. Endologix stockholders will not
receive a milestone payment if the milestone is not reached on or before June
30, 2004.
FORM OF CONSIDERATION (SEE PAGE )
We will pay the merger consideration to the holders of Endologix common
stock in the form of Radiance common stock and cash. We will pay an aggregate of
$8,369,289 in cash and issue up to an aggregate of 11,159,052 shares of Radiance
common stock. The form of payment of the milestone will be either in cash or
stock, at our sole discretion, subject to an overall limitation that the amount
of cash we pay in the merger cannot exceed 50% of the total consideration. Our
payment of the merger consideration will result in significant dilution to
Radiance stockholders.
Although the total amount of cash and stock to be paid as part of the
merger consideration is fixed, we will allow Endologix stockholders to request a
higher percentage of cash or a higher percentage of stock. However, any payment
by us of a higher percentage of cash or a higher percentage of stock to any
individual Endologix stockholder must be offset by requests from different
stockholders of offsetting allocations. Any payment of the allocation in
accordance with the payment election shall be made at our sole and reasonable
discretion.
ADDITIONAL DOCUMENTS RELATED TO THE MERGER (SEE PAGE )
The merger agreement contains additional agreements between Radiance and
Endologix and/or their affiliates which are related to the merger and must be
fulfilled by both parties.
Voting Agreement. We entered into a Voting Agreement with Franklin D.
Brown, Paul McCormick, Michael Henson and Dr. Edward Diethrich, pursuant to
which those stockholders agreed to vote in favor of the merger and against
proposals that might hinder Endologix's ability to consummate the merger.
Registration Statement. We agreed to file a registration statement with the
SEC within ten business days after the closing of the merger, in order to
register for resale the shares of Radiance common stock issued in connection
with the merger.
8
Lock-Up Agreements. We entered into lock-up agreements with each of the
officers and directors of Endologix, and with Maurice Buchbinder, M.D., Jeffrey
F. O'Donnell and Jeffrey H. Thiel, pursuant to which those individuals will be
restricted from selling shares of Radiance common stock until 180 days after the
SEC declares the registration statement effective.
Escrow Agreement. We have agreed with Endologix that all or a portion of
any milestone payment due will be deposited in escrow should we have claims
pending against Endologix for indemnification pursuant to the merger agreement.
Loan Agreement. Although not specifically set forth in the merger
agreement, we have entered into a loan agreement and agreed to loan to Endologix
up to $3,000,000 in the event the merger is not consummated. The loan will be
secured pursuant to a security agreement granting us a first priority security
interest in all of Endologix's intellectual property as collateral, including
patents, trademarks and research data.
INDEMNIFICATION (SEE PAGE )
We agreed to indemnify all of the directors and officers of Endologix
against any liability or losses which any of them may incur from any lawsuit or
other action brought by stockholders of Endologix as a result of the merger, or
any of the transactions contemplated by the merger agreement.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE )
The completion of the merger depends on a number of conditions being
satisfied, including the following:
- approval by the stockholders of Radiance of the issuance of shares of
Radiance common stock to Endologix stockholders in connection with the
merger;
- the conversion of all shares of Endologix preferred stock into shares
of common stock;
- approval of the merger by the stockholders of Endologix;
- related agreements such as a registration rights agreement, lock-up
agreements and an escrow agreement between Endologix and Radiance
and/or their affiliates being entered into;
- the requirement that Radiance have $8.5 million in cash after payment
of the merger consideration;
- the absence of any order, decree or ruling or any statute or
regulation which would prohibit the merger or render the merger
illegal; and
- the accuracy of representations and warranties made by each of
Radiance and Endologix as of the date of the merger agreement and as
of the closing of the merger.
Either Radiance or Endologix may choose to waive a condition to its
obligation to complete the merger even though that condition has not been
satisfied.
9
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE )
Radiance and Endologix each have the right to terminate the merger if the
closing price of Radiance common stock as reported on Nasdaq on the trading day
immediately preceding the date of the merger is less than $0.90. In addition,
either Radiance or Endologix can terminate the merger agreement in the event of
certain governmental or regulatory actions, in the event of a material breach of
the merger agreement, or if the merger is not completed by August 31, 2002.
Additionally, either Radiance or Endologix can terminate the merger if the
dissenting shares of Endologix represents greater than 5% of the total number of
shares of Endologix common stock. Radiance and Endologix also can terminate the
merger agreement by their mutual written consent.
EXPENSES (SEE PAGE )
If the merger is not completed because one party cannot obtain the consent
of its stockholders, that party will pay the costs of the other party incurred
in connection with the merger, up to a maximum of $200,000. Otherwise, the
merger agreement provides that all costs and expenses incurred in connection
with the merger agreement and the transactions contemplated thereby, whether
consummated or not, will be paid by the party incurring such cost or expense.
Therefore, if the merger closes, Radiance effectively will be paying the costs
and expenses of Radiance and Endologix.
FEDERAL INCOME TAX CONSEQUENCES
Radiance intends the merger to be tax free to Radiance and to the
stockholders of Endologix. Radiance and Endologix intend that the merger be
treated as a reorganization under Section 368(a) of the Internal Revenue Code of
1986.
REGULATORY APPROVAL
There are no federal or state regulatory requirements which must be
complied with or approval which must be obtained in connection with the merger.
10
NAME CHANGE FROM RADIANCE TO ENDOLOGIX
We propose to approve and adopt an amendment to our certificate of
incorporation to change our name from Radiance Medical Systems, Inc. to
Endologix, Inc., which would be effective only upon completion of the merger.
OUR RECOMMENDATIONS TO STOCKHOLDERS
The independent committee of our board of directors has unanimously
approved the issuance of common stock and the merger and recommends that you
vote in favor of the issuance of common stock and the merger. Both our board of
directors and the independent committee unanimously have approved the name
change from Radiance to Endologix, and recommend that you vote in favor of that
proposal.
11
INFORMATION CONCERNING SOLICITATION AND VOTING
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting of the stockholders of Radiance Medical Systems, Inc.
will be held on [May 29], 2002 at 10:00 a.m., local time, at 13900 Alton
Parkway, SUITE 122, Irvine, California (the "Special Meeting").
On the record date, [April 29], 2002, __________ shares of Radiance common
stock were outstanding and entitled to vote. As of April 29, 2002, stockholders
who are not affiliates of Radiance owned approximately _______ shares, or __%,
of the outstanding shares of Radiance common stock. Endologix owns no shares of
Radiance's common stock. The directors and officers of Radiance and their
affiliates together own approximately ________% of the common stock of Radiance.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, stockholders of record of Radiance as of the close
of business on April 29, 2002 (the "Record Date") will be asked to consider and
vote upon:
- a proposal to approve the issuance of shares of Radiance common stock
in exchange for all outstanding shares of the capital stock of
Endologix in the related merger of a subsidiary of Radiance with and
into Endologix, pursuant to an Agreement and Plan of Merger dated
February 8, 2002 by and among Radiance, Endologix, and a wholly-owned
subsidiary of Radiance;
- a proposal to approve and adopt an amendment to the certificate of
incorporation of Radiance to change the name of Radiance from Radiance
Medical Systems, Inc. to Endologix, Inc.; and
- such other matters as may properly be brought before the special
meeting.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE; QUORUM
Only holders of record of Radiance's common stock at the close of business
on the record date of [April 29, 2002] are entitled to notice of and to vote at
the special meeting. As of the close of business on the record date, there were
__________ shares of common stock outstanding and entitled to vote, held of
record by approximately __________ stockholders. A majority, or __________ of
these shares, present in person or represented by proxy, will constitute a
quorum for the transaction of business. Each stockholder is entitled to one vote
for each share of common stock held as of the record date. Abstentions and
broker non-votes will be counted as present and voting for the purposes of
determining whether there is a quorum at the special meeting.
VOTE REQUIRED
Issuance and Merger. Radiance values the advice and consent of its
stockholders and, is seeking their consent to the issuance of common stock in
the merger. The rules of the National Association of Securities Dealers, or
NASD, the governing body of the Nasdaq exchange on which shares of Radiance are
traded, require the affirmative vote of the holders of a majority of the shares
12
of Radiance's common stock represented at the special meeting and voting on the
proposal. Abstentions will have the same effect as votes against the issuance of
common stock in the merger, and broker non-votes will have no effect.
Name Change. Radiance seeks its stockholders' consent to the name change.
Pursuant to the Delaware General Corporation Law, the name change requires the
affirmative vote of a majority of all outstanding shares of the capital stock of
Radiance. Abstentions and broker non-votes will have the same effect as votes
against the name change.
VOTING OF PROXIES; REVOCABILITY OF PROXIES
The proxy accompanying this proxy statement is solicited on behalf of the
board of directors of Radiance for use at the special meeting of stockholders.
The board of directors requests stockholders to complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Radiance. All proxies that are executed properly and
received by Radiance in time to be voted at the special meeting, and that are
not revoked, will cause the shares of common stock represented thereby to be
voted at the special meeting in accordance with the instructions indicated on
the proxies or, if no direction is indicated, FOR approval of the issuance of
Radiance common stock in the related merger; and FOR approval of the name change
from Radiance to Endologix. Any stockholder who has given a proxy may revoke it
at any time before it is exercised at the special meeting by:
- delivering to the Secretary of Radiance by any means, including by
facsimile, a written notice bearing a date later than the proxy,
stating that the proxy is revoked, addressed to Radiance at 13900
Alton Parkway, Suite 122, Irvine, California 92618, facsimile number
(949) 457-9561;
- signing and delivering a proxy relating to the same shares and bearing
a later date than the earlier proxy prior to the vote at the special
meeting; or
- attending the special meeting and voting in person, although
attendance at the special meeting will not, by itself, revoke a proxy.
If a quorum is not obtained or if fewer shares of common stock than the
number required are voted in favor of approval of the issuance of Radiance
common stock in the merger, the board of directors expects to postpone or
adjourn the special meeting in order to permit additional time for soliciting
and obtaining additional proxies or votes, and at any subsequent reconvening of
the special meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original special meeting, except for any
proxies which have theretofore effectively been revoked or withdrawn.
SOLICITATION OF PROXIES AND EXPENSES
We will bear the cost of soliciting proxies from our stockholders. In
addition to solicitation by mail, our
13
directors, officers and employees may solicit proxies from stockholders by
telephone, telegram, letter, facsimile or in person. Our employees will not
receive additional compensation for such solicitation. We may, if we believe it
is necessary or advisable, retain a proxy solicitation firm to deliver
solicitation materials to beneficial owners and to assist us in collecting
proxies from such individuals. Following the original mailing of the proxies and
other soliciting materials, we will request brokers, custodians, nominees and
other record holders to forward copies of the proxy and other soliciting
materials to persons for whom they hold shares of the common stock and to
request authority for the exercise of proxies. In such cases, we will, upon the
request of the record holders, reimburse such holders for their reasonable
expenses.
FORWARD-LOOKING STATEMENTS
We caution stockholders that, in addition to the historical financial
information included herein, this proxy statement includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Securities Reform Act") that are based on management's beliefs, as
well as on assumptions made by and information currently available to
management. All statements other than statements of historical fact included in
this proxy statement, including without limitation, certain statements under
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and located elsewhere herein regarding our
financial position and business strategy, may constitute forward-looking
statements. In addition, you generally can identify forward-looking statements
by the use of forward-looking terminology such as "believes," "may," "will,"
"expects," "intends," "estimates," "anticipates," "plans," "seeks," or
"continues," or the negative thereof or variations thereon or similar
terminology. Such forward-looking statements involve known and unknown risks,
including, but not limited to, economic and market conditions, the regulatory
environment in which we operate, competitive activities or other business
conditions. We cannot assure you that our actual results, performance or
achievements will not differ materially from any future results, performance or
achievements expressed or implied from such forward-looking statements. We
disclose important factors that could cause actual results to differ materially
from our expectations, or Cautionary Statements, in this proxy statement, as
well as in our Annual Report on Form 10-K for the year ended December 31, 2001.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
Cautionary Statements.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, which we refer to as the Exchange Act, and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission, or SEC. You may inspect and copy such
reports, proxy statements and other information at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices at 233 Broadway, New
York, New York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You also may obtain copies of these materials from the
SEC at prescribed rates by writing to the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains an Internet
web site that contains certain reports, proxy statements and other information
regarding issuers like Radiance who file electronically with the SEC. The
address of that site is http://www.sec.gov. You also may inspect the reports,
proxy statements and other information we file with the SEC at the offices of
the National Association of Securities Dealers, Inc., NASDAQ Reports Section,
1735 K Street, Washington, D.C. 20006.
14
PROPOSAL NO. 1
PROPOSAL TO APPROVE THE ISSUANCE OF
RADIANCE COMMON STOCK AND THE RELATED MERGER
GENERAL
The merger agreement provides for RMS Acquisition Corp., a wholly-owned
subsidiary of Radiance, which we refer to as Sub, to be merged with and into
Endologix, with Endologix as the surviving corporation in the merger. Upon
filing of a certificate of merger with the Delaware Secretary of State, which
will be the effective time of the merger, each share of Endologix common stock
will be exchanged for one share of Radiance common stock and $0.75 in cash. We
will issue an aggregate of up to 11,159,052 shares of Radiance common stock and
pay an aggregate of up to $8,369,289 in cash as payment of the merger
consideration. In addition, we may pay a milestone payment of an amount equal to
$5,579,526 if Endologix receives regulatory approval for its PowerLink System on
or before March 31, 2004, or an amount equal to $2,789,763 if Endologix receives
regulatory approval after March 31, 2004 and on or before June 30, 2004. If such
milestone payment is made, it will be paid, at our discretion, in either cash or
Radiance common stock, as valued at the average of the closing prices for
Radiance common stock as reported on Nasdaq for the ten trading days ending on
the trading day preceding the day on which the milestone is achieved. See the
discussion below in this Proposal No. 1, "The Merger Agreement - Merger
Consideration."
The terms of the Agreement and Plan of Merger may be amended or waived by
the parties thereto. See the discussion below in this Proposal No. 1, "The
Merger Agreement - Termination; Amendment; Expenses."
BACKGROUND OF THE MERGER
In September 2001, our management met to discuss how recently released
positive clinical results from trials involving drug-coated stents would affect
our business model and strategic direction. Our management determined that we
should investigate opportunities to develop alternative technologies, and
restructure operations in order to conserve cash until we could assess the
outcome of our BRITE II clinical study and the availability of additional data
regarding drug-coated stents. At a September 25, 2001 meeting, our board of
directors approved management proposals regarding restructuring and strategic
alternatives, and directed management to seek additional commercial
opportunities and analyze technologies outside of vascular brachytherapy.
On October 11, 2001, Jeffrey H. Thiel, our President and CEO, met with
Franklin D. Brown, Chairman and CEO of Endologix, to discuss Endologix's
financing activities, and our interest in Endologix's technology and in a
potential acquisition of Endologix. Mr. Brown and Mr. Thiel discussed, among
other issues, the cash position of Radiance, distribution opportunities,
management control, board control, and valuation. Because our management was
just beginning its evaluation of technologies outside of vascular brachytherapy,
both companies agreed to continue to pursue their own activities and perhaps
discuss a transaction at some other time in the future.
During the week of November 7, 2001, Mr. Thiel contacted Mr. Brown and
suggested they meet to continue discussions regarding a merger. On November 14,
2001 Mr. Brown and Mr. Thiel met to discuss the possible acquisition of
Endologix by Radiance. As a result of this meeting, both parties agreed to
consider pricing terms and transaction structure.
15
At a December 3, 2001 meeting of the Endologix board of directors, Mr.
Brown updated the board on his discussions with Radiance and the progress of a
private financing Endologix was pursuing. Mr. Brown and the Endologix board
discussed the advantages and disadvantages of proceeding with the private
placement financing as opposed to a merger with Radiance. Mr. Brown also updated
the board on the current status of Radiance's operations.
At the December 4, 2001 meeting of our board of directors, Mr. Thiel
informed the members of the board of directors that he had met with Mr. Brown on
two occasions to discuss the possible acquisition of Endologix. The directors
noted that Mr. Brown was the CEO and Chairman of the board of Endologix, that
Michael R. Henson was a member of the board of Endologix, and that Mr. von
Hoffman was patent counsel to Endologix. Because of these common interests and
some common share ownership, the board decided to form an independent committee
of Edward Leonard, William Davis and Maurice Buchbinder, M.D. to evaluate the
merits of a potential transaction with Endologix.
Between November 14, 2001 and December 13, 2001, Mr. Brown and Mr. Thiel
had informal conversations and exchanged emails regarding the terms of the
acquisition. On December 13, 2001, Mr. Brown and Mr. Thiel met to discuss a term
sheet that would become the basis of a formal letter of intent.
On December 17, 2001, Mr. Brown and Mr. Thiel met to negotiate the terms of
a potential acquisition, and agreed to submit the terms to Radiance's legal
counsel with instructions to draft a letter of intent. Over the next two days,
Mr. Thiel and Mr. Brown met several times in person and had several phone
conferences to discuss various drafts of the letter of intent.
At a December 17, 2001 meeting of the Endologix board of directors, Mr.
Brown summarized the terms of a letter of intent that Endologix had received
from Radiance. Mr. Michael R. Henson advised the Endologix board that he was the
Chairman of the board of Radiance and a significant shareholder of Radiance. Mr.
Brown also advised the Endologix board that he also was a member of the board of
directors of Radiance and a shareholder of Radiance. The board of directors of
Endologix reviewed the terms of the proposed letter of intent and discussed the
terms of the merger and the advantages and disadvantages to Endologix of
consummating such a transaction. After discussion, the board of Endologix
approved the terms of the merger as outlined in the letter of intent, with Mr.
Henson abstaining from voting, and authorized Mr. Brown to sign the letter of
intent on behalf of Endologix.
On December 19, 2001, Mr. Thiel called a telephonic meeting of our board
and the independent committee. At the meeting of the full board, Mr. Thiel
discussed the draft of a letter of intent that had been sent to all of the
directors, and the full board discussed the Endologix transaction generally, as
well as the status of two other opportunities that had been considered. After
the general discussion of the full board, the members of our full board who were
not members of the independent committee left the meeting, and the independent
committee discussed the potential Endologix transaction in more detail with Mr.
Thiel and our legal counsel. The independent committee discussed the
appropriateness of engaging a financial advisor and obtaining an independent
evaluation of the intellectual property portfolio of Endologix. Members of the
independent committee also instructed our management to conduct a due diligence
investigation of Endologix. On that basis, the independent committee unanimously
authorized Mr. Thiel to sign the letter of intent on behalf of Radiance, which
Mr. Thiel did later that day.
16
On January 8, 2002, the independent committee of our board of directors
held a telephonic meeting to discuss the status of potential engagements with an
investment banker to prepare a fairness opinion. After a discussion, the
independent committee authorized an engagement letter with A.G. Edwards. In
addition, the members of the independent committee discussed with Mr. Thiel and
our legal counsel the conduct of due diligence regarding Endologix. From the
date of this meeting until the signing of the merger agreement, various members
of our management, together with our legal counsel, conducted a due diligence
review of Endologix, including an investigation of legal, business, and
intellectual property matters, and the market for Endologix's products in
general.
From December through February 8, 2002, members of senior management of
Radiance and Endologix negotiated, and together with their legal advisors,
drafted the terms of a definitive merger agreement and related documents.
Additionally, from the date of its engagement on January 14, 2002, A.G. Edward
reviewed and commented on the terms of the merger agreement. Members of senior
management of Radiance and Endologix negotiated telephonically, exchanged
numerous versions of various documents, and held several meetings at the offices
of each of Radiance's and Endologix's legal counsel in order to negotiate terms
and to conduct due diligence. During this period Mr. Thiel kept the individual
members of the independent committee informed on the nature and progress of
these discussions and the substance of the due diligence investigation. The
parties finalized the terms of the merger agreement and the contents of the
disclosure schedules of each of Radiance and Endologix to be delivered in
connection with the execution of the merger agreement.
On February 6, 2002, our independent committee held a telephonic meeting to
discuss the terms of the Endologix transaction, a draft of the merger agreement,
and the results of management's and legal counsel's due diligence investigation.
The independent committee questioned several members of our senior management
regarding Endologix technology, the status of clinical trials, financial issues,
and competition. In addition, Mr. Brown and Paul McCormick, President and Chief
Operating Officer of Endologix, addressed the independent committee and answered
questions from its members regarding such issues. After Mr. Brown and Mr.
McCormick left the meeting, the independent committee discussed operations
matters with Mr. Thiel, as well as diligence materials Mr. Thiel had provided
the independent committee. After this discussion, representatives of A.G.
Edwards made a detailed presentation of information previously forwarded to all
of the board members. Representatives from A.G. Edwards then discussed its
opinion that the consideration to be received by Radiance was fair from a
financial point of view to Radiance. See the discussion below in Proposal No. 1,
"The Merger Agreement -- Opinion of Radiance's Financial Advisor," as well as
the full text of the fairness opinion included in this proxy statement as Annex
II, for a more complete discussion.
On February 6, 2002, Endologix held a special meeting of its board of
directors. Mr. Brown presented an overview of the proposed merger and led the
board in a discussion of the material provisions of the proposed merger
agreement. After this discussion, representatives of Gruntal & Co., financial
advisors to Endologix, made a detailed presentation of information previously
forwarded to all of the board members, including a detailed discussion
concerning the various comparables which Gruntal had evaluated in connection
with providing its fairness opinion. Representatives from Gruntal then discussed
the fairness of the transaction from a financial point of view to Endologix and
its shareholders. Mr. Brown and Endologix's legal advisors presented a summary
of the legal and other due diligence performed with respect to Radiance. The
Endologix board unanimously approved the merger and the transactions
contemplated thereby, and authorized Mr. Brown to execute the merger agreement
on behalf of Endologix. Following the meeting,
17
Endologix circulated an action by unanimous written consent to all the board
members, and all of the members unanimously consented to approve the merger
agreement and the transactions contemplated thereby, and unanimously adopted all
the resolutions approved at the February 6, 2002 board meeting. On February 6,
2002, Gruntal & Co. delivered a written opinion to the members of the Endologix
Board to the effect that the proposed merger was fair from a financial point of
view to the shareholders of Endologix.
On February 8, 2002 our independent committee met to discuss the final
draft of the merger agreement, as well as the written fairness opinion from A.G.
Edwards that the consideration to be received by Radiance was fair from a
financial point of view to Radiance. After discussion with our legal counsel and
representatives from A.G. Edwards, the independent committee authorized and
approved the execution of the merger agreement. The members of the independent
committee also signed a unanimous written consent dated February 8, 2002
authorizing and approving the merger agreement and the documents and
transactions contemplated thereby.
On February 8, 2002, each company executed and delivered the merger
agreement and related ancillary documents. Each company publicly announced
execution of the merger agreement by issuing a press release after the close of
financial markets on Monday, February 11, 2002.
RADIANCE'S REASONS FOR THE MERGER; RECOMMENDATION OF RADIANCE'S INDEPENDENT
COMMITTEE OF THE BOARD OF DIRECTORS
In September 2001, we decided to search for additional commercial
opportunities by evaluating technologies outside of vascular brachytherapy. We
decided to look at other medical device technologies in response to positive
data that had been presented on drug-coated stents, and the potential impact on
our RDX system if data from larger clinical trials involving drug-coated stents
were equally positive. Unless clinical study data involving drug-coated stents
from larger studies show restenosis rates significantly higher than what had
been presented, we believed the market for our RDX system likely would be
limited. As part of our evaluation of other technologies, we decided to make a
more thorough examination of the technology being developed by Endologix, of
which we were aware due to the presence on our board of directors of Mr. Brown,
the Chairman and CEO of Endologix, and Mr. Henson, a member of the board of
directors of Endologix, as well as our ownership of Endologix common stock.
Based on our investigation of the Endologix technology, we believed that
the PowerLink System is a novel treatment for abdominal aortic aneurysms, or
AAA, and that clinical results to date indicated that the PowerLink System had
several features and benefits that may provide a better clinical outcome in
comparison to devices currently available on the market. We believe the
acquisition of the Endologix technology as a result of the merger provides us
with a new and different medical device technology for a promising and
potentially lucrative market in the event that the market for the RDX system
does not develop.
Because of the presence of Mr. Brown and Mr. Henson on each company's board
of directors, the fact that another one of our directors, Gerard von Hoffman, is
patent counsel to Radiance and Endologix, and also because Jeffrey F. O'Donnell,
the Chairman of our board and our former CEO, and Jeffrey H. Thiel, our current
CEO and board member, both own shares of Endologix preferred stock, we decided
to form an independent committee of our board of directors to consider and
evaluate the merits of a proposed merger with Endologix and the transactions
contemplated thereby. In reaching its determination to recommend approval and
adoption of the
18
merger agreement and the merger, the independent committee of our board of
directors considered a number of factors, including the following:
- the current status of our business, financial condition, technology,
future prospects and market conditions;
- the business, financial condition, technology, prospects and market of
Endologix, including the fact that our senior management performed a
due diligence review of Endologix's technology and considered other
commercial opportunities and technologies;
- the cash position of Radiance and of Endologix and the ability of
Endologix to obtain FDA approval to market the PowerLink System in the
United States;
- the terms and conditions of the proposed merger agreement, including
the amount and form of consideration that we would agree to pay;
- the possibility of other strategic alternatives to the merger for
enhancing shareholder value;
- A.G. Edward's financial and strategic analysis and presentation to our
independent committee on February 6, 2002, as well as the opinion of
A.G. Edwards that, as of February 8, 2002, the consideration to be
received by us pursuant to the merger agreement was fair, from a
financial point of view, to Radiance. For a more complete discussion
of the opinion of A.G. Edwards, please see "Opinion of Radiance's
Financial Advisor" below.
The discussion above addresses the material factors considered by our board
of directors and its consideration of the merger and the transactions
contemplated thereby. In view of the variety of factors and the amount of
information considered, the independent committee of our board of directors did
not find it practicable to, and did not, make specific assessments of, quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination. The determination was made after consideration of
all of the factors as a whole. In addition, individual members of the
independent committee of our board of directors may have given different weights
to different factors.
The independent committee of our Radiance board of directors unanimously
approved the merger agreement, the merger and the transactions contemplated
thereby, and determined that the merger agreement, the merger and the
transactions contemplated thereby are advisable, fair and in the best interests
of Radiance and its stockholders. Accordingly, the independent committee and our
board of directors unanimously recommends that the Radiance stockholders vote
"FOR" approval and adoption of the merger agreement and the issuance of the
shares of Radiance common stock in the merger.
19
OPINION OF RADIANCE'S FINANCIAL ADVISOR
Radiance retained A.G. Edwards to render an opinion that as of February 8,
2002, the consideration to be received by Radiance in the proposed acquisition
of Endologix by Radiance pursuant to the terms of the Agreement and Plan of
Merger, or merger agreement, was fair, from a financial point of view, to
Radiance.
A.G. Edwards, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. From time to time, A.G.
Edwards has provided equity research coverage of Radiance and has been a market
maker in Radiance's common stock. A.G. Edwards is not aware of any present or
contemplated relationship between A.G. Edwards, Radiance, Radiance's directors
and officers or its shareholders, or between A.G. Edwards, Endologix,
Endologix's directors and officers or shareholders, which in its opinion would
affect the ability of A.G. Edwards to render a fair and independent opinion in
this matter.
In arriving at its written opinion, A.G. Edwards considered, among other
things:
- the draft merger agreement distributed February 6, 2002 and
discussions with counsel representing Radiance and the independent
committee of its board of directors concerning the merger agreement;
- the business and operations of Radiance and Endologix through
interviews with the management of Radiance and Endologix;
- certain audited historical financial statements for Radiance;
- certain unaudited and forecasted financial statements for Radiance as
prepared by Radiance's management;
- certain audited and unaudited historical financial statements for
Endologix;
- certain forecasted financial statements for Endologix as prepared by
Endologix's management, and reviewed and approved in all material
respects by Radiance's management, some of whom are shareholders in
Endologix;
- the current operations and future prospects of Endologix, primarily
through (a) discussions with the management of Endologix and (b)
interviews with members of the management of Radiance;
- pro forma financial statements dated February 7, 2002 of Radiance, as
prepared by Radiance management, giving effect to the transaction
contemplated by the merger agreement, as proposed in the draft merger
agreement and with certain assumptions noted in the opinion;
- the market data for financings of private medical device companies at
similar stages of development as Endologix;
20
- the market data for stocks of public companies in the same or similar
markets as Endologix;
- the financial terms of certain acquisitions which A.G. Edwards deemed
relevant for analytical purposes; and
- such other studies and analyses that A.G. Edwards considered
appropriate.
In preparing its opinion, A.G. Edwards has assumed and relied upon the
accuracy and completeness of all financial and other information that was
publicly available, supplied or otherwise made available to A.G. Edwards by
Radiance and Endologix. A.G. Edwards has not been engaged to, and therefore has
not, verified the accuracy or completeness of any such information. A.G. Edwards
has relied upon the assurances of the managements of Radiance and Endologix that
they are not aware of any facts that would make any financial or other
information inaccurate or misleading. A.G. Edwards has been informed and assumed
that financial projections supplied to, discussed with or otherwise made
available to it reflect the best currently available estimates and judgments of
the managements of Radiance and Endologix as to the expected future financial
performance of Radiance and Endologix, in each case on a stand-alone basis and
after giving effect to the Transaction. A.G. Edwards has not independently
verified such information or assumptions nor does it express any opinion with
respect thereto.
A.G. Edwards has not made any independent valuation or appraisal of the
assets or liabilities of Radiance or Endologix, nor has it been furnished with
any such appraisals. A.G. Edwards was not engaged to and did not review any
alternative transaction or strategic alternatives that may be available to
Radiance. A.G. Edwards' opinion is necessarily based on the economic, market and
other conditions as in effect on, and the information made available to A.G.
Edwards as of February 8, 2002.
The full text of the written opinion of A.G. Edwards dated February 8, 2002
setting forth the assumptions made, matters considered and limitations on
reviews undertaken, is attached hereto as Annex II to this proxy statement and
is incorporated herein by reference. Radiance shareholders are urged to read the
opinion, together with the assumptions and considerations set forth therein, in
its entirety. A.G. EDWARDS' OPINION WAS PREPARED FOR THE INFORMATION OF THE
INDEPENDENT COMMITTEE OF THE BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A
RECOMMENDATION AS TO HOW ANY HOLDER OF THE OUTSTANDING SHARES OF RADIANCE COMMON
STOCK SHOULD VOTE WITH RESPECT TO THE TRANSACTION CONTEMPLATED BY THE MERGER
AGREEMENT.
The following is a summary of the analyses used by A.G. Edwards in
rendering its opinion.
Comparable Company Analysis. A.G. Edwards performed an analysis to
determine the expected future value of Endologix in 2005, the first full year of
forecasted earnings, by applying market multiples based on current and
historical market data to Endologix's expected financial results. The future
value was then discounted back to establish an estimate of current value. Using
publicly available information, A.G. Edwards reviewed and compared Endologix
with financial and operating information of five specialty niche medical device
companies and five large capitalization medical device and product companies.
The five specialty niche medical device companies were Cardima, Inc., Micro
Therapeutics, Inc., NMT Medical, Inc., Novoste Corp. and Possis Medical, Inc.
The five large capitalization medical device and product companies were Boston
Scientific Corp., Edwards Lifesciences Corp., Guidant Corp., Johnson & Johnson
and Medtronic, Inc.
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Due to the development stage of the specialty niche medical device
companies, limited historical data is meaningful for valuation purposes. A.G.
Edwards reviewed equity research reports published on these stocks to evaluate
the forward multiples of future revenues and earnings the investment community
uses to value these early stage companies. The mature, large capitalization
medical device and product companies possess sufficient data for historical and
forward multiple analysis. These large capitalization companies' trading
activity provide current valuation multiples that can be applied to determine
how a medical device company may trade in the future. Applying revenue multiples
of 3.0x to 7.0x and earnings multiples of 25.0x to 35.0x from the comparable
public companies to the projected financials and discounting the results to
present at rates of 25% to 45% derives equity valuation ranges for Endologix of
approximately $55 million to $200 million using the revenue multiples, and $60
million to $131 million using the earnings multiples.
Comparable Private Company Financings Analysis. A.G. Edwards identified 25
recent private financings completed by medical device companies comparable to
Endologix. Of these 25, A.G. Edwards evaluated 11 comparable private medical
device companies where they had initiated clinical trials and publicized
valuation data. These 11 private medical device companies received pre-money
valuations with a median of approximately $46 million and a mean of
approximately $37 million.
Discounted Cash Flow Analysis. A.G. Edwards used a discounted cash flow
analysis to establish a current value for the future economic capabilities and
projections of Endologix. Value indications are developed by discounting
expected operating cash flows to their present value at a range of appropriate
discount rates. This analysis was highly dependent on Endologix and Radiance
managements' financial projections for Endologix and a calculated terminal value
at the end of 2006, the last period of forecasted financial statements. A.G.
Edwards utilized the above-mentioned comparable companies analysis to create two
cases using a terminal multiple of 2006 revenue and a terminal multiple of 2006
earnings, both discounted back to present. Three sensitivity analyses were
performed to determine the valuation impact of adjustments to the following key
assumptions:
- revenue multiples of 3.0x to 7.0x;
- earnings multiples of 25.0x to 35.0x; and
- percentages of projected revenue achieved, from 80% to 100%.
All three analyses were discounted back to present at rate of 25% to 45%
and resulted in equity valuation ranges of approximately $37 million to $206
million using the revenue multiples, $40 million to $131 million using the
earnings multiples, and $51 million to $144 million using the percentages of
projected net revenue achieved.
Comparable Precedent Transaction Analysis. A.G. Edwards evaluated
comparable precedent private medical device company transactions to provide
reference points for the application of market multiples for the Endologix
Transaction. This analysis represents an index of recent market prices paid by
other acquirers and accepted by sellers. The multiples derived from this
analysis were significantly under-weighted in the valuation of Endologix due to
the limited number of transactions with publicized and valid multiples. The
aggregate valuation analysis provides a more relevant analysis of value. Ten
transactions were identified, of which four published aggregate transaction
valuations, with a median aggregate transaction valuation of approximately
$73 million with a range of $25 million to $149 million. These four transactions
involved American OsteoMedix
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Corp, World Medical Manufacturing Corp., EndoVascular Technologies, Inc. and
Corvita Corporation.
Pro Forma Financial Analysis. A.G. Edwards analyzed the pro forma effects
of the Transaction on the earnings per share of Radiance in calendar year 2002,
based on the financial projections provided by the managements of Endologix and
Radiance. Given the limited projected future operations of Radiance and the
developmental stage of Endologix's operations, A.G. Edwards observed and
evaluated the significantly dilutive impact the purchase would have on earnings
per share as Endologix continues through its regulatory approval process.
The summary of the A.G. Edwards report set forth above does not purport to
be a complete description of the main elements of A.G. Edwards' presentations to
Radiance's Special Committee of the Board of Directors on February 6 and
February 8 of 2002. It does not purport to be a complete description of the
analyses performed, or the matters considered, by A.G. Edwards in rendering its
opinion. A.G. Edwards believes that its analyses and the summary set forth above
must be considered as a whole and that selecting portions of such analyses,
without considering all analyses, or of the above summary, without considering
all factors and analyses, would create an incomplete view of the processes
underlying the analyses set forth in the A.G. Edwards report and its fairness
opinion. The fact that any specific analyses have been referred to in the
summary above is not meant to indicate that such analysis was given greater
weight than any other analyses.
The preparation of a fairness opinion is not necessarily susceptible to
partial analyses or summary. In rendering its fairness opinion, A.G. Edwards
applied its judgment to a variety of complex analyses and assumptions. A.G.
Edwards may have given various analyses more or less weight than other analyses,
and may have deemed various assumptions more or less probable than other
assumptions. The assumptions made, and the judgments applied, by A.G. Edwards in
rendering its opinion are not readily susceptible to description beyond that set
forth in the written text of the fairness opinion itself.
In performing its analyses, A.G. Edwards made numerous assumptions with
respect to industry performance and general business and economic conditions,
which are beyond the control of Endologix. The analyses performed by A.G.
Edwards are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of A.G. Edwards'
analysis of the fairness of the consideration to be received by Radiance in the
transaction, pursuant to the merger agreement, and were provided to Radiance's
independent committee of the board of directors in connection with the delivery
of A.G. Edwards' fairness opinion. In addition, as described above, A.G.
Edwards' opinion and presentation to Radiance's independent committee of the
board of directors was one of many factors taken into consideration by the
independent committee of the board of directors in making its determination to
approve the merger agreement.
The terms of the engagement of A.G. Edwards by Radiance are set forth in a
letter agreement between A.G. Edwards and Radiance, the engagement letter.
Pursuant to the terms of the engagement letter, as compensation for rendering
its opinion to the independent committee of the board of directors of Radiance,
Radiance agreed to pay A.G. Edwards a fee of $250,000. In addition, Radiance
agreed to reimburse A.G. Edwards for the reasonable travel and out-of-pocket
expenses incurred in connection with its engagement. Radiance has agreed to
indemnify A.G. Edwards against certain liabilities in connection with the
engagement of A.G. Edwards.
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THE MERGER AGREEMENT
This section of the proxy statement describes some aspects of the proposed
merger. The description of the merger agreement contained in this proxy
statement is not complete and is qualified in its entirety by reference to the
merger agreement, a copy of which is attached to this proxy statement as Annex I
and which is incorporated by reference. We urge you to read the entire merger
agreement carefully.
STRUCTURE; EFFECTIVE TIME
The merger agreement provides for the merger of a wholly-owned subsidiary
of ours, which we refer to as Sub, into Endologix. Endologix will survive the
merger and continue to exist after the merger as a wholly-owned subsidiary of
Radiance. The effective time of the merger will be at such time as a certificate
of merger is filed with the Secretary of State of Delaware, or a later time if
specified in the certificate of merger. If the merger is approved by the
requisite vote of our stockholders, we expect the effective time to occur on
[May 29], 2002, or as promptly as practicable following the satisfaction or
waiver of all the conditions to the merger.
After the effective time of the merger, the bylaws and certificate of
incorporation of the surviving corporation in the merger of Endologix and Sub
will be those of Sub, until amended in accordance with such bylaws and Delaware
law.
MERGER CONSIDERATION
The merger agreement provides that each share of Endologix common stock
outstanding immediately prior to the effective time will, at the effective time
of the merger, be converted into the right to receive the merger consideration,
including the right to receive a milestone payment if earned. All shares of
Endologix common stock that are owned by Radiance or Sub will, at the effective
time, be cancelled and no payment will be made for such shares. If the
dissenters rights of any shares of Endologix common stock are perfected, then
those shares will be treated as provided in Section 2.2 of the merger agreement.
If the merger is completed, we will pay the stockholders of Endologix the
merger consideration of one share of Radiance common stock and $0.75 in cash for
each share of Endologix common stock. We will pay an aggregate of $8,369,289 in
cash and issue an aggregate of 11,159,052 shares of Radiance common stock, which
together with any milestone payment will comprise the merger consideration. We
will make a milestone payment only in the event the FDA approves the
pre-marketing approval, or PMA, application with respect to Endologix's
PowerLink System by certain dates, as discussed below.
Options for Endologix common stock will accelerate and vest immediately
prior to the completion of the merger. If holders exercise the options prior to
completion of the merger, the holders of the underlying Endologix common stock
will receive the same consideration for their shares as other holders of
Endologix common stock. If not exercised prior to completion of the merger, any
outstanding Endologix options will terminate. All shares of Endologix preferred
stock must convert into Endologix common stock prior to completion of the
merger.
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Registration
We will file a registration statement with the SEC covering the resale of
the shares of Radiance common stock issued in connection with the merger, within
ten business days of the closing of the merger. As a result of the lock-up
agreements we entered into with each of the officers and directors of Endologix
and with Maurice Buchbinder, M.D., Jeffrey F. O'Donnell and Jeffrey H. Thiel,
none of those individuals will be able to sell their shares of Radiance common
stock until 180 days after the SEC declares the registration statement
effective.
Milestone Payment
We have identified FDA approval of Endologix's pre-marketing approval, or
PMA, application regarding its PowerLink System, as an important juncture in the
process of obtaining United States regulatory approval and therefore important
to bringing the Endologix technology to the marketplace. The milestone payment
we may pay to the former holders of Endologix common stock depends on if and
when the milestone is achieved. We will make a milestone payment within ten days
of achievement of such milestone, as follows:
- We will pay an aggregate of $5,579,526 to the former holders of
Endologix common stock if the FDA approves the PMA application with
respect to Endologix's PowerLink System on or before March 31, 2004;
or
- We will pay an aggregate of $2,789,763 to the former holders of
Endologix common stock in the event the FDA approves the PMA
application after March 31, 2004 and on or before June 30, 2004; or
- We will not make any milestone payment if the FDA does not approve the
PMA application on or before June 30, 2004.
If the milestone is achieved, we will make the milestone payments in either
Radiance common stock or in cash, at our sole discretion. The value of our
common stock for purposes of paying the milestone payment will be the average of
the closing prices of our common stock for the 10 trading days preceding the
achievement of the milestone. Therefore, if we decide to pay the milestone
payment in the form of our common stock, the exact number of shares that we
would issue will depend on the value of our common stock at the time the
milestone is achieved. In no event, however, can the payment of a milestone
payment result in greater than 50% of the value of the total merger
consideration being paid in cash. In the event the 50% cash limitation prevents
us from paying the milestone payment in cash, we will need to pay the milestone
payment with our common stock. If a milestone is achieved and we decide to pay
the milestone payment in the form of our common stock, the use of our common
stock in payment could result in significant dilution to our current
stockholders.
We are entitled to withhold delivery of a milestone payment if we have a
claim for indemnification against Endologix, and if we make the claim prior to
one year from the closing of the merger. If the claim has not been resolved by
the time we are required to make a milestone payment, we are entitled to deposit
the milestone payment into an escrow, pursuant to the terms of the escrow
agreement.
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FORM OF CONSIDERATION
We will pay an aggregate of up to $8,369,289 in cash, and issue an
aggregate of up to 11,159,052 shares of our common stock. In addition, as
described above, we may make any milestone payment, if the milestone is
achieved, in the form of cash or stock at our sole discretion subject to the
overall limitation on cash payments as discussed above in the discussion of the
milestone payment.
Although the total amount of cash and stock to be paid as part of the
merger consideration is fixed, we will allow Endologix stockholders to request a
higher percentage of cash or a higher percentage of stock, as the request may
be. However, any payment by us of a higher percentage of cash or a higher
percentage of stock to any individual Endologix stockholder must be offset by a
requests from different stockholders of an opposite allocation. Any payment of
the allocation in accordance with the payment election shall be made at our sole
and reasonable discretion.
OTHER DOCUMENTS RELATED TO THE MERGER
The merger agreement contains additional agreements between Radiance and
Endologix and/or their affiliates which are related to the merger and must be
fulfilled by both parties.
Voting Agreement. We entered into a Voting Agreement with Franklin D.
Brown, Paul McCormick, Michael Henson and Dr. Edward Diethrich, pursuant to
which those stockholders agreed to vote in favor of the merger and against
proposals that might hinder Endologix's ability to consummate the merger.
Registration Statement. We agreed to file a registration statement with the
SEC within ten business days after the closing of the merger, in order to
register for resale the shares of Radiance common stock issued in connection
with the merger. THE REGISTRATION RIGHTS AGREEMENT IS ATTACHED AS EXHIBIT B TO
THE MERGER AGREEMENT, WHICH IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX I, AND
WE ENCOURAGE YOU TO READ IT IN ITS ENTIRETY.
Lock-Up Agreements. We entered into lockup agreements with each of the
officers and directors of Endologix, and with Maurice Buchbinder, M.D., Jeffrey
F. O'Donnell and Jeffrey H. Thiel pursuant to which those individuals will be
restricted from selling shares of Radiance common stock until 180 days after the
SEC declares the registration statement effective.
Escrow Agreement. We have agreed with Endologix that all or a portion of
any milestone payment due will be deposited in escrow should we have claims
pending against Endologix for indemnification pursuant to the merger agreement.
Franklin D. Brown, who will be the CEO of the surviving company after the
merger, will serve as the Endologix stockholders' representative under the
escrow agreement. The escrow agreement specifies how the parties are to resolve
any dispute over the escrow fund, and the procedure for paying any of the escrow
fund to Radiance or to the former Endologix stockholders. We have agreed to pay
to the Endologix stockholders any milestone payment in excess of claims pending
at that time. The escrow agreement is attached as Exhibit A to the merger
agreement, which is attached to this proxy statement as Annex I, and we
encourage you to read it in its entirety.
Loan Agreement. Although not specifically set forth in the merger
agreement, we have entered into a loan agreement and agreed to loan to Endologix
an amount up to $3,000,000 in the
26
event the merger is not consummated. This loan would be secured pursuant to a
security agreement granting us a first priority security interest in all of
Endologix's intellectual property as collateral, including patents, trademarks,
research data and regulatory submissions.
We agreed to enter into the loan agreement to provide Endologix with cash
to fund its operations in the event the merger agreement terminates or the
closing of the merger is delayed. Endologix terminated its pursuit of a private
financing transaction in order to enter into the merger agreement. In addition,
pursuant to the merger agreement, Endologix agreed not to solicit any other
acquisition or licensing transaction of any kind until the earlier of July 1,
2002 or our termination of the proposed merger, without the payment by us of any
break-up fee. Because Endologix anticipates it will need additional cash to fund
its operations in the event that the merger does not occur or the closing is
delayed, and because there is no provision for a break-up fee in the merger
agreement, we agreed to enter into the loan agreement.
OPTIONS
Pursuant to the terms of the merger agreement, options for 1,064,107 shares
of Endologix common stock will vest and become exercisable immediately upon
prior to the completion of the merger. If the holders of Endologix options
exercise prior to the effective date of the merger, the holders of the
underlying Endologix common stock will receive the same consideration for their
shares as other holders of Endologix common stock. If holders do not exercise
their options prior to completion of the merger, the options will terminate.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties relating to, among other things:
- incorporation, organization, authority and similar corporate matters
on behalf of each of Radiance and Endologix;
- authorized and outstanding capital stock of each of Radiance and
Endologix;
- authorization, execution, delivery and enforceability of the merger
agreement and related matters;
- documents we have filed with the SEC and the accuracy of information
contained therein;
- compliance with law;
- litigation;
- taxes;
- retirement and other employee plans and matters relating to the
Employee Retirement Income Security Act of 1974; and
- the absence of material changes and events.
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ADDITIONAL AGREEMENTS
Pursuant to the merger agreement, we have agreed with Endologix as to
various other matters. These additional agreements must be fulfilled as a
condition to the completion of the merger. Some of these additional agreements
are:
- each party has access to information of the other party;
- each party shall maintain the confidentiality of the other party's
information;
- we will register for resale with the SEC the shares of our common
stock issued in connection with the merger;
- we will file an application for additional listing on the Nasdaq
National Market of our shares of common stock issued in the merger;
- we will use our reasonable best efforts to obtain the consent of our
stockholders; and
- until the earlier of July 1, 2002 or our termination of the merger
agreement, Endologix will not initiate, solicit or encourage any
proposal to merge with, consolidate with, or be acquired by any other
entity, or consider any acquisition or similar transaction.
OFFICERS AND DIRECTORS
Effective upon completion of the merger, we have agreed that William G.
Davis, Edward M. Leonard and Gerard von Hoffman will resign as members of our
board of directors. In addition, we agreed to fill the vacancies created by such
resignations with Edward B. Diethrich, M.D. and Paul McCormick, and that
Franklin D. Brown shall become Chairman of our board of directors. Dr. Diethrich
currently is a director of Endologix. At the next annual meeting of our
stockholders, we have agreed with Endologix to nominate Maurice Buchbinder, M.D.
and Jeffrey F. O'Donnell for reelection to our board of directors, and to
recommend such nominees to our stockholders.
We also have agreed that, following the merger, Franklin D. Brown shall
become our chief executive officer and Paul McCormick shall become our president
and chief operating officer.
COVENANTS
Pursuant to the merger agreement, we have agreed with Endologix that
between the date of the merger agreement and the effective time of the merger,
except as permitted in the merger agreement or otherwise consented to in
writing, to conduct our respective business according to certain agreements.
Listed below are some of the most important of these agreements. Endologix has
agreed that it shall, among other things:
- carry on its business in the ordinary course consistent with prior
practice;
- not declare or pay any dividends other than in the ordinary course
consistent with prior practice;
- not issue additional shares of capital stock;
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- not merge or consolidate with another entity;
- not incur any liens or security interests or encumber any of its
property; and
- not take any action to cause the merger not to be treated as a tax
free reorganization under applicable law.
We have agreed with Endologix, among other things, to:
- carry on our business in the ordinary course consistent with prior
practice;
- use all reasonable efforts to take all actions necessary to effectuate
the merger;
- timely file all filings required under the Securities and Exchange
Act; and
- not take any action to cause the merger not to be treated as a tax
free reorganization under applicable law.
CONDITIONS TO CLOSING
Under the merger agreement, consummation of the merger is subject to the
approval of Radiance and Endologix stockholders and certain other conditions,
unless waived by the benefiting party. These other conditions include, but are
not limited to:
- the execution of the registration rights, lock-up and escrow
agreements;
- the conversion of all shares of Endologix preferred stock into shares
of common stock;
- the requirement that Radiance have cash or cash equivalents of at
least $8.5 million after payment of the cash portion of the merger
consideration;
- the absence of any temporary restraining order, preliminary or
permanent injunction or other legal restraint or prohibition that
prevents completion of the merger;
- the accuracy of representations and warranties made by each of
Radiance and Endologix as of the date of the merger agreement and as
of the closing of the merger;
- receipt by Endologix of all necessary contractual consents;
- receipt of legal opinions; and
- compliance with all material covenants.
INDEMNIFICATION
Each of Radiance and Endologix has agreed to indemnify the other party
against any losses arising out of or due to the breach of certain
representations, warranties or covenants contained in the merger agreement.
Radiance will be entitled to indemnification for Endologix's breaches of
representations and warranties regarding its financial statements, FDA matters
and intellectual
29
property rights. Endologix will be entitled to indemnification for Radiance's
breach of representations and warranties regarding its SEC filings, the
operation of its business and its license agreement with Guidant Corporation.
The indemnification obligation arises only if the aggregate amount of such
losses arising out of all such breaches exceeds $100,000, and thereafter,
indemnification is available only up to the amount of the milestone payment
actually earned. Any claim for indemnification must be brought within one year
of the effective time of the merger.
We also have agreed to indemnify, to the fullest extent under the Delaware
Law, all officers and directors of Endologix as of the closing of the merger in
any action brought against such individuals by existing stockholders and
optionholders of Endologix immediately prior to the merger, as a result of the
merger.
TERMINATION; AMENDMENT; EXPENSES
We can agree with Endologix to terminate the merger agreement. In addition,
either company can terminate the merger agreement if:
- the merger is not completed by August 31, 2002;
- the closing price of Radiance common stock as reported on Nasdaq on
the trading day immediately preceding the effective date of the merger
is less than $0.90;
- any governmental or regulatory authority whose action is required for
the merger decides not to take such action;
- the other party materially breaches any of its covenants in the merger
agreement;
- a court issues a final order permanently prohibiting the merger;
- the dissenting shares of Endologix represents greater than 5% of the
total outstanding shares of Endologix common stock immediately prior
to the effective time of the merger; or
- if the required stockholder vote of the other party necessary for
completion of the merger is not obtained.
If both companies agree in writing, the terms and conditions of the merger
agreement may be waived, modified or extended.
All costs and expenses incurred in connection with the merger agreement and
the transactions contemplated thereby, including legal and accounting fees and
expenses, will be paid by the party incurring such expenses. However, if the
merger is not completed because one party cannot obtain the consent of its
stockholders, then that party will pay the costs of the other party up to
$200,000. Therefore, if the merger closes, Radiance effectively will be paying
the costs and expenses of Radiance and Endologix.
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ACCOUNTING TREATMENT OF TRANSACTION
The merger will be accounted for as a "purchase" in accordance with
generally accepted accounting principles, which means that the assets and
liabilities of Endologix will be recorded on our books at their fair values, and
any excess of the purchase price over the fair value of Endologix's tangible net
assets, will be recorded as identifiable intangible assets and goodwill, if any.
The results of Endologix's operations will be included in our consolidated
financial statements from the date the merger is completed.
CERTAIN INCOME TAX CONSEQUENCES
We intend the merger to qualify as a tax free reorganization under Section
368(a) of the Internal Revenue Code.
FEDERAL SECURITIES LAW CONSEQUENCES; REGISTRATION RIGHT; LOCK-UP
The shares of Radiance common stock to be issued to Endologix shareholders
pursuant to the merger agreement will not be registered under the Securities Act
of 1933, as amended, at the time of the completion of the merger. Therefore, the
shares may be sold only after registration under the Securities Act or under an
exemption from such registration.
We agreed to register for re-sale the shares of our common stock issued as
payment of the merger consideration by filing a registration statement with the
SEC within ten business days after the closing date of the merger. Endologix has
agreed to use its best efforts to have the Endologix shareholders enter into the
registration rights agreement. In addition, the officers and directors of
Endologix, as well as Maurice Buchbinder, M.D., Jeffrey F. O'Donnell and Jeffrey
H. Thiel, have agreed to enter into lock-up agreements which prevents the sale
by them of Radiance common stock owned by them for a period of 180 days after
the date on which the SEC declares the Registration Statement effective.
NASDAQ NATIONAL MARKET LISTING
We have agreed to file an application for additional listing on the Nasdaq
National Market of the shares of Radiance common stock to be issued in the
merger. We intend to change our symbol on the Nasdaq from RADX to ELGX in the
event we complete the merger with Endologix.
APPRAISAL OR DISSENTERS' RIGHTS
Stockholders of Endologix will be entitled to an appraisal of their shares
of Endologix common stock, in accordance with the dissenters rights provisions
of Delaware law.
REGULATORY APPROVAL
There are no federal or state regulatory requirements which must be
complied with or approval which must be obtained in connection with the merger.
INTERESTS OF RADIANCE'S OFFICERS AND DIRECTORS IN THE MERGER
Several members of our board of directors and several of our officers own
Radiance common stock and/or hold stock options and, to that extent, their
interest in the merger is the same as yours.
31
However, as set forth below, some of the officers and directors of Radiance
have interests in the merger that are different from your interests as a
stockholder. The independent committee considered these interests in
recommending and approving the merger.
- Franklin D. Brown, a director of Radiance, is also Chief Executive
Officer, and Chairman of the board of Endologix. Mr. Brown
beneficially owns 712,396 shares of Endologix common stock, 50,000
shares of Endologix Series A preferred stock, and 25,000 shares of
Endologix Series B preferred stock.
- Jeffrey H. Thiel, President and Chief Executive Officer of Radiance,
owns 16,000 shares of Endologix Series A preferred stock and
beneficially owns 8,000 shares of Series B preferred stock. Pursuant
to Mr. Thiel's employment agreement with Radiance, upon his
termination which will occur as a result of the merger, Mr. Thiel is
entitled to thirteen months' severance pay and continued benefits for
one year. Additionally, Mr. Thiel's Radiance stock options that would
have vested over the following year will vest immediately upon his
termination. Finally, Radiance also will forgive a $100,000 loan,
together with accrued interest thereon, that Radiance made to Mr.
Thiel.
- Michael R. Henson, a director and former Chairman of the board and
Chief executive Officer of Radiance, is also a former Chairman of the
board and former Chief Executive Officer of Endologix. Mr. Henson
beneficially owns 1,123,917 shares of Endologix common stock, of which
25,000 are held by Mr. Henson's wife, 120,000 shares of Endologix
Series A preferred stock, and 10,000 shares of Endologix Series B
preferred stock. Mr. Henson also holds options to purchase 27,083
shares of Endologix common stock.
- Gerard von Hoffmann, a director of Radiance, owns 10,000 shares of
Endologix Series B preferred stock. Mr. von Hoffman also serves as
patent counsel to both Radiance and Endologix.
- Jeffrey F. O'Donnell, Chairman of the board of directors of Radiance,
owns 40,000 shares of Endologix Series A preferred stock and 20,000
shares of Endologix Series B preferred stock.
In recognition of their service to Radiance, the compensation committee
awarded each of William G. Davis, Edward M. Leonard and Gerard von Hoffman an
option to acquire 25,000 shares of our common stock, which will become fully
vested on completion of the merger. In addition, the compensation committee
amended an existing option to acquire 6,000 shares of our common stock held by
Mr. Davis to have an exercise period of five years from the date we signed the
merger agreement.
The director and officers listed above who are also stockholders and
optionholders of Endologix will receive the same merger consideration as other
stockholders and optionholders of Endologix.
In addition to the ownership of the capital stock of Endologix shown above,
Mr. Brown and Mr. Henson serve as members of the board of directors of both
companies, and Mr. Brown also is the Chief Executive Officer and Chairman of the
board of Endologix.
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All shares of Endologix preferred stock must convert into Endologix common
stock prior to completion of the merger. Also, all options will accelerate and
vest prior to the completion of the merger, and to the extent not exercised
prior to completion of the merger, will terminate.
33
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
Our common stock is traded on the Nasdaq National Market under the symbol
"RADX."
Our common stock commenced trading on the Nasdaq National Market on June
20, 1996. The following table sets forth for the periods indicated the reported
high and low closing sale prices for our common stock as reported on the Nasdaq
National Market.
HIGH LOW
------ -----
FISCAL 2000
First Quarter $12.75 $4.56
Second Quarter 11.25 6.88
Third Quarter 16.69 7.47
Fourth Quarter 11.63 4.56
FISCAL 2001
First Quarter $ 7.31 $3.25
Second Quarter 6.00 2.44
Third Quarter 6.30 1.15
Fourth Quarter 1.95 0.90
FISCAL 2002
First Quarter 2.25 1.19
Second Quarter (through April 4, 2002) 1.43 1.19
On February 8, 2002, the date we signed the merger agreement, the closing
sale price of our common stock on the Nasdaq National Market was $1.73. On
February 11, 2002, the last full trading day prior to the public announcement of
the proposed merger, the high sale price was $1.73 and the closing price was
$1.70 per share, and the low sale price was $1.68 per share. On April 4, 2002
the closing sale price on the Nasdaq National Market was $1.30 per share and
there were approximately 236 record holders of our common stock.
We have never declared or paid and do not anticipate declaring or paying
any dividends on our common stock in the foreseeable future. Any future decision
to pay dividends will be at the discretion of our board of directors and will
depend on then existing conditions, including our financial condition, result of
operations, contractual restrictions, capital requirements, business prospects
and such other factors as our board of directors deems relevant. We currently
intend to retain any future earnings to support our operations and to finance
the growth and development of our business.
34
BUSINESS OF RADIANCE
INTRODUCTION
We have developed proprietary devices to deliver radiation to prevent the
recurrence of blockages in arteries following balloon angioplasty, vascular
stenting and other interventional treatments of blockages in coronary and
peripheral arteries. We incorporate our proprietary RDX technology into
catheter-based systems that deliver beta radiation to the site of a treated
blockage in an artery in order to decrease the likelihood of restenosis. The
application of beta radiation inside the artery at the site of a blockage has
proven clinically effective in inhibiting cell proliferation, a cause of
restenosis.
We designed the RDX system to provide safe and effective treatment for the
prevention of restenosis without many of the disadvantages inherent in
alternative radiation delivery systems. Our proprietary RDX system carries a
radiation source on an inflatable balloon catheter. This patented technology
allows the RDX system to deliver a therapeutic dose of radiation with
approximately 80% less total radiation activity than competing systems. As a
result, the RDX system is easier to use, does not require supplemental capital
equipment, and is readily disposable. In addition, we believe that the RDX
system is suitable to treat arteries that are significantly larger and smaller
than can be treated with alternative radiation delivery systems.
Prior to developing the RDX system, we manufactured and marketed coronary
stents, coronary stent delivery systems and balloon dilatation catheters for
coronary applications. We licensed our proprietary Focus balloon technology to
Guidant Corporation for use in Guidant's stent delivery systems. Royalties from
this license are the primary source of our current revenues.
Recent Developments
In September and November 2001, three companies published the first
feasibility clinical study data for drug coated stents, a competing technology
to our RDX system. While our RDX system uses beta radiation to treat restenosis
resulting from angioplasty procedures, drug coated stents have drugs that
inhibit cell proliferation to limit restenosis. Though drug coated stent
feasibility trials were on a relatively small cohort of patients, all three
companies reported restenosis rates near or at zero percent. In addition, in
March 2002 clinical investigators for Johnson & Johnson reported positive data
involving drug coated stents that showed zero restenosis after a 12 month
period. Finally, in addition to the positive data regarding the ability of drug
coated stents to treat de novo restenosis recently released Brazilian research
data from a small two year study of 30 patients indicates that drug coated
stents are effective in treating in-stent restenosis. Unless clinical study data
involving drug coated stents from the pivotal, larger studies planned or in
progress show restenosis rates significantly higher than reported in pilot
studies, the market for the RDX system likely will be limited.
As a result, in order to conserve cash prior to assessing the outcome of
our BRITE II clinical study and deciding whether to make our RDX system coronary
PMA filing, and to position ourselves to take advantage of strategic
alternatives, we decided in September 2001 to restructure our operations. Our
restructuring plan consisted of the following:
- Discontinue marketing and manufacturing of the RDX system in Europe
and other international markets in the third quarter of 2001;
35
- Discontinue marketing and manufacturing of products using our Focus
technology subject to fulfillment of outstanding orders;
- Cease clinical trials for the RDX system in Japan;
- Involuntary termination of 55 employees, which we completed in the
first quarter of 2002; and
- Search for additional commercial opportunities by evaluating
technologies outside of radiation therapy.
Future Operations
Based on the preliminary results from clinical studies involving drug
coated stents, we believe the market for our RDX system likely will be limited.
We have agreed to acquire Endologix, Inc. for the opportunity to develop an
alternative technology and to manufacture and market a medical device based on
this technology that potentially represents a more promising commercial market.
Therefore, if stockholders approve and the merger is consummated, we expect to
begin combining the operations of Endologix with ours immediately. Although we
plan to complete our remaining clinical trials involving the RDX system, unless
initial positive results from studies involving competing drug coated stent
technologies prove inaccurate, we expect that our ongoing operations following
completion of the merger primarily will be research and development of
Endologix's technology, and the production and distribution of the Endologix
product(s).
INDUSTRY BACKGROUND
Coronary Artery Disease
Coronary artery disease is the leading cause of death in the United States.
More than 13 million people in the United States currently have been diagnosed
with coronary artery disease, which generally is characterized by the
progressive accumulation of plaque on the walls of arteries as a result of the
deposit of cholesterol and other fatty materials. This accumulation of plaque
leads to a narrowing of the interior passage, or lumen, of the arteries,
reducing blood flow to the heart. Insufficient blood flow to the heart restricts
the oxygen supply, resulting in heart attack and/or death.
Coronary artery disease is treated by re-opening or bypassing narrowed
blood vessels, thereby increasing blood flow to the heart. The three most common
forms of treatment are:
- coronary artery bypass graft, or CABG;
- percutaneous transluminal coronary angioplasty, or PTCA; and
- stenting.
CABG is a highly invasive, open-chest surgical procedure in which blood
vessel grafts from the patient's leg or chest are used to bypass the site of a
blocked artery, thereby restoring blood flow. CABG, still considered the most
effective and long-lasting treatment for coronary artery disease, is generally
the primary treatment for severe coronary artery disease involving multiple
vessels. In
36
addition, CABG is often a treatment of last resort for patients who have
undergone other less invasive procedures but require reintervention.
PTCA is the principal less invasive alternative to CABG. PTCA is performed
in a cardiac catheterization laboratory, commonly referred to as a cath lab, by
an interventional cardiologist. During PTCA, the cardiologist inserts a
guidewire into a blood vessel through a puncture in the leg, or arm in some
cases, and guides it through the blood vessel to the diseased site. The
cardiologist then guides a balloon-tipped catheter over the wire to the location
of the plaque, or lesion, obstructing the artery. After positioning the balloon
across the lesion inside the vessel, the cardiologist inflates and deflates the
balloon several times. Frequently, the cardiologist inflates successively larger
balloons at the lesion site, requiring the use of multiple balloon catheters.
The inflation of the balloon cracks or reshapes the plaque and the arterial
wall, thereby expanding the arterial passage. PTCA typically results in
increased blood flow without the actual removal of any plaque. However, injury
to the arterial wall often occurs under balloon pressure. Clinical studies
indicate that patients treated with PTCA often experience restenosis within six
months following the procedure.
Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased diameter in the coronary
artery by mechanically supporting the diseased site. Of all the non-surgical
treatments that have sought to improve PTCA, stents have shown the best results
in reducing the rate of restenosis. In 2000, stents were used in approximately
70% to 90% of the PTCA procedures performed in the United States. In a typical
stent procedure, a cardiologist pre-dilates the artery at the lesion site with a
balloon catheter, delivers the stent to the site of the lesion and, with the use
of a second balloon catheter, expands the stent and firmly positions it in
place. Once placed, stents support the walls of the coronary artery to enable
the artery to remain open and functional.
The use of stents has grown rapidly since their commercial introduction in
the United States in 1994. Despite their rapid adoption, stents have some
disadvantages. While stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, they may increase, rather than decrease, the excessive proliferation
of cells at the treatment site, referred to as hyperplasia. Stents not only are
permanent implants that may result in unforeseen long-term adverse effects, but
stents also cannot be used in cases where the coronary arteries are too tortuous
or too narrow.
Peripheral Vascular Disease
Peripheral vascular disease encompasses a broad spectrum of blockages
outside the coronary circulatory system. Peripheral vascular disease generally
is characterized by atherosclerosis of the inside walls of the peripheral, or
non-coronary, arteries, frequently those of the legs. This condition leads to a
narrowing of the lumen, reducing blood flow to the extremities, especially the
feet and legs. Insufficient blood flow to these areas restricts the oxygen
supply, resulting in tissue death and, in extreme cases, gangrene and
amputation. Treatment methods for these patients include arterial bypass surgery
and balloon angioplasty.
Restenosis
Restenosis typically refers to a renarrowing of an artery within six months
of a revascularization treatment to less than 50% of the artery's size following
the original procedure.
37
Restenosis is a vascular response to arterial injury and occurs frequently after
a revascularization procedure. A revascularization stretches arteries or
otherwise damages the treated segment of an artery. Due to multiple mechanisms
controlling vascular repair, restenosis may occur within a short period after a
revascularization procedure or may develop over the course of months or years.
Restenosis that occurs shortly after a revascularization procedure usually
results from elastic recoil of the artery.
Restenosis occurring a longer period of time after a revascularization
procedure may result from excessive proliferation of cells at the treatment
site, known as hyperplasia, or from a remodeling of the arterial segment, the
causes of which are not well understood. In response to an arterial injury from
revascularization, the body initiates a biochemical response to repair the
injury site and protect it from further harm. This response will include a
signal to adjacent cells of the arterial wall to multiply. Often this cell
proliferation goes unchecked, resulting in a much thicker and inelastic arterial
wall and in reduced blood flow.
Radiation Therapy and Vascular Brachytherapy
For more than 50 years, radiation therapy has been used routinely to treat
proliferative cellular disorders, such as cancer. There are two types of
radiation used for brachytherapy, beta and gamma. While externally applied
radiation has shown little beneficial effect on treated arteries, the
application of beta and gamma radiation within the blood vessel at the site of
arterial injury has proven clinically effective in treating restenosis by
inhibiting cell proliferation. This type of treatment is referred to as vascular
brachytherapy.
MARKET OPPORTUNITY
Size of Market
Coronary Artery Disease. Coronary artery disease is the leading cause of
death in the United States and Europe. In 1999, physicians performed
approximately 1.2 million PTCA procedures worldwide to treat this disease.
Approximately 40% of PTCA patients experience restenosis within six months of
the initial procedure. These patients may require another angioplasty procedure
or a CABG procedure. Approximately 400,000 CABG procedures are performed
annually in the United States. Approximately 25% of all heart bypass grafts
narrow or become blocked within five years, requiring a repeat procedure.
Approximately 70% to 90% of angioplasty procedures include the placement of
a stent. Clinical studies indicate that 15% to 30% of the patients who receive
stents following balloon angioplasty experience restenosis, referred to as
"in-stent" restenosis. Patients suffering from in-stent restenosis often
experience recurrent restenosis and, as a result, are prone to multiple
revascularization procedures. The likelihood of recurrent restenosis in this
group of patients is between 40% to 65%. In total, approximately $3 billion is
spent annually in the United States on repeat revascularization procedures
prompted by restenosis.
The entry of drug coated stents into the market, if the larger clinical
trials underway are successful, likely will have a significant negative impact
on the market for vascular brachytherapy. We expect initial results of these
larger clinical trials in the third quarter of 2002.
38
Peripheral Vascular Disease. Peripheral vascular disease encompasses a
broad spectrum of blockages outside the coronary circulatory system. This
disease afflicts up to 5% of all men and 2% of all women age 50 or older,
resulting in approximately 350,000 newly diagnosed cases per year in the United
States. Physicians perform approximately 300,000 peripheral vascular blockage
revascularization procedures annually in the United States. Of these,
approximately 35% to 40% are peripheral balloon angioplasty procedures. More
than 40% of these patients experience restenosis. At present, the treatment
options for restenosis in these patients include a repeat angioplasty or a
peripheral artery bypass procedure.
There currently is one large clinical trial for the treatment of peripheral
vascular disease being conducted. We believe that positive results from this
trial or others involving peripheral vascular disease could expand the market
for the treatment of peripheral vascular disease. We believe, however, that
unless we produce the RDX system for coronary applications, the manufacturing
and marketing of the RDX system for treatment of peripheral vascular disease
most likely will not be commercially viable.
PRODUCTS
The RDX System
Device description. The RDX system is a patented device that we believe
represents a second generation radiation delivery technology for use in vascular
brachytherapy. The RDX system is unique among devices developed for this purpose
due to its use of a radioactive source carried by a balloon. Our innovative RDX
system is fabricated by encapsulating, or sandwiching, a radioactive film source
within two balloon membranes. The two balloon membranes isolate the source from
direct contact with the patient and the inflation media, thereby fully
containing the isotope. The source element is a thin film containing solid state
Phosphorous-32, or (32)P. (32)P is a pure beta emitter, with a half-life of 14.3
days.
A customized plastic shield approximately 2.0 centimeters in diameter
covers the radioactive portion of the catheter. Plastic is an effective shield
for beta isotopes. Dose rates measured on the surface of the shield while the
balloon is in the shield are less than the hand dose received from other medical
equipment typically used in a catheterization procedure. The radiation is low
enough that the RDX system can be packaged in a standard catheter kit and
shipped via overnight delivery. The shield serves both to protect personnel from
radiation while the device is not in use, and to introduce the device into the
guiding catheter. The RDX system can be developed in a variety of balloon
diameters and source lengths for coronary and peripheral treatment applications.
We designed the RDX system's catheter to allow for its configuration in both
over-the-wire and rapid-exchange format, the two methods used to deploy
angioplasty balloons.
The RDX System Treatment Procedure. The RDX system is approximately as
flexible as a conventional PTCA catheter, and delivers the balloon radiation
source to the lesion site the same way as a conventional balloon catheter. The
RDX system does not require any custom guides, catheters or wires for use. Prior
to using the RDX system, the cardiologist completes the primary
revascularization procedure, leaving the guidewire across the lesion.
The cardiologist introduces the RDX system into the patient and advances it
to the treatment site in a manner similar to any PTCA catheter. Once in place,
low pressure inflation of the balloon at two atmospheres deploys the source
directly against the internal wall of the vessel. After leaving the
39
RDX catheter in place for the dwell time, which is pre-printed on the package,
to achieve the correct dose, the cardiologist deflates the balloon and withdraws
the source back into the shield.
For disposal, the source portion is cut off of the catheter into a shielded
container, and the balance of the catheter is disposed of as normal medical
waste. Approximately one year later, the medical facility disposes of the source
portion as normal medical waste.
RDX System Product Pipeline. We are not actively developing any additional
products at this time, at least until we are able to assess the results of our
BRITE II clinical study and the results of the larger trials involving drug
coated stents that other companies currently are conducting.
Catheter and Stent Products
In the past we manufactured a number of integrated stent delivery systems
for coronary applications. In December 2001, we discontinued the manufacture and
sale of products subject to the shipment of outstanding orders. In June 1998, we
licensed our Focus technology to Guidant for use in stent delivery as part of a
long term technology license agreement.
CLINICAL TRIALS
Our RDX Clinical Trials
We currently are conducting the Beta Radiation to Reduce In-Stent
Restenosis, or BRITE II, clinical trial in the United States and Europe to
obtain regulatory approval to market the RDX system in the United States. We are
conducting the BRITE II study to obtain the data we need to support a pre-market
approval application for the FDA to market the RDX system in the United States
for the treatment of in-stent restenosis. We are conducting the BRITE SVG study
to show the feasibility of the RDX system in treating restenosis in sapheneous
vein graft patients, and we are conducting the Radiation After PTA is Done, or
RAPID, study to show the feasibility of the RDX system in peripheral arteries.
BRITE II Clinical Study. BRITE II is a multicenter, randomized, double
blind placebo controlled clinical study designed to prove the safety and
efficacy of the RDX system for the treatment of in-stent restenosis. We
completed enrollment of 423 patients in December 2001. We will conduct clinical
and angiographic follow-up nine months post procedure, which we expect to
complete in September 2002. If the data is positive and if the initial positive
results from studies involving competing drug coated stent technologies prove
unsustainable in larger clinical trials, we may use the data to support a PMA
application to the FDA. We expect to report the results of the study by the end
of 2002 or early 2003.
BRITE SVG Clinical Study. The BRITE SVG study is a multicenter, pilot study
designed to show the feasibility of the RDX system for the treatment of
restenosis in sapheneous vein graft patients after receiving PTCA. This clinical
study includes only patients who have undergone a coronary bypass surgical
procedure and, following a diagnosis of a blockage in one of the bypass grafts,
require further interventional treatment. The vessels in such patients are
larger than normal coronary arteries and are 3.0 to 5.0 millimeters in size. The
protocol allows treatment of both in-stent lesions and de novo lesions. In July
2001, we completed enrollment of 49 patients, including 24 patients with
in-stent lesions and 25 patients with de novo lesions. We expect to report the
results of this study in the second quarter of 2002.
40
RAPID Clinical Study. Surgery and percutaneous transluminal angioplasty, or
PTA, are common treatments for peripheral artery disease related to stenosis of
the peripheral arteries. As with PTCA, the long term effectiveness of PTA is not
as favorable as surgery, due to restenosis. Early studies with gamma radiation
have shown that brachytherapy may be effective in reducing restenosis rates
after PTA. We designed the RAPID study to investigate the feasibility of beta
radiation for the treatment of the artery located in the mid to lower thigh,
where stenosis develop that affect the patient's ability to walk and can lead to
ulceration, gangrene, or even amputation in extreme cases. In May 2001, we
performed the first known radiation of a peripheral vessel by using a larger
version of our RDX system adapted for peripheral use. We expect to complete
enrollment in the second quarter of 2002, and expect to have results available
by the end of 2002 or early 2003.
CLINICAL TRIALS OF DRUG COATED STENTS
In addition to the data already released by three companies from
feasibility studies regarding drug coated stents, a competing technology to our
RDX systems, a number of our competitors currently are conducting
investigational studies in the United States and Europe on drug coated stents.
Some of these studies in the summary of the data released thus far are as
follows:
- In September 2001, Johnson & Johnson released randomized trial data
from the RAVEL study. Six month follow-up on 120 patients showed no
restenosis in the test group.
- In September 2001, Boston Scientific released results from the TAXUS I
study involving 30 patients. Sixth month angiographic follow-up showed
no restenosis versus 11% in the control group, although the data is
not statistically significant due to the small number of patients.
- In November 2001, Cook released randomized trial data from the
European ELUTES study involving approximately 200 patients in four
escalating dose groups and a control group. The data showed a 3%
restenosis rate in the highest dose group versus 20.6% in the control
group.
- In November, 2001, Cook released data from the ASPECT trial being
conducted in Asia. The ASPECT trial involved approximately 150
patients, and showed results similar to the ELUTES study, although
Cook believes safety data was not as positive due to inconsistencies
in the medications given to some patients in the study.
In addition to the studies on coronary arteries outlined above, several
companies also have announced studies to evaluate the use of drug coated stents
in treating in-stent restenosis, vein grafts and peripheral artery disease.
MANUFACTURING
The RDX System. In the event we decide to begin manufacturing the RDX
system, we plan to manufacture the base catheter of the RDX system at our
facilities in Irvine, California. In Europe, we have an agreement with Bebig, a
German manufacturer, to activate the radioactive sources and complete final
assembly of the RDX system. Pursuant to an amended two year manufacturing
agreement that is renewable three times for subsequent two-year terms, Bebig
would perform final assembly with our proprietary equipment and proprietary
processes. Bebig produced only a small number of units for us under the
manufacturing agreement. If we were to receive regulatory approval
41
and decide to market the RDX system in the United States, we would expect to
enter into a similar agreement with a company located in the United States. In
October 2001 we stopped manufacturing of the RDX system in Europe. The physical
plant still remains at Bebig in Germany although Bebig no longer staffs the
facility. Currently, all radioactive source manufacture and final assembly used
for clinical trials have been produced by a U.S. based, licensed radiation
facility. Regulations require that a licensed facility must perform the handling
of radioactive materials. We do not have and do not intend to pursue such a
license, and therefore we would contract with outside facilities to handle
radioactive materials for us. The radioactive manufacturing facility in the U.S.
is still functional and is able to produce catheters as required for the BRITE
II clinical trial. Although we shut down our manufacturing facility in December
2001, we would restart it in the event we receive PMA approval from FDA and
decided to market the RDX system in the United States.
Due to the shelf-life of the RDX system, it is critical to manufacture and
ship these products as close to the date of use as possible. Moreover,
coordination among us, the contract manufacturer, the shipping carrier and the
end user is necessary in order to reduce product waste. Because radioactive
sources must travel from one licensed facility to another licensed facility, the
source manufacturer, such as Bebig, will be responsible for warehousing the
final RDX system and shipping it to the end user.
Catheter and Stent Products. We shut down our catheter and stent assembly
facility in Irvine, California in December 2001.
MARKETING AND SALES
In December 2001 we discontinued all sales and marketing activities for
Radiance Medical Systems products worldwide.
Guidant Corporation. In June 1998, we entered into a technology license
agreement with Guidant, an international interventional cardiology products
company, granting them a 10 year license to manufacture and distribute stent
delivery products using our Focus technology. We are entitled to receive
royalties as long as the agreement is in effect. In the year ended December 31,
2001, we recorded $6.4 million in royalties.
Cosmotec Co., Ltd. In June 1999, we granted Cosmotec of Japan distribution
rights to market our vascular radiation therapy products in Japan. We received
an upfront cash payment and are recognizing the income over the seven-year term
of the distribution agreement. We also received $1.0 million from Cosmotec for a
debenture issued in June 2000, which was converted into 142,857 shares of common
stock at $7.00 per share in August 2000. As part of this transaction, in August
1999 we acquired a 51% interest, for $233,000, in a joint venture named
Radiatec, with an affiliate of Cosmotec to gain regulatory approval of and
provide distribution for the RDX system in Japan.
In 1998 and 1999, we reduced our U.S. sales force and did not actively
promote our products in the United States due to regulatory approval
requirements, the competitive environment and our decision to focus our efforts
on the development of the RDX system. Due to the licensing in June 1998 of the
technology upon which our currently-marketed products are based, and the sale of
our vascular access product line and related assets in January 1999, our product
sales decreased substantially since 1998. We do not expect to have sales in the
foreseeable future unless we receive PMA approval from the FDA and decide to
market the RDX system in the United States.
42
PATENTS AND PROPRIETARY INFORMATION
We own two issued United States patents and hold a non-exclusive license to
a third issued United States patent along with its issued German counterpart,
covering the present design of the RDX system. All four issued patents relate to
radiation delivery catheters in which the radioisotope is carried by an
inflatable balloon for positioning against a vessel wall. We own three
additional issued United States patents relating to radiation delivery systems
which are not incorporated in the present design of the RDX system.
In July 1999, we entered into a three-year technology sub-license agreement
with Bebig for non-exclusive rights to the Hehrlein patents for radiation
technology. In October 2001 we amended the agreement with Bebig. Pursuant to the
amendment, we extended the license until November 2002. At that time, we will
assess the status of our clinical trials and the market for our RDX system. If
we do not enter into another license agreement with Bebig at that time, it is
unlikely that Bebig will continue to license the Hehrlein patents from Hehrlein,
and therefore the rights to the Hehrlein patents would revert to Hehrlein.
Including the patents and rights to the RDX system and radiation delivery,
we own or have the rights to 31 issued U.S. patents, one issued European patent
and two Japanese patents covering certain aspects of our technologies. Our
policy is to protect our 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 our business. We cannot
assure you that any issued patents will provide competitive advantages for our
products or that they will not be challenged or circumvented by our competitors.
COMPETITION
We believe that the primary competitive factors in the market for
interventional cardiology devices are:
- clinical effectiveness;
- product safety;
- catheter size;
- flexibility and trackability;
- ease of use;
- reliability;
- price;
- availability of third-party reimbursement;
- distribution capability;
- time necessary to develop products successfully; and
43
- ability to receive regulatory approval.
We believe drug coated stents, and the companies that manufacture them, are
the most significant competitive obstacles we face. Several companies, including
Johnson & Johnson, Boston Scientific, Cook and Guidant Corporation, are
attempting to develop drug coated stents. These stents typically are coated with
a drug that inhibits growth of tissue to attempt to prevent or reduce the
occurrence of restenosis. Johnson & Johnson's stent, in a small feasibility
trial, showed a significant reduction in restenosis, and they completed
enrollment and begun patient follow up in an 1,100 patient, randomized trial. To
date, none of the drug coated stents has received regulatory approval, although
Johnson & Johnson could receive CE Mark approval as early as the second quarter
of 2002 and PMA approval in early 2003. Although we cannot predict the market
for drug coated stents with certainty until results from larger clinical trials
become available, based on the preliminary results from studies involving drug
coated stents, we believe the market for our brachytherapy products likely will
be limited.
Most of our competitors have substantially greater capital resources than
we do and also have greater resources and expertise in the areas of research and
development, obtaining regulatory approvals, manufacturing and marketing. We
cannot assure you that competitors and potential competitors will not succeed in
developing, marketing and distributing technologies and products that are more
effective than those we will develop and market or that would render our
technology and products obsolete or noncompetitive. Additionally, many of the
competitors have the capability to bundle a wide variety of products in sales to
cath labs. We may be unable to compete effectively against such competitors and
other potential competitors in terms of manufacturing, marketing and sales.
Any product we develop that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products, such as drug coated stents. Accordingly, we expect the relative speed
with which we can develop products, gain regulatory approval and reimbursement
acceptance and supply commercial quantities of the product to the market to be
an important competitive factor. In addition, we believe that the primary
competitive factors for products addressing restenosis include safety, efficacy,
ease of use, reliability, suitability for use in cath labs, service and price.
Drug coated stents compare more favorably than our RDX system with respect to
all of these factors. We also believe that physician relationships, especially
relationships with leaders in the interventional cardiology community, also are
important competitive factors.
THIRD-PARTY REIMBURSEMENT
In the United States, medical institutions are the primary purchasers of
our products. Medical institutions then bill various third-party payors, such as
Medicare, Medicaid, and other government programs and private insurance plans,
for the healthcare services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group established by the U.S. Centers for Medicare and
Medicaid Services, or CMS. The fixed rate of reimbursement is based on the
procedure performed, and is unrelated to the specific devices used in that
procedure.
Reimbursement of interventional procedures utilizing our products currently
is covered under a diagnosis-related group. However, if a procedure is not
covered by a diagnosis-related group,
44
payors may deny reimbursement. In addition, 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. Therefore, we cannot assure you that reimbursement for any new
procedure we develop will be available to hospitals and other users of our
products, or that future reimbursement policies of payors will not hamper our
ability to sell new products on a profitable basis.
Outside the United States, market acceptance of products depends partly
upon the availability of reimbursement within the prevailing healthcare payment
systems. Reimbursement systems vary significantly by country, and by region
within some countries, and reimbursement approvals must be obtained on a
country-by-country basis. Reimbursement is obtained from a variety of sources,
including government sponsored healthcare and private health insurance plans.
Some countries have centrally organized healthcare systems, but in most
cases there is a degree of regional autonomy either in deciding whether to pay
for a particular procedure or in setting the reimbursement level. The manner in
which new devices enter the healthcare system depends on the system: there may
be a national appraisal process leading to a new procedure or product coding, or
it may be a local decision made by the relevant hospital department. The latter
is particularly the case where a global payment is made that does not detail
specific technologies used in the treatment of a patient. Most foreign countries
also have private insurance plans that may reimburse patients for alternative
therapies. Although not as prevalent as in the United States, managed care is
gaining prevalence in certain European countries.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
other countries. The general escalation in medical costs has led to and probably
will continue to create increased pressures on the health care providers to
reduce the cost of products and services, including any products we develop. If
third party reimbursements are inadequate to provide us with a profit on any
products we develop, our efforts to develop and market products in the future
may fail.
GOVERNMENT REGULATION
The manufacturing and marketing of our products are subject to extensive
and rigorous government regulation in the United States and in other countries.
Prior to commercialization, new products must meet rigorous governmental agency
requirements for pre-clinical and clinical testing and patient follow-up.
Federal regulations control the ongoing safety, efficacy, manufacture, storage,
labeling, record-keeping, and marketing of all medical devices. We cannot sell
or market the RDX system without U.S. and foreign approvals.
If a medical device manufacturer establishes that a newly developed device
is "substantially equivalent" to a legally marketed Class I or Class II device,
or to a Class III device that the Food and Drug Administration, or FDA, has not
called for a pre-market approval application, or PMA, 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.
All of the 510(k) clearances received for our catheters were based on
substantial equivalence to legally marketed devices. We cannot assure you that
the FDA will grant us timely 510(k) clearance for any of our future products or
significant modifications of our existing products. In addition, if the FDA has
concerns about the safety or effectiveness of any of our products, it could act
to withdraw approval or clearances of those products or request that we present
additional data.
45
If substantial equivalence cannot be established, or if the FDA determines
the device or the particular application for the device requires a more rigorous
review to assure safety and effectiveness, the FDA will require the manufacturer
to submit a PMA which 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 typically requires the submission of clinical data. The
PMA process may require as many as 1,000 patients, depending on indications,
with at least one year follow-up. The RDX system will be subject to this PMA
process over the next two years. In January 2001, we began the BRITE II trial, a
423 patient randomized study to test the efficacy of the RDX system for the
treatment of in-stent restenosis.
Because the RDX system utilizes radiation sources, its manufacture,
distribution, transportation import/export, use and disposal are subject to
federal, state and/or local laws and regulations relating to the use and
handling of radioactive materials. If we decide to commercialize the RDX system,
we will need to maintain our device registration with the U.S. Nuclear
Regulatory Commission, or NRC, or an equivalent state agency, of our radiation
sources for certain medical uses to distribute the radiation sources
commercially to licensed recipients in the United States. In addition, we and/or
our supplier of radiation sources must obtain a specific license from the NRC to
distribute such radiation sources commercially as well as comply with all
applicable regulations. We and/or our supplier of radiation sources also must
comply with NRC and U.S. Department of Transportation regulations on the
labeling and packaging requirements for shipment of radiation sources to
hospitals or other users of the RDX system. In addition, hospitals may be
required to obtain or expand their licenses to use and handle beta radiation
prior to receiving radiation sources for use in the RDX system. We would expect
to comply with comparable radiation regulatory requirements and/or approvals in
markets outside the United States.
FDA regulations require us to register as a medical device manufacturer
with the FDA. Additionally, the California Department of Health Services, or
CDHS, requires us to register as a medical device manufacturer within the state.
Because of this, the FDA and the CDHS inspect us on a routine basis for
compliance with QSR regulations. These regulations require that we manufacture
our products and maintain related documentation in a prescribed manner with
respect to manufacturing, testing and control activities. We have undergone and
expect to continue to undergo regular QSR inspections in connection with the
manufacture of our products at our facilities. Further, the FDA requires us to
comply with various FDA regulations regarding labeling. The Medical Device
Reporting laws and regulations require us to provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of our
devices, as well as product malfunctions that likely would 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.
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, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of our products. Delays in receipt of clearances or approvals, failure
to receive clearances or approvals or the loss of previously received clearances
or approvals would have a material adverse effect on our business, financial
condition and results of operations.
46
We are subject to other federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices. We cannot accurately predict the extent of government
regulation that might result from any future legislation or administrative
action. Failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
International sales are subject to regulatory requirements in many
countries. The regulatory review process varies from country to country and may
in some cases require the submission of clinical data. We most likely would rely
on distributors in such foreign countries to obtain the requisite regulatory
approvals. We cannot assure you, however, that we would obtain such approvals on
a timely basis or at all. In addition, the FDA must approve the export to
certain countries of devices which require a PMA but are not yet approved
domestically.
If we decided to sell a product in Europe, we would need to comply with the
requirements of the Medical Devices Directive, or MDD, and affix the CE Mark on
our products to attest to such compliance. To achieve compliance, our products
must meet the "Essential Requirements" of the MDD relating to safety and
performance and we must successfully undergo verification of our regulatory
compliance, or conformity assessment, by a Notified Body selected by us. The
level of scrutiny of such assessment depends on the regulatory class of the
product, and many of our coronary products are currently in Class III, the
highest risk class, and therefore subject to the most rigorous controls.
In December 1996, we received ISO 9001/EN46001 certification from our
Notified Body with respect to the manufacturing of all of our products in our
Irvine facilities. This certification demonstrates that we manufacture our
products in accordance with certain international quality requirements. A
manufacturer must receive ISO 9001/EN46001 certification prior to applying for
the CE Mark of specific products. In January 1998, we obtained the right to
affix the CE Mark to all of our products then sold in Europe. We are subject to
continued supervision by our Notified Body and will be required to report any
serious adverse incidents to the appropriate authorities. We also must comply
with additional requirements of individual nations. Failure to maintain
compliance required for the CE Mark could have a material adverse effect upon
our business, financial condition and results of operations. We cannot assure
you that we will be able to achieve or maintain such compliance on all or any
product or that we will be able to produce products timely and profitably while
complying with the MDD and other regulatory requirements.
In June 2001, we received CE Mark approval of the RDX system. However, as a
result of our restructuring in September 2001, we do not at this time have plans
to market the RDX system in Europe.
PRODUCT LIABILITY
The manufacture and marketing of medical devices carries the risk of
financial exposure to product liability claims. Medical devices often are 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. We are
currently covered under a product liability insurance policy with coverage
limits of $10.0 million per occurrence and $10.0 million per year in the
aggregate. We cannot assure you that our product liability insurance is adequate
or that such insurance coverage will remain available at acceptable costs. We
also cannot assure you that we will not incur significant product liability
claims in the future. A successful claim
47
brought against us in excess of its insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
Additionally, adverse product liability actions could negatively affect the
reputation and sales of our products and our ability to obtain and maintain
regulatory approval for our products, as well as substantially divert the time
and effort of management away from our operations.
EMPLOYEES
As of December 31, 2001, we had 14 employees, including four in
manufacturing, five in clinical affairs, one in sales and marketing and four in
administration. We reduced our workforce from 64 employees in September 2001 to
nine employees in the first quarter of 2002. We believe that the success of our
business will depend, in part, on our ability to attract and retain qualified
personnel. Our employees are not subject to a collective bargaining agreement,
and we believe we have good relations with our employees.
RESEARCH AND DEVELOPMENT
We spent $14.6 million in fiscal year 2001, $11.5 million in fiscal year
2000, and $8.6 million in fiscal year 1999 on research and development.
PROPERTIES
Currently, we lease facilities aggregating approximately 33,000 square
feet, including 11,000 square feet subleased to others, in Irvine, California
under various lease agreements, most of which expire in October 2003. As a
result of our restructuring, we are attempting to sublease to others
approximately 16,000 additional square feet of our facilities. Endologix is
considering using this space. We believe that our facilities are adequate to
meet requirements through the term of our lease.
LEGAL PROCEEDINGS
In September 1999, Endosonics Corporation, now a wholly-owned subsidiary of
Jomed N.V., filed a complaint for declaratory relief against Radiance in the
Superior Court in Orange County, California, claiming that under a May 1997
agreement between the parties, Endosonics had rights to combine Radiance's Focus
balloon technology with an Endosonics' ultrasound imaging transducer on the same
catheter with a coronary vascular stent. In February 2001 the court ruled in our
favor, ruling that Jomed-Endosonics had no such rights to include a stent with
the Focus balloon and ultrasound imaging transducer. Under the judgment, we are
entitled to recover approximately $460,000 of our legal fees. In May 2001
Jomed-Endosonics appealed the judgment, and the court has not yet set a hearing
date for the appeal. We do not believe that this matter will have a material
adverse effect on our financial position or operating results.
We are a party to other ordinary disputes arising in the normal course of
business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on our consolidated financial position.
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BUSINESS OF ENDOLOGIX
INTRODUCTION
Engologix is engaged in the development, manufacture, sales and marketing
of minimally invasive therapies for the treatment of cardiovascular disease.
Endologix's first product, the PowerLink System, is a catheter-based alternative
treatment for abdominal aortic aneurysm, or AAA. AAA is a weakening of the wall
of the aorta, the largest artery of the body. Once AAA develops, it continues to
enlarge and if left untreated becomes increasingly susceptible to rupture. The
overall patient mortality rate for ruptured abdominal aortic aneurysms is
approximately 75%. AAA is the 13th leading cause of death in the United States
today.
Dr. Edward Diethrich, one of Endologix's founders and a director, and his
associates at the Arizona Heart Institute, or AHI, in Phoenix, Arizona, have
been leaders in the development of minimally invasive treatments for
cardiovascular disease. As a pioneer in treating abdominal aortic aneurysms
utilizing catheter-based technologies, Dr. Diethrich was involved with a number
of commercial device human clinical trials. Together with his associates, Dr.
Diethrich handcrafted new endoluminal grafts incorporating innovative designs
and conducted a pilot human clinical study under the auspices of the FDA. The
early results were encouraging and led to Endologix's formation in 1997.
The PowerLink System, is a catheter and endoluminal graft, or ELG, system.
The self-expanding stainless steel stent cage is covered by ePTFE, a common
surgical graft material. The PowerLink ELG is implanted in the abdominal aorta
gaining access through the femoral artery. Once deployed into its proper
position, the blood flow is shunted away from the weakened or "aneurysmal"
section of the aorta, reducing pressure and the potential for the aorta to
rupture. Endologix believes that implantation of its products will reduce the
mortality and morbidity rates associated with conventional AAA surgery.
Endologix believes the appeal of the PowerLink System for patients,
physicians, and health-care payors is compelling. The current standard of
treatment is a highly invasive, open surgical procedure requiring a large
incision in the patient's abdomen, withdrawal of the patient's intestines to
provide access to the aneurysm, and the cross clamping of the aorta to stop
blood flow. This procedure typically lasts two to four hours and is performed
under general anesthesia. This surgery has an operative mortality rate estimated
to range from 4% to 10%, dramatically higher than the 1.5% surgical mortality
that is expected for conventional coronary bypass surgery. In addition,
complication rates vary depending upon patient risk classification, ranging from
15% for low-risk patients to 40% for high-risk patients. The average cost of
conventional AAA surgery is approximately $28,000, excluding physicians' fees.
The typical recovery period for conventional AAA surgery includes a hospital
stay of 10 to 15 days and post-hospital convalescence of 8 to 12 weeks.
CLINICAL OVERVIEW
Atherosclerosis is a type of arteriosclerosis. Arteriosclerosis is the
thickening and hardening of arteries. Some hardening of arteries occurs
naturally as people grow older. Atherosclerosis involves deposits of fatty
substances, cholesterol, cellular waste products, calcium and other substances
on the inner lining of an artery. Atherosclerosis is a slow, complex disease
that starts in childhood and often progresses with age.
49
Atherosclerosis also can reduce the integrity and strength of the vessel
wall, causing the vessel wall to expand or balloon out. This is called an
aneurysm. Aneurysms are commonly diagnosed in the aorta, which is the body's
largest artery. The highest incidence of aortic aneurysms occurs in the segment
below the opening of the arteries that feed the kidneys, the renal arteries, to
where the aorta divides into the two iliac arteries that travel down the legs.
Once diagnosed, patients with AAA require a combination of medical therapy and
non-invasive monitoring, or must undergo a major surgery procedure to repair the
aneurysm.
For years, physicians have been interested in less invasive methods to
treat AAA disease as an alternative to the current standard of surgical repair.
The high morbidity and mortality rates of surgery is well-documented, yet
medical management for this condition carries the catastrophic risk of aneurysm
rupture. Physicians and commercial interests alike began investigating
catheter-based alternatives to repair the aneurysm from within, utilizing
surgical grafts in combination with expandable wire cages or scaffolds to
exclude blood flow and pressure from the weakened segment of the aorta.
MARKET OPPORTUNITY
In the United States alone, an estimated 1.7 million people have an
abdominal aortic aneurysm, including those not yet diagnosed. Once an abdominal
aortic aneurysm develops, it continues to enlarge and if left untreated, becomes
increasingly susceptible to rupture. The overall patient mortality rate for
ruptured aneurysms is approximately 75%. Even intact or non-ruptured AAAs can
cause serious clinical problems. Although AAA is one of the most serious
cardiovascular diseases, most AAAs are never detected. Approximately 70% to 80%
of AAA patients do not have symptoms at the time of initial diagnosis, and AAAs
generally are discovered inadvertently during procedures to diagnose unrelated
medical conditions. Endologix estimates that each year approximately 190,000
AAAs are diagnosed in the United States and 45,000 patients undergo surgery.
AAAs generally are more prevalent in people over the age of 60 and are more
common in men than in women.
Endologix's minimally invasive treatment of AAA requires only a small
incision in the femoral artery of the leg, minimizing both hospital lengths of
stay and the amount of time required for convalescence. These benefits led many
physicians and commercial concerns to invest time, money and energy to develop
these technologies.
Endologix expects adoption of less invasive treatments will phase in over
time and be segmented by the size of the aneurysm. Patients diagnosed with an
abdominal aortic aneurysm larger than five centimeters can be classified into
three categories, those patients opting for elective surgery, patients who
refuse surgery due to the clinical risks, and those who are considered at high
risk for an open procedure. These high-risk patients will populate the initial
patient pool for Endologix's less invasive techniques. Endologix believes that
ELGs could be applied to as much as 60% of the approximately 45,000 surgeries
performed in the United States each year. Endologix expects the market
opportunity to grow based on the following factors:
- Elderly Population Growth Rate. In 2000, the age 65 and over
population in the United States numbered approximately 34 million, or
12.4% of the total population, while growing at a higher growth rate
than the overall U.S. population. In the United States, the vast
majority of AAA cases are performed in patients age 65 and over.
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- Increasing Expectations of Maintaining Active Lifestyles. Baby
boomers, on average, exercise more frequently and live more active
lifestyles than the average American. As baby boomers age, their more
active lifestyle, combined with their strong desire to maintain the
quality of life to which they are accustomed, make them increasingly
likely to seek minimally invasive alternatives and forego the long
convalescence period required by conventional surgical alternatives.
- Increased Screening will Increase the Patient Pool. Medical Journals
report that AAA screening at age 65 reduces mortality from AAA
disease. Endologix believes that like colonoscopy or mammography,
non-invasive testing and minimally invasive alternatives for treatment
of AAA will increase the number of patients seeking screening for this
serious medical condition.
ENDOLOGIX'S SOLUTION
Endologix's PowerLink System is a self-expanding stainless steel stent cage
covered with ePTFE, a common surgical graft material. The PowerLink ELG is
implanted in the abdominal aorta, gaining access by a small incision through the
femoral artery. Once deployed into its proper position, the blood flow is
shunted away from the weakened, or aneurysmal, section of the aorta, reducing
pressure and the potential for the aorta to rupture.
Endologix has followed the progress of early technologies and Endologix
believes the PowerLink System is a superior design that overcomes the inherent
limitations of early generation devices. Endologix believes that major
advantages of its PowerLink System are as follows:
- One-Piece, Bifurcated ELG. This eliminates many of the problems
associated with early generation multi-piece systems. The PowerLink
System eliminates much of the guidewire manipulation required during
the procedure to assemble the component parts of a modular system,
thereby simplifying the procedure. In addition, in the follow-up
period, there can be no limb detachment with a one-piece system.
Endologix believes this should result in continued long term exclusion
of the aneurysm, and excellent clinical results.
- Fully Supported. The main body and limbs of the PowerLink System are
fully supported by a stainless steel cage. The stainless steel cage
greatly reduces or eliminates the risk of kinking in even tortuous
anatomy, eliminating the need for additional procedures or costly
peripheral stents. Kinking results in reduced blood flow and limb
thrombosis.
- Unique, Minimally Invasive Delivery Mechanism. The PowerLink System
only requires a small surgical incision in one leg. The other leg only
needs placement of a non-surgical introducer sheath, only three
millimeters in diameter. Other ELGs typically need surgical exposure
of the femoral artery in both legs to introduce the multiple
components. Endologix's unique delivery mechanism and downsizing of
the catheter permits its technology to be used in patients having
small or very tortuous access vessels. Endologix believes the ease of
use of the PowerLink System will improve clinical results, simplify
the procedure, and lead to product adoption.
- Self-Expanding. The stent is formed from a stainless steel variant in
a proprietary configuration that is protected by Endologix's patent
portfolio. This proprietary design
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expands to the proper size of the target aorta and eliminates the need
for hooks or barbs for attachment. Based on Endologix's results to
date, Endologix believes its PowerLink System has an excellent record
for successful deployments.
- Single Wire Construction. The main body of the stent cage is made of a
single length of wire, shaped into its appropriate configuration.
There can be no individual stent migration since the main body is made
of a single stent.
Limitations of Earlier Technology
Endologix's technology is dramatically different than devices currently
available commercially. Despite enthusiasm by physicians and patients alike for
minimally invasive technology, Endologix believes early generation devices have
achieved a limited market penetration due to design flaws and related
complications. The published clinical literature details many of the
deficiencies of these approaches. In Endologix's opinion, early generation
devices have the following limitations:
- Assembly Required. Multi-piece, or modular, systems require assembly
within the aneurysm sac by mating the various device components. These
systems can be more difficult to implant and lead to long operative
times. In addition, there are a number of reports of limb detachment
during the follow-up period. Limb detachment can lead to a leak and a
re-pressurization of the sac. Endologix believes this results in
increased risk of AAA rupture, often requiring a highly invasive, open
surgical procedure to repair the detachment.
- Lack of Support. ELGs with non-supported systems do not have
integrated stent cages to support the ELG's main body or limbs. Due to
the tortuous anatomy, non-supported systems have demonstrated a high
propensity to kink, particularly in the limbs, leading to thrombosis,
which is a blockage of blood flow through the ELG. This requires a
second procedure using balloon angioplasty and/or stent placement to
correct the condition. This also adds additional device costs and may
require a second hospitalization.
- Use of Hooks and Barbs. Early generation devices have used hooks and
barbs in an attempt to secure the implant and to inhibit movement, or
migration, during the follow-up period. The use of hooks limits the
device application to specific aortic neck anatomies that are
non-calcified and have limited angulation. In addition, Endologix
believes hooks have been implicated in reduced deployment success
rates and a higher surgical conversion rate.
- Use of Individual Stents. Early generation ELGs utilized individual
stents sutured together to create an endoskeleton or cage. Over a
period of two years, reports of suture breakage, resulting in
individual stent separation and migration, have been prevalent. This
resulted in unusual wear of the polyester graft material leading to
perforations of the graft. These patients required surgery to remove
the ELG followed by a conventional open surgery procedure. Endologix
believes this was the primary cause for the manufacturer to recall its
product and to temporarily suspend its U.S. human clinical trial.
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Endologix believes that as a result of its significant advantages,
physicians are likely to consider its procedure for patients currently treated
surgically as well as for some patients who elect not to undergo open surgery or
who are deemed not to be candidates for open surgery.
ENDOLOGIX'S STRATEGY
Endologix's objective is to become the premier supplier of endovascular
surgery products which repair diseased or damaged vascular structures as an
alternative to open surgery. As part of Endologix's core strategy, Endologix
intends to:
- Demonstrate a Significant Technology Advantage. Endologix's strategy
has been to develop technology that addresses the limitations of the
early generation devices, and execute clinical studies to substantiate
the superiority of its technology. Being "first to market" has not
been an advantage in the AAA market thus far, as other devices
approved for marketing in the United States have undergone
post-approval recalls and/or temporary sales suspensions.
- Establish the PowerLink System as the Standard of Care for AAA Repair.
Endologix intends to establish its products as the standard of care
for elective treatment of AAAs. Endologix plans to coordinate each
market rollout by selectively targeting top tier medical institutions
utilizing its various investigational sites as training sites. There
are currently six hospitals that have participated in the Endologix
Japanese trial and there will be 15 to 20 sites utilized in its FDA
Phase 2 study.
- Execute a Global Marketing Strategy and Address Key Markets. Endologix
has obtained the right to affix the CE Mark and it is establishing
distribution in Europe. Endologix was the first company to submit for
the Shonin in the AAA device market when it submitted Japanese data
with respect to its PowerWeb, the predecessor device to the PowerLink
system. The Shonin is the Japanese equivalent of the pre-market
approval, or PMA, application with the FDA in the United States.
Endologix intends to establish a direct sales organization in the
United States upon completion of its U.S. Investigational Device
Exemption, or IDE, and upon receipt of FDA approval.
- Increase Public Awareness. When Endologix receives regulatory
approval for its technology, Endologix intends to promote its
endovascular procedure for patients by trying to increase public
awareness of AAA disease and by supporting the merits of early
detection and endovascular treatment. Recent published articles
report that baseline testing for AAA can reduce the incidence of
rupture.
- Continue to Develop Core Competencies. Endologix believes it has
demonstrated core competencies in developing catheter-based solutions
that addresses a large unmet clinical need Endologix identified after
close consultation with key physicians. Endologix's focus at this time
is the aortic aneurysm market due to its analysis of that market's
opportunity. In the future, Endologix intends to develop additional
devices to expand the application. Endologix believes its initiation
of a Suprarenal trial in the U.S. is an example of building on a core
technology platform. Endologix intends to protect its technology by
filing for patent protection, and to vigorously defend its
intellectual property rights against any infringement.
53
PRODUCTS
Variations in patient anatomies require an adaptive technology. Endologix
designed its PowerLink System, with its multiple aortic cuffs, limb extensions,
bifurcated main body lengths and diameters to simplify procedure, improve
clinical results, and drive product adoption by offering physicians a full line
of products that are adaptable for treatment of the majority of patients with
AAA disease.
PowerLink Infrarenal Bifurcated System. The PowerLink Infrarenal Bifurcated
System is available in multiple diameters and lengths and can treat patients
that have an aortic neck up to 26 millimeters in diameter. Endologix uses
thin-walled ePTFE which permits the graft to be used in a wide range of neck
diameters. This permits Endologix to treat a wide variety of anatomies with a
standard device making it easier for hospital purchasing patterns. Endologix
expects this product to account for approximately 50% of its sales.
PowerLink Suprarenal Bifurcated System. The PowerLink Suprarenal Bifurcated
System is available in multiple diameters and lengths and can treat patients
that have an aortic neck up to 26 millimeters in diameter. The suprarenal model
has a segment of uncovered stent at the proximal end. This permits the operator
to place the device more proximally, over the opening of the renal arteries in
patients with short or angulated aortic necks. The uncovered stent permits
continuous blood flow to the renal arteries, thereby mitigating the risk of
kidney complications. Endologix is the only company that currently provides a
standard model in both an infrarenal and suprarenal configuration. Endologix
expects this product to account for approximately 40% of its sales.
PowerLink Aorto-Uni-iliac System. The PowerLink Aorto-Uni-iliac System is
available for patients with AAA and either bilateral common iliac artery
aneurysms or iliac access conditions that make the placement of any bifurcated
graft problematic. As in the PowerLink Bifurcated System, the Aorto-Uni-iliac
System is available in an infrarenal or suprarenal configuration.
PowerLink Aortic Cuffs and Limb Extensions. The PowerLink Aortic Cuffs and
Limb Extensions permit the physician to treat a greater number of patients.
Aortic cuffs are available in 25 to 28 millimeters in diameter and multiple
lengths. They also are available in the infrarenal or suprarenal configurations.
Limb extensions are 20 millimeters and 16 millimeters in diameter with various
lengths, allowing the physician to customize the technology to a given
individual.
SALES AND MARKETING
Europe. The market for ELGs in Europe is influenced by vascular surgeons,
interventional radiologists and, to a lesser extent, interventional
cardiologists who perform catheter directed treatment of AAA. The European
market is less concentrated than the domestic market. Endologix has obtained the
right to affix the CE Mark to its family of PowerLink products. Due to capitated
hospital budgets and reimbursement scenarios that are less favorable than those
of the U.S., Endologix currently sells its devices through independent
distributors. Endologix will participate in and share the costs of attending key
cardiovascular conferences in Europe. Through its Vice President of Sales
Europe/Middle East, Endologix expects to continue to interface with key opinion
leaders in Europe. Endologix plans on establishing clinical registries for
Italy, Germany and Benelux/United Kingdom. These registries will compile acute
clinical results and follow-up on a series of patients. Endologix believes that
its unique technology will translate into more favorable long-term clinical
outcomes that will drive future revenue. In addition, using physicians to report
on
54
clinical trials develops loyalty and is Endologix's preferred method of
heightening product awareness.
Japan. Endologix is the first company to submit for the Shonin utilizing a
complete Japanese patient cohort. Along with Cosmotec Co., Ltd., its Japanese
distributor and equity partner, Endologix contracted with Medical Industries
Corp., or MIC, a prestigious in-country caretaker consulting firm to conduct the
study. Tokyo Medical University was the Principal Investigative Site with
Professor Shin Ishimaru, M.D. as the Principal Investigator. He has published
extensively and participates as a faculty member for many surgical congresses.
Endologix completed enrollment of the 79 patient study in November 2000.
Endologix believes it will be the first company to enter the Japanese market for
ELGs with a commercial device in the second quarter of 2003. Cosmotec will
market Endologix's technology with a combination of clinical specialists and a
vascular sales force. Cosmotec has seven sales offices throughout the country
and a sales force of over 70 persons.
United States. The primary customer and decision maker for these devices in
the U.S. is the vascular surgeon. The market is fairly concentrated with
estimates of 800 to 1,000 potential vascular surgeons in 500 to 800 hospitals.
This concentration of users lends itself to Endologix's establishing a
well-trained, clinically oriented sales force. This approach has demonstrated
great success in other medical devices such as pacemakers, coronary stents, and
surgical staplers. Endologix will direct its sales force to solicit new users
while providing clinical support for both the physician and his staff as they
build trust and brand loyalty for Endologix's technology.
REIMBURSEMENT
In October 2000, the U.S. Centers for Medicare and Medicaid Services, or
CMS, issued a guideline regarding the proper coding of Endologix's procedures
for billing purposes. The agency instructed that code 39.71, for endovascular
graft repair of aneurysm, be utilized. For purposes of hospital reimbursement,
the majority of patients using the Endologix device will be classified under DRG
110, Major Cardiovascular Procedures with Complication/Comorbidity. In the
latest data published by CMS, the national average reimbursement for DRG 110
exceeded $21,000.
Upon obtaining the Shonin in Japan, equivalent to FDA approval of a PMA
application in the U.S., Endologix's next step will be to establish the level of
reimbursement in Japan which will drive hospital pricing. Endologix believes
that the level of reimbursement in Japan will approximate that which is
prevalent in the United States.
COMPETITION
Endologix expects that significant competition in the endovascular grafting
market will develop over time. Two manufacturers, Guidant Corporation and
Medtronic, obtained FDA marketing approval for their ELGs in September 1999.
Endologix expects that COOK Inc. and WL Gore may obtain FDA marketing approval
sometime prior to Endologix's introduction of the PowerLink System. However,
Endologix believes that its technology offers significant clinical advantages
over currently available technologies. The cardiovascular device industry is
marked by rapid technological improvements and, as a result, physicians are
quick to seize upon improved designs. Significant market share and revenue can
be captured by designs demonstrating superior clinical outcomes. Endologix
believes deliverability and durability are the two most important product
characteristics. The PowerLink System is the only available one-piece
bifurcated, fully supported ELG, and Endologix believes that it will offer
improved deliverability and durability.
55
Companies that are "first to market" in the United States with a new
technique must underwrite the significant and expensive challenge of physician
training and proctoring. In addition, the first generation companies have borne
these costs as well as costs of addressing reimbursement issues. Endologix
believes that its PowerLink System represents next generation technology that is
poised to take advantage of a well-prepared market. The chart below compares the
PowerLink System with competing AAA systems.
STENT GRAFT CHARACTERISTICS
---------------------------
FULLY
MFG. SINGLE PIECE? SUPPORTED FIXATION FDA STATUS
---- ------------- --------- -------- ----------
Endologix Yes Yes Radial Force & Column In Trial
PowerLink One-Piece Strength
Guidant Yes No Hooks Approved
Ancure One-Piece
Medtronic No Yes Radial Force Approved
AneuRx, Talent 2 piece
Cook No Yes Radial Force & Barbs In Trial
Zenith 3 piece
WL Gore No Yes Radial Force In Trial
Excluder 2 piece
Edwards LifeSciences No Yes Balloon Expandable Restarted
LifePath 3 piece Trial
TeraMed No Yes Radial Force In Trial
Ariba 2 piece
Sulzer No No Radial Force
Anaconda 3 piece Wire Rings (1)
Boston Scientific No Yes Radial Force & Barbs
Vanguard 2 piece (1)
PATENTS
Endologix has an aggressive program to develop intellectual property in the
United States, Europe and Asia. Endologix is building a portfolio of apparatus
and method patents covering various aspects of its current and future
technology. Endologix has eight U.S. patents issued, covering more than 163
claims, and thirteen pending U.S. patent applications. Endologix intends to
continue to file for patent protection to strengthen its intellectual property
position as it continues to develop its technology. The chart below summaries
the patents issued to Endologix.
----------
(1) Not currently in trial.
56
UNITED STATES PATENTS ISSUED
----------------------------
PATENT # TITLE
-------- -----
6,077,296 Endoluminal Vascular Prosthesis
6,090,128 Bifurcated Vascular Graft Deployment Device
6,156,063 Method of Deploying Bifurcated Vascular Graft
6,187,036 Endoluminal Vascular Prosthesis
6,197,049 Articulated Bifurcation Graft
6,210,422 Bifurcated Vascular Graft Deployment System
6,261,316 Single Puncture Bifurcation System
6,331,190 Endoluminal Vascular Prothesis
Endologix requires its employees, consultants and advisors to execute
confidentiality agreements in connection with their employment, consulting or
advisory relationships. Endologix also requires employees, consultants and
advisors who it expects may work on its products to agree to disclose and assign
to Endologix all inventions conceived during the work day, using Endologix's
property or which relate to Endologix's business.
The medical device industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants into the market increases, the
possibility of an infringement claim increases.
FACILITIES AND EMPLOYEES
Endologix's corporate headquarters is located at 13700 Alton Parkway, Suite
160, Irvine, California 92618. Endologix occupies approximately 15,000 square
feet under a sublease with Radiance that expires on October 31, 2003. As of
December 31, 2001, Endologix had 38 employees, 17 in management and sales, 15 in
manufacturing and six in research and development.
LEGAL PROCEEDINGS
Endologix is not a party to any legal suits or complaints.
MARKET FOR CAPITAL STOCK; DIVIDENDS
Endologix is a privately held company and there is no public market for
its capital stock. Endologix has never paid a cash dividend on its capital
stock.
57
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
RADIANCE MEDICAL SYSTEMS, INC. SELECTED HISTORICAL FINANCIAL DATA
We derived the following summary financial information from our
consolidated financial statements. You should read this summary financial
information in conjunction with our consolidated financial statements and
related notes included in this proxy statement.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- ------- -------- ------- --------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Product............................ $9,438 $9,415 $3,856 $2,139 $1,111
License............................ -- 2,760 2,855 6,800 6,528
-------- ------- -------- ------- --------
Total revenue........................ 9,438 12,175 6,711 8,939 7,639
-------- ------- -------- ------- --------
Cost of sales:
Cost of product sales.............. 6,102 6,152 2,823 1,465 1,149
Cost of sales from restructuring(2) -- -- -- -- 601
-------- ------- -------- ------- --------
Total cost of sales.................. 6,102 6,152 2,823 1,465 1,750
-------- ------- -------- ------- --------
Gross profit......................... 3,336 6,023 3,888 7,474 5,889
Operating costs and expenses:
Research and development........... 7,041 7,957 8,610 11,508 14,605
Marketing and sales................ 6,691 5,371 1,989 842 1,305
General and administrative......... 2,347 2,937 2,468 3,097 2,582
Charge for acquired in-process
research and development(1)...... -- 234 4,194 -- --
Restructuring charges(2)........... -- -- -- -- 4,617
Minority interest.................. -- (992) (6) (26) (65)
-------- ------- -------- ------- --------
Total operating costs and expenses... 16,079 15,507 17,255 15,421 23,044
-------- ------- -------- ------- --------
Loss from operations................. (12,743) (9,484) (13,367) (7,947) (17,155)
Other income......................... 2,225 1,498 2,587 2,484 1,514
-------- ------- -------- ------- --------
Net loss............................. $(10,518) $(7,986) $(10,780) $(5,463) $(15,641)
======== ======= ======== ======= ========
Basic and diluted net loss per share. $(1.15) $(0.90) $(0.98) $(0.46) $(1.20)
======== ======= ======== ======= ========
Shares used in computing basic and
diluted net loss per share......... 9,118 8,862 10,951 11,749 13,086
======== ======= ======== ======= ========
DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 6,141 $ 1,437 $ 2,051 $ 6,311 $ 3,327
Marketable securities
available-for-sale................. 24,773 23,375 20,004 24,046 16,983
Working capital...................... 33,828 24,905 9,793 23,202 15,111
Total assets......................... 39,615 32,035 29,873 38,454 23,330
Accumulated deficit.................. (21,567) (29,553) (40,333) (45,796) (61,437)
Total stockholders' equity........... 36,127 27,449 25,111 35,240 19,758
----------
(1) The charges for acquired in-process research and development for the years
ended December 31, 1998 and 1999 relate to our acquisition of the former
Radiance Medical Systems, Inc. These charges represent the portion of the
purchase price allocated to the acquired research and development projects,
which, at the
58
date of the acquisition, were in process, had not reached technological
feasibility and had no alternative future use. See Note 2 to the
Consolidated Financial Statements.
(2) Radiance recorded a restructuring charge which included involuntary
employee termination costs, the write-off of previously acquired intangible
assets and equipment, charges under non-cancelable commitments and other
charges. See Note 15 to Radiance's consolidated financial statements.
59
ENDOLOGIX, INC. SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data as of December 31, 2000
and 2001 and for each of the years then ended has been derived from Endologix's
financial statements included elsewhere in this proxy statement. Selected
historical financial data as of December 31, 1997, 1998 and 1999 and for each of
the years then ended has been derived from Endologix's audited consolidated
financial statements not included in this proxy statement. The following data
should be read in conjunction with Endologix's "Management Discussion and
Analysis of Financial condition and Results of Operations" and Endologix's
financial statements and related notes included elsewhere in this proxy
statement.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(In thousands, except per share data)
Statement of Operations Data:
Revenue:
Product ......................... $ -- $ -- $ 1,545 $ 3,757 $ 2,838
Joint development(1) ........... -- -- -- 933 197
------- ------- ------- ------- -------
Total revenue ..................... -- -- 1,545 4,690 3,035
Cost of sales ..................... -- -- 811 1,522 1,279
------- ------- ------- ------- -------
Gross profit ...................... -- -- 734 3,168 1,756
Operating costs and expenses:
Research and development ........ 100 2,163 2,433 2,628 3,634
Marketing and sales ............. -- -- 645 519 819
General and administrative ...... 142 897 1,423 1,041 1,518
Joint development expense ....... -- -- -- 933 --
------- ------- ------- ------- -------
Total operating costs and expenses 242 3,060 4,501 5,121 5,971
------- ------- ------- ------- -------
Loss from operations .............. (242) (3,060) (3,767) (1,953) (4,215)
Other income, net ................. 27 140 210 143 258
------- ------- ------- ------- -------
Net loss .......................... (215) (2,920) (3,557) (1,810) (3,957)
Accretion of discount on redeemable
preferred stock ............... -- -- -- (18) (18)
------- ------- ------- ------- -------
Net loss attributable to common
shareholders ...................... $ (215) $(2,920) $(3,557) $(1,828) $(3,975)
======== ======= ======= ======= =======
DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents ............ $ 1,320 $ 5,188 $ 2,853 $ 7,176 $ 3,845
Inventories .......................... -- 1,059 858 818 1,390
Working capital ...................... 1,354 5,631 3,634 7,578 3,810
Total assets ......................... 1,421 6,480 4,174 8,965 6,351
Redeemable convertible preferred stock 1,600 9,003 10,485 10,503 10,520
Accumulated deficit .................. (215) (3,135) (6,692) (8,520) (12,496)
Total stockholders' deficit .......... (210) (3,190) (6,690) (2,772) (6,207)
---------------
(1) In January 2000, Endologix entered into a joint development agreement with
a shareholder whereby Endologix received $1.8 million to undertake a research
and development project and fund certain purchases by the shareholder. During
2000, Endologix recognized $933 as joint development revenues to recover an
identical amount in incurred expenses related to the project; Endologix also
used $670 of joint development funds to purchase related materials. In June
2001, the shareholder terminated the joint development agreement and remaining
deferred revenue was recorded as income.
60
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the proposed acquisition by Radiance of Endologix in a transaction to be
accounted for as a purchase. The unaudited pro forma balance sheet is based on
the individual balance sheets of Radiance and Endologix appearing elsewhere in
this proxy statement and has been prepared to reflect the proposed acquisition
by Radiance of Endologix as of December 31, 2001. The unaudited pro forma
statement of operations is based on the individual statements of operations of
Radiance and Endologix appearing elsewhere in this proxy statement, and combines
the results of operations of Radiance and Endologix for the year ended December
31, 2001. These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of
Radiance and Endologix included elsewhere in this proxy statement.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of operating results or the financial position
that would have occurred if the acquisition had been consummated as of the
assumed date, nor is it necessarily indicative of the future operating results
or financial position of the combined companies. Radiance has not conducted an
independent valuation of the acquired intangible and tangible net assets of
Endologix. However, the unaudited pro forma financial information is based on
assumptions that Radiance believes are reasonable. The final allocations are
likely to be different from the amounts reflected below, and may result in
additional identifiable intangible assets or changes thereto, including changes
to the amount allocated to acquired in-process technology. These differences may
be significant. Radiance intends to engage an independent firm to perform an
appraisal of the acquired net assets and the allocation of the purchase price
upon consummation of the acquisition.
The acquisition of Endologix is subject to the approval of the
shareholders of both companies and other customary closing conditions. See
Proposal No. 1 in this proxy statement, "The Merger Agreement," for a more
complete discussion of the proposed merger.
61
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
PRO FORMA
RADIANCE ENDOLOGIX ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 3,327 $ 3,845 $ -- $ 7,172
Marketable securities ..................... 12,322 -- (9,024)(d) 3,492
available-for-sale......................... 354(b)
(160)(c)
Other current assets ...................... 2,655 2,003 -- 4,658
-------- -------- -------- --------
Total current assets .................. 18,304 5,848 (8,830) 15,322
Net property and equipment .................... 10 162 -- 172
Marketable securities available-for-sale....... 4,661 -- -- 4,661
Goodwill ...................................... -- -- 6,956(g) 6,956
Other acquired intangibles .................... -- -- 2,064(g) 2,064
-------- -------- -------- --------
Other assets .................................. 355 341 -- 696
-------- -------- -------- --------
Total assets .............................. $ 23,330 $ 6,351 $ 190 $ 29,871
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities ........................... $ 3,193 $ 2,038 $ -- $ 5,231
Deferred revenue .............................. 279 -- -- 279
Minority interest ............................. 100 -- -- 100
-------- -------- -------- --------
Total liabilities ......................... 3,572 2,038 -- 5,610
-------- -------- -------- --------
Redeemable, convertible preferred stock:
Series A ................................. -- 1,618 (1,618)(a) --
Series B ................................. -- 7,417 (7,417)(a) --
Series C ................................. -- 1,485 (1,485)(a) --
Stockholders' equity:
Common stock .............................. 13 6 5(a) 24
11(e)
(11)(f)
Additional paid-in capital ................ 80,850 7,691 4,696(a) 99,506
354(g)
18,656(e)
(12,741)(f)
Accumulated deficit ....................... (61,437) (12,496) (13,990)(h) (75,427)
13,890(f)
(1,394)(b)(c)
Other stockholders' equity ................ 332 (1,408) 1,234(b) 158
-------- -------- -------- --------
Total stockholders' equity (deficit).... 19,758 (6,207) 10,710 24,261
-------- -------- -------- --------
Total liabilities and
stockholders' equity ................ $ 23,330 $ 6,351 $ 190 $ 29,871
======== ======== ======== ========
62
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- The pro forma balance sheet has been prepared to reflect the proposed
acquisition of Endologix by Radiance for an aggregate purchase price of $27,691,
which consists of the issuance of 11,159,052 shares of Radiance common stock
valued at $1.67 per share, using the average Radiance common stock price as
quoted on the Nasdaq for the period from February 6, 2002 through February 14,
2002, $8,369 in cash and $655 in estimated costs directly attributable to the
proposed acquisition. Under purchase accounting, the total purchase price will
be allocated to the acquired tangible assets and liabilities of Endologix based
on their fair values at the closing of the proposed acquisition, with the
balance allocated to intangible assets and goodwill. The amount and components
of the estimated purchase price along with the allocation to assets purchased
and liabilities assumed are as follows:
Net assets acquired $ 4,681
Acquired technology 2,064
Acquired in-process technology 13,990
Goodwill 6,956
-------
Total purchase price $27,691
-------
The net assets acquired represent the historical net assets of Endologix
at December 31, 2001 of $4,313, the receipt of $354 in cash as a result of the
exercise of stock options immediately prior to the proposed acquisition, the
payment of $160 in acquisition costs by Endologix and the $174 note receivable
from an Endologix stockholder that is classified as an offset to stockholders'
equity.
Pro forma adjustments are made to reflect:
(a) The conversion of all outstanding shares of Endologix preferred stock into
common stock on a one-for-one basis, which is a condition to completion of
the proposed acquisition.
(b) The immediate vesting and exercise of all of Endologix common stock
options, which is a provision in Endologix's stock option plan in the event
of a change of control, results in estimated cash proceeds of $354 and the
recognition of $1,234 in compensation expense. The $1,234 in compensation
expense has not been included in the Unaudited Pro Forma Combined Condensed
Statement of Operations as it is non-recurring.
(c) Estimated transaction costs of $160 incurred by Endologix.
(d) The payment of $9,024 for the cash component of the purchase price which
includes the $8,369 per the acquisition agreement and $655 in estimated
transaction costs.
(e) The issuance of 11,159,052 shares of Radiance common stock, which is a
component of the purchase price.
(f) The elimination of the stockholders' equity accounts of Endologix.
(g) The allocation of the purchase price to the $2,064 in acquired technology
with an estimated life of five years, and $6,956 in goodwill. The
historical financial statements contained herein do not reflect the
provisions of SFAS No. 142; however, SFAS No. 142 has been applied to the
proposed acquisition of Endologix.
(h) The expensing of the $13,990 purchase price allocated to acquired
in-process technology, which is believed to have no alternative future use.
The $13,990 of acquired in process technology has not been included in the
Unaudited Pro Forma Combined Condensed Statement of Operations as it is
non-recurring.
63
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RADIANCE ENDOLOGIX PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
Consolidated Statement of Operations Data:
Revenue:
Product .................................... $ 1,111 $ 2,837 $ -- $ 3,948
License .................................... 6,528 -- -- 6,528
Joint development .......................... -- 198 -- 198
-------- -------- -------- --------
Total revenue ................................ 7,639 3,035 -- 10,674
-------- -------- -------- --------
Cost of sales:
Cost of product sales ...................... 1,149 1,279 -- 2,428
Cost of sales from restructuring (Note 3).. 601 -- -- 601
-------- -------- -------- --------
Total cost of sales .......................... 1,750 1,279 -- 3,029
-------- -------- -------- --------
Gross profit ................................. 5,889 1,756 -- 7,645
Operating costs and expenses:
Research and development ................... 14,605 3,634 413(a) 18,652
Marketing and sales ........................ 1,305 819 -- 2,124
General and administrative ................. 2,582 1,518 -- 4,100
Restructuring charges (Note 3) ............. 4,617 -- -- 4,617
Minority interest .......................... (65) -- -- (65)
-------- -------- -------- --------
Total operating costs and expenses ........... 23,044 5,971 413 29,428
-------- -------- -------- --------
Loss from operations ......................... (17,155) (4,215) (413) (21,783)
Other income ................................. 1,514 258 (494)(b) 1,278
-------- -------- -------- --------
Net loss ..................................... (15,641) (3,957) (907) (20,505)
Accretion of discount on redeemable
preferred stock ........................... -- (18) 18(c) --
-------- -------- -------- --------
Net loss attributable to common
shareholders .............................. $(15,641) $ (3,975) $ (889) $(20,505)
======== ========= ======== ========
Basic and diluted net loss per share ......... $ (1.20) $ (0.85)
======== ========
Shares used in computing basic and diluted
net loss per share ........................ 13,086 24,245
======== ========
64
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- The Unaudited Pro Forma Combined Condensed Statement of Operations
gives effect to the following pro forma adjustments necessary to reflect the
proposed acquisition outlined in Note 1 to the Unaudited Pro Forma Combined
Condensed Balance Sheet.
(a) Amortization expense for the acquired technology using an estimated useful
life of five years. Goodwill resulting from the acquisition is not
amortized in accordance with the provisions of SFAS 142.
(b) Reduction of interest income on the lower short-term investment balance due
to the payment of the $8,369 cash component of the purchase price and $655
in estimated acquisition costs, net of Endologix's payment for acquisition
costs and receipt of cash from the exercise of stock options, using an
estimated interest rate of 5.6% per annum.
(c) Elimination of the preferred stock accretion.
NOTE 2 -- Basic and diluted net loss per share was computed using the 13,086,000
shares of Radiance common stock outstanding plus the 11,159,052 issued as a
component of the purchase price.
NOTE 3 -- Radiance recorded a restructuring charge which included involuntary
employee termination costs, the write-off of previously acquired intangible
assets and equipment, charges under non-cancelable commitments and other
charges. See Note 15 to Radiance's consolidated financial statements.
65
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table sets forth certain historical per share data of
Radiance and combined per share data of Radiance and Endologix on an unaudited
pro forma basis. Radiance has never paid cash dividends. You should read the
information set forth below along with the selected historical financial data
and the unaudited pro forma combined condensed financial information included
elsewhere in the proxy statement. The pro forma combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the merger been consummated as of the beginning of the periods presented and
you should not construe it as representative of future operations.
The historical book value per share is computed by dividing common
stockholder's equity as of December 31, 2001 by the actual number of common
shares outstanding. The pro forma net loss per share is computed by diving the
pro forma net loss by the pro forma weighted average number of shares
outstanding, assuming Radiance had acquired Endologix on January 1, 2001. The
pro forma combined book value per share is computed by dividing total pro forma
stockholder's equity by the pro forma number of shares of common stock
outstanding at December 31, 2001, assuming the merger had occurred on that date.
The Endologix equivalent pro forma combined per share amounts are calculated by
multiplying the Radiance pro forma combined per share amounts by the exchange
ratio of 1:1.
YEAR ENDED
DECEMBER 31,
2001
-----------------
Historical Radiance:
Net loss per basic and diluted share.......................... $(1.20)
YEAR ENDED
DECEMBER 31,
2001
-----------------
Pro forma combined diluted net loss:
Per Radiance share............................................ $(0.85)
Equivalent per Endologix share................................ $(0.85)
AS OF
DECEMBER 31, 2001
-----------------
Book value per share:
Historical Radiance........................................... $ 1.51
Equivalent per historical Endologix........................... $(1.01)
Pro forma combined per Radiance share......................... $ 1.00
Pro forma combined per Endologix share........................ $ 1.00
66
RADIANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with "Selected Consolidated Financial Data" and our Consolidated Financial
Statements and the related notes included in this proxy statement. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of various factors, including the
risks we discuss in "Risk Factors" included in our Annual Report on Form 10-K
for the year ended December 31, 2001 and elsewhere in this proxy statement.
OVERVIEW
Organizational History
We were formed in 1992, and our common stock began trading publicly in
1996. The current Radiance Medical Systems, Inc. resulted from our 1999
acquisition of the portion of our former Radiance Medical Systems subsidiary
that we did not already own. We originally incorporated the former Radiance as a
separate entity to focus on the research and development of radiation therapy to
treat cardiovascular disease, and to obtain outside sources of financing for
such research and development. In January 1999, we paid approximately $6.9
million in stock, $692,000 in cash, and $1.1 million in common stock options to
acquire the portion of the former Radiance that we did not already own. In
addition, the stockholders and option holders of the former Radiance could have
received product development milestone payments of $2.00 for each share of
preferred stock and $3.00 for each share of common stock. However, no milestones
were met. See Note 2 to the Consolidated Financial Statements for a more
complete discussion of the acquisition.
Our Business
We have developed proprietary devices to deliver radiation to prevent
the recurrence of blockages in arteries following balloon angioplasty, vascular
stenting and other interventional treatments of blockages in coronary and
peripheral arteries. We incorporate our proprietary RDX technology into
catheter-based systems that deliver beta radiation to the site of a treated
blockage in an artery in order to decrease the likelihood of restenosis. The
application of beta radiation inside the artery at the site of a blockage has
proven clinically effective in inhibiting cell proliferation, a cause of
restenosis.
We designed the RDX system to provide safe and effective treatment for
the prevention of restenosis without many of the disadvantages inherent in
alternative radiation delivery systems. Our proprietary RDX system carries a
radiation source on an inflatable balloon catheter. This patented technology
allows the RDX system to deliver a therapeutic dose of radiation with
approximately 80% less total radiation activity than competing systems. As a
result, the RDX system is easier to use, does not require supplemental capital
equipment, and is readily disposable. In addition, we believe that the RDX
system is suitable to treat arteries that are significantly larger and smaller
than can be treated with alternative radiation delivery systems.
Prior to June 1998, we focused on manufacturing and selling a broad
range of angioplasty catheters and stent products, including our Focus
technology product line. As catheter and stent products became widely available
and were subject to increasing price pressure, we shifted our focus
67
to the research and development of radiation therapy devices to treat
restenosis. Since June 1998, we have:
- licensed our proprietary Focus technology for balloon angioplasty to
Guidant Corporation for use in Guidant's stent delivery systems;
- acquired the portion of our former Radiance Medical Systems
subsidiary that we did not already own, which was researching and
developing radiation therapy treatment devices to prevent blockages
in arteries following interventional treatments;
- sold our vascular access product line and related assets;
- reduced our direct sales force; and,
- restructured our operations beginning in September 2001.
In the first quarter of 2001, we began two U.S. clinical trials of the
RDX system. One trial, BRITE II, is a randomized, pivotal trial to test the
effectiveness of the RDX system for in stent restenosis, and the other trial,
BRITE SVG, is a feasibility study for de novo and in stent restenosis in
saphenous vein bypass grafts. In the second quarter of 2001, we began an
international feasibility clinical trial, RAPID, of the RDX system for treating
restenosis in two main vessels in the leg, the femoral and popliteal arteries.
As of December 31, 2001, we had completed enrollment in the BRITE II 423
patients and in the BRITE SVG trials 49 patients. Of the total of 20 patients to
be enrolled in the RAPID trial, as of December 31, 2001, we had enrolled 15
patients. We expect that enrollment in the RAPID trial will be completed in the
second quarter of 2002.
Over the past few years, our source of revenues has shifted gradually
from direct sales to royalties from licenses involving our products. In June
1998, we entered into a technology license agreement with Guidant Corporation,
granting Guidant rights, including exclusive rights in the United States, to
manufacture and distribute products using our Focus technology for the delivery
of stents. In exchange, we received milestone payments based upon the transfer
of the technological knowledge to Guidant, and continue to receive royalty
payments based upon the sale of products by Guidant using the Focus technology.
The payments under the Guidant license are the primary source of our existing
revenues. See Note 5 to the Consolidated Financial Statements for a further
discussion of the license agreement.
We have experienced an operating loss for each of the last three years.
Our results of operations have varied significantly from quarter to quarter, and
we expect that our results of operations will continue to vary significantly in
the future. Our quarterly operating results depend upon several factors,
including:
- the timing and amount of expenses associated with clinical testing of
the RDX system;
- the progress and success of clinical trials and regulatory approvals;
- varying product sales by our licensee; and,
- outcomes from future partnering or technology acquisition agreements,
if any.
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We discontinued the sale of Focus technology products in the fourth
quarter of 2001. Therefore, revenues in the future are almost entirely dependent
on license fees from our Focus technology license agreement with Guidant. As
work is completed on our clinical studies in the next twelve months, our
expenses will be reduced significantly, but they will be relatively fixed.
Recent Developments and Company Restructuring
In September and November 2001, three companies published the first
feasibility clinical study data for drug coated stents, a competing technology
to our RDX system. While our RDX system uses beta radiation to treat restenosis
resulting from angioplasty procedures, drug coated stents have drugs that
inhibit cell proliferation to limit restenosis. Though drug coated stent
feasibility trials were on a relatively small cohort of patients, all three
companies reported restenosis rates near or at zero percent. In addition, in
March 2002 clinical investigators for Johnson & Johnson reported positive data
involving drug coated stents that showed zero restenosis after a 12-month
period. Finally, in addition to the positive data regarding the ability of drug
coated stents to treat de novo restenosis recently released Brazilian research
data from a small two year study of 30 patients indicates that drug coated
stents are effective in treating in-stent restenosis. Unless clinical study data
involving drug coated stents from the pivotal, larger studies planned or in
progress show restenosis rates significantly higher than reported in pilot
studies, the market for the RDX system likely will be limited.
As a result, in order to conserve cash prior to assessing the outcome of
our BRITE II clinical study and deciding whether to make our RDX system coronary
PMA filing, and to position ourselves to take advantage of strategic
alternatives, we decided in September 2001 to restructure our operations. Our
restructuring plan consisted of the following:
- Discontinue marketing and manufacturing of the RDX system in Europe
and other international markets in the third quarter of 2001;
- Discontinue marketing and manufacturing of products using our Focus
technology subject to fulfillment of outstanding orders;
- Cease clinical trials for the RDX system in Japan;
- Involuntary termination of 55 employees, which we completed in the
first quarter of 2002; and
- Search for additional commercial opportunities by evaluating
technologies outside of radiation therapy.
As a result of the restructuring plan, we recorded a $344,000 charge,
comprised of manufacturing facility set up and sub-license fees and
non-cancelable commitments under the agreements with Bebig, $20,000 in other
non-cancelable commitments, $601,000 for the write-off of inventory that will
not be used to fulfill the outstanding Focus technology product orders, $1.1
million for employee termination benefits and $42,000 for other exit costs.
In addition, we concluded that equipment and intangible assets
associated with RDX technology, previously acquired in fiscal 1999, were
impaired, resulting in charges of $390,000 and $2.1 million. We concluded the
assets would not generate future cash flows. Because we also
69
decided to cease manufacturing of the Focus technology product line, subject to
fulfillment of outstanding orders, we recorded a charge of $40,000 for equipment
used in the production of Focus technology products. We also wrote off $269,000
for the carrying value of furniture, computers, software and leasehold
improvements that were no longer being used.
During the fourth quarter of 2001, we completed our evaluation of
facility needs and recorded a $309,000 restructuring charge for non-cancelable
lease commitments, net of estimated sublease income of $256,000.
Following the restructuring, we assigned the remaining workforce of nine
people to complete the BRITE II pivotal clinical trial and the BRITE SVG and
RAPID feasibility clinical trials, as well as to identify strategic partners and
promising technology. Once the BRITE II clinical trial is complete and pivotal
clinical trial data on drug-coated stents is available, we will decide whether
to file for PMA for the RDX system.
Future Operations
Based on the preliminary results from clinical studies involving drug
coated stents, we believe the market for our RDX system likely will be limited.
We have agreed to acquire Endologix, Inc. for the opportunity to develop an
alternative technology and to manufacture and market a medical device based on
this technology that potentially represents a more promising commercial market.
Therefore, if stockholders approve and the merger is consummated, we expect to
begin combining the operations of Endologix with ours immediately. Although we
plan to complete our remaining clinical trials involving the RDX system, unless
initial positive results from studies involving competing drug coated stent
technologies prove inaccurate, we expect that our ongoing operations following
completion of the merger primarily will be research and development of
Endologix's technology, and the production and distribution of the Endologix
product(s).
Definitive Merger Agreement
In February 2002, we signed a definitive merger agreement with
Endologix, Inc. The merger is subject to Radiance's and Endologix' shareholders'
approval and other customary closing conditions. Endologix is a developer and
manufacturer of minimally invasive treatment of vascular diseases. Endologix'
lead technology is the PowerLink System, an endoluminal stent graft, or ELG, for
the treatment of abdominal aortic aneurysms.
Under the terms of the merger agreement, we will issue $0.75 in cash and
one share of our common stock for each share of Endologix common stock. The
aggregate amount of cash to be issued at the closing of the merger will not
exceed $8.4 million, and the aggregate number of our shares of common stock to
be issued at the closing of the merger will not exceed an aggregate of
11,159,052 shares. In addition, we may pay contingent consideration in the
amount of approximately $5.6 million in the event pre-market approval, or PMA,
is received for the PowerLink System on or before March 31, 2004, or
approximately $2.8 million if PMA approval is received by June 30, 2004. We may
choose to pay the contingent consideration, if payable, in cash or common stock
at our sole discretion. The merger agreement also provides for the cancellation
of Endologix' treasury stock, and shares of Endologix common stock that we own.
We own 475,000 shares, or 4%, of the fully diluted equity of Endologix.
70
Notwithstanding any other provision of the agreement, in no event shall
the total amount of cash to be paid by us exceed 50% of the total of all of the
merger consideration, valuing each share of our common stock for this purpose at
its Nasdaq market closing price on the trading day immediately preceding the
payment date of such share.
In addition, we have agreed to loan Endologix up to $3.0 million in the
event the merger is not completed. The loan will be collateralized by a first
priority security interest on all of Endologix' intellectual property, and will
be due on the earlier of October 1, 2003 or upon the closing by Endologix of an
equity or debt financing of $10.0 million or more, a merger in which Endologix
is not the surviving entity, or the sale of all or substantially all of its
assets.
Significant Accounting Policies and 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, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
collectibility of customer accounts, whether the cost of inventories can be
recovered, the value assigned to and estimated useful life of intangible assets,
the realization of tax assets and estimates of tax liabilities, contingent
liabilities and the potential outcome of litigation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
- allowances for accounts receivable and inventory;
- long-lived assets, including intangible assets; and
- income taxes.
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These
estimates are based on our review of the aging of customer balances,
correspondence with the customer, and the customer's payment history. If
additional information becomes available to us indicating the financial
condition of the customer is deteriorating, we may make additional allowances.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, as driven by economic and
market conditions, and the product's shelf life. If actual demand, or economic
or market conditions are less favorable than those projected by management, we
may make additional inventory write-downs. We revised our estimate of demand for
our Focus technology products in 2001, which resulted in the write-down of
inventory. We record an impairment charge, or expense, for long-lived assets
whenever events or changes in circumstances indicate that the value recorded for
the asset may not be recoverable. Future changes in operations, such as our
decision to discontinue new sales of our Focus product, adverse market
conditions or the introduction of competing technologies, such as drug-coated
stents, among other things, could cause us to write down the asset, resulting in
the recording of an expense, to better reflect our current estimate of its
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value. We reduce our deferred tax assets to zero due to uncertainties concerning
the future realization of the related tax benefits, primarily due to our history
of losses. In the event we were to determine that we would be able to realize
some or all of the tax benefit of the deferred tax assets, we would reduce the
valuation allowance, resulting in increased income in the period we made such
determination.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2000 and 2001
Product Sales. Sales decreased 48% to $1.1 million in the year ended
December 31, 2001 from $2.1 million in the year ended December 31, 2000, as a
result of increased competition for angioplasty catheter and stent products.
Because we discontinued manufacturing and marketing of our Focus technology
products as part of our restructuring plan, we anticipate only minor product
sales in 2002 from our existing products. However, we have signed a definitive
merger agreement with Endologix. If the shareholders of both companies approve
the merger, the amount and composition of our product sales could change in the
future.
License Revenue. License revenue decreased 4% to $6.5 million in the
year ended December 31, 2001 from $6.8 million in the year ended December 31,
2000. Our technology license agreement with Guidant resulted in $6.4 million in
royalties in each of 2000 and 2001 In addition, we recognized $300,000 in
minimum royalties in 2000 and $17,000 in minimum royalties in 2001, under our
agreement with Escalon Medical Corporation. We currently do not expect to
receive more than the minimum royalties due under the Escalon agreement, which
we will recognize as revenue when cash is collected due to the uncertainty as to
whether Escalon has the ability to pay the amounts due under the agreement.
The source of license revenues is primarily royalties received from
sales of licensed products by Guidant. Thus, changes in Guidant's sales of
licensed products will significantly impact future revenues. Although the
license agreement with Guidant expires in June 2005, if at any time Guidant
discontinued selling licensed products, we would not receive royalties from them
in excess of the minimum annual amount of $250,000.
Cost of Product Sales. The cost of product sales decreased 22% to $1.1
million in the year ended December 31, 2001 from $1.5 million in the year ended
December 31, 2000. This decrease was attributable primarily to a 48% decrease in
product sales to $1.1 million in the year ended December 31, 2001 from $2.1
million in the year ended December 31, 2000, partially offset by an increase in
cost of product sales of $216,000 due to inventory reserves for expired
products. Although sales decreased 48%, because cost of sales includes costs
that are fixed and do not vary with production, the cost of sales for 2001 did
not decrease by the same percentage.
Cost of Sales from Restructuring. Due to our restructuring and
discontinuance of the marketing of existing products that we announced in the
third quarter of 2001, we wrote-off $601,000 of inventory that would not be used
to fulfill existing customer orders. We do not anticipate any more write-offs of
inventory due to the restructuring.
Gross Profit. Gross profit decreased 21% to $5.9 million in the year
ended December 31, 2001 from $7.5 million in the year ended December 31, 2000.
The decrease in gross profit for the year ended December 31, 2001 was due
primarily to the inventory write off of $601,000 as a result of
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the restructuring, a decrease in product sales of $1.0 million because of
increasing competition and the aging of our Focus technology product line, and a
decrease by $283,000 in the amount of license revenue under the Escalon
agreement following its amendment in February 2001.
Gross profit on product sales decreased 106% to negative $38,000 in the
year ended December 31, 2001 from $674,000 in the year ended December 31, 2000,
due primarily to a decrease in product sales of $1.0 million and the fixed cost
component of cost of sales that does not vary with production.
Research and Development. Research and development expenses increased
27% to $14.6 million in the year ended December 31, 2001 from $11.5 million in
the year ended December 31, 2000. The primary reason for this increase was
additional spending on clinical trials and development of pilot production for
the RDX system. Because we discontinued new research and development projects as
part of our 2001 restructuring plan, we anticipate materially lower research and
development expenses in 2002 for our existing technology. If the merger with
Endologix is approved, because they are conducting research and development
projects and a pivotal U.S. clinical trial, and plan future clinical trials, our
research and development expenses for the newly combined company could be
significantly higher than our current projection for 2002.
Marketing and Sales. Marketing and sales expenses increased 55% to $1.3
million in the year ended December 31, 2001 from $842,000 in the year ended
December 31, 2000. This increase was primarily the result of the expiration of a
marketing allowance for Cathex, our Japanese Focus technology distributor, in
the fourth quarter of 2000. Because we discontinued marketing and sales of our
existing products as part of our 2001 restructuring plan, we do not anticipate
any marketing and sales expenses in 2002 unless we complete our merger with
Endologix. Because Endologix markets its PowerLink System in Europe and is
spending funds to develop its international sales and distribution network, our
marketing and sales expenses could be significantly higher than our current
forecast for 2002 if the merger is approved.
General and Administrative. General and administrative expenses
decreased 17% to $2.6 million in the year ended December 31, 2001 from $3.1
million in the year ended December 31, 2000. The decrease was due primarily to
lower bonus and payroll expenses from personnel reductions. We anticipate that
general and administration expenses for 2002 will be materially lower than for
2001, unless the merger with Endologix is approved. Assuming that the merger is
approved, we still anticipate that the total general and administration expense
for 2002 will be comparable to that of 2001.
Restructuring Charges. We recognized restructuring charges totaling $4.6
million in the year ended December 31, 2001. The charges consisted of a $2.1
million impairment charge for previously acquired RDX developed technology, $1.1
million of involuntary employee termination costs, a $699,000 impairment charge
for manufacturing and other operating assets, $344,000 charge, comprised of
manufacturing facility setup and sub-license fees and non-cancelable commitments
under agreements with Bebig, $20,000 in other non-cancelable commitments,
$309,000 of non-cancelable lease commitments, net of estimated sublease income
of $256,000, and $42,000 of other non-cancelable commitments and exit costs.
Other Income (Expense). Other income decreased 39% to $1.5 million for
the year ended December 31, 2001 from $2.5 million in the year ended December
31, 2000. Interest income was $1.4 million in each of the years ended December
31, 2001 and 2000. Gain on sale of assets
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decreased to $89,000 in 2001 from $1.1 million in 2000. The primary source for
the 2000 gain on sale of assets was the sale of an option to purchase an equity
investment, which expired without exercise in December 2000.
Comparison of Years Ended December 31, 1999 and 2000
Product Sales. Sales decreased 45% to $2.1 million in the year ended
December 31, 2000 from $3.9 million in the year ended December 31, 1999. In
January 1999, we sold our vascular access product line and related assets and
acquired the former Radiance. As a result of increased competition for
angioplasty catheter products, sales of our Focus technology products decreased
38% to $2.1 million in the year ended December 31, 2000 from $3.4 million in
year ended December 31, 1999. As a result of our sale of the vascular access
product line, there were no sales of vascular access products in the year ended
December 31, 2000 compared to $486,000 in sales in the year ended December 31,
1999.
License Revenue. License fee and other revenue increased 138% to $6.8
million in the year ended December 31, 2000 from $2.9 million in the year ended
December 31, 1999. In 1998, we signed a technology license agreement with
Guidant, which resulted in $2.3 million in milestone-related license fees and
$250,000 in royalties in 1999 and $6.4 million in royalties in 2000. In
addition, in each of 1999 and 2000, we recognized $300,000 in minimum royalties
under the agreement with Escalon.
Cost of Product Sales. The cost of product sales decreased 48% to $1.5
million in the year ended December 31, 2000 from $2.8 million in the year ended
December 31, 1999. This decrease was attributable primarily to a 45% decrease in
sales to $2.1 million in the year ended December 31, 2000 from $3.9 million in
the year ended December 31, 1999.
Gross Profit. Gross profit increased 92% to $7.5 million in the year
ended December 31, 2000 from $3.9 million in the year ended December 31, 1999.
The increase in gross profit for the year ended December 31, 2000 was due
primarily a $3.9 million increase in license revenue, for which there is no
associated cost of sales, and was partially offset by a decrease in product
sales.
Gross profit on product sales decreased 31% to $674,000 in the year
ended December 31, 2000 from $1.0 million in the year ended December 31, 1999.
Although product sales decreased 45%, the decrease in gross profit for 2000
product sales was just 31% because a larger percentage of the product sales for
2000 were in markets where we charged more for the same products.
Research and Development. Research and development expenses increased
34% to $11.5 million in the year ended December 31, 2000 from $8.6 million in
the year ended December 31, 1999. The primary reason for this increase was
additional spending on clinical trials and development of pilot production for
the RDX system.
Marketing and Sales. Marketing and sales expenses decreased 58% to $0.8
million in the year ended December 31, 2000 from $2.0 million in the year ended
December 31, 1999. This decrease primarily was the result of the expiration of a
marketing allowance for Cathex, our Japanese Focus technology distributor, in
the fourth quarter of 2000. Reductions in our international sales force and
related expenses also contributed to the decrease in expenses.
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General and Administrative. General and administrative expenses
increased 25% to $3.1 million in the year ended December 31, 2000 from $2.5
million in the year ended December 31, 1999. The increase was due primarily to
$386,000 in legal costs associated with the Endosonics litigation and higher bad
debt expense by $179,000 in 2000 compared with 1999.
Charge for Acquired In-Process Research and Development. We recognized a
charge of $4.2 million in the year ended December 31, 1999. We incurred the
charge for the acquisition in January 1999 of the shares of the former Radiance
Medical Systems that we did not already own.
Other Income (Expense). Other income decreased 4% to $2.5 million for
the year ended December 31, 2000 from $2.6 million in the year ended December
31, 1999. Interest income increased 11% to $1.4 million in the year ended
December 31, 2000 from $1.2 million in the year ended December 31, 1999. The
increase in interest income was due primarily to an increase in invested cash
from our secondary offering in October 2000. Gain on sale of assets decreased to
$1.1 million in 2000 from $1.3 million in 1999 as the 1999 gain included the
sale of the assets of the vascular access product line and related assets. The
primary source for the 2000 gain on sale of assets was the sale of an option to
purchase certain equity investments held by us.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily by:
- selling our equity securities;
- obtaining advances from EndoSonics, our former parent company;
- licensing our technologies; and,
- entering into international product distribution agreements.
Prior to our initial public offering in 1996, we raised an aggregate of
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital advances from EndoSonics, which we repaid
during the third quarter of 1996.
In the second quarter of 1996, we closed our initial public offering of
common stock, which resulted in net proceeds of approximately $42.8 million
after deducting underwriting discounts and commissions and other expenses of the
offering.
In the third quarter of 1997, SCIMED Life Systems, Inc. exercised
120,000 common stock warrants, obtained from us through a 1995 stock purchase
and technology license agreement, for $377,000. We also received $200,000 from
the sale of 25,000 shares of our common stock to Cathex, Ltd. under a May 1997
agreement that gave Cathex exclusive product distribution rights in Japan for
our existing products until January 1, 2001. We agreed to terminate the
distribution agreement with Cathex in the fourth quarter of 2000.
In January 1999, we also sold substantially all of our vascular access
product line and related assets to Escalon Medical Corporation for approximately
$2.1 million. In lieu of minimum royalties payable through January 2004, we are
receiving periodic payments of interest and principal under a note with a face
value of $718,000. See Note 2 to the Consolidated Financial Statements for
further discussion of our transaction with Escalon.
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In June 1999, we granted Cosmotec Co., Ltd. of Japan the exclusive
distribution rights to market our vascular radiation therapy products in Japan.
We received $1.0 million from Cosmotec as an upfront cash payment and began
recognizing income ratably over the estimated seven-year term of the agreement.
As part of the transaction with Cosmotec, in August 1999, we acquired a 51%
interest, for $233,000, in a joint venture named Radiatec, with an affiliate of
Cosmotec to gain regulatory approval of and provide distribution for the RDX
system in Japan.
We borrowed $1.0 million from Cosmotec and recorded $1.4 million in debt
in June 2000 to reflect the fair value of the 5%, $1.0 million face amount
convertible debenture. On September 13, 2000, Cosmotec converted the debenture
into 142,857 shares of our common stock at $7.00 per share. See Note 10 to the
Consolidated Financial Statements for additional discussion of the convertible
debenture.
In July 1999, we entered into a two-year contract manufacturing
agreement with Bebig GmbH to activate the radioactive sources and complete final
assembly of the RDX system in Europe. Pursuant to the agreement, which was
amended in July 2000, we paid $732,000 during 2000 and were committed to pay
approximately $710,000 in 2001 of facility set-up fees. In February 2001, we
agreed to second and third amendments of the manufacturing agreement. The second
amendment expanded production capacity, and we committed to pay additional fees
of approximately $635,000 in 2001, bringing the total fees for 2001 to
approximately $1.3 million. During 2001, we paid all of the aforementioned fees
following the achievement of manufacturing milestones by Bebig, with the
exception of a portion of one milestone for $51,000 that Bebig did not complete
before we discontinued manufacturing following our restructuring. See Note 15 to
the Consolidated Financial Statements for additional discussion of restructuring
charges related to Bebig. In addition, we completed the preparation of certain
manufacturing equipment to be used by Bebig to perform the final assembly of the
RDX system during the second quarter of 2001 and Bebig purchased it for
$450,000, which approximated our cost.
The third amendment, which had a one-year term, increased the amount we
would pay Bebig for each unit produced and set a minimum facility charge. We
also agreed to pay all material and third party costs associated with production
validation and an agreed amount for each unit produced. In 2001, we paid a total
of $278,000 for minimum facility fees, $54,000 for reimbursement of third party
costs for charges incurred prior to the discontinuance of manufacturing
following our restructuring, and $139,000 in non-cancelable commitments through
the term of the manufacturing agreement.
In May 2001, we agreed to a fourth amendment to the agreement under
which Bebig agreed to fulfill customer service functions for an annual fee of
$95,000. In 2001, we paid $48,000 in fees for services performed and the
remaining $47,000, excluding $8,000 in associated taxes, for the non-cancelable
commitment under the agreement through April 2002.
In conjunction with the contract manufacturing agreement, we entered
into a three year sub-license agreement with Bebig for radiation technology that
we believed might be useful in the development of our radiation therapy
products. During 2001, we recorded $125,000 in license fee expense and paid an
additional $150,000 for license rights through November 2002. All license fees
due under the license agreement for prior periods were offset by payments under
the manufacturing agreement. The sub-license was subject to renewal, without
cost, until the underlying patents' expiration dates.
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We have expensed, as research and development costs, all costs
associated with the contract manufacturing and license agreements with Bebig,
except those expensed as restructuring costs.
In September 2001, we implemented a restructuring plan that included the
discontinuance of European manufacturing. See Note 15 to the Consolidated
Financial Statements for additional discussion of the restructuring charges. As
a result, we included the remaining non-cancelable contractual commitments due
under the agreements with Bebig, including the remaining minimum sub-license fee
totaling $344,000, as a component of the restructuring charge that we paid in
the fourth quarter of 2001. We did not owe any amounts to Bebig at December 31,
2001. As a result of the restructuring, at December 31, 2001 we had $920,000 in
accrued liabilities, of which $841,000 will be paid in 2002 and $79,000 will be
paid in 2003.
Net cash used in operating activities increased 47% to $10.0 million for
the year ended December 31, 2001 from $6.7 million for the year ended December
31, 2000. The increase in net cash used resulted primarily from higher research,
development and clinical expenses for 2001 compared with 2000. Due to our
restructuring, we believe that research and development expenses will decrease
for the year ended December 31, 2002 compared with the year ended December 31,
2001, without taking into account the increase that would result if we complete
the merger with Endologix. If the merger with Endologix is approved, we
anticipate that net cash used in operating activities will be somewhat less than
that for 2001.
At December 31, 2001, we had cash, cash equivalents and marketable
securities available for sale of $20.3 million. We expect to incur substantial
costs related to, among other things, U.S. clinical testing prior to achieving
positive cash flow from operations in late 2002. We anticipate that our cash and
anticipated revenues from operations will be sufficient to fund our operations
through at least the second quarter of 2003. However, if the merger with
Endologix is approved by both company's shareholders, we will pay $8.4 million
to Endologix shareholders as part of the merger consideration and our capital
requirements will be substantially higher. Moreover, our future capital
requirements will depend on many factors, including:
- approval of the merger with Endologix;
- our 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;
- the establishment of collaborative relationships with other parties;
and,
- the ability to develop technology and to commercialize products.
We likely will need to raise funds through additional financings,
including private or public equity or debt offerings and collaborative
arrangements with existing or new corporate partners. We cannot assure you that
we will be able to raise funds on favorable terms, or at all. If adequate funds
are not available, we may need to delay, scale back or eliminate one or more of
our development programs or obtain funds through arrangements with collaborative
partners or others that may require us to grant rights to technologies or
products that we would not otherwise grant.
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Trade accounts receivable, net, decreased 75% to $139,000 at December
31, 2001 from $564,000 at December 31, 2000. The decrease resulted primarily
from lower product sales.
Other receivables decreased 8% to $2.3 million at December 31, 2001 from
$2.5 million at December 31, 2000. The decrease is attributable primarily to the
$347,000 reimbursement of a portion of the secondary offering costs by
Endosonics Corporation, and a $165,000 decrease in royalty revenue receivable
from Escalon Medical Corporation, partially offset by an increase of $203,000 in
royalty revenue receivable from Guidant Corporation.
Inventory decreased 93% to $73,000 at December 31, 2001 from $1.1
million at December 31, 2000. The decrease was due primarily to the write-off of
$601,000 of excess and unsalable inventories because we discontinued RDX
catheter and Focus technology production under the restructuring plan. The
decrease in inventories also was due to the disposal of Focus technology-related
inventories because of our estimation of decreasing demand.
Property and equipment, net, decreased 99% to $10,000 at December 31,
2001 from $743,000 at December 31, 2000, due primarily to an impairment charge
of $699,000 in September 2001 as part of our restructuring.
Intangibles, net, which were comprised of acquired, developed RDX
technology and the acquired value of the assembled RDX workforce, decreased 100%
to zero at December 31, 2001 from $2.8 million at December 31, 2000. This
decrease was due to amortization of $700,000 in 2001, followed by an impairment
charge of $2.1 million taken at the end of the third quarter 2001 following our
decision to restructure and to discontinue RDX system sales.
Accounts payable and accrued expenses increased 20% to $3.1 million at
December 31, 2001 from $2.6 million at December 31, 2000. This increase was
attributable to higher accruals for clinical expenditures of $788,000 and
accrued restructuring expenses, including $619,000 for involuntary employee
terminations and $301,000 for non-cancelable commitments.
Deferred revenue decreased 18% to $360,000 at December 31, 2001 from
$441,000 at December 31, 2000. The decrease was due to continuing amortization
of deferred distributor fees from Cosmotec. See Note 3 to the Consolidated
Financial Statements for additional discussion of the deferred distributor fees.
Quantitative and Qualitative Disclosures About Market Risk
We do not believe that we currently have material exposure to interest
rate, foreign currency exchange rate or other relevant market risks.
Interest Rate and Market Risk. Our exposure to market risk for changes
in interest rates relates primarily to our investment profile. We do not use
derivative financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy, limit the amount of
credit exposure to any one issuer. We are averse to principal loss and try to
ensure the safety and preservation of our invested funds by limiting default
risk, market risk, and reinvestment risk. We attempt to mitigate default risk by
investing in only the safest and highest credit quality securities and by
constantly positioning our portfolio to respond appropriately to a significant
reduction in a credit rating of any investment issuer or guarantor. At December
31, 2001, our investment portfolio included only high-grade corporate bonds and
commercial paper and government bonds all with remaining maturities of less than
two years.
The table below provides information about our available-for-sale
investment portfolio. For investment securities, the table presents principal
cash flows and related weighted average fixed interest rates by expected
maturity dates.
Principal amounts by expected maturity in the subsequent twelve-month periods
ending December 31:
Fair Value at
December 31,
2001 2002 Total 2001
---- ---- ----- -------------
(In thousands, except interest rates)
Cash and cash equivalents........ $ 3,484 -- $ 3,484 $ 3,484
Weighted average interest rate... 2.12% -- 2.12%
Investments...................... $12,100 $4,500 $16,600 $16,983
Weighted average interest rate... 6.65% 5.87% 6.44%
Total portfolio.................. $15,584 $4,500 $20,084 $20,467
Weighted average interest rate... 5.63% 5.87% 5.69%
Foreign Currency Exchange Risk. We do not believe that we currently have
material exposure to foreign currency exchange risk because of the relative
insignificance of our foreign subsidiaries and because our international
transactions are denominated primarily in U.S. dollars.
78
ENDOLOGIX MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Endologix is engaged in the development, manufacture, sales and
marketing of minimally invasive therapies for the treatment of cardiovascular
disease. Its first product, the PowerLink System, is a catheter-based
alternative treatment for abdominal aortic aneurysm, or AAA. AAA is a weakening
of the wall of the aorta, the largest artery of the body. Once AAA develops, it
continues to enlarge and if left untreated becomes increasingly susceptible to
rupture. The overall patient mortality rate for ruptured abdominal aortic
aneurysms is approximately 75%. AAA is the 13th leading cause of death in the
United States today.
Endologix's technology, the PowerLink System, is a catheter and
endoluminal graft, or ELG, system. The self-expanding stainless steel stent cage
is covered by ePTFE, a common surgical graft material. The PowerLink ELG is
implanted in the abdominal aorta gaining access through the femoral artery. Once
deployed into its proper position, the blood flow is shunted away from the
weakened or "aneurysmal" section of the aorta, reducing pressure and the
potential for the aorta to rupture. Endologix believes that implantation of its
products will reduce the mortality and morbidity rates associated with
conventional AAA surgery. Endologix is currently selling its device in Europe
and selected markets outside of the United States, and is conducting phase two
clinical studies to support a pre-market approval, or PMA, application with the
FDA in order to market the PowerLink System in the United States.
HISTORY
Endologix was formed in June 1997. In August 1997, Endologix completed a
$1,625,000 Series A Preferred Stock financing. In November 1998, Endologix
completed a $7,429,972 Series B Preferred Stock financing. Endologix completed a
$1,499,999 Series C Preferred Stock financing in February 1999.
In August 1999, Endologix and some of its shareholders, or the Sellers,
entered into an option agreement with another shareholder, or the Buyer,
pursuant to which the Sellers granted to Buyer an option to purchase all of the
outstanding shares of common and preferred stock of Sellers, as well as options
issued in connection with Endologix's 1997 Stock Option Plan, and all warrants
outstanding. In consideration for the option, Buyer paid approximately $25
million to the Sellers, and $5 million to Endologix, for a total payment of $30
million. In October 2000, the Sellers entered into an option extension agreement
whereby the Sellers granted Buyer an extension until December 15, 2000 to
exercise the option. In consideration for the option extension, the Buyer paid
approximately $5 million to the Sellers in accordance with the option extension
agreement. In December 2000, the option lapsed and all rights of the Buyer under
the option agreement terminated and the option price was forfeited.
In August 2001, Endologix engaged an investment banker to assist with
its Series D Preferred Stock financing to obtain private financing in order to
finance its operations through PMA approval. Due to the uncertainty in the
financial markets following the events of September 11, 2001, Endologix decided
to delay the proposed Series D Preferred Stock financing, and, instead,
considered possible candidates for a strategic business relationship or
acquisition. In February, 2002, Endologix signed the definitive merger agreement
with Radiance. Radiance also agreed to loan
79
Endologix up to $3 million in the event the merger is not completed. Endologix
will use any amounts advanced pursuant to the loan for working capital purposes
in order to fund Endologix's operations through December 31, 2002. The loan will
be collateralized by first priority security interest on all of Endologix's
intellectual property, and will be due on the earlier of October 1, 2003 or upon
the closing by Endologix of an equity or debt financing of $10 million or more,
a merger in which Endologix is not the surviving entity, or the sale of all or
substantially all of its assets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations has been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of Endologix's
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and related disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, Endologix's management evaluates these estimates and assumptions,
including those related to bad debts, inventory valuation, income taxes, accrued
liabilities, contingencies and litigation. Endologix bases these estimates on
historical experience and on various other factors Endologix's management
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The following critical accounting policies affect Endologix's more
significant judgments and estimates used in the preparation of Endologix's
financial statements:
- Revenue Recognition. Endologix records a sale after all significant
obligations have been met, collectibility is probable and title has
passed. Title typically passes upon shipment or implantation of the
device for sales to distributors and medical facility customers,
respectively. Product returns historically have been insignificant
and are charged against revenue in the period returned.
- Accounts Receivable. Endologix estimates the collectibility of
customer receivables on an ongoing basis. A considerable amount of
judgment is required in assessing the ultimate realization of these
receivables, including the current credit-worthiness of each
customer. If the financial condition of Endologix's customers
deteriorate, resulting in an impairment of their ability to make
required payments, additional allowances may be required.
- Inventory Reserves. Endologix states its inventories at the lower of
cost or market and provides reserves for potential excess and
obsolete products. In assessing the ultimate realization of
inventories, Endologix makes judgments as to future demand
requirements and compares that with its current inventory levels. It
is possible that future changes in market conditions may necessitate
additional inventory reserves.
- Accrual for Clinical Trial Payments. Endologix has clinical trial
agreements with several physicians and medical facilities. Amounts to
be paid under these agreements are determined based upon the number
of patients that participate in the clinical trial and complete the
required post implant analysis. Endologix must estimate the number of
clinical trial patients that will complete the
80
required post implant analysis based on prior experience. It is
possible that additional accruals may be necessary if a greater
number of patients than currently anticipated participate in the post
implant analysis.
RESULTS OF OPERATIONS
Product Sales. Product Sales decreased 24% to $2.8 million in the year
ended December 31, 2001 from $3.8 million in the year ended December 31, 2000.
This reduction was primarily caused by a change in European Distribution as a
result of a shareholder electing not to execute its purchase option to purchase
all outstanding Endologix equity instruments from Endologix's holders. Sales to
European distributors decreased to $1.6 million in the year ended December 31,
2001 from $2.8 million in the year ending December 31, 2000. This reduction in
sales was exacerbated by a negotiated agreement that returned distribution
rights to Endologix at no cost to Endologix but permitted the shareholder a
phase out period to sell its existing inventory to selected markets. At the end
of the period the shareholder was required to return any residual inventory to
Endologix at no additional charge, which provided an incentive for discounting
to customers in those markets. In addition European market conditions required
that Endologix reduce its average selling price to its new distributors. The
lower product sales in Europe were offset by a modest increase of $623,000 in
domestic sales as Endologix conducts its FDA clinical trial.
Cost of Gross Sales. The cost of product sales decreased 19% to $1.3
million in the year ended December 31, 2001 from $1.5 million in the year ended
December 31, 2000. The decrease was attributable primarily to a 24% decrease in
product sales to $2.8 million in the year ended December 31, 2001 from $3.7
million in the year ended December 31, 2000.
Gross Profit. Gross Profit decreased 43% to $1.8 million in the year
ended December 31, 2001 from $3.2 million in the year ended December 31, 2000.
The decrease in gross profit for the year ended December 31, 2001 was due
primarily to lower product sales of $920,108 due to a change in the Company's
distribution in Europe and to a lesser extent to reductions in average selling
prices to its new distributors in Europe.
Research and Development. Research and Development expenses increased
32% to $3.6 million in the year ended December 31, 2001 from $2.6 million in the
year ended December 31, 2000. The primary reason for this increase was
additional spending on product development projects as well as efforts required
to support clinical trials.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses increased 38% to $2.3 million in the year ended December
31, 2001 from $1.6 million in the year ended December 31, 2000. The increase in
sales and marketing expenses was primarily due to hiring a vice
president/consultant in 2001 to recruit and manage Endologix's distribution
network in Europe as well as support its sales efforts. In addition legal fees
incurred as part of Endologix's Series D financing efforts contributed to the
increase of these expenses.
Joint Development. Joint development expenses in the amount of $932,700
were incurred in the year ending December 31, 2000 and were offset by an equal
amount recognized as Joint Development Revenue. This program was funded by a
shareholder, which focused research efforts to develop new endoluminal
technologies. On June 30, 2001, the shareholder terminated the agreement and the
remaining amounts earned under the agreement of $197,400 was recorded as Joint
Development Revenue in the year ended December 31, 2001.
81
Stock Based Compensation. Stock based compensation increased 516% to
$498,572 in the year ended December 31, 2001 from $80,990 in the year ended
December 31, 2000. This increase primarily was the result of compensatory stock
option granted late in December 2000. Endologix results of operations include
one month and twelve months of amortization for these grants for the years ended
December 31, 2000 and 2001, respectively.
Interest Expense. Interest expense in the amount of $29,300 was from a
$1.0 million unsecured subordinated convertible note to a shareholder. The note
bears interest at a rate of 10% and is due in full in September 2002. Should
Endologix complete an equity offering greater than $2.5 million, the terms of
the note provides for automatic conversion of half of principal amount to Series
D preferred stock, or the equity securities offered in the next financing.
Interest Income. Interest income increased 65% to $235,700 in the year
ended December 31, 2001 from $143,100 in the year ended December 31, 2000. The
increase was attributable to the interest on $5.7 million received by Endologix
in 2000 as working capital and escrow payment as part of the shareholder option
agreement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in Endologix's operating activities in 2001 of $4,261,000
was attributable to its net loss of $3,958,000, an increase in inventory of
$571,000, and payments on current liabilities of $201,000, and a long-term
clinical trial deposit of $317,000, partially offset by non-cash charges for
stock based compensation of $499,000, depreciation of $81,000, and net decreases
in other current assets of $206,000. Inventories increased 69.8% in 2001 over
2000 levels, due primarily to finished goods produced to support forecasted 2002
demand. The net increase in the long-term clinical trial deposit is the result
of a new clinical analysis agreement executed during 2001.
Net cash used in investing activities of $110,000 for 2001 was
attributable to purchases of property and equipment.
Net cash provided by financing activities in 2001 of $1,041,000 was
attributable to the proceeds of a related party note of $1,000,000 and the
proceeds from stock options exercises of $41,000.
At December 31, 2001, Endologix had cash and cash equivalents of
$3,845,000. Cash and cash equivalents includes cash on hand, and short-term
investments with original maturities of three months or less. Endologix expects
that its operations will continue to use cash in 2002 as its primary product
continues U.S. clinical trials.
82
Contractual obligations at December 31, 2001 are summarized below:
Payments Due By Period
--------------------------------------------------
2006 and
Total 2002 2003 2004 2005 beyond
---------- ---------- -------- ---- ---- --------
Operating lease
obligations ........ $ 585,000 $ 313,000 $272,000 $-- $ -- $ --
Note payable to related
party: ............. 1,000,000 1,000,000 -- -- -- --
---------- ---------- -------- ---- ---- ----
$1,585,000 $1,313,000 $272,000 $ -- $ -- $ --
========== ========== ======== ==== ==== ====
In order to meet its financing needs, in February 2002, Endologix
entered into two agreements with Radiance Medical Systems, Inc. First, Endologix
entered into a merger agreement with Radiance. Second, Endologix entered into a
separate $3,000,000, 10% interest loan agreement with Radiance that, in the
event the Radiance merger is not consummated by July 1, 2002, provides for
optional monthly draws in increments of $500,000. The loan agreement matures on
October 1, 2003.
Endologix believes its current working capital position together with
the liquidity provided by the Radiance merger or the Radiance loan are adequate
to fund operations in the ordinary course of business, anticipated clinical
trial expenditures, debt payment requirements and other contractual obligations,
through FDA approval should the merger be consummated, or through December 31,
2002 should Endologix draw upon the Radiance loan agreement.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk, i.e., the risk of loss arising from adverse
changes in market rates and prices, to which Endologix is exposed is interest
rate risk.
Interest Rate Risk. Endologix's exposure to interest rate risk is
limited to its cash and cash equivalents which are sensitive to changes in the
general level of U.S. interest rates. Endologix estimates that a 10% decline in
the interest earned on its cash and cash equivalents would have resulted in an
increase in Endologix's net loss by approximately $6,000 for the year ended
December 31, 2001.
83
SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Radiance
regarding the ownership of Radiance's common stock as of March 15, 2002 by: (i)
each stockholder known to Radiance to be a beneficial owner of more than five
percent (5%) of Radiance's common stock; (ii) each director; (iii) each Named
Executive Officer set forth in the Summary Compensation Table included in our
Form 10-K for the year ended December 31, 2001; and (iv) all current directors
and officers of Radiance as a group. Also set forth below is the percentage of
outstanding shares beneficially owned after consummation of the merger.
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED(1) SHARES(2)
------------------------------------- --------------------- ------------
William Harris Investors (3) 772,571 5.9%
Two North La Salle Street, Suite 400
Chicago, IL 60602
Dimensional Fund Advisors 687,273 5.2%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Jeffrey H. Thiel(5) 229,430 1.7%
Joseph Bishop(6) 70,279 *
Paul A. Molloy(7) 16,667 *
David M. Richards(8) 44,773 *
Brett A. Trauthen(9) 85,233 *
Franklin D. Brown(10) 47,500 *
Maurice Buchbinder, M.D.(11) 911,369 6.8%
13900 Alton Parkway, Suite 122
Irvine, CA 92618
William G. Davis(12) 80,430 *
Michael R. Henson(13) 640,273 4.8%
13900 Alton Parkway, Suite 122
Irvine, CA 92618
Gerard von Hoffmann(14) 105,429 *
84
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED(1) SHARES(2)
------------------------------------- --------------------- ------------
Edward M. Leonard(15) 101,192 *
Jeffrey F. O'Donnell(16) 293,976 2.2%
All directors and officers as a group
(12 persons)(17) 2,626,493 18.3%
Total Principal Stockholders 4,086,337 28.4%
-------------------
*Represents beneficial ownership of less than 1%.
(1) The number of shares of Common Stock beneficially owned includes any shares
issuable pursuant to stock options that may be exercised within 60 days
after March 20, 2002. Shares issuable pursuant to such options are deemed
outstanding for computing percentage of the person holding such options but
are not deemed to be outstanding for computing the percentage of any other
person.
(2) Applicable percentages are based on 170,044 shares plus the number of
shares such individual can acquire within 60 days of March 20, 2002.
(3) Pursuant to a Schedule 13G/A filed with the Commission on February 15,
2002, William Harris Investors reported that it had shares voting and sole
dispositive power over 772,571 shares.
(4) Pursuant to a Schedule 13G/A filed with the Commission on February 12,
2002, Dimensional Fund Advisors reported that it had shares voting and sole
dispositive power over 687,273 shares.
(5) Includes 189,459 shares subject to options exercisable within 60 days after
March 20, 2002. Mr. Thiel shares voting and investment power with his
spouse as co-trustee with respect to 36,471 shares that a held in a
revocable trust.
(6) Includes 63,864 shares subject to options exercisable within 60 days after
March 20, 2002.
(7) Includes 16,667 shares subject to options exercisable within 60 days after
March 20, 2002.
(8) Includes 42,216 shares subject to options exercisable within 60 days after
March 20, 2002.
(9) Includes 54,167 shares subject to options exercisable within 60 days after
March 20, 2002.
(10) Includes 42,500 shares subject to options exercisable within 60 days after
March 20, 2002.
(11) Includes 190,169 shares subject to options exercisable within 60 days after
March 20, 2002.
85
(12) Includes 73,500 shares subject to options exercisable within 60 days after
March 20, 2002. Mr. Davis shares voting and investment power with his
spouse as co-trustee with respect to 6,930 shares held in a revocable
trust.
(13) Includes 111,980 shares subject to options exercisable within 60 days after
March 20, 2002.
(14) Includes 67,500 shares subject to options exercisable within 60 says after
March 20, 2002.
(15) Includes 67,500 shares subject to options exercisable within 60 days after
March 20, 2002. Mr. Leonard shares voting and investment power as a
beneficiary with respect to 22,807 shares held in a retirement trust. Mr.
Leonard disclaims beneficial ownership with respect to 200 shares held by
his spouse and 3,000 shares held as custodian for his minor children under
the Uniform Gift to Minors Act.
(16) Includes 289,165 shares subject to options exercisable within 60 days after
March 20, 2002.
(17) Includes 1,208,687 shares subject to options exercisable within 60 days
after March 20, 2002.
86
VOTE REQUIRED; INDEPENDENT COMMITTEE'S RECOMMENDATION
The affirmative vote of the holders of a majority of the outstanding
shares of common stock present and voting on the proposal at the special meeting
is required to authorize the common stock issuance and the related merger.
Abstentions will have the same effect as the votes against the common stock
issuance and related merger and broker non-votes will have no effect.
THE INDEPENDENT COMMITTEE OF THE BOARD OF DIRECTORS OF RADIANCE
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE COMMON STOCK ISSUANCE
AND THE RELATED MERGER. Proxies solicited by management will be voted FOR the
common stock issuance and the merger unless a vote against the proposal or
extension is specifically indicated.
PROPOSAL NO. 2
PROPOSAL TO APPROVE AMENDMENT TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
CHANGE THE NAME OF RADIANCE
PROPOSED AMENDMENT
Our board of directors has adopted, and is recommending to the
stockholders for their approval at the special meeting, a resolution to amend
Article First of Radiance's Amended and Restated Certificate of Incorporation to
change Radiance's name. The applicable text of the resolution of the board of
directors is as follows:
"RESOLVED, that Article First of the Corporation's Amended and
Restated Certificate of Incorporation be amended to read in its entirety
as follows:
"First: The Name of this corporation is: Endologix, Inc."
In the judgement of the board of directors, the name change will be
desirable in view of the significant change of character and strategic focus of
Radiance resulting from the merger if the acquisition of Endologix is
consummated. Approval of Proposal No. 1 and closing of the merger is a condition
precedent to the adoption of the proposed name change. If the amendment is
adopted, Radiance stockholders will not be required to exchange outstanding
stock certificates for new certificates.
APPROVAL BY STOCKHOLDERS
Approval of the proposal requires the affirmative vote of a majority of
the outstanding shares of Radiance stock entitled to vote at the special
meeting. Abstentions and broker non-votes will have the same effect as votes
against the name change. If approved by the stockholders, the amendment to
Article First of the certificate of incorporation will become effective upon
filing with the Secretary of State of Delaware a Certificate of Amendment to
Radiance's Amended and Restated Certificate of Incorporation, which filing is
expected to take place at, or shortly after, the effective time of the merger.
However, our board of directors will be authorized, without a further vote of
the stockholders, to abandon the name change and determine not to file the
Certificate of Amendment if the board of directors concludes that such action
would be in the best interest of Radiance and its stockholders. If this proposal
is not approved by the stockholders, then the Certificate of
87
Amendment will not be filed and Radiance will adopt Endologix, Inc. as a name
under which it does business. The official corporate name will remain Radiance
Medical Systems, Inc.
RECOMMENDATION
THE BOARD OF DIRECTORS OF RADIANCE UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF THE NAME CHANGE. Proxies solicited by
management will be voted FOR the name change unless a vote against the proposal
is specifically indicated.
DEADLINE FOR RECEIPT OF
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Any stockholder desiring to submit a proposal for action at the 2002
Annual Meeting of Stockholders should arrange for such proposal to be delivered
to Radiance at its principal place of business no later than January 6, 2002, in
order to be considered for inclusion in Radiance's proxy statement relating to
that meeting. Matters pertaining to such proposals, including the number and
length thereof, the 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 SEC and other laws and regulations.
On May 21, 1998 the SEC 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 Radiance's use of its discretionary proxy
voting authority with respect to a stockholder proposal which is not addressed
in Radiance's proxy statement. The new amendment provides that if a proponent of
a proposal fails to notify Radiance at least 45 days prior to the month and day
of mailing of the prior year's proxy statement, then Radiance 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 Radiance's 2002 Annual Meeting of Stockholders, if
Radiance is not provided notice of a stockholder proposal, which the stockholder
has not previously sought to include in Radiance's proxy statement, by March 23,
2002, Radiance will be allowed to use its voting authority as outlined.
INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP serves as independent accountants
for Radiance for the current fiscal year and served for the fiscal year ended
December 31, 2001. We expect a representative of PricewaterhouseCoopers LLP to
be present at the special meeting to respond to stockholders' questions, and
that representative will be given an opportunity to make a brief presentation to
the stockholders if he or she so desires and will be available to respond to
appropriate questions. We have been advised by PricewaterhouseCoopers LLP that
neither that firm nor any of its associates has any material relationship with
Radiance nor any affiliate of Radiance.
88
OTHER MATTERS
At the time of the preparation of this Proxy Statement, the Board of
Directors knows of no other matter which will be acted upon at the Special
Meeting. If any other matter is presented properly for action at the Special
Meeting or at any adjournment or postponement thereof, it is intended that the
proxies will be voted thereto in accordance with the best judgment and in the
discretion of the proxy holders.
By Order of the Board of Directors,
RADIANCE MEDICAL SYSTEMS, INC.
David M. Richards
Secretary
Irvine, California
__________, 2002
89
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
Radiance Medical Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows present fairly, in all material respects, the financial
position of Radiance Medical Systems, Inc. and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule on page F-24 presents
fairly, in all material respects, the information set forth therein for the
years ended December 31, 2001, 2000 and 1999 when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California
February 8, 2002
F-1
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
----------------------
2000 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 6,311 $ 3,327
Marketable securities available-for-sale, including unrealized gains of
$113 and $131 ........................................................ 15,162 12,322
Accounts receivable, net of allowance for doubtful accounts of $113
and $244 ............................................................. 564 139
Other receivables ....................................................... 2,511 2,310
Inventories ............................................................. 1,085 73
Other current assets .................................................... 239 133
-------- --------
Total current assets .................................................... 25,872 18,304
-------- --------
Property and equipment:
Furniture and equipment ................................................. 2,225 1,544
Leasehold improvements .................................................. 317 236
-------- --------
2,542 1,780
Less accumulated depreciation and amortization .......................... (1,799) (1,770)
-------- --------
Net property and equipment .......................................... 743 10
Marketable securities available-for-sale, including unrealized gain of $28
and $125, respectively .................................................. 8,884 4,661
Intangibles, net of amortization .......................................... 2,786 --
Notes receivable from officers ............................................ 126 147
Other assets .............................................................. 43 208
-------- --------
Total assets ........................................................ $ 38,454 $ 23,330
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................... $ 2,589 $ 3,112
Deferred revenue ........................................................ 81 81
-------- --------
Total current liabilities ........................................... 2,670 3,193
Deferred revenue .......................................................... 360 279
Minority interest ......................................................... 184 100
-------- --------
Total liabilities ................................................... 3,214 3,572
-------- --------
Commitments and contingencies (Notes 11 and 16)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares
issued and outstanding .............................................. -- --
Common stock, $0.001 par value; 30,000,000 shares authorized, 13,049,000
and 13,122,000 shares issued and outstanding ........................ 13 13
Additional paid-in capital .............................................. 80,886 80,850
Deferred compensation ................................................... (208) (15)
Accumulated deficit ..................................................... (45,796) (61,437)
Accumulated other comprehensive income .................................. 345 347
-------- --------
Total stockholders' equity .......................................... 35,240 19,758
-------- --------
Total liabilities and stockholders' equity .......................... $ 38,454 $ 23,330
======== ========
F-2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
-------- -------- --------
Revenue:
Product ................................................... $ 3,856 $ 2,139 $ 1,111
License ................................................... 2,855 6,800 6,528
-------- -------- --------
Total revenue .......................................... 6,711 8,939 7,639
-------- -------- --------
Cost of sales:
Cost of product sales ..................................... 2,823 1,465 1,149
Cost of sales from restructuring .......................... -- -- 601
-------- -------- --------
Total cost of sales .................................... 2,823 1,465 1,750
-------- -------- --------
Gross profit ................................................ 3,888 7,474 5,889
-------- -------- --------
Operating costs and expenses:
Research and development .................................. 8,610 11,508 14,605
Marketing and sales ......................................... 1,989 842 1,305
General and administrative ................................ 2,468 3,097 2,582
Charge for acquired in-process research and development ... 4,194 -- --
Restructuring charges ..................................... -- -- 4,617
Minority interest in losses of subsidiary ................. (6) (26) (65)
-------- -------- --------
Total operating costs and expenses ..................... 17,255 15,421 23,044
-------- -------- --------
Loss from operations ...................................... (13,367) (7,947) (17,155)
-------- -------- --------
Other income (expense):
Interest income ........................................... 1,246 1,383 1,426
Gain on sale of assets .................................... 1,335 1,140 89
Other income (expense), net ............................... 6 (39) (1)
-------- -------- --------
Total other income ..................................... 2,587 2,484 1,514
-------- -------- --------
Net loss .................................................... $(10,780) $ (5,463) $(15,641)
======== ======== ========
Basic and diluted net loss per share ........................ $ (0.98) $ (0.46) $ (1.20)
======== ======== ========
Shares used in computing basic and diluted net loss per share 10,951 11,749 13,086
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY OTHER
----------------------- PAID-IN DEFERRED ACCUMULATED ---------------------- COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT SHARES AMOUNT INCOME
---------- ---------- ---------- ------------ ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31,
1998 ................ 9,578,000 $ 10 $ 60,664 $ (409) $ (29,553) 686,000 $ (3,675) $ 462
Acquisition of RMS ..... 1,900,000 2 8,033 -- -- -- -- --
Exercise of common
stock options ....... 359,000 -- 259 -- -- -- -- --
Employee stock purchase
plan ................ 59,000 -- 168 -- -- -- -- --
Deferred compensation,
net ................. -- -- 359 (359) -- -- -- --
Amortization of deferred
compensation ........ -- -- -- 244 -- -- -- --
Net loss ............... -- -- -- -- (10,780) -- -- --
Unrealized loss on
investments, net .... -- -- -- -- -- -- -- (202)
Unrealized exchange rate
loss ................ -- -- -- -- -- -- -- (112)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31,
1999 ................ 11,896,000 12 69,483 (524) (40,333) 686,000 (3,675) 148
Exercise of common stock
options ............. 130,000 -- 479 -- -- -- -- --
Employee stock purchase
plan ................ 66,000 -- 228 -- -- -- -- --
Sale of common stock
(net of costs of
$1,217) ............. 814,000 1 9,357 -- -- (686,000) 3,675 --
Convertible debenture
exercise ............ 143,000 -- 1,375 -- -- -- -- --
Deferred compensation,
net ................. -- -- (36) 36 -- -- -- --
Amortization of deferred
compensation ........ -- -- -- 280 -- -- --
Net loss ............... -- -- -- -- (5,463) -- -- --
Unrealized gain on
investments, net .... -- -- -- -- -- -- -- 134
Unrealized exchange
rate gain ........... -- -- -- -- -- -- -- 63
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31,
2000 ................ 13,049,000 13 80,886 (208) (45,796) -- -- 345
Exercise of common stock
options ............. 21,000 -- 38 -- -- -- -- --
Employee stock purchase
plan ................ 52,000 -- 216 -- -- -- -- --
Deferred compensation,
net ................. -- -- (290) 290 -- -- -- --
Amortization of deferred
compensation ........ -- -- -- (97) -- -- -- --
Net loss ............... -- -- -- -- (15,641) -- -- --
Unrealized gain on
investments, net .... -- -- -- -- -- -- -- 115
Unrealized exchange rate
loss ................ -- -- -- -- -- -- -- (113)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31,
2001 ................ 13,122,000 $ 13 $ 80,850 $ (15) $ (61,437) -- $-- $ 347
========== ========== ========== ========== ========== ========== ========== ==========
STOCKHOLDERS' COMPREHENSIVE
EQUITY LOSS
------------ -------------
BALANCE AT DECEMBER 31,
1998 ................ $ 27,499
Acquisition of RMS ..... 8,035
Exercise of common
stock options ....... 259
Employee stock purchase
plan ................ 168
Deferred compensation,
net ................. --
Amortization of deferred
compensation ........ 244
Net loss ............... (10,780) $ (10,780)
Unrealized loss on
investments, net .... (202) (202)
Unrealized exchange rate
loss ................ (112) (112)
---------- ----------
BALANCE AT DECEMBER 31,
1999 ................ 25,111 $ (11,094)
----------
Exercise of common stock
options ............. 479
Employee stock purchase
plan ................ 228
Sale of common stock
(net of costs of
$1,217) ............. 13,033
Convertible debenture
exercise ............ 1,375
Deferred compensation,
net ................. --
Amortization of deferred
compensation ........ 280
Net loss ............... (5,463) $ (5,463)
Unrealized gain on
investments, net .... 134 134
Unrealized exchange
rate gain ........... 63 63
---------- ----------
BALANCE AT DECEMBER 31,
2000 ................ 35,240 $ (5,266)
==========
Exercise of common stock
options ............. 38
Employee stock purchase
plan ................ 216
Deferred compensation,
net ................. --
Amortization of deferred
compensation ........ (97)
Net loss ............... (15,641) $(15,641)
Unrealized gain on
investments, net .... 115 115
Unrealized exchange rate
loss ................ (113) (113)
---------- ----------
BALANCE AT DECEMBER 31,
2001 ................ $ 19,758 $ (15,639)
========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
-------- -------- --------
Operating activities:
Net loss ................................................ $(10,780) $ (5,463) $(15,641)
Adjustments to reconcile net loss to net cash used in
operating activities:
Restructuring charges ................................. -- -- 3,453
Depreciation and amortization ......................... 1,333 1,288 1,057
Amortization of deferred compensation ................. 243 280 (97)
Bad debt expense ...................................... (168) 38 131
Charge for acquired in-process research and development 4,194 -- --
Minority interest in losses of subsidiary ............. (6) (26) (65)
Gain on disposal of assets ............................ (1,302) (223) (19)
Changes (net of effects of acquisition of interest in
(former) Radiance and Radiatec):
Accounts receivable ................................. 1,510 468 295
Inventories ......................................... 97 (263) 411
Other receivables and current assets ................ (290) (1,769) 79
Accounts payable and accrued expenses ............... (2,105) (125) 523
Deferred revenue .................................... 679 (971) (81)
-------- -------- --------
Net cash used in operating activities ................... (6,595) (6,766) (9,954)
-------- -------- --------
Investing activities:
Purchase of available-for-sale securities ............. (25,256) (26,312) (17,157)
Sales of available-for-sale securities ................ 28,413 22,404 24,335
Capital expenditures for property and equipment ...... (439) (100) (329)
Sale of Vascular Access business unit, net ............ 2,070 -- --
Proceeds from sale of option on investment securities.. 1,232 252 --
Purchase of controlling interest in Radiance, net of
cash acquired ..................................... 233 -- --
Purchase of interest in (former) Radiance, net of cash
acquired ........................................... 455 -- --
-------- -------- --------
Net cash provided by (used in) investing activities ..... 6,708 (3,756) 6,849
-------- -------- --------
Financing activities:
Proceeds from issuance of convertible debenture ....... -- 1,000 --
Proceeds from sale of common stock .................... -- 14,250 --
Costs of equity issuances ............................. -- (1,217) --
Proceeds from sale of common stock under employee stock
purchase plan ........................................ 168 228 216
Proceeds from exercise of stock options ............... 260 479 38
Proceeds from repayment of affiliate debt ............. 73 -- --
-------- -------- --------
Net cash provided by financing activities ............... 501 14,740 254
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents .......................................... -- 42 (133)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .... 614 4,260 (2,984)
Cash and cash equivalents, beginning of year ............ 1,437 = 6,311
-------- -------- --------
Cash and cash equivalents, end of year .................. $ 2,051 $ 6,311 $ 3,327
======== ======== ========
Supplemental disclosure of non-cash financing activities:
In January 1999, the Company acquired the remaining
common stock of (former) Radiance. The following is
a summary of the 1999 activity:
Fair value of assets acquired, including intangible
assets .............................................. $ 8,962
Cash paid ............................................. (692)
Common stock and options issued ....................... (8,035)
--------
Liabilities assumed ................................... $ 235
========
Conversion of long-term debt to common stock .......... $ 1,375
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
RADIANCE MEDICAL SYSTEMS
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
Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc.
and herein after referred to the "Company" or "Radiance") was incorporated in
March 1992 in the State of California and reincorporated in the State of
Delaware in June 1993. Prior to the restructuring in September 2001 (Note 15),
the Company was developing proprietary devices to deliver radiation to prevent
the recurrence of blockages in arteries following balloon angioplasty, vascular
stenting, arterial bypass surgery and other interventional treatments of
blockages in coronary and peripheral arteries. The Company incorporated its
proprietary RDX technology into catheter-based systems that deliver beta
radiation to the site of a treated blockage in an artery in order to decrease
the likelihood of restenosis (the "RDX system"). The Company also manufactured,
licensed and sold angioplasty catheters and stent products, including its "Focus
technology" product line primarily through medical device distributors. The
Company operates in a single business segment.
In August 1999, the Company contributed cash of $233 in return for a 51%
interest in Radiatec, a joint venture formed to distribute the Company's RDX
catheter products in Japan.
The consolidated financial statements include the accounts of the
Company and its wholly and majority-owned subsidiaries. Intercompany
transactions have been eliminated in consolidation.
Significant Accounting Policies and 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, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
collectibility of customer accounts, whether the cost of inventories can be
recovered, the value assigned to and estimated useful life of intangible assets,
the realization of tax assets and estimates of tax liabilities, contingent
liabilities and the potential outcome of litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements:
- allowances for accounts receivable and inventory;
- long-lived assets, including intangible assets; and
- income taxes.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
These estimates are based on the Company's review of the aging of customer
balances, correspondence with the customer, and the customer's payment history.
If additional information becomes available to the Company indicating the
financial condition of the customer is deteriorating, additional allowances may
be required. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand, as driven
by economic and market conditions, and the product's shelf life. If actual
demand, or economic or market conditions are less favorable than those projected
by management, additional inventory write-downs may be required. The Company
revised the estimate of demand for Focus technology products in 2001, which
resulted in the write-down of inventory. The Company records an impairment
charge, or expense, for long-lived assets whenever events or changes in
circumstances indicate that the value recorded for the asset may not be
recoverable. Future changes in operations, such as the decision to discontinue
new sales of the Focus technology products (Note 15), adverse market conditions
or the introduction of competing technologies, such as drug coated stents, among
other things, could cause the Company to write down the asset (i.e., record an
expense)
F-6
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
to better reflect management's current estimate of its value. Radiance reduces
its deferred tax assets to zero due to uncertainties concerning the future
realization of the related tax benefits, primarily due to the Company's history
of losses. In the event Radiance was to determine that it would be able to
realize some or all of the tax benefit of the deferred tax assets, the valuation
allowance would be reduced, resulting in increased income in the period such
determination was made.
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 ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
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 accumulated other comprehensive income,
net of realized gains and losses. Management evaluates the classification of its
securities based on the Company's short-term cash needs. 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 (losses) of $(11), $(2) and $70 for the years ended December 31,
1999, 2000 and 2001, respectively, are included in other income (expense). The
cost of securities sold is based on the specific identification method.
Investments
The Company holds an investment in common stock in a private company
named Endologix, Inc. (Note 18). In the year ended December 31, 1997, the
investment of 475,000 shares of common stock was reduced to zero based on an
other than temporary decline in value determined at that time.
Inventories
Inventories 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 on a
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements and assets acquired under capital leases are amortized over the
term of the lease or the estimated useful life of the asset, whichever is
shorter. Maintenance and repairs are expensed as incurred while renewals or
betterments are capitalized. Upon sale or disposition of property and equipment,
any gain or loss is included in the statement of operations. The estimated
useful lives for furniture and equipment range from three to seven years and the
estimated useful life for leasehold improvements is seven years. Following the
restructuring (Note 15), the estimated useful lives of production-related
equipment were reduced to three months to reflect the estimated time necessary
to manufacture products to complete existing Focus technology product orders and
RDX systems for the remaining clinical trials.
Intangible Assets
Intangible assets acquired in connection with business combinations are
amortized on the straight-line method over their estimated useful lives.
Intangible assets, totaling $4,567, from the purchase of a controlling interest
in and acquisition of Radiance Medical Systems, Inc. (the "former Radiance")
were being amortized over three to seven years, respectively. Based upon a
valuation of intangible assets acquired in the purchase of a controlling
interest in and acquisition of the former Radiance, $3,266 and $1,301 were
capitalized as developed technology and covenants not to compete, respectively,
and $4,194 was expensed as acquired in-process research
F-7
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
and development in 1999. During the years ended December 31, 1999, 2000 and
2001, the Company recorded $900, $881 and $675 of amortization expense,
respectively, for developed technology and covenants not to compete (Note 15 for
discussion of restructuring activities and impairment of these assets).
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," long-lived
assets and intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates potential impairment by comparing the
carrying amount of the asset with the estimated undiscounted future cash flows
associated with the use of the asset and its eventual disposition. Should the
review indicate that the asset is not recoverable, the Company's carrying value
of the asset would be reduced to its estimated fair value, which is measured by
future discounted cash flows.
In September 2001, the Company decided to restructure its operations and
discontinue marketing and manufacturing of the RDX system. As a result, the
Company recorded impairment charges for its intangible assets and property and
equipment totaling $2,111 and $699, respectively (Note 15).
Fair Value of Financial Instruments
The carrying amount of all financial instruments approximates fair value
because of the short maturities of the instruments.
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 on going 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.
In June 1998, the Company signed a technology license agreement with
Guidant Corporation ("Guidant"), an international interventional cardiology
products company, granting them the right to manufacture and distribute products
using the Company's Focus technology for stent deployment. During 1999, 2000 and
2001, the Company recognized revenue from Guidant of $2,250, $6,415 and $6,429,
respectively, which represented 34%, 72% and 84% of total revenues, respectively
(Note 5). There are no other customers who represented greater than 10% of the
Company's total revenues. As of December 31, 2000 and 2001, receivables from
Guidant amounted to $1,651 and $1,854, respectively. No other single customer
accounted for more than 10% of the Company's receivable balance at December 31,
2000 and 2001.
F-8
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Product Sales by Geographic Region
The Company had product sales by region as follows:
Year Ended December 31,
------------------------------------------
1999 2000 2001
------ ------ ------
Europe ............. $2,094 $1,230 $ 416
United States ...... 707 86 40
Asia ............... 382 269 138
Middle East ........ 114 236 174
Latin America ...... 218 178 165
Other .............. 341 140 178
------ ------ ------
$3,856 $2,139 $1,111
====== ====== ======
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an
arrangement with the customer that states a fixed and determinable price and
terms, delivery of the product has occurred in accordance with the shipment
terms, and collectibility of the receivable is reasonably assured. The Company
accepts returned defective products within 60 days of original shipment to the
customer. The Company records an accrual for an estimate of returns at the time
revenue is recognized. To date, such returns have been insignificant.
License revenues from milestone payments were recognized in 1999 on a
contract with Guidant upon the transfer of technology to Guidant (Note 5). The
Company earns royalty revenue, which is included in license revenue in the
consolidated statement of operations, as a result of the sale of product rights
and technologies to third parties. Royalties are recognized upon the sale of
products, subject to the royalty, by the third party. License revenues are
recognized ratably over the estimated life of the agreement (Note 3).
Foreign Currency Translation
The Company has designated local currency as the functional currency for
its foreign subsidiaries. Accordingly, the assets and liabilities of foreign
subsidiaries are translated at the rates of exchange at the balance sheet date.
The income and expense items of these subsidiaries are translated at average
monthly rates of exchange. The resulting translation gains and losses are
included as a component of accumulated other comprehensive income on the
consolidated balance sheet.
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 the
alternative fair value accounting provided for under SFAS 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 the provisions of
APB 25, the Company recognizes compensation expense only to the extent that the
exercise price of the Company's employee stock options is less than the market
price of the underlying stock on the date of grant. Pro forma information
regarding net loss and loss per share is required by SFAS No. 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted under the fair value method. 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 that 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.
F-9
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
In calculating pro forma information regarding net loss and net loss 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: risk-free
interest rate of 6.4%, 5.1% and 4.3%; a dividend yield of 0%, 0% and 0%;
volatility of the expected market price of the Company's common stock of 0.889,
0.700 and 0.700; and a weighted-average expected life of the options of 5.0, 5.0
and 5.0 years for 1999, 2000 and 2001, 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, 1999, 2000 and 2001
follows:
1999 2000 2001
-------- -------- --------
Pro forma net loss....................................... $(12,335) $(6,850) $(16,824)
Pro forma basic and diluted net loss per share........... $ (1.13) $ (0.58) $ (1.29)
The Company accounts for non-employee stock-based awards, in which goods
or services are the consideration received for the stock options issued, in
accordance with the provisions of SFAS No. 123 and related interpretations.
Compensation expense for non-employee stock-based awards is recognized in
accordance with FASB Interpretation 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Options or Award Plans, an Interpretation of APB
Opinions No. 15. and 25 ("FIN 28"). Under SFAS No. 123 and FIN 28, the Company
records compensation expense based on the then-current fair values of the stock
options at each financial reporting date. Compensation recorded during the
service period is adjusted in subsequent periods for changes in the stock
options' fair value.
Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in different periods
for financial statement purposes versus tax return purposes. Under this method,
deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets when it is more likely than not that a portion of such
assets will not be recoverable through future operations. The provision for
income taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Net Loss Per Share
Net loss per common share is computed using the weighted average number
of common shares outstanding during the periods presented. Because of the net
losses during the years ended December 31, 1999, 2000 and 2001, options to
purchase the common stock of the Company were excluded from the computation of
net loss per share because the effect would have been antidilutive. If they were
included, the number of shares used to compute net loss per share would have
been increased by approximately 292,000 shares, 1,066,000 shares and 261,000
shares for the years ended December 31, 1999, 2000 and 2001, respectively.
However, options to purchase approximately 984,000 shares at a weighted average
exercise price of $5.25, 57,000 shares at a weighted average exercise price of
$12.88 and 1,337,000 shares at a weighted average exercise price of $5.73 that
were outstanding during 1999, 2000 and 2001, respectively, would have still been
excluded from the computation of diluted loss per share because the options'
exercise price was greater than the average market price of the common shares.
F-10
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Research and Development Costs
Research and development costs are expensed as incurred.
Comprehensive Income (Loss)
The Company accounts for elements of comprehensive income (loss)
pursuant to SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income
(loss) includes unrealized holding gains and losses and other items that have
been previously excluded from net income (loss) and reflected instead in
stockholders' equity. Comprehensive income (loss) includes net loss, the effect
of foreign currency translation adjustments, and unrealized holding gains
(losses) on marketable securities classified as available-for-sale.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued FAS No.
141 and 142. FAS No. 141, "Business Combinations," is effective for all business
combinations for which the date of acquisition is after June 30, 2001 and
requires that the purchase method of accounting be used for all business
combinations, establishes specific criteria for the recognition of intangible
assets separately from goodwill, and requires unallocated negative goodwill to
be written off immediately as an extraordinary gain. FAS No. 142, "Goodwill and
Other Intangible Assets," requires that goodwill and indefinite lived intangible
assets will no longer be amortized, goodwill will be tested for impairment at
least annually at the reporting unit level, intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. The Company will adopt both FAS No. 141 and 142 on
January 1, 2002. The Company believes that the adoption of these statements will
not have an impact on its consolidated financial statements.
In August 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." FAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS No. 144 develops one accounting model for long-lived assets that are to be
disposed of by sale, requires that long-lived assets that are to be disposed by
sale be measured at the lower of book value or fair value less cost to sell and
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. FAS No. 144 is effective for all fiscal years beginning
after December 15, 2001 and will be adopted by the Company on January 1, 2002.
The Company believes that the adoption of FAS No. 144 will not have an impact on
its consolidated financial statements.
2. ACQUISITION AND SALE OF ASSETS
Acquisition of the former Radiance
The Company incorporated the former Radiance in August 1997 to develop
radiation products to treat restenosis based on the Company's patented Focus
technology. In consideration for the Company granting to the former Radiance a
license to the Focus technology, the former Radiance issued to the Company
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 the former Radiance's products, and a promise to pay
royalties to the Company based on sales of products utilizing the licensed
technology. Following the former Radiance's sale of stock to investors in a
private offering, the Company did not control the former Radiance and accounted
for its investment on the equity method. In September 1998, the Company
exercised warrants to purchase an additional 1,500,000 Series B preferred shares
in the former Radiance for $0.975 per share or a total of $1,463, bringing the
Company's ownership of the outstanding equity of the former Radiance to
approximately 50%, and began accounting for its investment in the former
Radiance under the consolidation method.
In November 1998, the Company signed a definitive merger agreement (the
"Merger Agreement") with the former Radiance and in January 1999, the Company
acquired the former Radiance pursuant to the Merger
F-11
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Agreement. Under the terms of the Merger Agreement, the Company paid the
shareholders of the former Radiance $3.00 for each share of preferred stock and
$2.00 for each share of common stock for a total consideration of approximately
$7,571, excluding the value of Radiance common stock options to be provided to
the former Radiance optionholders in exchange for their former Radiance common
stock options. Such consideration was paid by delivery of an aggregate of
1,900,157 shares of common stock, and $692 in cash to certain former Radiance
stockholders who elected to receive cash pursuant to the Merger Agreement.
Options for 546,250 shares of the former Radiance common stock accelerated and
vested immediately prior to the completion of the merger. Of these, 1,250 were
exercised, and the holder received the same consideration for his shares of the
former Radiance common stock as other holders of the former Radiance common
stock. The options not exercised prior to the completion of the merger were
assumed by the Company and converted into options at the same exercise price to
purchase an aggregate of 317,776 shares of the Company's common stock for a
total consideration of approximately $1,150.
In addition, under the Merger Agreement, the former Radiance share and
option holders could have received product development milestone payments of
$2.00 for each share of preferred stock and $3.00 for each share of common
stock. The milestones represented important steps in the United States Food and
Drug Administration and European approval process that the Company believed were
critical to bringing the Company's technology to the marketplace. The milestones
were not met.
The former Radiance merger consideration was allocated to tangible
assets (aggregating approximately $459) acquired and assumed liabilities
(aggregating approximately $235), with the remaining consideration being
allocated to acquired in-process research and development ("IPR&D"), developed
technology and employment contracts, according to a valuation.
Significant portions of the former Radiance merger consideration were
identified as intangible assets. Valuation techniques were employed that reflect
the then guidance from the Securities and Exchange Commission on approaches and
procedures to be followed in developing allocations to IPR&D.
At the date of the merger, technological feasibility of IPR&D projects
had not been reached and the technology had no alternative future uses.
Accordingly, the Company expensed the portion of the purchase price allocated to
IPR&D of $4,194 in the year ended December 31, 1999.
The IPR&D is comprised of technological development efforts aimed at the
discovery of new, technologically advanced knowledge, the conceptual formulation
and design of possible alternatives, as well as the testing of process and
product cost improvements. Specifically, these technologies included, but were
not limited to, efforts to apply radiation to an angioplasty catheter, increase
the radiation activity level on the catheter and improve the performance of a
radioactive angioplasty catheter.
The amount of consideration allocated to IPR&D was determined by
estimating the stage of completion of each IPR&D project at the date of the
merger, estimating cash flows resulting from the future research and
development, clinical trials and release of products employing these
technologies, and discounting the net cash flows back to their present values.
The weighted average stage of completion for all projects, in aggregate,
was approximately 70% as of the merger date. As of that date, the estimated
remaining costs to bring the projects under development to technological
feasibility and through clinical trials and regulatory approval process were
approximately $5,500. The cash flow estimates from sales of products
incorporating those technologies was estimated to commence in the year 2001,
with revenues increasing for the first four years, followed by declines in
subsequent periods as other new products were expected to be introduced and
represent a larger proportion of the total product offering. The cash flows from
revenues forecasted in each period are reduced by related expenses, capital
expenditures, the cost of working capital, and an assigned contribution to the
core technologies serving as a foundation for the research and development. The
discount rates applied to the individual technology's net cash flows ranged from
20% to 35%, depending on the level of risk associated with a particular
technology and the current return on investment requirements of the market.
These discount rates reflect "risk premiums" of 18% to 105% over the estimated
weighted average cost of capital of 17% computed for the Company.
F-12
A portion of the former Radiance consideration premium was allocated to
identifiable intangibles. The identifiable intangibles consist primarily of
developed technology and employment contracts (i.e., covenants not to compete
and the assembled workforce). The fair value of the developed technology at the
dates of acquisition of a majority and then the remainder of the capital stock
of the former Radiance was $187 and $3,079, respectively, and represent the
acquired, aggregate fair value of individually identified technologies that were
fully developed at the time. As with the IPR&D, the developed technology was
valued using the future income approach, in context of the business enterprise
value of the former Radiance. The employment contracts assigned values at the
dates of acquisition of a majority and the then remainder of the capital stock
of the former Radiance were approximately $72 and $1,229, respectively.
Sale of Vascular Access Assets
In October 1998, the Company signed a letter of intent to sell
substantially all of the properties and assets used exclusively in its Vascular
Access product line to Escalon and in January 1999 the sale was completed under
a definitive Assets Sale and Purchase Agreement ("Agreement"). Under the terms
of the Agreement, the Company received an initial payment of $1,104 in January
1999. This payment represented a $1,000 consideration payment increased by the
excess of the actual inventory transferred of $704 over the contractual estimate
of $600. In October 1999, the Company received an additional $1,000 upon the
completion of the transfer of technology. The Company continued to manufacture
certain products on a "cost plus" basis for ten months following the Agreement
date. The Company recorded $1,211 in 1999 as other income for the excess of the
cash payments received over the cost basis of the assets sold.
As it was also entitled to receive royalty payments upon the sale of
products for a five-year period, the Company recognized as revenue the pro-rata
minimum royalty due for 1999 of $283 and the annual royalty due for 2000 of
$300. In February 2001, the Company amended the Agreement with Escalon regarding
the payment of royalties. As payment for $182 in royalties due the Company in
the first quarter of 2001, Escalon issued 50,000 shares of Escalon common stock
to the Company with a fair value of $100, which approximated the market price as
quoted on NASDAQ, a prime plus one percent interest bearing note receivable due
in January 2002 for $65, and cash of $17. The Company recognized a loss of $20
upon the sale of the shares of Escalon common stock in the fourth quarter of
2001. The note receivable was paid in January 2002.
Additionally, the Company received a prime (4.75% at December 31, 2001)
plus one percent interest bearing note receivable for $718, payable in eleven
equal quarterly installments from April 2002 to October 2004, representing the
remaining minimum royalties, on a discounted basis, due for 2001 to 2003 under
the Agreement. Additional royalties above the minimums will only be paid under
the amended agreement if related product sales exceed $3,000 annually. The
Company is recognizing interest income and license revenue under the $718 note
receivable on a cash basis, as collection of this note receivable was not
reasonably assured. Accordingly, the note receivable and deferred revenue are
not recorded on the consolidated balance sheet. Interest income of $47 was
recognized in 2001 and no royalties were recognized as revenue in 2001.
3. DEFERRED REVENUE
Deferred Distributor Fees
In June 1999, the Company granted Cosmotec of Japan distribution rights
to market its vascular radiation therapy products in Japan. Radiance received
$1,000 as cash payment in exchange for the distribution rights and is
recognizing the payment as revenue ratably over the estimated seven-year term of
the distribution agreement. The Company recognized $71, $81 and $81 of revenue
during the years ended December 31, 1999, 2000 and 2001, respectively. The cash
received in excess of revenue recognized has been recorded as deferred revenue.
In conjunction with the granting of distribution rights, the Company issued a
$1,000 convertible debenture to Cosmotec. The convertible debenture was issued
at below its estimated fair value resulting in a $377 reduction in the deferred
revenue recorded by the Company (Note 10).
F-13
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Gain on Sale of Assets
In August 1999, the Company sold an option to an unrelated party to
purchase the Company's 475,000 shares of Endologix common stock. Under the
option agreement, the purchaser made a non-refundable cash payment to the
Company of $1,232 for the option and had until December 2000 to exercise the
option. The option premium was recognized on a straight-line basis over the
option term, resulting in a gain of $347 and $886 being recognized as gain on
sale of assets in other income for the years ended December 31, 1999 and 2000,
respectively. In the fourth quarter of 2000, the optionholder paid an additional
amount to extend the option period for one week and the Company received an
additional $252, which was also recognized as gain on sale of assets in other
income. The optionholder did not exercise the option prior to its expiration.
4. DISTRIBUTION AGREEMENT WITH CATHEX
The Company entered into a distribution agreement, dated May 1, 1997,
with Cathex, Ltd. ("Cathex Agreement"), whereby Cathex was appointed to serve as
Radiance's exclusive distributor for certain of the Company's products in Japan.
In exchange for this exclusive distributorship, Cathex shareholders agreed to
purchase $200 in Radiance common stock or approximately 25,000 shares. Cathex
also agreed to undertake all necessary clinical trials to obtain approval from
Japanese regulatory authorities for the sale of said products in Japan. Cathex's
purchases under the Cathex Agreement were subject to certain minimum
requirements. The initial term of the Cathex Agreement expired on January 1,
2001, and was subject to a five-year extension. In the fourth quarter of 2000,
the Company and Cathex agreed to terminate the agreement. Sales to Cathex
accounted for 6% and 1% of total revenues in 1999 and 2000, respectively.
5. LICENSE AGREEMENTS
EndoSonics Corporation
In 1995 and 1997, the Company entered into license agreements with
EndoSonics pursuant to which the Company granted EndoSonics the non-exclusive,
royalty-free right to certain technology for use in the development and sale of
certain products. In exchange, Radiance received the non-exclusive, royalty-free
right to utilize certain of EndoSonics' product regulatory filings to obtain
regulatory approval of Radiance products (Note 16).
Guidant Corporation
In June 1998, the Company signed a technology license agreement with
Guidant granting them the right to manufacture and distribute stent delivery
products using the Company's Focus technology. Under the agreement, the Company
was 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 Focus technology. The final two milestone payments, totaling $2,000,
were received in the first half of 1999. Based upon the completion of certain
initial technology transfer milestones, the Company recognized $2,250 in license
revenue in 1999. In 1999, the Company recorded the minimum royalty due under the
agreement of $250. For the years ended December 31, 2000 and 2001, the Company
recorded $6,415 and $6,429, respectively, in royalties under the agreement. At
December 31, 2000 and 2001, $1,651 and $1,854, respectively, due under this
agreement are included in other receivables on the consolidated balance sheet.
F-14
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. 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. A
major financial institution manages the Company's investment portfolio. As of
December 31, 2001, $12,322 and $4,661 of the Company's debt securities had
contractual maturities of less than one year and between one to two years,
respectively.
DECEMBER 31, 2000 DECEMBER 31, 2001
------------------------------- -------------------------------
Gross Gross
Unrealized Unrealized
Holding Fair Holding Fair
Cost Gains Value Cost Gains Value
------- ------- ------- ------- ------- -------
U.S. Treasury and other agencies
debt securities ................ $ 2,004 $ 5 $ 2,009 $ 7,069 $ 86 $ 7,155
Corporate debt securities ...... 21,901 136 22,037 9,658 170 9,828
------- ------- ------- ------- ------- -------
$23,905 $ 141 $24,046 $16,727 $ 256 $16,983
======= ======= ======= ======= ======= =======
7. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
------------------------
2000 2001
----------- -----------
Raw materials $ 498 $ --
Work in process 178 --
Finished goods 409 73
---------- -----------
$ 1,085 $ 73
========== ===========
The Company discontinued sales and manufacturing of its products, except
to fill existing orders following its decision to restructure operations (Note
15).
8. INTANGIBLES
Intangibles consisted of the following:
DECEMBER 31,
---------------------------
2000 2001
------- ------
Developed technology $ 3,266 $ --
Employment contracts 1,301 --
------- ----
4,567 --
Accumulated amortization (1,781) --
------- ----
Intangible assets, net $ 2,786 $ --
======= ====
Following its decision to restructure operations, the Company concluded
that the intangible assets were impaired (Note 15).
F-15
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
DECEMBER 31,
---------------------------
2000 2001
------ ------
Accounts payable $1,293 $ 309
Accrued payroll and related expenses 1,045 446
Accrued restructuring charges -- 920
Accrued clinical expenses 241 1,029
Other accrued expenses 10 408
------ ------
$2,589 $3,112
====== ======
Accrued restructuring charges are comprised of $619 in employee
termination benefits and $301 in non-cancelable commitments (Note 15).
10. CONVERTIBLE DEBENTURE
In June 1999, in conjunction with an agreement to grant Cosmotec
distribution rights to market the Company's vascular radiation therapy products
in Japan, a convertible debenture agreement was executed between the Company and
Cosmotec whereby the Company was committed to sell Cosmotec a 5%, $1,000 face
amount convertible debenture in June 2000. The convertible debenture was issued
in June 2000 and would have matured in June 2003. In September 2000, Cosmotec
converted the debenture at the initial conversion price of $7.00 per share into
142,857 shares of common stock.
The Company recorded the convertible debenture at its fair value of
$1,407, and the difference between the fair value and the cash proceeds received
from this debenture was recorded as a reduction in the deferred revenue
associated with the distribution agreement (Note 3). The excess of the
debenture's fair value over its face value of $1,000 was amortized as a
reduction to interest expense through September 2000, the date of the
conversion, and the remaining unamortized balance was converted to equity.
During the year ended December 31, 2000, $32 was amortized to interest expense.
11. COMMITMENTS AND CONTINGENCIES
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 renewal options as prescribed by the agreements.
Future minimum payments by year under noncancellable operating leases
with initial terms in excess of one year were as follows as of December 31,
2001:
Year Ending December 31,
2002................................................ $510
2003................................................ 440
2004................................................ 80
2005................................................ 20
------
$1,050
======
During the fourth quarter of 2001, the Company completed its evaluation
of facility needs and recorded a $309 restructuring charge for non-cancelable
lease commitments, net of estimated sublease income of $256 (Note
F-16
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15). As of December 31, 2001, $288 of the lease commitment restructuring charge,
net of estimated sub-lease income, was included in accounts payable and accrued
expenses.
Rental expense charged to operations for all operating leases during the
years ended December 31, 1999, 2000 and 2001, was approximately $558, $543 and
$487, respectively.
The Company has subleased some of its facilities and is currently
entitled to receive income of approximately $115 and $96 during the years ended
December 31, 2002 and 2003, respectively. Rental income recorded for all
subleased facilities during the years ended December 31, 1999, 2000 and 2001,
was approximately $8, $19 and $100, respectively.
Contract Manufacturing Agreement with Bebig GmbH
In July 1999, the Company entered into a two-year contract manufacturing
agreement with Bebig GmbH ("Bebig") to activate the radioactive sources and
complete final assembly of the RDX system in Europe. Pursuant to the agreement,
which was amended in July 2000, Radiance paid $732 during 2000 and was committed
to pay approximately $710 in 2001 of certain facility set-up fees. In February
2001, the Company agreed to second and third amendments of the manufacturing
agreement. The second amendment called for the expansion of the production
capacity, and the Company was committed to pay additional fees of approximately
$635 in 2001, bringing the total fees for 2001 to approximately $1,345. During
2001, the Company paid all of the aforementioned fees, following the achievement
of manufacturing milestones by Bebig, with the exception of a portion of one
milestone for $51 that was not completed before manufacturing was discontinued
following the restructuring (Note 15). In addition, the Company completed the
preparation of certain manufacturing equipment to be used by Bebig to perform
the final assembly of the RDX system during the second quarter of 2001 and Bebig
purchased it for $450, which approximated Radiance's cost.
The third amendment, which had a one-year term, increased the amount the
Company would pay Bebig for each unit produced and set a minimum facility
charge. The Company also agreed to pay all material and third party costs
associated with production validation and an agreed amount for each unit
produced. In 2001, the Company paid a total of $278 for minimum facility fees
and $54 for reimbursement of third party costs for charges incurred prior to the
discontinuance of manufacturing following the restructuring, and $139 in
non-cancelable commitments through the term of the manufacturing agreement.
In May 2001, the Company agreed to a fourth amendment to the agreement
under which Bebig would fulfill customer service functions for an annual fee of
$95. In 2001, the Company paid $48 in fees for services performed and the
remaining $47, excluding $8,000 in associated taxes, for the non-cancelable
commitment under the agreement through April 2002.
In conjunction with the contract manufacturing agreement, the Company
entered into a three year sub-license agreement with Bebig for certain radiation
technology that it believed might be useful in the development of its radiation
therapy products. During 2001, the Company recorded $125 in license fee expense
and paid an additional $150 for license rights through November 2002. All
license fees due under the license agreement for prior periods were offset by
payments under the manufacturing agreement. The sub-license was subject to
renewal, without cost, until the underlying patents' expiration dates.
The Company has expensed, as research and development, all costs
associated with the contract manufacturing and license agreements with Bebig,
except those expensed as restructuring costs.
In September 2001, the Company implemented a restructuring plan that
included the discontinuance of European manufacturing (Note 15). As a result,
the remaining non-cancelable contractual commitments due under the agreements
with Bebig (including the remaining minimum sub-license fee), totaling $344, was
included as a component of the restructuring charge that was paid in the fourth
quarter of 2001. No amounts are owed to Bebig at December 31, 2001.
F-17
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. STOCKHOLDERS' EQUITY
Sale of Common Stock
In October 2000, the Company closed a secondary offering and sold
1,500,000 shares of its common stock, including 686,000 shares held as treasury
stock, at $9.50 per share, which resulted in net proceeds of approximately $13.0
million after deducting underwriting discounts and commissions and other
expenses of the offering.
Treasury Stock
In May 1997, the Board of Directors authorized the repurchase, at
management's discretion, of up to 700,000 shares of the Company's common stock
during the remainder of 1997 and 1998. In August 1998, the Board of Directors
increased this authorization to repurchase from 700,000 to 1,000,000 shares. The
authorization for the repurchase of the common stock was based upon the belief
that the market undervalued the Company's stock at the time. A total of 686,000
shares had been repurchased. In October 2000, all of the treasury shares were
sold.
Stock Option Plan
In May 1996, the Company adopted the 1996 Stock Option/Stock Issuance
Plan (the "1996 Plan") that is the successor to the Company's 1995 Stock Option
Plan. In September 1997, the Company adopted the 1997 Supplemental Stock Option
Plan (the "1997 Plan"). Under the terms of the 1996 and 1997 Plans, 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 market value of the
Company's common stock on the date of grant. At December 31, 2001, the Company
had authorized 3,450,000 and 90,000 shares of common stock for issuance under
the 1996 and 1997 Plan, respectively. At December 31, 2001, the Company had
359,866 shares and 11,500 shares of common stock available for grant under the
1996 and 1997 Plan, respectively. The options granted under the Plans are
exercisable over a maximum term of ten years from the date of grant and
generally vest over a four-year period. The activity under both plans is
summarized below:
OPTION PRICE NUMBER OPTIONS
PER SHARE OF SHARES EXERCISABLE
--------- --------- -----------
Balance at December 31, 1998 .... $1.00 to $12.00 1,513,378
Granted ......................... $2.69 to $ 6.19 767,333
Granted as merger consideration . $ 0.11 317,776
Exercised ....................... $0.11 to $ 2.50 (358,722)
Forfeited ....................... $1.00 to $ 9.50 (213,918)
---------------- ----------
Balance at December 31, 1999 .... $0.11 to $12.00 2,025,847 724,705
=========
Granted ......................... $5.81 to $13.19 349,600
Exercised ....................... $0.11 to $ 9.50 (130,410)
Forfeited ....................... $3.00 to $13.19 (113,809)
---------------- ----------
Balance at December 31, 2000 .... $0.11 to $13.19 2,131,228 1,129,863
=========
Granted ......................... $1.55 to $ 6.88 333,700
Exercised ....................... $1.00 to $ 3.50 (21,417)
Forfeited ....................... $1.55 to $13.19 (271,250)
Balance at December 31, 2001 .... $0.11 to $13.19 2,172,260 1,525,275
================ ========== =========
Under the merger agreement with the former Radiance, the options
outstanding prior to the merger accelerated, vested and were, if unexercised,
assumed by the Company and converted into options at the same exercise price
(Note 2).
F-18
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information regarding stock options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ------------ ----------- -------- ----------- ----------
$ 0.11 - 98,541 7.0 $0.11 98,541 $ 0.11
1.00 - 2.50 171,834 3.7 1.39 171,834 1.39
2.69 - 3.63 564,913 7.1 3.42 437,987 3.42
4.31 - 6.19 983,892 7.4 4.95 625,245 5.01
6.38 - 8.75 299,592 8.0 7.03 162,844 7.26
12.00 - 13.19 53,489 7.5 12.85 28,823 12.57
--------- --- ----- --------- ------
0.11 - 13.19 2,172,261 7.1 $4.53 1,525,275 $ 4.21
========= === ===== ========= ======
The weighted-average grant-date fair value of options granted during
1999, 2000 and 2001 where the exercise price on the date of grant was equal to
the stock price on that date, was $4.18, $7.75, and $4.64, respectively. Under
the merger agreement with the former Radiance, 317,776 options were granted in
January 1999 at a weighted-average grant-date fair value of $3.94 per share and
an exercise price of $0.11 per share.
During the years ended December 31, 1999, 2000 and 2001, $359, $(36),
and $(290), respectively, of deferred compensation was recorded for the fair
value of current year non-employee option grants, net of the change to the fair
value of previously issued, non-employee, unvested stock options. Deferred
compensation is being amortized over the vesting period of the related options,
which is generally four years. During the years ended December 31, 1999, 2000
and 2001, $244, $280 and $(97), respectively, was recorded as compensation
expense net of any change in the estimated fair value of the unvested options.
During the years ended December 31, 1999, 2000 and 2001, 108,333, 44,600, and
30,000 options, respectively, were granted to non-employees. As of December 31,
1999, 2000 and 2001, a total of 173,665, 214,932 and 244,932 non-employee stock
options, respectively, were outstanding. No compensation expense was recorded in
the financial statements for stock options issued to employees for 1999, 2000,
and 2001 because the options were granted with an exercise price equal to the
market price of the Company's common stock on the date of grant.
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. In June 2000, an additional 200,000 shares of common stock were approved
for issuance under the Purchase Plan, bringing the total reserved to 400,000
shares. During 1999, 2000 and 2001, a total of approximately 59,000, 66,000, and
52,000 shares of common stock, respectively, were purchased at an average price
of $2.83, $3.47, and $4.17 per share, respectively.
F-19
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. INCOME TAXES
Significant components of the Company's deferred tax assets and
(liabilities) are as follows at December 31:
2000 2001
-------- --------
Net operating loss carryforward .... $ 10,354 $ 14,029
Accrued expenses ................... 89 108
Tax credits ........................ 2,457 2,459
Bad debt reserve ................... 45 97
Depreciation ....................... (141) 47
Amortization ....................... (1,393) 124
Inventory write-downs .............. 137 372
Capitalized research and development 1,963 1,696
Deferred revenue ................... 175 143
Deferred compensation amortization . 417 378
Other .............................. 1 540
-------- --------
Deferred tax assets ................ 14,104 19,993
Valuation allowance ................ (14,104) (19,993)
-------- --------
Net deferred tax assets............ $ -- $ --
======== ========
The valuation allowance increased by $1,762, $2,247, and $5,889 in 1999,
2000, and 2001 respectively.
The Company's effective tax rate differs from the statutory rate of 35%
due primarily to federal and state losses that were recorded without tax
benefit.
At December 31, 2001, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $40,021 and $7,227,
respectively, which begin to expire in 2009 and 2003, respectively. In addition,
the Company has research and development and other tax credits for federal and
state income tax purposes of approximately $1,349, and $1,110, respectively,
which begin to expire in 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.
The results of operations for the years ended December 31, 1999, 2000
and 2001 include the net losses of the Company's wholly-owned German and
majority-owned Japanese subsidiaries of $177, $176, and $93, respectively.
14. 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 1999, 2000 or
2001.
15. RESTRUCTURING CHARGES
In September 2001, two companies published the first feasibility
clinical study data for drug coated stents, a competing technology to the
Company's RDX system. While the Company's RDX system uses beta radiation to
treat restenosis resulting from angioplasty procedures, drug-coated stents have
drugs that inhibit cell proliferation to
F-20
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
limit restenosis. Though drug-coated stent feasibility trials were on a
relatively small cohort of patients, both companies reported restenosis rates
near or at zero percent. Unless clinical study data involving drug coated stents
from the pivotal, larger studies planned or in progress show restenosis rates
significantly higher than reported in pilot studies, the market for the RDX
system likely will be limited.
As a result, in order to conserve cash prior to assessing the outcome of
our BRITE II clinical study and deciding whether to make our PMA filing, and to
position the Company to take advantage of strategic alternatives, the Company
decided in September 2001 to restructure its operations. The restructuring plan
was comprised of the following: a) discontinue marketing and manufacturing of
the RDX System in Europe and other international markets in the third quarter of
2001, b) discontinue marketing and manufacturing of products using the Company's
Focus technology subject to the fulfillment of outstanding orders, which was
completed in the fourth quarter of 2001, c) cease clinical trials for the RDX
system in Japan, and d) involuntary termination of 55 employees, which is
expected to be completed in the first quarter of 2002, and e) search for
additional commercial opportunities by evaluating technologies outside of
radiation therapy. The involuntarily terminated employees consisted of 28
employees in manufacturing, 19 employees in research, development, and
regulatory and clinical affairs, 3 employees in sales and marketing and 5
employees in administration. As of December 31, 2001, 51 employees had actually
been terminated.
As a result of the restructuring plan, the Company recorded a $344
charge, comprised of manufacturing facility set up and sub-license fees and
non-cancelable commitments under the agreements with Bebig, $20 in other
non-cancelable commitments, $601 for the write-off of inventory that will not be
used to fulfill the outstanding Focus technology product orders, $1,093 for
employee termination benefits and $42 for other exit costs.
The Company evaluated the estimated cash flows it expected to generate
from its RDX technology, including any possible cash flows associated with its
eventual disposition. Due to the Company's decision to cease marketing and
manufacturing in Europe, and the uncertainty surrounding whether it will pursue
marketing the RDX technology in other countries, the Company concluded that no
future cash flows are expected to be generated from the RDX technology. As a
result, the net carrying value of the Company's equipment related to the RDX
technology and its intangible assets, consisting of acquired technology and
employment contracts, were written down to zero, resulting in a charge of $390
and $2,111, respectively.
The Company also evaluated the estimated cash flows expected to be
generated from equipment used in the production of its Focus technology product
line, including any possible cash flows associated with the equipment's eventual
disposition. Due to the Company's decision to cease manufacturing of the Focus
technology product line, subject to the fulfillment of outstanding orders, the
Company recorded a charge of $40 based on estimated discounted cash flows, and
revised the estimated useful life of the equipment used in the production of
Focus technology products to three months.
The Company also wrote off $269 for the carrying value of furniture,
computers, software and leasehold improvements that are no longer being used.
During the fourth quarter of 2001, the Company completed its evaluation
of its facility needs and recorded a $309 restructuring charge for
non-cancelable lease commitments, net of estimated sublease income of $256.
F-21
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of the restructuring activities in the year ended
December 31, 2001, exclusive of the $601 inventory impairment charge that is
included in cost of sales:
LIABILITY
BALANCE
CASH NON-CASH DECEMBER 31,
CHARGES PAYMENTS CHARGES 2001
------- -------- ------- ------------
Employee termination benefits .......... $ 1,093 $ (474) $ -- $ 619
Property and equipment ................. 699 -- (699) --
Intangible assets ...................... 2,111 -- (2,111) --
Non-cancelable commitments ............. 672 (371) -- 301
Other charges .......................... 42 -- (42) --
------- ------- ------- -------
$ 4,617 $ (845) $(2,852) $ 920
======= ======= ======= =======
During 2002 and 2003, Radiance will pay $841 and $79, respectively, of
the accrued liabilities recorded under the restructuring that are outstanding as
of December 31, 2001.
16. LEGAL MATTERS
On September 15, 1999, EndoSonics Corporation, now a wholly-owned
subsidiary of Jomed N.V., filed a complaint for declaratory relief in the
Superior Court in Orange County, California, claiming that under a May 1997
agreement between the parties, EndoSonics had rights to combine Radiance's Focus
balloon technology with an EndoSonics' ultrasound imaging transducer on the same
catheter with a coronary vascular stent. In February 2001 the court ruled in the
Company's favor, ruling that Jomed-EndoSonics had no such rights to include a
stent with the Focus balloon and ultrasound imaging transducer. Under the
judgment, the Company is entitled to recover approximately $460 of its legal
fees it had previously expensed. In May 2001, Jomed-EndoSonics appealed the
judgment. A court date has not yet been set. The Company believes that this
matter will not have a material adverse effect on its financial position,
results of operations or cash flows. No amounts have been included in the
consolidated financial statements as of December 31, 2001 for this potential
legal fee recovery.
The Company is a party to ordinary disputes arising in the normal course
of business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
17. RELATED PARTY TRANSACTION
Notes Receivable from Officers
In January 1997, the Company loaned $100,000 to its then president and
now chief executive officer. The note is collateralized by a second trust deed
on the home of the CEO and had a five-year term with interest compounding
semi-annually at 6%. The principal and interest was originally due January 2002
and has been extended to January 2004.
In October 1997, former Radiance loaned $10,000 to its director of
research and development. When former Radiance was acquired by the Company, the
loan was continued and former Radiance's director of research and development
became the Company's vice president of clinical affairs. The note is not
collateralized and had a six month term with interest compounding semi-annually
at 6%. The principal and interest was originally due March 1998 and has been
extended to March 2003.
18. SUBSEQUENT EVENTS
In February 2002, the Company signed a definitive merger agreement with
Endologix, Inc. ("Endologix"), a developer and manufacturer of minimally
invasive treatment of vascular diseases. Endologix' lead technology is the
PowerLink System, an endoluminal stent graft for the treatment of abdominal
aortic aneurysms.
F-22
RADIANCE MEDICAL SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Under the terms of the merger agreement, the Company will issue $0.75
for each share of Endologix common stock, for an aggregate amount of cash not to
exceed $8,369, and one share of Radiance common stock for each share of
Endologix common stock, not to exceed an aggregate issuance of 11,159,052
shares. In addition, Radiance may pay contingent consideration in the amount of
$5,579 in the event pre-market approval, or PMA, is received for the PowerLink
System on or before March 31, 2004, or $2,790 if PMA approval is received by
June 30, 2004. Radiance may choose to pay the contingent consideration, if
payable, in cash or common stock at its sole discretion. The merger agreement
also provides for the cancellation of Endologix' treasury stock and 475,000
shares of Endologix common stock, or 4% of the fully diluted equity of
Endologix, that Radiance owns.
Immediately prior to the effective time of the merger, each Endologix
common shareholder can elect to receive all or a portion of the merger
consideration, excluding any milestone payment, in either cash or stock. In no
event shall the total amount of cash to be paid by the Company exceed 50% of the
total of all of the merger consideration, valuing each share of the Company's
common stock at its NASDAQ market closing price on the day immediately preceding
the payment date of the merger consideration.
In addition, Radiance has agreed to loan Endologix up to $3 million in
the event the merger is not completed. The loan will be collateralized by a
first priority security interest on all of Endologix' intellectual property, and
will be due on the earlier of October 1, 2003 or upon the closing by Endologix
of certain transactions, namely an equity or debt financing of $10,000 or more,
a merger in which Endologix is not the surviving entity, or the sale of all or
substantially all of its assets.
The merger is subject to Radiance and Endologix shareholder approval and
other customary closing conditions. If approved, the Company will account for
the transaction using the purchase method of accounting.
F-23
RADIANCE MEDICAL SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(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(a) PERIOD
------------------------------------ --------- -------- --------- ------------- ----------
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts ... $ 113 $ 131 $-- $ -- $ 244
Reserve for excess and obsolete ... $ 343 $ 817 $-- $ (175) $ 985
inventories
Income tax valuation allowance .... $14,104 $ 5,889 $-- $ -- $19,993
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts ... $ 150 $ 11 $-- $ (48) $ 113
Reserve for excess and obsolete ... $ 622 $ -- $-- $ (279) $ 343
inventories
Income tax valuation allowance .... $11,857 $ 2,247 $-- $ -- $14,104
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts ... $ 583 $ (168) $-- $ (265) $ 150
Reserve for excess and obsolete ... $ 1,856 $ -- $-- $(1,234) $ 622
inventories
Income tax valuation allowance .... $10,095 $ 1,762 $-- $ -- $11,857
(a) Deductions represent the actual write-off of accounts receivable balances
or the disposal of inventory.
F-24
Report of Independent Auditors
Board of Directors and Shareholders
Endologix, Inc.
We have audited the accompanying balance sheets of Endologix, Inc. as of
December 31, 2000 and 2001 and the related statements of operations, redeemable
preferred stock and other shareholders' deficit, and cash flows for the years
then ended. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Endologix, Inc. at December 31,
2000 and 2001 and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Orange County, California
February 4, 2002, except for Note 7,
as to which the date is February 8, 2002
F-25
ENDOLOGIX, INC.
BALANCE SHEETS
DECEMBER 31
---------------------------------
2000 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 7,175,700 $ 3,845,495
Accounts receivable, less allowances of $0 and
$147,792, at December 31, 2000 and 2001,
respectively ................................................ 674,031 524,454
Inventories .................................................... 818,400 1,389,604
Prepaid expenses and other current assets ...................... 144,500 88,903
------------ ------------
Total current assets ............................................... 8,812,631 5,848,456
Property and equipment, net ........................................ 133,300 161,944
Long-term deposits for clinical trial services ..................... -- 316,571
Receivable from related party ...................................... 19,469 24,470
------------ ------------
Total assets ....................................................... $ 8,965,400 $ 6,351,441
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................... $ 727,622 $ 859,846
Accrued liabilities ................................................ 309,800 178,654
Deferred revenue ................................................... 197,400 --
Note payable to related party ...................................... -- 1,000,000
------------ ------------
Total current liabilities .......................................... 1,234,822 2,038,500
Redeemable, convertible preferred stock, $0.001 par value:
Authorized shares 10,000,000:
Series A:
Authorized shares -- 1,300,000; Issued and outstanding
shares 1,300,000 at December 31, 2000 and 2001
(liquidation preference $1,625,000 at December 31, 2001) ...... 1,613,709 1,618,226
Series B:
Authorized shares 3,200,000; Issued and outstanding
shares 2,971,989 at December 31, 2000 and 2001
(liquidation preference $7,429,973 at December 31, 2001) ...... 7,410,716 7,416,798
Series C:
Authorized shares 447,345; Issued and outstanding
shares 428,571 at December 31, 2000 and 2001
(liquidation preference $1,499,999 at December 31, 2001) ...... 1,478,159 1,485,242
Commitments and contingencies
Other shareholders' deficit:
Common stock, $0.001 par value:
Authorized shares -- 15,500,000
Issued and outstanding shares -- 6,008,531 and
6,161,915 at December 31, 2000 and 2001, respectively ......... 6,008 6,162
Additional paid-in capital ...................................... 7,231,944 7,750,873
Treasury stock, at cost 332,000 shares at December 31,
2000 and 2001 ................................................. (60,000) (60,000)
Deferred compensation ........................................... (1,255,222) (1,234,417)
Note receivable from shareholder ................................ (174,300) (174,300)
Accumulated deficit ............................................. (8,520,436) (12,495,643)
------------ ------------
Total shareholders' deficit ........................................ (2,772,006) (6,207,325)
------------ ------------
Total liabilities and shareholders' deficit ........................ $ 8,965,400 $ 6,351,441
============ ============
See accompanying notes.
F-26
ENDOLOGIX, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-------------------------------
2000 2001
----------- -----------
Sales ............................................. $ 3,757,500 $ 2,837,392
Joint development revenue ......................... 932,700 197,400
----------- -----------
Total revenue ..................................... 4,690,200 3,034,792
Cost of goods sold(1) ............................. 1,514,700 1,228,618
----------- -----------
Gross profit ...................................... 3,175,500 1,806,174
Research and development(1) ....................... 2,595,500 3,428,715
Selling, general and administrative(1) ............ 1,519,900 2,093,698
Joint development expense ......................... 932,700 --
Stock-based compensation .......................... 80,990 498,572
----------- -----------
Loss from operations .............................. (1,953,590) (4,214,811)
Miscellaneous income .............................. -- 50,869
Interest expense .................................. -- (29,332)
Interest income ................................... 143,100 235,749
----------- -----------
Loss before income taxes .......................... (1,810,490) (3,957,525)
Provision for income taxes ........................ -- --
----------- -----------
Net loss .......................................... (1,810,490) (3,957,525)
Accretion of discount on redeemable preferred stock (17,682) (17,682)
----------- -----------
Net loss attributable to common shareholders ...... $(1,828,172) $(3,975,207)
=========== ===========
(1) Excludes stock-based compensation as follows: :
Cost of goods sold ........................... $ 7,692 $ 50,280
Research and development ..................... 32,394 205,169
Selling, general and administrative .......... 40,904 243,123
----------- -----------
Total stock-based compensation .................... $ 80,990 $ 498,572
=========== ===========
See accompanying notes.
F-27
ENDOLOGIX, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND OTHER SHAREHOLDER'S DEFICIT
Redeemable, convertible Redeemable, convertible Redeemable, convertible
preferred stock Series A preferred stock Series B preferred stock Series C
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ---------- ------- ----------
Balance at December 31, 1999 1,300,000 $1,609,192 2,971,989 $7,404,634 428,571 $1,471,076
Exercise of warrants -- -- -- -- -- --
Additional paid-in capital associated with
expiration of option agreement, net of
$120,800 income tax liability (Note 3) -- -- -- -- -- --
Deferred compensation resulting from the grant
of 524,000 options, exercisable into
common stock at $.35 per share -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Reversal of previously recorded deferred
compensation as a result of stock option
forfeitures -- -- -- -- -- --
Accretion on preferred stock -- 4,517 -- 6,082 -- 7,083
Net loss -- -- -- -- -- --
--------- ---------- --------- ---------- ------- ----------
Balance at December 31, 2000 1,300,000 1,613,709 2,971,989 7,410,716 428,571 1,478,159
EXERCISE OF STOCK OPTIONS -- -- -- -- -- --
DEFERRED COMPENSATION RESULTING FROM THE
GRANT OF 194,000 OPTIONS, EXERCISABLE
INTO COMMON STOCK AT $.35 PER SHARE -- -- -- -- -- --
OPTIONS GRANTED TO NON-EMPLOYEES (EXERCISABLE
INTO 122,5000 SHARES OF COMMON STOCK
AT $.35 PER SHARE) -- -- -- -- -- --
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- -- -- --
REVERSAL OF PREVIOUSLY RECORDED DEFERRED
COMPENSATION AS A RESULT OF STOCK OPTION
FORFEITURES -- -- -- -- -- --
ACCRETION ON PREFERRED STOCK -- 4,517 -- 6,082 -- 7,083
NET LOSS -- -- -- -- -- --
--------- ---------- --------- ---------- ------- ----------
BALANCE AT DECEMBER 31, 2001 1,300,000 $1,618,226 2,971,989 $7,416,798 428,571 $1,485,242
========= ========== ========= ========== ======= ==========
Common Stock Add'l Treasury Stock
-------------------- Paid-in ---------------------- Deferred
Shares Amount Capital Shares Amount Compensation
--------- ------ ----------- -------- -------- ------------
Balance at December 31, 1999 5,996,351 $5,996 $ 505,716 (332,000) $(60,000) $ (274,950)
Exercise of warrants 12,180 12 35,066 -- --
Additional paid-in capital associated with
expiration of option agreement, net of
$120,800 income tax liability (Note 3) -- -- 5,629,900 -- -- --
Deferred compensation resulting from the grant
of 524,000 options, exercisable into
common stock at $.35 per share -- -- 1,135,333 -- -- (1,135,333)
Amortization of deferred compensation -- -- -- -- -- 80,990
Reversal of previously recorded deferred
compensation as a result of stock option
forfeitures -- -- (74,071) -- -- 74,071
Accretion on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------ ----------- -------- -------- -----------
Balance at December 31, 2000 6,008,531 6,008 7,231,944 (332,000) (60,000) (1,255,222)
EXERCISE OF STOCK OPTIONS 153,384 154 41,162 -- -- --
DEFERRED COMPENSATION RESULTING FROM THE
GRANT OF 194,000 OPTIONS, EXERCISABLE
INTO COMMON STOCK AT $.35 PER SHARE -- -- 389,940 -- -- (389,940)
OPTIONS GRANTED TO NON-EMPLOYEES (EXERCISABLE
INTO 122,5000 SHARES OF COMMON STOCK
AT $.35 PER SHARE) -- -- 121,738 -- -- --
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- -- -- 376,834
REVERSAL OF PREVIOUSLY RECORDED DEFERRED
COMPENSATION AS A RESULT OF STOCK OPTION
FORFEITURES -- -- (33,911) -- -- 33,911
ACCRETION ON PREFERRED STOCK -- -- -- -- -- --
NET LOSS -- -- -- -- -- --
--------- ------ ----------- -------- -------- -----------
BALANCE AT DECEMBER 31, 2001 6,161,915 $6,162 $ 7,750,873 (332,000) $(60,000) $(1,234,417)
========= ====== =========== ======== ======== ===========
Note
Receivable
from Accumulated
Shareholder Deficit Total
----------- ------------- ------------
Balance at December 31, 1999 $(174,300) $ (6,692,264) $(6,689,802)
Exercise of warrants -- -- 35,078
Additional paid-in capital associated with
expiration of option agreement, net of
$120,800 income tax liability (Note 3) -- -- 5,629,900
Deferred compensation resulting from the grant
of 524,000 options, exercisable into
common stock at $.35 per share -- -- --
Amortization of deferred compensation -- -- 80,990
Reversal of previously recorded deferred
compensation as a result of stock option
forfeitures -- -- --
Accretion on preferred stock -- (17,682) (17,682)
Net loss -- (1,810,490) (1,810,490)
--------- ------------ -----------
Balance at December 31, 2000 (174,300) (8,520,436) (2,772,006)
EXERCISE OF STOCK OPTIONS -- -- 41,316
DEFERRED COMPENSATION RESULTING FROM THE
GRANT OF 194,000 OPTIONS, EXERCISABLE
INTO COMMON STOCK AT $.35 PER SHARE -- -- --
OPTIONS GRANTED TO NON-EMPLOYEES (EXERCISABLE
INTO 122,5000 SHARES OF COMMON STOCK
AT $.35 PER SHARE) -- -- 121,738
AMORTIZATION OF DEFERRED COMPENSATION -- -- 376,834
REVERSAL OF PREVIOUSLY RECORDED DEFERRED
COMPENSATION AS A RESULT OF STOCK OPTION
FORFEITURES -- -- --
ACCRETION ON PREFERRED STOCK -- (17,682) (17,682)
NET LOSS -- (3,957,525) (3,957,525)
--------- ------------ -----------
BALANCE AT DECEMBER 31, 2001 $(174,300) $(12,495,643) $(6,207,325)
========= ============ ===========
See accompanying notes.
F-28
ENDOLOGIX, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------
2000 2001
----------- -----------
OPERATING ACTIVITIES:
Net loss $(1,810,490) $(3,957,525)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 63,100 81,796
Stock based compensation 80,990 498,572
Changes in operating assets and liabilities:
Accounts receivable (507,740) 149,577
Inventories 39,100 (571,204)
Prepaid expenses and other current assets (20,500) 55,597
Long-term deposit for clinical trial services -- (316,571)
Receivable from related party (7,060) (5,001)
Accounts payable 439,022 132,224
Accrued liabilities 98,300 (131,146)
Deferred revenue 197,400 (197,400)
----------- -----------
Net cash used in operating activities (1,427,878) (4,261,081)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (35,500) (110,440)
----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 35,078 41,316
Net proceeds from note issuance to related party -- 1,000,000
Proceeds from option agreement (Note 3) 5,750,700 --
----------- -----------
Net cash provided by financing activities 5,785,778 1,041,316
----------- -----------
Increase (decrease) in cash and cash equivalents 4,322,400 (3,330,205)
Cash and cash equivalents at beginning of period 2,853,300 7,175,700
----------- -----------
Cash and cash equivalents at end of period $ 7,175,700 $ 3,845,495
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes $ 800 $ 149,416
NONCASH OPERATING TRANSACTION
Tax liability associated with option agreement
(Note 3) $ 120,800 $--
See accompanying notes.
F-29
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation and Description of Business
Endologix, Inc. (the Company) was incorporated on June 20, 1997 in the State of
Delaware. The Company manufactures for resale unique medical devices primarily
for the treatment of patients with abdominal aortic aneurysms to both domestic
and foreign customers. The Company sells its products to health care facilities
primarily in the United States and Europe. For the year ended December 31, 2001,
sales to domestic and foreign customers totaled $754,430 and $2,082,962,
respectively.
Basis of Presentation
The Company has experienced operating losses since inception and at December 31,
2001 has a shareholders' deficit of $6.2 million. The Company expects that its
operations will continue to use cash in 2002 as the Company's primary product
continues its U.S. clinical trials. In order to meet its financing needs, in
February 2002, the Company entered into two agreements with Radiance Medical
Systems, Inc. ("Radiance"). As described in Note 7, the Company has signed a
merger agreement with Radiance. If the merger is consummated, management
believes that cash held by Radiance will be sufficient to fund its operations
through December 31, 2002. In addition, in the event that the Radiance merger is
not consummated, the company has entered into a separate $3 million loan
agreement with Radiance (Note 7). Management believes that cash on had and the
availability of borrowings under the Radiance loan agreement will be sufficient
to fund operations through December 31, 2002.
Use of Estimates
The preparation of the 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 reported period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, and short-term investments with
original maturities of three months or less.
Concentration of Credit Risk
Approximately 80% of the Company's accounts receivable at December 31, 2001 were
due from customers located outside the United States. The Company performs
periodic credit evaluations of its customers and generally does not require
collateral.
F-30
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market with cost determined using
the first in, first out method. Inventories consist of the following:
DECEMBER 31
------------------------------
2000 2001
---------- ----------
Raw materials $ 469,400 $ 679,932
Work in process 55,400 62,951
Finished goods 293,600 646,721
---------- ----------
$ 818,400 $1,389,604
========== ==========
Property and Equipment
Property and equipment, at cost, consists of the following:
DECEMBER 31
-----------------------------
2000 2001
--------- ---------
Machinery and equipment $ 195,400 $ 199,212
Computer hardware and software 58,800 77,249
Furniture and fixtures 14,500 16,807
Leasehold improvements 12,300 37,789
Tooling and molds 4,800 65,183
--------- ---------
285,800 396,240
Less accumulated depreciation (152,500) (234,296)
--------- ---------
$ 133,300 $ 161,944
========= =========
Depreciation is provided using the straight-line method based on the estimated
useful lives of the related assets, generally three to five years.
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 flow estimated to be generated by those assets are less than
the carrying amount of those assets. Management believes that no impairment of
long-lived assets existed as of December 31, 2001.
Long-Term Deposit for Clinical Trial Services
During 2001 the Company made a deposit with a provider of clinical trial
research. The deposit will not be utilized or returned to the Company until
2003. Accordingly the deposit has been reflected as a long-term asset on the
balance sheet.
Revenue Recognition
The Company maintains consigned inventory at certain medical facilities. Revenue
is recognized with respect to consigned inventory upon implantation of the
product. The Company recognizes revenue for all other sales upon shipment to the
customer.
F-31
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable, and notes payable. The
Company believes all of the financial instruments' recorded values approximate
current values.
Stock Based Compensation
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25") and related interpretations, and has adopted the
disclosure-only alternative of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123"). Options granted to
non-employees, as defined, have been accounted for at fair market value in
accordance with Statement No. 123.)
Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. Under the liability method, deferred tax liabilities and
assets are determined based on the difference between financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Deferred tax assets are
recognized and measured based on the likelihood of realization of the related
tax benefit in the future.
2. REDEEMABLE PREFERRED STOCK
Holders of Series A, B and C convertible preferred stock are entitled to receive
annual noncumulative dividends of $0.06 per share, as and when declared by the
Board of Directors and have preference over holders of common stock. The
preferred shareholders have voting rights equal to those of holders of the
common stock, which is one vote for each share owned. At any time on or after
July 1, 2003, March 1, 2004, and February 1, 2005 and at the request of the
holders of at least two-thirds of the outstanding Series A, B and C convertible
preferred stock, respectively, the Company may be required to redeem the Series
A convertible preferred stock at $1.25 per share, the Series B convertible
preferred stock at $2.50 per share and the Series C convertible preferred stock
at $3.50 per share plus any dividends declared but unpaid over a period not to
exceed two years prior to date of the request. At any time prior to redemption,
the holders of the Series A, B and C convertible preferred stock may convert any
or all of their shares of preferred stock to common stock at a one for one
conversion rate, subject to certain adjustments. In addition, the Series A, B
and C convertible preferred stock will be automatically converted into common
stock at the then applicable conversion rate, in the event of a underwritten
public offering of common stock at an offering price of not less than $10.00 per
common stock with aggregate proceeds of not less than $10 million. The Series A,
B and C convertible preferred stock have a liquidation preference of the greater
of $1.25 per share, $2.50 per share and $3.50 per share, respectively, or the
amount they would have received had they converted the Series A, B or C
convertible preferred to common stock immediately prior to such liquidation or
winding up. The Series A, B and C redeemable preferred stocks are being accreted
to their redemption values over the period from the their issuance date to the
earliest date by which the shareholders could cause the Company to redeem the
respective preferred stocks.)
Holders of common stock issued or issuable upon conversion of the Series A, B
and C convertible preferred stock will have the right to require the Company to
file an unlimited number of Registration Statements on Form S-3 (or any
equivalent successor form), provided the anticipated aggregated offering price
in each registration on Form S-3 will exceed $1 million. Investors are entitled
to "piggy-back" registration rights on registrations of the Company, subject to
the right of the Company and its underwriters to reduce, in view of market
conditions, the number of shares which are proposed for registration. All
registration expenses will be borne by the Company.
F-32
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. OTHER SHAREHOLDERS' DEFICIT
Option Agreement
On August 13, 1999, the Company and certain of its shareholders ("Sellers")
entered into an option agreement with a shareholder ("Buyer") whereby the Buyer
was granted an option to purchase all of the outstanding shares of common and
preferred stock of Sellers, as well as options issued in connection with the
Company's stock option plan, and all warrants outstanding. In consideration for
the option, the Buyer paid approximately $30 million of which approximately $25
million was distributed to the Sellers and $5 million was distributed to the
Company in accordance with the option agreement. On October 17, 2000, the
Sellers entered into an option extension agreement whereby the Buyer was granted
an additional 60 days to exercise the option. In consideration for the option
extension, the Buyer paid approximately $5 million, which was distributed to the
Sellers in accordance with the option extension agreement. On December 18, 2000,
the option lapsed and all rights of the Buyer under the agreement terminated and
the option price was forfeited. The Company's portion of the proceeds from the
option and the extension were $5,750,700 and are included in additional paid-in
capital at December 31, 2000.
Stock Option Plan
The Company's Incentive Stock Option Plan (the Plan) provides for the granting
of options to purchase up to 1,900,000 shares of common stock to employees,
officers, directors, consultants and business associates. The options have terms
of five to ten years and generally vest ratably over four years.
The following table summarizes the Company's stock option activity for the
period December 31, 2001 and 2000:
WEIGHTED WEIGHTED
NUMBER OF OPTION PRICE AVERAGE AVERAGE FAIR
SHARES PER SHARE EXERCISE PRICE VALUE
----------- ------------- -------------- ------------
Balance at December 31, 1999 494,316 $0.125 to $0.35 $0.23
Options granted 524,000 $0.35 $0.35 $1.88
Forfeited (55,208) $0.125 to $0.35 $0.25
-------
Balance at December 31, 2000 963,108 $0.125 to $0.35 $0.30
OPTIONS GRANTED 316,500 $0.35 $0.35 $2.07
EXERCISED (153,384) $0.125 TO $0.35 $0.27
FORFEITED (25,658) $0.125 TO $0.35 $0.29
---------
BALANCE AT DECEMBER 31, 2001 1,100,566 $0.125 TO $0.35 $0.32
=========
The Company has historically granted stock options with an exercise price equal
to the fair market value of the Company's common stock as determined by the
Board of Directors. In order to present its financial statements in accordance
with Regulation S-X of the Securities and Exchange Commission, the Company
revisited the deemed fair value of its common stock taking into account the
Commission's views on the value of common stock as compared its sales of
convertible preferred stock. Based upon this analysis, certain stock options
were granted with exercise prices less than the deemed fair market value of the
common stock on the date of grant. The intrinsic value of the unvested
compensatory awards has been allocated to deferred compensation and recognized
as stock-based compensation over the remaining future vesting period.
As of December 31, 2001, options to purchase 349,699 shares of common stock were
available for grant under the Plan.
F-33
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. OTHER SHAREHOLDERS' DEFICIT (CONTINUED)
Stock Option Plan (continued)
The following table summarizes information regarding stock options outstanding
and exercisable at December 31, 2001:
WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS OUTSTANDING REMAINING CONTRACTUAL LIFE OPTIONS EXERCISABLE
--------------- ------------------- --------------------------- -------------------
$ .125 95,688 4.29 88,698
$ .25 176,732 7.33 124,982
$ .35 828,146 9.41 219,281
--------- --------
1,100,566 8.63 432,961
========= ========
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using the
"minimum value" method as permitted under SFAS 123 with the following
assumptions: risk-free interest rate of 5.0%; a dividend yield of 0% and a
weighted average expected life of the options of four years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. The Company's pro forma net
income (loss) under SFAS 123 are not materially different from the reported net
income (loss) in the accompanying financial statements for the years ended
December 31, 2001 and 2000. Accordingly, such pro forma disclosures have been
omitted.
Reserved Common Stock
The Board of Directors has reserved 4,700,560 shares of common stock for
issuance upon conversion of preferred stock and 1,450,265 shares under the Stock
Option Plan.
4. RELATED PARTY TRANSACTIONS
Supplier Agreement
The Company purchases a key component for its product from a related party under
a supply agreement that expires in 2007, and which then automatically renews.
Under the terms of the agreement, the Company has agreed to purchase certain
dollar amounts of the component or the agreement may be canceled. The Company is
economically dependent on this vendor as it is currently the sole source
provider of the medical device component.
Note Payable
On September 4, 2001, the Company issued a $1,000,000 unsecured subordinated
convertible note to a shareholder. The note bears interest at 10% and is due in
full on September 10, 2002. The terms of the note agreement provides for
automatic conversion of $500,000 of principal into shares of the Company's
Series D Preferred Stock if the Company completes an equity offering greater
than $2,500,000. The note also provides for voluntary conversion of $500,000 of
principal into Series D Preferred Stock any time prior to or upon the closing of
such financing.
Distribution Agreement
In 2000 and 2001, the Company sold product to a shareholder in connection with a
distribution agreement entered into on February 12, 1999. Total sales made to
the shareholder during 2000 and 2001 were $2,937,000 and $416,000, respectively.
In addition, there was approximately $389,450 in accounts receivable as of
December 31, 2000. There were no amounts due from the shareholder as of December
31, 2001. On June 30, 2001, the Company and the shareholder mutually agreed to
terminate the distributor agreement.
F-34
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Joint Development Agreement
On January 24, 2000, the Company entered into a joint development agreement with
a shareholder whereby the Company received $1.8 million to undertake a research
and development project and fund certain purchases by the shareholder. During
2000, the Company incurred $932,700 in expenses related to the project, and
purchases of $669,900 were paid with the joint development funds. The remaining
$197,400 is included on the balance sheet as deferred revenue as of December 31,
2000. On June 30, 2001, the shareholder terminated the joint development
agreement and the remaining deferred revenue was recorded as other income.
Shareholder Note Receivable
In September 1998, an officer of the Company purchased 700,000 shares of common
stock for $175,000, of which $700 was paid in cash. The remaining $174,300 was
evidenced by a five year, 6% note receivable and is recorded as a reduction of
shareholders' equity in the accompanying balance sheets.
Clinical Advisor Fees
During 2000 the Company paid $150,000 to a shareholder as a clinical advisor. No
such fees were paid during 2001.
Lease Agreement
During 2000, the Company entered into an office lease agreement with a
shareholder. The lease agreement expires in 2003. Rent paid under the lease
agreement during 2001 totaled $70,890.
5. COMMITMENTS
The Company leases equipment and facilities under noncancelable operating
leases. Future minimum rentals under these leases as of December 31, 2001 are as
follows:
2002 $313,400
2003 272,100
--------
$585,500
========
Rent expense was $253,971 and $182,160 for the years ended December 31, 2001 and
2000, respectively.
6. PROVISION FOR INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS No. 109), under which
deferred income tax assets and liabilities are recognized for the differences
between financial and income tax reporting bases of assets and liabilities based
on enacted tax rates and laws.
F-35
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Temporary differences and carryforwards that result in deferred income tax
balance as of December 31 are as follows:
2000 2001
----------- -----------
Deferred income tax assets:
Net operating loss carryforwards $ 950,000 $ 2,185,000
Research and development credit carryforwards 373,000 476,000
AMT and manufacturer's investment tax credit 123,000 121,000
Reserves and accruals 60,000 131,000
Stock-based deferred compensation 5,000 75,000
Other 22,000 38,000
----------- -----------
1,533,000 3,026,000
Valuation allowance (1,533,000) (3,026,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
Valuation allowances of $1,533,000 and $3,026,000 at December 31, 2000 and 2001,
respectively, have been recorded to offset the related net deferred tax assets
because the Company is uncertain as to whether such deferred tax assets will be
realized. The Company's tax provision differs from the tax benefit that would be
recognized on its net loss primarily because of the establishment of such
allowance.
At December 31, 2001, the Company had federal and state net operating loss
carryforwards of approximately $5,716,000 and $4,139,000, respectively, which
begin to expire in 2019 and 2005 for federal and state purposes, respectively.
The availability of these loss and credit carry forwards to reduce the Company's
future tax liability could be subject to limitations under Section 382 and 383
of the Internal Revenue Code of 1986, as amended. Certain ownership changes can
significantly limit the utilization of net operating loss carry forwards in the
period following the ownership change.
At December 31, 2001, the Company had federal and state research and development
credit carryforwards of approximately $257,000 and 219,000, respectively which
begin to expire in 2018 for Federal purposes and carryover indefinitely for
state purposes.
The differences between the provision for income tax expense at the federal
statutory rate of 34% and that reflected in the consolidated statements of
income are summarized as follows for the years ended December 31:
2000 2001
----------- -----------
Tax provision (benefit) at statutory $ (615,600) $(1,346,000)
rate
State taxes, net of federal benefit -- --
Research and development tax credit (63,800) (51,000)
Other 23,000 (96,000)
Increase in valuation allowance 656,400 1,493,000
----------- -----------
$ -- $ --
=========== ===========
F-36
ENDOLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS
Merger Agreement
On February 8, 2002 the Company signed a definitive merger agreement with
Radiance Medical Systems Inc., ("Radiance") a publicly held minority shareholder
of the Company. Under the terms of the merger agreement, Radiance will pay the
Company's shareholders $0.75 in cash and one share of Radiance common stock for
each share of the Company common stock not already owned by Radiance. The
Company's currently outstanding redeemable preferred stock will be converted to
common stock prior to the closing of the transaction. In addition, the Company's
common shareholders may receive milestone payments up to $0.50 for each share of
Endologix common stock based upon certain performance criteria.
Loan Agreement
On February 8, 2002, the Company also executed a $3,000,000, 10% interest loan
agreement with Radiance. In the event the merger describe above is not
consummated by July 1, 2002, the Company can borrow up to $3,000,000 in $500,000
monthly increments commencing July 1, 2002. The loan agreement matures on
October 1, 2003.
F-37
ANNEX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 8, 2002
BY AND AMONG
RADIANCE MEDICAL SYSTEMS, INC.,
RMS ACQUISITION CORP.
AND
ENDOLOGIX, INC.
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of February 8, 2002 (this
"Agreement") is made and entered into by and among Radiance Medical Systems,
Inc., a Delaware corporation ("Radiance"), RMS Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Radiance ("Sub"), and Endologix,
Inc., a Delaware corporation ("Endologix")
WHEREAS, the Board of Directors of each of Radiance, Sub and Endologix
believes it to be desirable and in the best interests of Radiance, Sub and
Endologix and each of their respective stockholders to merge Endologix and Sub
(the "Merger"); and
WHEREAS, Radiance, Sub and Endologix desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section
1.2), upon the terms and subject to the conditions set forth in this Agreement,
Sub shall be merged with and into Endologix in accordance with the provisions of
the Delaware General Corporation Law (the "DGCL"). Endologix shall be the
surviving corporation in the Merger (the "Surviving Corporation"). Sub and
Endologix are sometimes referred to herein as the "Constituent Corporations". As
a result of the Merger, each outstanding share of capital stock of Endologix
shall be canceled and converted into the right to receive the Merger
Consideration, in the manner provided in Article 2 hereof.
1.2 Effective Time. At the Closing (as defined in Section 1.3), a
certificate of merger (the "Certificate of Merger") shall be executed by the
parties hereto and filed with the Secretary of State of the State of Delaware
(the "Secretary of State"). The Merger shall become effective at the time of
filing of the Certificate of Merger (the "Effective Time").
1.3 Closing. The closing of the Merger (the "Closing") shall take
place at the offices of Stradling Yocca Carlson & Rauth, 660 Newport Center
Drive, Suite 1600, Newport Beach, California 92660, at 10:00 a.m. on the date
all of the conditions set forth herein have been satisfied or waived in
accordance with this Agreement (the "Closing Date"). At the Closing, Radiance,
Sub and Endologix shall deliver the certificates and other documents and
instruments required to be delivered hereunder.
1.4 Certificate of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time: (i) the Certificate of Incorporation of Sub
as in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended; and (ii)
the Bylaws of Sub as in effect immediately prior to the Effective Time shall be
the Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers of the Surviving Corporation. The
directors and officers of Sub immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation from and after the
Effective Time, until their successors shall have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and Bylaws.
1.6 Effects of the Merger. Subject to the foregoing, the effects
of the Merger shall be as provided in the applicable provisions of the DGCL.
1.7 Further Assurances. Each party hereto shall execute such
further documents and instruments and take such further actions as may
reasonably be requested by one or more of the others to consummate the Merger,
to vest the Surviving Corporation with full title to all assets, properties,
rights, approvals, immunities and franchises of either of the Constituent
Corporations or to effect the other purposes of this Agreement.
1.8 Tax Treatment. The parties intend that the Merger, together
with the sideways merger contemplated in Section 6.13, be treated as a
reorganization described in Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). The parties shall not take a position on any tax
returns inconsistent with such treatment unless otherwise required by law.
Radiance shall treat the portion of the Milestone Payment paid in Radiance
Common Stock as property that is permitted to be received under Section 354 of
the Code without the recognition of gain unless otherwise required by law.
ARTICLE 2
EXCHANGE OF SHARES
2.1 Exchange of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the holders of the capital stock of
Sub or Endologix:
(a) Cancellation of Treasury Stock and Stock Owned by
Radiance. All shares of capital stock owned by Endologix as treasury stock and
all shares of capital stock of Endologix owned by Radiance or Sub shall be
canceled and retired and shall cease to exist and no stock of Radiance or other
consideration shall be delivered in exchange therefor.
(b) Determination of Merger Consideration. Each issued and
outstanding share of Endologix common stock, $0.001 par value ("Endologix Common
Stock"), issued and outstanding immediately prior to the Effective Time, except
as otherwise provided in Section 2.1(a), shall be converted into the right to
receive the merger consideration (the "Merger Consideration") as follows:
(i) Cash Consideration. Subject to the allocation
and election request set forth in Section 2.1(c) and any allocation required
pursuant to Section 2.1(d), each share of Endologix Common Stock issued and
outstanding immediately prior to the Effective Time shall be entitled to receive
in cash an amount equal to seventy-five cents ($0.75) per share of Endologix
Common Stock issued and outstanding immediately prior to the Effective Time, not
to exceed Eight Million Three Hundred Sixty-Nine Thousand Two Hundred
Eighty-Nine Dollars ($8,369,289) in the aggregate.
2
(ii) Radiance Common Stock Merger Consideration.
Subject to the allocation and election set forth in Section 2.1(c) and any
allocation required pursuant to Section 2.1(d), each share of Endologix Common
Stock issued and outstanding immediately prior to the Effective Time shall be
entitled to receive one share of Radiance common stock, par value $0.001 per
share ("Radiance Common Stock"), in exchange for each share of Endologix Common
Stock issued and outstanding as of the Effective Time, not to exceed Eleven
Million One Hundred Fifty-Nine Thousand and Fifty-Two (11,159,052) shares in the
aggregate.
(iii) Milestone Payment. Upon completion by
Radiance, Sub or their successors or assigns of the following milestone (the
"Milestone") related to the PowerLink System, Radiance shall pay within ten (10)
days of achieving such Milestone to each holder of Endologix Common Stock
immediately prior to the Effective Time, the following payment (the "Milestone
Payment"):
(A) Upon the approval of the Pre-Marketing
Approval Application ("PMA") in the United States on or before March 31, 2004,
an amount for each share of Endologix common stock equal to Five Million Five
Hundred Seventy-Nine Thousand Five Hundred Twenty-Six Dollars ($5,579,526)
divided by the number of shares of Endologix Common Stock outstanding as of the
Effective Time, or
(B) Upon the approval of the PMA in the
United States after March 31, 2004 and on or before June 30, 2004, an amount for
each share of Endologix common stock equal to Two Million Seven Hundred
Eighty-Nine Thousand Seven Hundred Sixty-Three Dollars ($2,789,763) divided by
the number of shares of Endologix Common Stock outstanding as of the Effective
Time.
(C) No Milestone Payment shall be made if
the PMA is not approved on or before June 30, 2004.
(iv) Form and Payment of Milestone Payment. The
Milestone Payment shall be payable at the sole discretion of Radiance in either
cash or Radiance Common Stock, valued at the average of the closing prices of
Radiance Common Stock as reported on Nasdaq for the ten (10) trading days ending
on the trading day preceding the day that the Milestone is achieved (the
"Average Milestone Price"); provided, however, in the event the limit on the
payment of cash consideration provided in Section 2.1(d) would limit the amount
of cash payable, then the amount of the Milestone Payment that would be limited
by the 50% limitation contained in Section 2.1(d) shall be paid in Radiance
Common Stock.
(v) Potential Escrow of Milestone Payment. In the
event Radiance has pending claims for Radiance Indemnifiable Damages (as that
term is defined in Section 9.2(a)) made during the Indemnification Period, then
all or a portion of the subsequent Milestone Payment shall be deposited in
escrow, pursuant to the terms of an Escrow Agreement to be reasonably agreed to
by the parties (the "Escrow Agreement"), by and among Radiance, Franklin D.
Brown, as representative of the Endologix Stockholders) (the "Holders'
Representative"), and Commonwealth Land Title Company, as escrow agent (the
"Escrow Agent"). The total amount of such Milestone Payment deposited shall not
exceed the amount of the then pending claims, with the Radiance Common Stock
valued at the applicable Average Milestone Price as specified in Section
2.1(b)(iv). Any excess of the Milestone Payment over the amount of the then
pending claims shall be paid to the persons entitled thereto pursuant to Section
2.1(b)(iii). Any shares of Radiance Common
3
Stock included with the Milestone Payment that are deposited into escrow shall
be registered in the names of the holders, immediately prior to the Effective
Time, of Endologix Common Stock, but shall be held by the Escrow Agent, such
deposit to constitute an escrow fund to be governed by the terms set forth
herein and in the Escrow Agreement. The adoption and approval of the Merger by
the Endologix stockholders shall constitute approval of the Escrow Agreement and
of the appointment of Franklin D. Brown as the Holders' Representative.
(c) Optional Cash or Stock Election. Subject to the
allocation of cash pursuant to Section 2.1(d) and the election procedure set
forth in this Section 2.1(c), each record holder of shares of Endologix Common
Stock immediately prior to the Effective Time will be entitled to request to
receive all or a portion of the Merger Consideration to be paid at Closing, but
not the Milestone Payment, in either cash or stock (a "Payment Election"). All
such elections shall be received by Radiance prior to the Effective Time on a
form designed for that purpose and shall indicate the percentage of the Merger
Consideration such holder desires to receive in cash or stock. Holders who elect
to receive cash and stock in a percentage equal to the percentage of cash and
stock which Radiance has elected to pay pursuant to Section 2.1(b)(i) and (ii)
(the "Default Percentage") shall receive the first allocation of the Merger
Consideration. If the aggregate amount of cash or stock to be paid by Radiance
is insufficient to satisfy all remaining Payment Elections, such cash or stock,
as the case may be, shall be distributed first according to the Default
Percentage and thereafter, to the extent practicable, among such holders pro
rata in accordance with the relative amounts of cash or stock indicated by such
remaining Payment Elections. To the extent that the amount of cash or stock to
be paid by Radiance exceeds the aggregate amount indicated by such remaining
Payment Elections, all such Payment Elections shall be satisfied and the
remaining cash or stock shall be distributed to such holders pro rata, based on
the number of shares of Endologix Common Stock held by each such holder
immediately prior to the Effective Time. Any holder of Endologix Common Stock
who does not submit a Form of Election prior to the Effective Date shall be
deemed to have made an election to receive cash and stock in accordance with the
Default Percentage. The determination of the allocation in accordance with the
Payment Elections shall be made at the sole and reasonable determination of
Radiance.
(d) Limit on Payment of Cash Consideration.
Notwithstanding any other provision in this Agreement, in no event shall the
total amount of cash to be paid by Radiance as a component of the Merger
Consideration, including any cash paid pursuant to Sections 2.2 and 2.3, exceed
fifty percent (50%) of the total of all of the Merger Consideration, valuing
each share of Radiance Common Stock for this purpose at its fair market value on
the date each share is payable hereunder, which fair market value shall be the
closing price of Radiance Common Stock as reported on Nasdaq on the trading day
immediately preceding the payment date of such share. In the event of the
perfection of the rights set forth in Section 2.2, Radiance shall: (i) estimate
the fair value of all such Dissenting Shares (as that term is defined in Section
2.2) and withhold from the cash component of the Merger Consideration an amount
of cash equal to such estimate of fair value; and (ii) reallocate to the
Radiance Common Stock component of the Merger Consideration, the number of
shares of Radiance Common Stock that such Dissenting Shares would have had the
right to convert into pursuant to the payment of the Merger Consideration had
such dissenting rights not been perfected.
2.2 Dissenting Shares.
(a) Notwithstanding anything to the contrary in this
Agreement, each share of Endologix Common Stock issued and outstanding
immediately prior to the Effective Time
4
that is held by any stockholder who has not voted in favor of the Merger, has
perfected such holder's right to an appraisal of such holder's shares in
accordance with the applicable provisions of the DGCL, as applicable, and has
not effectively withdrawn or lost such right to appraisal (a "Dissenting
Share"), shall not be converted into the right to receive the Merger
Consideration pursuant to Section 2.1(b), but shall be entitled only to such
rights as are granted by the applicable provisions of the DGCL; provided,
however, that any Dissenting Share held by a person at the Effective Time who
shall, after the Effective Time, withdraw the demand for appraisal or lose the
right of appraisal, in either case pursuant to the DGCL, shall be deemed to be
converted into, as of the Effective Time, the right to receive the Merger
Consideration pursuant to Section 2.1(b).
(b) Endologix shall give Radiance (i) prompt notice of any
written demands for appraisal, withdrawals of demands for appraisal and any
other instruments served pursuant to the applicable provision of the DGCL,
relating to the appraisal process received by Endologix and (ii) the opportunity
to direct all negotiations and proceedings with respect to demands for appraisal
under the DGCL, with the participation of Endologix. Endologix will not
voluntarily make any payment with respect to any demands for appraisal and will
not, except with the prior written consent of Radiance, settle or offer to
settle any such demands.
2.3 Fractional Shares. No fractional shares of Radiance Common
Stock shall be issued, but in lieu thereof each holder of shares of Endologix
Common Stock, who otherwise would be entitled to receive a fraction of a share
of Radiance Common Stock (after aggregating all fractional shares of Radiance
Common Stock to be received by such holder), shall receive from Radiance an
amount of cash (rounded up to the nearest whole cent) equal to the product of
the fraction of a share of Radiance Common Stock to which such holder would
otherwise be entitled, times the closing price for Radiance Common Stock on the
trading day prior to the Closing.
2.4 Treatment of Endologix Preferred Stock and Options. Each
share of Endologix Series A, Series B and Series C Convertible Preferred Stock
shall be converted into Endologix Common Stock immediately prior to the closing.
Each Endologix Option shall accelerate and vest immediately prior to the Closing
and, to the extent not exercised at the Closing, shall terminate.
2.5 Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Radiance
shall designate a bank or trust company reasonably acceptable to Endologix (the
"Exchange Agent"). On the Closing Date, Radiance shall deposit with the Exchange
Agent a combination of cash and certificates representing the number of duly
authorized whole shares of Radiance Common Stock issuable in connection with the
Merger as of the Closing Date, plus an amount of cash equal to (i) Eight Million
Three Hundred Sixty-Nine Thousand Two Hundred Eighty-Nine Dollars ($8,369,289)
plus (ii) the aggregate amount payable in lieu of fractional shares in
accordance with Section 2.3, to be held for the benefit of and distributed to
such holders in accordance with this Section 2.5. The Exchange Agent shall agree
to hold such shares of Radiance Common Stock and funds (such shares of Radiance
Common Stock and funds, together with earnings thereon, being referred to herein
as the "Exchange Fund") for delivery as contemplated by this Section 2.5 and
upon such additional terms as may be agreed upon by the Exchange Agent,
Endologix and Radiance before the Effective Time. If for any reason (including
losses) the amount of cash in the Exchange Fund is inadequate to pay the cash
amounts to which holders of shares of Endologix Common Stock shall be entitled
pursuant to
5
Section 2.3, Radiance shall make available to the Surviving Corporation
additional funds for the payment thereof.
(b) Endologix Stock Exchange Procedures. As soon as
reasonably practicable after the Effective Time, Radiance shall cause the
Exchange Agent to mail to each holder of record of a certificate or certificates
which, immediately prior to the Effective Time, represented outstanding shares
of Endologix Common Stock (individually, a "Certificate" and collectively, the
"Certificates"), and whose shares are to be exchanged pursuant to Section 2.1
into the right to receive the Merger Consideration: (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Radiance may reasonably specify) and (ii) instructions for use in effecting the
surrender of Certificates in exchange for certificates representing shares of
Radiance Common Stock constituting the Merger Consideration and cash (both in
lieu of fractional shares and as a component of the Merger Consideration). Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
such letter of transmittal duly executed and completed in accordance with its
terms, the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of Radiance
Common Stock constituting the Merger Consideration, the cash component of the
Merger Consideration and the cash amount payable in lieu of fractional shares in
accordance with Section 2.3, and the Certificate so surrendered shall forthwith
be canceled. In no event shall the holder of any Certificate be entitled to
receive interest on any funds to be received in the Merger. In the event of a
transfer of ownership of Endologix Common Stock which is not registered in the
transfer records of Endologix, a certificate representing that number of whole
shares of Radiance Common Stock constituting the Merger Consideration, any cash
component of the Merger Consideration and the cash amount payable in lieu of
fractional shares in accordance with Section 2.3, may be paid and issued to a
transferee if the Certificate representing such Endologix Common Stock is
presented to the Exchange Agent accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.5(b), each Certificate shall be deemed at any time after the Effective Time
for all corporate purposes of Radiance, except as limited by paragraph (c)
below, to represent ownership of the number of shares of Radiance Common Stock
into which the number of shares of Endologix Common Stock shown thereon have
been converted as contemplated by this Article 2.
(c) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the Effective Time with
respect to Radiance Common Stock with a record date on or after the Effective
Time shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Radiance Common Stock represented thereby and no cash payment
in lieu of fractional shares shall be paid to any such holder pursuant to
Section 2.3 until the holder of record of such Certificate shall surrender such
Certificate in accordance with this Section 2.5. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Radiance Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions, if any,
with a record date on or after the Effective Time which theretofore became
payable, but which were not paid by reason of the immediately preceding
sentence, with respect to such whole shares of Radiance Common Stock, and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date on or after the Effective Time but prior to surrender and a
payment date subsequent to surrender payable with respect to such whole shares
of Radiance Common Stock.
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(d) No Further Ownership Rights in Endologix Stock. As of
the Effective Time the Endologix Common Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of Certificates previously representing any such Endologix Common Stock
shall cease to have any rights with respect thereto, except the right to receive
the Merger Consideration upon surrender of the certificates representing such
Endologix Common Stock, as contemplated hereby, or pursuant to Section 2.2. From
and after the Effective Time, the stock transfer books of Endologix shall be
closed and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Endologix Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Section
2.5.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ENDOLOGIX
Endologix represents and warrants to Radiance and Sub that:
3.1 Organization and Qualification. Endologix is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to carry
on its business as now conducted and as proposed to be conducted. Endologix is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed or to be in
good standing (individually or in the aggregate) would not have a materially
adverse effect on the business, condition (financial or otherwise), properties,
assets (including intangible assets), liabilities (including contingent
liabilities), prospects, or results of operations of Endologix (a "Material
Adverse Effect"). Subject to obtaining Endologix Stockholder's Approval,
Endologix has all requisite corporate power and authority to execute and deliver
this Agreement.
3.2 Subsidiaries. Endologix does not own, directly or indirectly,
any capital stock or other ownership interest in any corporation, partnership,
joint venture, or other entity.
3.3 Authority Relative to this Agreement. Subject to obtaining
Endologix Stockholders' Approval (as defined below), Endologix has full
corporate power and authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by Endologix and the
consummation by Endologix of the transactions contemplated hereby have been duly
authorized and approved by the Board of Directors of Endologix, the Board of
Directors of Endologix has agreed to recommend adoption of this Agreement by the
stockholders of Endologix and directed that this Agreement be submitted to the
stockholders of Endologix for their consideration, and no other corporate
proceedings on the part of Endologix or its stockholders are necessary to
authorize the execution, delivery and performance of this Agreement by Endologix
and the consummation by Endologix of the transactions contemplated hereby, other
than obtaining Endologix Stockholders' Approval. "Endologix Stockholders'
Approval" means the requisite approvals of the shareholders of Endologix of this
Agreement and the Merger required by the DGCL, and the Certificate of
Incorporation and Bylaws of Endologix, including the conversion of all shares of
Endologix Preferred Stock into Endologix Common Stock immediately prior to the
Effective Time. Endologix
7
has received and has provided to Radiance the voting agreements of the Endologix
stockholders listed on Schedule 3.3 to approve the Merger. Subject to obtaining
Endologix Stockholders' Approval, this Agreement has been duly authorized and
validly executed by Endologix and constitutes a valid and legally binding
obligation of Endologix, enforceable in accordance with its terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
3.4 Capital Stock of Endologix.
(a) The authorized capital stock of Endologix consists of
15,500,000 shares of Endologix Common Stock and 10,000,000 shares of Endologix
preferred stock, of which 1,300,000 shares are designated as Series A
Convertible Preferred Stock, 3,200,000 of which are designated as Series B
Convertible Preferred Stock, and 477,345 of which are designated Series C
Convertible Preferred Stock. As of the date hereof, 5,829,915 shares of Common
Stock, 1,300,000 shares of Series A Convertible Preferred Stock, 2,971,989
shares of Series B Convertible Preferred Stock and 428,571 shares of Series C
Convertible Preferred Stock, were issued and outstanding and 332,000 shares of
capital stock are held by Endologix in its treasury. As of the date hereof,
there are outstanding options to purchase 1,105,566 shares of Endologix Common
Stock. Except as disclosed in Section 3.4 of the Endologix Disclosure Schedule
attached hereto, all outstanding shares of capital stock of Endologix are duly
authorized, validly issued, fully paid, and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes, or other indebtedness
of Endologix having the right to vote (or convertible into securities having the
right to vote) on any matters on which stockholders of Endologix may vote.
Except as set forth in Section 3.4 of the Endologix Disclosure Schedule, as of
the date hereof, there are no securities, options, warrants, calls, rights,
commitments, agreements, arrangements, or undertakings of any kind to which
Endologix is a party or by which it is bound obligating Endologix to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other voting securities of Endologix or obligating Endologix to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking (together, "Options").
Except as disclosed in Section 3.4 of the Endologix Disclosure Schedule, as of
the date hereof, there are no outstanding contractual obligations of Endologix
to repurchase, redeem, or otherwise acquire any shares of capital stock of
Endologix. Endologix has furnished to Radiance true and correct copies of
Endologix's Certificate of Incorporation and Bylaws as in effect as of the date
hereof. The offers and sales of all of the outstanding shares of capital stock
of Endologix were at all relevant times either registered under the Securities
Act of 1933, as amended (the "Securities Act"), and applicable state securities
laws or exempt from such requirements.
(b) Endologix acknowledges that the offering and sale of
the Radiance Common Stock to be issued in exchange for all the outstanding
shares of capital stock of Endologix have not been registered with the
Securities and Exchange Commission (the "SEC") or any state securities laws and
is intended to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and the provisions of Regulation D
promulgated thereunder ("Regulation D"). Except as disclosed in Section
3.4(b)(i) of the Endologix Disclosure Schedule to the actual knowledge of
Endologix, without investigation, the holders of all the outstanding shares and
options to acquire shares of capital stock of Endologix fulfill, and will
fulfill as of the Effective Time, the investor suitability requirements under
Section 4(2) of the Securities Act and
8
Regulation D. Set forth in Section 3.4(b)(ii) of the Endologix Disclosure
Schedule is a list of holders of Endologix capital stock and options to acquire
capital stock, together with the number of shares and/or options held by each
such holder, who shall receive an offer from Endologix prior to the Effective
Time for Endologix to purchase such shares and/or options. Endologix shall use
its best efforts to obtain from each Endologix shareholder and optionholder not
listed in Section 3.4(b)(i) of the Endologix Disclosure Schedule a confirmation
that such shareholder is an "accredited investor" as defined under Regulation D;
provided, that in no event shall the number of holders of Endologix Common Stock
that are not "accredited investors" as of the Effective Time exceed thirty-five.
Notwithstanding anything herein to the contrary, Endologix assumes no
responsibility for Radiance's compliance with the applicable federal and state
securities laws in connection with the Merger and issuance of Radiance Common
Stock and Radiance options. Endologix acknowledges that the shares of Radiance
Common Stock are restricted securities and must be held indefinitely unless
subsequently registered under the Securities Act or unless an exemption from
such registration is available.
(c) Except as disclosed in Section 3.4(c) of the Endologix
Disclosure Schedule, there are no (i) outstanding Options obligating Endologix
or (ii) voting trusts, proxies or other commitments, understandings,
restrictions or arrangements in favor of any person other than Endologix.
3.5 Non-Contravention; Approvals and Consents.
(a) Except as disclosed in Section 3.5 of Endologix
Disclosure Schedule, and except for the filing of the Agreement of Merger and
other appropriate merger documents required by the DGCL with the Secretary of
State and appropriate documents with the relevant authorities of other states in
which the Constituent Corporations are qualified to do business, the execution
and delivery of this Agreement by Endologix does not, and the performance by
Endologix of its obligations hereunder and the consummation of the transactions
contemplated hereby will not, conflict with, result in a violation or breach of,
constitute (with or without notice or lapse of time or both) a default under,
result in or give to any person any right of payment or reimbursement,
termination, cancellation, modification or acceleration of, or result in the
creation or imposition of any pledges, claims, liens, charges, encumbrances, and
security interests of any kind or nature whatsoever (collectively, "Liens") upon
any of the assets or properties of Endologix under, any of the terms, conditions
or provisions of (i) the Certificate of Incorporation or Bylaws of Endologix, or
(ii) (x) any statute, law, rule, regulation or ordinance (together, "Laws"), or
any judgment, decree, order, writ, permit or license (together, "Orders"), of
any court, tribunal, arbitrator, authority, agency, commission, official or
other instrumentality of the United States or any state, county, city or other
political subdivision (a "Governmental or Regulatory Authority"), applicable to
Endologix or any of its assets or properties, or (y) any note, bond, mortgage,
security agreement, indenture, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind (together,
"Contracts") to which Endologix is a party or by which Endologix or any of its
assets or properties is bound, excluding from the foregoing clauses (x) and (y)
conflicts, violations, breaches, defaults, payments, reimbursements,
terminations, cancellations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on Endologix or on the
ability of Endologix to consummate the transactions contemplated by this
Agreement.
(b) Other than obtaining Endologix Stockholder's Approval
and except as disclosed in Section 3.5 of Endologix Disclosure Schedule, no
consent, approval or action of, filing
9
with or notice to any Governmental or Regulatory Authority or other public or
private third party is necessary or required under any of the terms, conditions
or provisions of any Law or Order of any Governmental or Regulatory Authority or
any contract to which Endologix is a party or by which Endologix or any of its
assets or properties is bound for the execution and delivery of this Agreement
by Endologix, the performance by Endologix of its obligations hereunder or the
consummation of the transactions contemplated hereby, other than such consents,
approvals, actions, filings and notices which the failure to make or obtain, as
the case may be, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on Endologix or on the ability of
Endologix to consummate the transactions contemplated by this Agreement.
3.6 Financial Statements. Endologix has delivered to Radiance a
true and complete copy of the following financial statements: (i) the audited
balance sheets of Endologix as of December 31, 1999 and December 31, 2000 and
the related audited statement of operations for the fiscal years then ended; and
(ii) the unaudited balance sheet of Endologix as of September 30, 2001 and the
unaudited statement of operations for such interim period (the "Endologix
Financial Statements'). As of their respective dates and for the respective
periods then ended, the audited financial statements and unaudited interim
financial statements (including, in each case, the notes, if any, thereto)
included in Endologix Financial Statements (A) were prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated therein or in the notes
thereto) and (B) fairly present (subject, in the case of the unaudited interim
financial statements, to normal, recurring year-end audit adjustments which are
not expected to be, individually or in the aggregate, materially adverse to
Endologix and to the absence of certain footnote disclosures) the financial
position of Endologix as at the respective dates thereof and the results of its
operations and cash flows for the respective periods then ended.
3.7 Absence of Changes. Except as disclosed in Section 3.7 of the
Endologix Disclosure Schedule and except for matters reflected or reserved
against in the balance sheet for the period ended September 30, 2001 included in
Endologix Financial Statements, since September 30, 2001 Endologix has conducted
its business only in the ordinary course, consistent with past practice and
there has been no change and no development in the business, properties,
operations, condition (financial or otherwise), or results of operations of
Endologix that had or could reasonably be expected to have a Material Adverse
Effect other than those occurring as a result of general economic or financial
conditions or other developments that are not unique to Endologix but also
affect other persons who participate or are engaged in the lines of business in
which Endologix participates or is engaged, or other than those occurring as a
result of this Agreement and the transactions contemplated hereby.
3.8 Absence of Undisclosed Liabilities. Except for liabilities
that are disclosed in this Section 3 and/or in the Endologix Disclosure Schedule
and except for matters reflected or reserved against in the balance sheet for
the period ended December 31, 2000 or in the September 30, 2001 Endologix
balance sheet for the period ended September 30, 2001 included in Endologix
Financial Statements, Endologix did not have at such date, nor has Endologix
incurred since that date, any liabilities or obligations (whether absolute,
accrued, contingent, fixed or otherwise, or whether due or to become due) of any
nature that would be required by generally accepted accounting principles to be
reflected on a balance sheet of Endologix (including the notes thereto), except
liabilities or obligations (i) which were incurred in the ordinary course of
business consistent with past practice or (ii) which have not been, and could
not be reasonably expected to have a Material Adverse Effect on Endologix.
10
3.9 Legal Proceedings. Except as disclosed in Section 3.9 of
Endologix Disclosure Schedule: (i) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of Endologix, threatened against,
relating to or affecting, nor to the knowledge of Endologix are there any
Governmental or Regulatory Authority investigations or audits pending or
threatened against, relating to or affecting, Endologix or any of its assets and
properties which could reasonably be expected to have a Material Adverse Effect
on Endologix or on the ability of Endologix to consummate the transactions
contemplated by this Agreement; (ii) Endologix is not subject to any Order of
any Governmental or Regulatory Authority which is having or could be reasonably
expected to have a Material Adverse Effect on Endologix, or on the ability of
Endologix to consummate the transactions contemplated by this Agreement; and
(iii) there are no material actions, suits, arbitrations or proceedings that
Endologix currently intends to initiate.
3.10 Contracts and Commitments. Section 3.10 of Endologix
Disclosure Schedule contains a true and complete list of each of the following
written, or to Endologix's knowledge, oral, contracts (the "Material Contracts')
to which Endologix is a party: (i) all Contracts (excluding Endologix Employee
Benefit Plans which can be terminated at will without subjecting Endologix to
cost or penalty) providing for a commitment for employment or consultation
services for a specified or unspecified term to, or otherwise relating to
employment or the termination of employment of, any employee; (ii) all Contracts
with any Person containing any provision or covenant prohibiting or limiting the
ability of Endologix to engage in any business activity or compete with any
Person in connection with its business or prohibiting or limiting the ability of
any Person to compete with Endologix in connection with its business; (iii) all
partnership, joint venture, stockholders' or other similar Contracts with any
Person in connection with Endologix's business; (iv) all Contracts relating to
the future disposition or acquisition of assets of Endologix, other than as
contemplated by this Agreement or dispositions or acquisitions in the ordinary
course of business; (v) all other Contracts with respect to Endologix that (A)
involve the payment or potential payment, pursuant to the terms of any such
Contract, by or to Endologix of more than $25,000 annually and (B) cannot be
terminated within sixty (60) days after giving notice of termination without
resulting in any material cost or penalty to Endologix. To the knowledge of
Endologix, there is no default or event that with notice or lapse of time, or
both, would constitute a material default by Endologix under any of the Material
Contracts to which it is a party. Endologix has not received notice of a default
under any Material Contract by any party thereto. Each of the Material Contracts
is enforceable against Endologix in accordance with its terms, except as such
enforceability may be limited by general principles of equity or by bankruptcy,
insolvency or other similar laws relating to rights of creditors. Endologix has
not received notice that any party to any of the Material Contracts intends to
cancel or terminate any of the Material Contracts or to exercise or not exercise
any options under any of the Material Contracts.
3.11 Taxes. Endologix has filed all tax returns that are required
to have been filed by it in any jurisdiction for all periods ending on or prior
to the date hereof and to the knowledge of Endologix such tax returns are true,
correct and complete in all material respects, and to its knowledge Endologix
has paid all taxes shown to be due and payable on such returns and all other
taxes and assessments payable by it to the extent the same have become due and
payable and before they have become delinquent, except for any taxes and
assessments the amount, applicability or validity of which is currently being
contested in good faith by appropriate proceedings and with respect to which
Endologix has set aside on its books reserves (segregated to the extent required
by generally accepted accounting principles, consistently applied throughout the
specified period and in the immediately comparable period) deemed by it in its
reasonable discretion to be adequate. Endologix has no knowledge of any proposed
material tax assessment, obligation or other claim
11
against Endologix. There are no material liens for taxes upon any property or
assets of Endologix, except for liens for taxes not yet due. There are no
unresolved issues of law or fact arising out of a notice of deficiency, proposed
deficiency or assessment from the Internal Revenue Service ("IRS") or any other
governmental taxing authority with respect to taxes of Endologix which, if
decided adversely would have a Material Adverse Effect on Endologix. Endologix
is not a party to any agreement providing for the allocation or sharing of taxes
with any entity other than agreements the consequences of which are adequately
reserved for in Endologix Financial Statements. Endologix has not, with regard
to any assets or property held, acquired or to be acquired by it, filed a
consent to the application of Section 341(f) of the Code.
3.12 Employee Benefit Plans.
(a) Except as set forth in Section 3.12 of Endologix
Disclosure Schedule, Endologix has no Employee Benefit Plan or other Plan.
(b) As used herein:
(i) "Employee Benefit Plan" means any Plan entered
into, established, maintained, contributed to or required to be contributed to
by Endologix and existing on the date of this Agreement or at any time
subsequent thereto and on or prior to the Effective Time and, in the case of a
Plan which is subject to Part 3 of Title I of ERISA, Section 412 of the Code or
Title IV of ERISA, at any time during the five-year period preceding the date of
this Agreement; and
(ii) "Plan" means any employment, bonus, incentive
compensation, deferred compensation, pension, profit sharing, retirement, stock
purchase, stock option, stock ownership, stock appreciation rights, phantom
stock, leave of absence, layoff, vacation, day or dependent care, legal
services, cafeteria, life, health, medical, accident, disability, workers'
compensation or other insurance, severance, separation, termination, change of
control or other benefit plan, agreement, practice, policy or arrangement of any
kind, whether written or oral, including, but not limited to any "employee
benefit plan" within the meaning of Section 3(3) of ERISA.
3.13 Title to Assets. Endologix is in possession of and has good
title to, or has valid leasehold interests in or valid rights under contract to
use, all of its properties and assets primarily used in its business and
material to the condition (financial or other) of such business, free and clear
of all Liens, except (i) the lien for current taxes, payments of which are not
yet delinquent, (ii) such imperfections in title and easements and encumbrances,
if any, as are not substantial in character, amount or extent and do not
materially detract from the value of or interfere with the present use of the
property subject thereto or affected thereby, or otherwise materially impair
Endologix's business operations (in the manner presently carried on by
Endologix) or (iii) as disclosed in Endologix Financial Statements, and except
for such matters which, individually or in the aggregate, would not have a
Material Adverse Effect on Endologix. All leases under which Endologix leases
any substantial amount of real or personal property have been made available to
Radiance and are in good standing, valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default by Endologix or to the knowledge of Endologix any event which with
notice or lapse of time or both would become a default by Endologix other than
defaults under such leases which in the aggregate would not have a Material
Adverse Effect on Endologix.
12
3.14 Permits, Etc. Endologix owns or validly holds all material
licenses, permits, certificates of authority, registrations, franchises and
similar consents granted or issued by any applicable Governmental or Regulatory
Authority, used or held for use which are required to conduct and material to
the condition of its business.
3.15 Compliance with Laws. To the knowledge of Endologix,
Endologix is not in violation of, nor has it violated, any applicable provisions
of any Laws or any term of any Order binding against it, except for violations
which do not have and would not have, a Material Adverse Effect on Endologix.
Section 3.15 of Endologix Disclosure Schedule sets forth a complete list of
Endologix's licenses, permits and authorizations ("Permits") other than those
not material to the business or operations of Endologix. Since December 31,
1999, no state or federal governmental entity has revoked or materially limited
any license or certificate of authority of Endologix material to its business,
and no investigation or proceeding is pending or, to Endologix's knowledge,
threatened, which involves the revocation or material limitation of any of such
licenses or certificates. Endologix has no knowledge of any information which
would lead Endologix to believe that any licenses or permits necessary to the
conduct of the business of Endologix as presently conducted will not remain in
full force and effect for the complete duration of their terms. Endologix has
made available to Radiance all material filings made to, and all inspection or
compliance reports or correspondence received from, Governmental Entities for
the last three years and will make available to Radiance all other Permits as
requested by Radiance. To the knowledge of Endologix, each of such filings was
in material compliance with all applicable laws and regulations.
3.16 FDA Matters. Except as otherwise set forth in Section 3.16
of Endologix Disclosure Schedule:
(a) To the knowledge of Endologix, Endologix is in
compliance in all material respects with all current applicable laws, statutes,
rules, regulations, standards, guides or orders administered, issued or enforced
by the FDA or any other Governmental or Regulatory Authority having regulatory
authority or jurisdiction over the products and operations of Endologix.
(b) Endologix has not received from the FDA or any other
Governmental or Regulatory Authority, and Endologix has no knowledge of any
facts which would furnish any reasonable basis for, any notice of adverse
findings, FDA Form 483 inspectional observations, regulatory letters, notices of
violations, warning letters, Section 305 criminal proceeding notices under the
Federal Food, Drug and Cosmetic Act or other similar communication from the FDA
or other Governmental or Regulatory Authority, and to the knowledge of Endologix
there have been no seizures conducted or threatened by the FDA or other
Governmental or Regulatory Authority.
(c) To the knowledge of Endologix, there are no facts
which are reasonably likely to cause (i) the non-approval or non clearance,
denial, withdrawal, recall or require suspension or additional approvals or
clearances of any products intended to be sold by Endologix, or (ii) a change in
the manufacturing, marketing classification, labeling or intended use of any
such products.
3.17 Intellectual Property Rights
(a) Schedule 3.17 of the Endologix Disclosure Schedule
contains a true and correct list of all patents and patent applications,
including reissues, divisions, continuations,
13
continuations-in-part and extensions thereof and reexamination certificates
therefor and all trademarks, service marks and trade names owned or controlled
by Endologix.
(b) Except as described in Schedule 3.17 of the Endologix
Disclosure Schedule, to the knowledge of Endologix: (i) no third party is
infringing or misappropriating any of Endologix' intellectual property rights;
and (ii) Endologix' current PowerLink System does not infringe any valid claim
of a third party patent.
(c) Except as set forth on Schedule 3.17 of the Endologix
Disclosure Schedule, to the knowledge of Endologix, there are no outstanding
claims asserted or threatened against Endologix alleging that the development,
manufacture, marketing, distribution, sale or use of the PowerLink System
infringes or misappropriates any intellectual property or other proprietary
rights of any third party.
(d) To the knowledge of Endologix: (i) all of the patents
listed in Schedule 3.17 of the Endologix Disclosure Schedule are valid and in
full force and effect, and are not the current subject of any interference or
opposition proceeding; and (ii) it is unaware of any publications or activities
including, without limitation, patents, articles, and public uses or sales, by
it or others, which would or might invalidate any claim(s) of any such patent.
It has not conducted, nor has it commissioned the conducting of, any written
infringement or validity studies regarding any such patent or patent application
that it has not provided to Radiance for inspection prior to the date hereof.
3.18 Labor Controversies.
(a) There are no material controversies pending or, to the
knowledge of Endologix, threatened between Endologix and any representatives of
any of Endologix's employees.
(b) To the knowledge of Endologix, there are no material
organizational efforts presently being made involving any of the presently
unorganized employees of Endologix.
(c) To the knowledge of Endologix, Endologix has complied
in all material respects with all laws relating to the employment of labor,
including without limitation, any provisions thereof relating to wages, hours,
collective bargaining, and the payment of social security and similar taxes,
with respect to its employees on the Endologix payroll.
(d) To the knowledge of Endologix, no person has asserted
that Endologix is liable in any material amount for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing (subject to
the proviso set forth in subparagraph (a) above), except for such controversies,
organizational efforts, non-compliance and liabilities which, individually or in
the aggregate, could not be reasonably expected to have a Material Adverse
Effect on Endologix.
3.19 Insurance. Section 3.19 of Endologix Disclosure Schedule
lists all policies of fire, liability, life and employee health, environmental,
errors and omissions, workers' compensation and other forms of insurance
currently held and maintained by Endologix (the "Insurance Policies"). Endologix
believes that such Insurance Policies are commercially reasonable in amount and
coverage. To the knowledge of Endologix, all of the Insurance Policies are in
full force and effect, all billed premiums with respect thereto covering all
periods up to and including the Closing Date
14
have been paid or will have been paid on or prior to the Closing Date and no
written notice of cancellation or termination has been received with respect to
any such Policy, except for failures to pay or cancellations or terminations
which would not reasonably be expected to have a Material Adverse Effect on
Endologix.
3.20 Guaranties. Endologix has not executed any guaranty or
otherwise agreed to be a guarantor of any liability or obligation (including
indebtedness) of any other person.
3.21 Tax-Free Reorganization. Endologix has not taken and has not
agreed to take any action that would interfere with the ability of Radiance to
treat the Merger, together with the Sideways Merger contemplated in Section
6.13, as a tax-free reorganization within the meaning of Section 368(a) of the
Code.
3.22 Board of Directors and Stockholder Approval. The Board of
Directors has approved and adopted this Agreement and has authorized the
officers of Endologix to enter into this Agreement and to submit it to the
Endologix stockholders for their approval.
3.23 Brokers and Finders. Other than Gruntal & Co., L.L.C.,
Endologix has not employed any broker, finder, consultant or intermediary in
connection with the transactions contemplated by this Agreement who would be
entitled to a broker's, finder's or similar fee or commission in connection
therewith or upon the consummation thereof. Endologix is solely responsible for
the payment of any fee, commission or reimbursement that may be due to or become
payable to Gruntal & Co., L.L.C. in connection with the transactions
contemplated by this Agreement.
3.24 Full Disclosure. No information furnished by or on behalf of
Endologix to Radiance pursuant to this Agreement and any information contained
in Endologix Disclosure Schedule and other Schedules to this Agreement, at any
time prior to the Closing Date, contains nor will contain any untrue statement
of a material fact and does not and will not omit to state any material fact
necessary to make any statement, in light of the circumstances under which such
statement is made, not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF RADIANCE AND SUB
Radiance and Sub jointly and severally represent and warrant to
Endologix as follows:
4.1 Organization of Radiance and Sub. Each of Radiance and Sub is
an entity duly organized, validly existing and in good standing under the laws
of its respective jurisdiction. Radiance and Sub has full corporate power and
authority to own or lease and to operate and use its properties and assets and
to carry on its business as now conducted and as proposed to be conducted
pursuant to this Agreement. Radiance is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties make such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed or to be in good standing (individually or in the
aggregate) would not have a materially adverse effect on the business, condition
(financial or otherwise), properties, assets, including intangible assets,
liabilities (including contingent liabilities), prospects, or results of
operations of Radiance (a "Material Adverse Effect"). Except for Sub and as
disclosed
15
in Section 4.1 of the Radiance Disclosure Schedule or in the Radiance Reports
(as that term is defined in Section 4.6), Radiance does not own, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, joint venture or other entity.
4.2 Authorization. Each of Radiance and Sub has full corporate
power and authority to execute, deliver and perform this Agreement and the
Related Agreements and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance of this Agreement and the
Related Agreements by Radiance have been duly authorized and approved by the
Board of Directors of Radiance and does not require any further authorization or
consent of Radiance other than approval by its stockholders. This Agreement has
been duly authorized, validly executed and delivered by Radiance and constitutes
the legal, valid and binding obligations of Radiance enforceable in accordance
with its terms, except as the enforceability thereof may be subject to or
limited by (i) bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws now or hereafter in effect relating to or affecting
creditors' rights, and (ii) general equitable principles, regardless of whether
the issue of enforceability is considered in a proceeding in equity or at law.
4.3 Capital Stock of Radiance and Sub.
(a) The authorized capital stock of Radiance consists of
30,000,000 shares of Radiance Common Stock and 5,000,000 shares of preferred
stock. As of February 7, 2002, 13,167,712 shares of Common Stock and no shares
of preferred stock, were issued and outstanding and no shares of Radiance Common
Stock are held by Radiance in its treasury. As of February 7, 2002, there are
outstanding options to purchase 2,002,853 shares of Radiance Common Stock (the
"Radiance Options"). All outstanding shares of capital stock of Radiance are
duly authorized, validly issued, fully paid, and nonassessable and not subject
to preemptive rights and such capital stock has been issued in full compliance
with all applicable federal and state securities laws. There are no bonds,
debentures, notes, or other indebtedness of Radiance having the right to vote
(or convertible into securities having the right to vote) on any matters on
which stockholders of Radiance may vote. Except as set forth above, as of the
date hereof, there are no securities, options, warrants, calls, rights,
commitments, agreements, arrangements, or undertakings of any kind to which
Radiance is a party or by which it is bound obligating Radiance to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other voting securities of Radiance or obligating Radiance to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking (together, "Options").
As of the date hereof, there are no outstanding contractual obligations of
Radiance to repurchase, redeem, or otherwise acquire any shares of capital stock
of Radiance. Radiance has furnished to Endologix true and correct copies of
Radiance's Certificate of Incorporation and Bylaws as in effect as of the date
hereof. The authorized capital stock of Sub consists of 100 shares of common
stock, $.001 par value, of which 100 shares are issued and outstanding and owned
of record by Radiance. Except as contemplated by this Agreement, there are no
outstanding options, warrants, or other rights to subscribe for or purchase from
Radiance any capital stock of Sub, or securities convertible into Sub, and there
are no commitments, agreements, arrangements or undertakings of any kind to
which Sub is a party or by which it is bound obligating Sub to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other voting securities of Sub or obligating Sub to issue, grant,
extend or enter into any Options. As of the date hereof, there are no
outstanding contractual obligations of Sub to repurchase, redeem or otherwise
acquire any shares of capital stock of Sub.
16
(b) Except as disclosed in Section 4.3(b) of the schedule
attached hereto (the "Radiance Disclosure Schedule"), there are no (i)
outstanding Options obligating Radiance or (ii) voting trusts, proxies or other
commitments, understandings, restrictions or arrangements in favor of any person
other than Radiance.
4.4 Non-Contravention; Approvals and Consents.
(a) Except as disclosed in Section 4.4 of Radiance
Disclosure Schedule, and except for the filing of the Agreement of Merger and
other appropriate merger documents required by the DGCL with the Secretary of
State and appropriate documents with the relevant authorities of other states in
which the Constituent Corporations are qualified to do business, the execution
and delivery of this Agreement by Radiance does not, and the performance by
Radiance of its obligations hereunder and the consummation of the transactions
contemplated hereby will not, conflict with, result in a violation or breach of,
constitute (with or without notice or lapse of time or both) a default under,
result in or give to any person any right of payment or reimbursement,
termination, cancellation, modification or acceleration of, or result in the
creation or imposition of any pledges, claims, liens, charges, encumbrances, and
security interests of any kind or nature whatsoever (collectively, "Liens") upon
any of the assets or properties of Radiance under, any of the terms, conditions
or provisions of (i) the Certificate of Incorporation or Bylaws of Radiance, or
(ii) (x) any statute, law, rule, regulation or ordinance (together, "Laws"), or
any judgment, decree, order, writ, permit or license (together, "Orders"), of
any court, tribunal, arbitrator, authority, agency, commission, official or
other instrumentality of the United States or any state, county, city or other
political subdivision (a "Governmental or Regulatory Authority"), applicable to
Radiance or any of its assets or properties, or (y) any note, bond, mortgage,
security agreement, indenture, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind (together,
"Contracts") to which Radiance is a party or by which Radiance or any of its
assets or properties is bound, excluding from the foregoing clauses (x) and (y)
conflicts, violations, breaches, defaults, payments, reimbursements,
terminations, cancellations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on Radiance or on the
ability of Radiance to consummate the transactions contemplated by this
Agreement.
(b) Except as disclosed in Section 4.4 of Radiance
Disclosure Schedule, no consent, approval or action of, filing with or notice to
any Governmental or Regulatory Authority or other public or private third party
is necessary or required under any of the terms, conditions or provisions of any
Law or Order of any Governmental or Regulatory Authority or any contract to
which Radiance is a party or by which Radiance or any of its assets or
properties is bound for the execution and delivery of this Agreement by
Radiance, the performance by Radiance of its obligations hereunder or the
consummation of the transactions contemplated hereby, other than such consents,
approvals, actions, filings and notices which the failure to make or obtain, as
the case may be, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on Radiance or on the ability of
Radiance to consummate the transactions contemplated by this Agreement.
4.5 No Litigation or Regulatory Action. Except as disclosed in
the Radiance Reports or in Section 4.5 of Radiance Disclosure Schedule: (i)
there are no actions, suits, arbitrations or proceedings pending or, to the
knowledge of Radiance, threatened against, relating to or affecting, nor to the
knowledge of Radiance are there any Governmental or Regulatory Authority
investigations or audits pending or threatened against, relating to or
affecting, Radiance or any of its assets and
17
properties which could reasonably be expected to have a Material Adverse Effect
on Radiance or on the ability of Radiance to consummate the transactions
contemplated by this Agreement; (ii) Radiance is not subject to any Order of any
Governmental or Regulatory Authority which is having or could be reasonably
expected to have a Material Adverse Effect on Radiance, or on the ability of
Radiance or Sub to consummate the transactions contemplated by this Agreement;
and (iii) there are no material actions, suits, arbitrations or proceedings that
Radiance currently intends to initiate.
4.6 SEC Documents. Radiance has delivered or made available to
Endologix true and correct copies of each registration statement, report,
definitive proxy statement or definitive information statement and all exhibits
thereto filed (including exhibits and any amendments thereto) since January 1,
1999 with the SEC under or pursuant to the Securities Act of 1933, as amended
(the "Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (collectively, the "Radiance Reports"). As of their respective
dates, or as subsequently amended prior to the Closing Date, the Radiance
Reports complied in all material respects with the requirements of the Exchange
Act applicable to such Radiance Reports, and none of the Radiance Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Radiance included in the Radiance
Reports comply in all material respects with applicable accounting requirements
in the published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP applied on a consistent basis (except as
may be indicated in the notes thereto) and fairly present the consolidated
financial position of Radiance and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments, the absence of notes and as permitted by Form 10-Q
of the Exchange Act). As of their respective dates, the Radiance Reports
complied as to form in all material respects with the applicable requirements of
the Securities Act and/or the Exchange Act.
4.7 Brokers and Finders. Other than A.G. Edwards & Sons, Inc.,
Radiance has not employed any broker, finder, consultant or intermediary in
connection with the transactions contemplated by this Agreement who would be
entitled to a broker's, finder's or similar fee or commission in connection
therewith or upon the consummation thereof. Radiance is solely responsible for
the payment of any fee, commission or reimbursement that may be due to or become
payable to A.G. Edwards & Sons, Inc. in connection with the transactions
contemplated by this Agreement.
4.8 Taxes.
(a) Prior to the Merger, Radiance will be in control of
Sub within the meaning of Section 368(c) of the Code. Radiance will not cause or
permit Sub to issue additional shares of its stock that would result in Radiance
losing control of Sub within the meaning of Section 368(c) of the Code. No stock
of Sub will be issued in the Merger.
(b) During its corporate existence, Sub has owned no
assets, and prior to the Merger shall not own any assets other than the shares
of Radiance to be distributed in the Merger.
(c) As of the date hereof and as of the Effective Time,
Radiance has no plan or intention to reacquire any of its stock to be
distributed in the Merger.
18
4.9 Absence of Changes. Except: (i) as disclosed in Section 4.19
of the Radiance Disclosure Schedule; (ii) for matters reflected or reserved
against in the balance sheet for the period September 30, 2001 included in the
Radiance Reports; and (iii) as disclosed in the Radiance Reports filed as of the
date of this Agreement, since September 30, 2001, Radiance has conducted its
business only in the ordinary course, consistent with past practice and there
has been no change and no development in the business, properties, operations,
condition (financial or otherwise), or results of operations of Radiance that
had or could reasonably be expected to have a Material Adverse Effect other than
those occurring as a result of general economic or financial conditions or other
developments that are not unique to Radiance but also affect other persons who
participate or are engaged in the lines of business in which Radiance
participates or is engaged, or other than those occurring as a result of this
Agreement and the transactions contemplated hereby.
4.10 Contracts and Commitments. To the knowledge of Radiance,
there is no default or event that with notice or lapse of time, or both, would
constitute a material default by Radiance under that certain license agreement
between Radiance and Guidant Corporation dated June 19, 1998, (the "Guidant
License"). Radiance has not received notice of a default under the Guidant
License. The Guidant License is enforceable against Radiance in accordance with
its terms, except as such enforceability may be limited by general principles of
equity or by bankruptcy, insolvency or other similar laws relating to rights of
creditors. Radiance has not received notice that Guidant intends to cancel or
terminate the Guidant License or to exercise or not exercise any options under
the Guidant License.
4.11 Title to Assets. Radiance is in possession of and has good
title to, or has valid leasehold interests in or valid rights under contract to
use, all of its properties and assets primarily used in its business and
material to the condition (financial or other) of such business, free and clear
of all Liens, except (i) the lien for current taxes, payments of which are not
yet delinquent, (ii) such imperfections in title and easements and encumbrances,
if any, as are not substantial in character, amount or extent and do not
materially detract from the value of or interfere with the present use of the
property subject thereto or affected thereby, or otherwise materially impair
Radiance's business operations (in the manner presently carried on by Radiance)
or (iii) as disclosed in the Radiance Reports, and except for such matters
which, individually or in the aggregate, would not have a Material Adverse
Effect on Radiance. All leases under which Radiance leases any substantial
amount of real or personal property have been made available to Endologix and
are in good standing, valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default by
Radiance or to the knowledge of Radiance any event which with notice or lapse of
time or both would become a default by Radiance other than defaults under such
leases which in the aggregate would not have a Material Adverse Effect on
Radiance.
4.12 Permits, Etc. Radiance owns or validly holds all material
licenses, permits, certificates of authority, registrations, franchises and
similar consents granted or issued by any applicable Governmental or Regulatory
Authority, used or held for use which are required to conduct and material to
the condition of its business.
4.13 Compliance with Laws. To the knowledge of Radiance, Radiance
is not in violation of, nor has it violated, any applicable provisions of any
Laws or any term of any Order binding against it except for violations which do
not have and would not have a Material Adverse Effect on Radiance.
19
4.14 Labor Controversies. Except as disclosed in Section 4.14 of
the Radiance Disclosure Schedule, there are no material controversies pending
or, to the knowledge of Radiance, threatened between Radiance and any of its
employees.
4.15 Radiance Stock Issued in Merger. The shares of Radiance
Common Stock to be issued in the Merger will, when issued and delivered to the
stockholders of Endologix as a result of the Merger and pursuant to the terms of
this Agreement, be duly and validly authorized and issued, fully paid,
non-assessable and free of preemptive rights of any securityholder of Radiance,
and issued in compliance with applicable federal and state securities laws.
4.16 Full Disclosure. No information furnished by or on behalf of
Radiance to Endologix pursuant to this Agreement and any information contained
in the Radiance Disclosure Schedule and other Schedules to this Agreement, at
any time prior to the Closing Date, contains nor will contain any untrue
statement of a material fact and does not and will not omit to state any
material fact necessary to make any statement, in light of the circumstances
under which such statement is made, not misleading.
ARTICLE 5
COVENANTS
5.1 Covenants of Endologix. At all times from and after the date
hereof until the Effective Time, Endologix covenants and agrees as to itself
that (except as expressly contemplated or permitted by this Agreement, or to the
extent that Radiance and Sub shall otherwise consent in writing):
(a) Endologix shall conduct its business only in, and
Endologix shall not take any action except in, the ordinary course consistent
with past practice.
(b) Without limiting the generality of paragraph (a) of
this Section, except as otherwise disclosed in Section 5.1 of Endologix
Disclosure Schedule, as applicable, and except as contemplated or permitted by
this Agreement, (i) Endologix shall use all commercially reasonable efforts to
preserve intact in all material respects its present business organization and
reputation, to keep available the services of its key officers and employees, to
maintain its respective assets and properties in good working order and
condition, ordinary wear and tear excepted, to maintain insurance on its
tangible assets and business in such amounts and against such risks and losses
as are currently in effect, to preserve its relationships with customers and
suppliers and others having significant business dealings with it and to comply
in all material respects with all Laws and Orders of all Governmental or
Regulatory Authorities applicable to them, and (ii) Endologix shall not:
(A) amend or propose to amend its
Certificate of Incorporation or Bylaws;
(B) (w) declare, set aside or pay any
dividends on or make other distributions in respect of any of its capital stock,
(x) split, combine, reclassify or take similar action with respect to any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, (y) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such liquidation or
20
a dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization or (z) directly or indirectly purchase, redeem or otherwise
acquire any shares of its capital stock or any Option with respect thereto,
except for (i) the repurchase of capital stock from employees pursuant to
existing agreements providing for the repurchase of such shares of capital stock
upon termination of employment at the employee's cost therefor and (ii) the
repurchases from holders and not to exceed the number of shares and/or options
as are set forth in Section 3.4(b)(ii) of the Endologix Disclosure Schedule,
provided the price per share and/or option paid by Endologix shall be reasonably
approved by Radiance;
(C) except for the issuance of Endologix
capital stock upon exercise or conversion of presently outstanding warrants,
options, rights or convertible securities in accordance with their present
terms, issue, deliver or sell, or authorize or propose the issuance, delivery or
sale of, any shares of its capital stock or any Option with respect thereto, or
modify or amend any right of any holder of outstanding shares of capital stock
or Options with respect thereto;
(D) acquire (by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner) any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to Endologix;
(E) other than dispositions of assets which
are not individually or in the aggregate, material to Endologix, and except as
contemplated by this Agreement, sell, lease, grant any security interest in or
otherwise dispose of or encumber any of its assets or properties;
(F) except to the extent required by
applicable law, (x) permit any material change in (A) any investment,
accounting, financial reporting, inventory, credit, allowance or tax practice or
policy or (B) any method of calculating any bad debt, contingency or other
reserve for accounting, financial reporting or tax purposes or (y) make any
material tax election or settle or compromise any material income tax liability
with any Governmental or Regulatory Authority;
(G) except as contemplated by this
Agreement, (x) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of its business consistent with
past practice in an aggregate principal amount exceeding $100,000 (net of any
amounts of any such indebtedness discharged during such period), or (y)
voluntarily purchase, cancel, prepay or otherwise provide for a complete or
partial discharge in advance of a scheduled repayment date with respect to, or
waive any right under, any indebtedness for borrowed money other than in the
ordinary course of its business consistent with past practice in an aggregate
principal amount exceeding $100,000;
(H) enter into, adopt, amend in any material
respect (except as may be required by applicable law) or terminate any Endologix
Employee Benefit Plan or any other agreement or arrangement, plan or policy
between Endologix and one or more of its directors, officers or employees, or,
except for normal increases in the ordinary course of business consistent with
past practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to Endologix, increase in any manner the
compensation or fringe benefits of
21
any director, officer or employee or pay any benefit not required by any plan or
arrangement in effect as of the date hereof;
(I) enter into any contract or amend or
modify any existing contract, or engage in any new transaction, outside the
ordinary course of business consistent with past practice or not on an arm's
length basis, with any affiliate of Endologix;
(J) make any capital expenditures or
commitments for additions to plant, property or equipment constituting capital
assets except in the ordinary course of business consistent with past practice
in an aggregate amount exceeding $100,000;
(K) make any change in the lines of business
in which it participates or is engaged;
(L) take any action to cause the Merger,
together with the Sideways Merger contemplated in Section 6.13, not to be
treated as a tax-free reorganization within the meaning of Section 368(a) of the
Code; or
(M) enter into any contract, agreement,
commitment or arrangement to do or engage in any of the foregoing.
5.2 Covenants of Radiance. At all times from and after the date
hereof until the Effective Time, Radiance covenants and agrees as to itself that
(except as expressly contemplated or permitted by this Agreement, or to the
extent that Endologix shall otherwise consent in writing):
(a) Radiance shall conduct its business only in, and
Radiance shall not take any action except in, the ordinary course consistent
with past practice.
(b) Without limiting the generality of paragraph (a) of
this Section 5.2, except as otherwise disclosed in Section 5.2 of the Radiance
Disclosure Schedule, as applicable, and except as contemplated or permitted by
this Agreement, (i) Radiance shall use all commercially reasonable efforts to
preserve intact in all material respects its present business organization and
reputation, to maintain its respective assets and properties in good working
order and condition, ordinary wear and tear excepted, to maintain insurance on
its tangible assets and business in such amounts and against such risks and
losses as are currently in effect, and to comply in all material respects with
all Laws and Orders of all Governmental or Regulatory Authorities applicable to
it, and (ii) Radiance shall not:
(A) amend or propose to amend its
Certificate of Incorporation or Bylaws;
(B) (w) declare, set aside or pay any
dividends on or make other distributions in respect of any of its capital stock,
(x) split, combine, reclassify or take similar action with respect to any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, (y) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such liquidation or a dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
or (z) directly or indirectly purchase, redeem or otherwise acquire any shares
of its capital stock or any Option with respect thereto, except for the
repurchase of capital stock from employees pursuant to
22
existing agreements providing for the repurchase of such shares of capital stock
upon termination of employment at the employee's cost therefor;
(C) except for the issuance of Radiance
capital stock upon exercise or conversion of presently outstanding warrants,
options, rights or convertible securities in accordance with their present
terms, issue, deliver or sell, or authorize or propose the issuance, delivery or
sale of, any shares of its capital stock or any Option with respect thereto, or
modify or amend any right of any holder of outstanding shares of capital stock
or Options with respect thereto;
(D) acquire (by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner) any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to Radiance;
(E) other than dispositions of assets which
are not individually or in the aggregate, material to Radiance, sell, lease,
grant any security interest in or otherwise dispose of or encumber any of its
assets or properties;
(F) except as contemplated by this
Agreement, (x) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of its business consistent with
past practice in an aggregate principal amount exceeding $50,000 (net of any
amounts of any such indebtedness discharged during such period), or (y)
voluntarily purchase, cancel, prepay or otherwise provide for a complete or
partial discharge in advance of a scheduled repayment date with respect to, or
waive any right under, any indebtedness for borrowed money other than in the
ordinary course of its business consistent with past practice in an aggregate
principal amount exceeding $50,000;
(G) enter into, adopt, amend in any material
respect (except as may be required by applicable law) or terminate any employee
benefit plan or any other agreement or arrangement, plan or policy between
Radiance and one or more of its directors, officers or employees, or, except for
normal increases in the ordinary course of business consistent with past
practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to Radiance, increase in any manner the
compensation or fringe benefits of any director, officer or employee or pay any
benefit not required by any plan or arrangement in effect as of the date hereof;
(H) enter into any contract or amend or
modify any existing contract, or engage in any new transaction, outside the
ordinary course of business consistent with past practice or not on an arm's
length basis, with any affiliate of Radiance;
(I) make any capital expenditures or
commitments for additions to plant, property or equipment constituting capital
assets except in the ordinary course of business consistent with past practice
in an aggregate amount exceeding $100,000;
(J) take any action to cause the Merger not
to be treated as a tax-free reorganization within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code; or
23
(K) enter into any contract, agreement,
commitment or arrangement to do or engage in any of the foregoing.
5.3 Advice of Changes. Each party shall confer on a regular and
frequent basis with the other with respect to its business and operations and
other matters relevant to the Merger, and shall promptly advise the other,
orally and in writing, of any change or event, including, without limitation,
any complaint, investigation or hearing by any Governmental or Regulatory
Authority (or communication indicating the same may be contemplated) or the
institution or threat of litigation, having, or which, insofar as can be
reasonably foreseen, could have, a Material Adverse Effect on Endologix, or
Radiance and its Subsidiaries taken as a whole, as the case may be, or on the
ability of Endologix or Radiance and Sub, as the case may be, to consummate the
transactions contemplated hereby.
ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 Access to Information; Confidentiality.
(a) Each of Endologix and Radiance shall, and shall cause
each of its Subsidiaries, if any, to, throughout the period from the date hereof
to the Effective Time, (i) provide the other party and its directors, officers,
employees, legal, investment banking and financial advisors, accountants and any
other agents and representatives (collectively, "Representatives") with full
access, upon reasonable prior notice, and during normal business hours, to
Endologix or Radiance and its Subsidiaries, as the case may be, and their
respective assets, properties, books and records, but only to the extent that
such access does not unreasonably interfere with the business and operations of
Endologix or Radiance and its Subsidiaries, as the case may be, and (ii) furnish
promptly to such persons (x) a copy of each report, statement, schedule and
other document filed or received by Endologix and its Subsidiaries or Radiance
and its Subsidiaries, as the case may be, pursuant to the requirements of
federal or state securities laws or filed with any other Governmental or
Regulatory Authority, and (y) all other information and data (including, without
limitation, copies of Contracts, Endologix Employee Benefit Plans or Radiance
Employee Benefit Plans, as the case may be, and other books and records)
concerning the business and operations of Endologix or Radiance, as the case may
be, as the other party or any of such other persons reasonably may request. No
investigation pursuant to this paragraph or otherwise shall affect any
representation or warranty contained in this Agreement or any condition to the
obligations of the parties hereto.
(b) Each party will hold, and will use its best efforts to
cause its Representatives to hold, in strict confidence, unless (i) compelled to
disclose by judicial or administrative process or by-other requirements of
applicable Laws or Governmental or Regulatory Authorities (including, without
limitation, in connection with obtaining the necessary approvals of this
Agreement or the transactions contemplated hereby of Governmental or Regulatory
Authorities), or (ii) disclosed in an action or proceeding brought by a party
hereto in pursuit of its rights or in the exercise of its remedies hereunder,
all documents and information concerning the other party and its Subsidiaries
furnished to it by such other party or its Representatives in connection with
this Agreement or the transactions contemplated hereby, except to the extent
that such documents or information can be shown to have been (x) previously
known by Endologix or Radiance, as the case may be, or its Representatives, (y)
in the public domain (either prior to or after the furnishing of such documents
or information hereunder) through no fault of Endologix or Radiance, as the case
may be,
24
and its Representatives or (z) later acquired by Endologix or Radiance, as the
case may be, or its Representatives from another source if the recipient is not
aware that such source is under an obligation to Endologix or Radiance, as the
case may be, to keep such documents and information confidential. In the event
that this Agreement is terminated without the transactions contemplated hereby
having been consummated, upon the request of Endologix or Radiance, as the case
may be, the other party will, and will cause its Representatives to, promptly
(and in no event later than five (5) business days after such request) redeliver
or cause to be redelivered all copies-of documents and information furnished by
Endologix or Radiance, as the case may be, or its Representatives to such party
and its Representatives in connection with this Agreement or the transactions
contemplated hereby and destroy or cause to be destroyed all notes, memoranda,
summaries, analyses, compilations and other writings related thereto or based
thereon prepared by Endologix or Radiance, as the case may be, or its
Representatives.
6.2 Registration of Radiance Common Stock. Radiance shall
register for re-sale the shares of Radiance Common Stock issued pursuant to the
payment of the Merger Consideration and the Milestone Payment and shall file a
registration statement with respect to such registration with the SEC within ten
(10) business days after the Closing Date; provided, however, Endologix shall
use its best efforts to have the holders of shares of Endologix Common Stock
enter into a registration rights agreement with Radiance in the form of Exhibit
A hereto (the "Registration Rights Agreements").
6.3 Lock Up Agreement. Endologix shall cause each of its officers
and directors to enter lock-up agreements (the "Lock-Up Agreements") with
Radiance prior to the Effective Time which shall restrict the re-sale of
Radiance Common Stock issued pursuant to the payment of the Merger Consideration
for a period of 180 days after the SEC declares effective the registration
statement referred to in Section 6.2.
6.4 Nasdaq Listing. Radiance shall cause the shares of Radiance
Common Stock to be issued in the Merger in accordance with this Agreement to be
listed on the Nasdaq National Market prior to the effectiveness of the
registration of the Radiance Common Stock as provided in Section 6.2.
6.5 Approval of Stockholders. Subject to the exercise of
fiduciary obligations under applicable law as advised by independent counsel,
Radiance shall use its reasonable best efforts to obtain approval of this
Agreement by its stockholders (the "Radiance Stockholder Approval") as soon as
reasonably practicable after the date hereof and shall recommend to its
stockholders that it is in the best interest of the stockholders that the
stockholders of Radiance approve this Agreement and the transactions
contemplated hereby.
6.6 Regulatory and Other Approvals. Subject to the terms and
conditions of this Agreement and without limiting the provisions of Sections 6.3
and 6.4, each of Endologix and Radiance will proceed diligently and in good
faith and will use all commercially reasonable efforts to do, or cause to be
done, all things necessary, proper or advisable to, as promptly as practicable,
(i) obtain all consents, approvals or actions of, make all filings with and give
all notices to Governmental or Regulatory Authorities or any other public or
private third parties required of Radiance, Endologix or any of their
Subsidiaries to consummate the Merger and the other matters contemplated hereby,
and (ii) provide such other information and communications to such Governmental
or Regulatory Authorities or other public or private third parties as the other
party or
25
such Governmental or Regulatory Authorities or other public or private third
parties may reasonably request in connection therewith.
6.7 Board of Directors.
(a) Radiance shall take all necessary action so that
following the closing of the Merger, the directors of Radiance shall be:
Franklin D. Brown Chairman of the Board
Maurice Buchbinder, M.D. Director
Edward B. Diethrich, M.D. Director
Michael R. Henson Director
Paul McCormick Director
Jeffrey F. O'Donnell Director
Jeffrey H. Thiel Director
and the officers of Radiance shall be:
Franklin D. Brown Chief Executive Officer
Paul McCormick President and Chief Operating Officer
(b) Each of Endologix and Radiance agrees that Radiance
shall: (i) nominate Maurice Buchbinder, M.D. and Jeffrey F. O'Donnell for
election to the Board of Directors of Radiance at the next annual meeting of
stockholders of Radiance; and (ii) take all necessary action to cause such
election, including a recommendation for the election of such nominees.
6.8 Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such cost or expense. If the Merger is not consummated due to
either party's failure to obtain Stockholder Approval, the party unable to
obtain such approval shall reimburse the expenses of the other party incurred in
connection with this Agreement and the Merger, up to a maximum of Two Hundred
Thousand Dollars ($200,000).
6.9 Indemnification of Officers and Directors.
(a) From and after the Effective Time, Radiance shall, to
the fullest extent authorized by the DGCL or any other applicable law as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits Radiance to provide broader
indemnification rights than such law permitted Radiance to provide prior to such
amendment), indemnify all directors and officers of Endologix as of the Closing
against any liability or losses (including reasonable attorney's fees and costs
for counsel who are reasonably acceptable to Radiance) any of them may incur
from any action, proceeding or investigation brought against such individuals by
existing stockholders and option holders of Endologix immediately prior to the
Merger as a result of the Merger, or any of the transactions contemplated by
this Agreement. The right to indemnification conferred in this Section shall be
a contract right and shall include the right to be paid by Radiance any expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, if so required by the DGCL, such advance shall be made
only upon delivery to Radiance of an undertaking, by or on behalf of such
director or officer, to
26
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section 6.9 or
otherwise. Radiance shall not be liable for any settlement effected without its
written consent (which consent shall not be unreasonably withheld). Radiance
shall not be obligated pursuant to this Section 6.9 to pay the fees and
disbursements of more than one counsel for all officers and directors in any
single action, except to the extent that, in the opinion of counsel for the
officers and directors, two or more of such officers and directors have
conflicting interests in the outcome of such action, or one or more of such
officers and directors and Radiance have conflicting interests in the outcome of
such action. Radiance may obtain directors' and officers' liability insurance
covering its obligations under this Section 6.9.
(b) The provisions of this Section 6.9 are intended to be
for the benefit of, and shall be enforceable by, each officer and director of
Endologix as of the Closing, and his or her heirs and legal representatives, and
shall be in addition to any other rights an officer and director of Endologix
may have under the Certificate of Incorporation or Bylaws of the Surviving
Corporation, under the DGCL or otherwise.
(c) In the event Radiance or the Surviving Corporation, or
any of their respective successors or assigns, (i) consolidates with or merges
into any other person and shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (ii) transfers all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision shall be made so that the successors and assigns of Radiance or
the Surviving Corporation, as the case may be, or at Radiance's option,
Radiance, shall assume the obligations set forth in paragraph (a) of this
Section 6.9.
(d) In the event Radiance or the, Surviving Corporation,
or any of their respective successors or assigns, obtains directors' and
officers' liability insurance covering any of their directors or officers, such
insurance shall also cover the directors and officers of Endologix as of the
date hereof with respect to the obligations hereunder.
6.10 Name Change. Radiance agrees to include in its proxy
statement to be filed with the Securities and Exchange Commission in connection
with a special meeting of its stockholders soliciting approval of the
transactions contemplated by the Merger, a proposal amending its Certificate of
Incorporation to change the name of Radiance Medical Systems, Inc. to Endologix,
Inc.
6.11 Notice and Cure. Each of Radiance, Sub and Endologix will
notify the other in writing of, and contemporaneously will provide the other
with true and complete copies of any and all information or documents relating
to, and will use best efforts to cure before the Closing, any event, transaction
or circumstance, as soon as practical after it becomes known to such party,
occurring after the date of this Agreement that causes or will cause any
covenant or agreement of Radiance, Sub or Endologix, as the case may be, under
this Agreement to be breached or that renders or will render untrue any
representation or warranty of Radiance, Sub or Endologix, as the case may be,
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. Each of Radiance, Sub and Endologix
also will notify the other in writing of, and will use best efforts to cure,
before the Closing, any violation or breach, as soon as practical after it
becomes known to such party, of any representation, warranty, covenant or
agreement made by Radiance, Sub or Endologix, as the case may be, in this
Agreement, whether occurring or arising prior to, on or after the date of this
Agreement. No notice given pursuant to this Section 6.11 shall have any effect
on the representations, warranties, covenants or agreements
27
contained in this Agreement for purposes of determining satisfaction of any
condition contained herein.
6.12 Fulfillment of Conditions. Subject to the terms and
conditions of this Agreement, each of Radiance, Sub and Endologix will take or
cause to be taken all steps necessary or desirable and proceed diligently and in
good faith to satisfy each condition to the other's obligations contained in
this Agreement and to consummate and make effective the transactions
contemplated by this Agreement, and neither Radiance nor Endologix will, nor
will it permit any subsidiary, if any, to, take or fail to take any action that
could be reasonably expected to result in the nonfulfillment of any such
condition.
6.13 No Solicitations. Endologix agrees that unless specifically
permitted in writing by Radiance until the earlier of (i) July 1, 2002 or such
later date as determined in accordance with Section 8.1(b)(i), or (ii) receipt
of written notice from Radiance of its intent not to proceed with the proposed
transaction, Endologix will not, directly or indirectly, through any officer,
director, affiliate or agent of Endologix, or otherwise, (i) solicit, initiate,
entertain, or encourage any proposals or offers from any third party relating to
(a) any possible acquisition of Endologix (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise), (b) any acquisition of its
assets, technology or securities, or (c) the grant of any license, distribution
or other commercial rights in Endologix's technology or its proposed products;
or (ii) enter into, or continue, any discussions or arrangements with, otherwise
cooperate with, facilitate or encourage any effort or attempt by, any third
party with respect to any of the foregoing, or furnish to any person any
information with respect to, or any person to do or seek any of the foregoing.
Endologix shall immediately cease and cause to be terminated any such contacts
or negotiations with third parties.
6.14 Completion of Sideways Merger. Within forty-five (45) days
following the Effective Time, Radiance agrees, as part of a single plan to which
the Merger is a part, to cause Endologix to be merged with and into a
newly-formed and wholly-owned subsidiary of Radiance ("Newsub") in accordance
with the provisions of the DGCL (the "Sideways Merger"). Newsub shall be the
surviving corporation in the Sideways Merger. Other than pursuant to the
Sideways Merger contemplated in this Section 6.13, Radiance has no present plan
or intention to (i) liquidate Newsub, (ii) merge Newsub with or into another
corporation including Radiance or any of its affiliates, or (iii) sell,
distribute or otherwise dispose of the stock of Endologix or Newsub, or cause
Endologix or Newsub to sell, distribute or otherwise dispose of any of Endologix
or Newsub's assets, except for transfers described in Section 368(a)(2)(C) of
the Code and Treasury Regulation Section 1.368-2(k).
ARTICLE 7
CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) No Injunctions or Restraints. No court of competent
jurisdiction or other competent Governmental or Regulatory Authority shall have
enacted, issued, promulgated, enforced or entered any Law or Order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of making illegal or otherwise restricting, preventing or prohibiting
consummation of the Merger or the other transactions contemplated by this
Agreement.
28
(b) Governmental and Regulatory Consents and Approvals.
Other than the filing provided for by Section 1.2, all consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
or any other public or private third parties or Radiance or Endologix
stockholders required of Radiance, Endologix or any Subsidiary which are to be
taken prior to the Effective Time to consummate the Merger and the other matters
contemplated hereby, the failure of which to be obtained or taken could be
reasonably expected to have a Material Adverse Effect on Radiance and its
Subsidiary taken as a whole, or the Surviving Corporation, or on the ability of
Radiance and Endologix to consummate the transactions contemplated hereby shall
have been obtained.
7.2 Conditions to Obligation of Radiance and Sub to Effect the
Merger. The obligation of Radiance and Sub to effect the Merger is further
subject to the fulfillment, at or prior to the Closing, of each of the following
additional conditions (all or any of which may be waived in whole or in part by
Radiance and Sub in their sole discretion):
(a) Representations and Warranties. Each of the
representations and warranties made by Endologix in this Agreement shall be true
and correct in all material respects as of the Closing Date as though made on
and as of the Closing Date or, in the case of representations and warranties
made as of a specified date earlier than the Closing Date, on and as of such
earlier date, and Endologix shall have delivered to Radiance a certificate,
dated the Closing Date and executed on behalf of Endologix by its Chairman of
the Board, Chief Executive Officer, President or any Executive or Senior Vice
President, to such effect.
(b) Performance of Obligations. Endologix shall have
performed and complied with, in all material respects, each agreement, covenant
and obligation required by this Agreement to be so performed or complied with by
Endologix at or prior to the Closing, and Endologix shall have delivered to
Radiance a certificate, dated the Closing Date and executed on behalf of
Endologix by its Chairman of the Board, President or any Executive or Senior
Vice President, to such effect.
(c) Orders and Laws. There shall not have been issued,
enacted, promulgated or deemed applicable to Endologix, the Surviving
Corporation or the transactions contemplated by this Agreement any Order or Law
of any Governmental or Regulatory Authority which is then in effect and which
could be reasonably expected to result in a material diminution of the benefits
of the Merger to Radiance, and there shall not be pending or threatened on the
Closing Date any action, suit or proceeding in, before or by any Governmental or
Regulatory Authority which could be reasonably expected to result in any such
issuance, enactment, promulgation or deemed applicability of any such Order or
Law or of any Order or Law.
(d) Contractual Consents. Endologix shall have received
all consents (or in lieu thereof waivers) from parties to each Contract to the
extent required pursuant to the terms of each such contract disclosed pursuant
to Sections 3.5 and 3.10.
(e) No Material Adverse Change. Since the date of this
Agreement, there shall have been no changes in the business, condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities (including contingent liabilities) or results of operations of
Endologix, which have had or may be reasonably expected to have, a Material
Adverse Effect on Endologix.
29
(f) Proceedings. All proceedings to be taken on the part
of Endologix in connection with the transactions contemplated by this Agreement
and all documents incident thereto shall be reasonably satisfactory in form and
substance to Radiance, and Radiance shall have received copies of all such
documents and other evidences as Radiance may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
(g) Opinion of Counsel. Radiance shall have received the
opinion of Rutan & Tucker, LLP, counsel to Endologix, dated the Closing Date, in
form reasonably acceptable to Radiance.
(h) Conversion of Preferred Stock. All shares of Series A,
Series B and Series C Convertible Preferred Stock of Endologix shall have been
converted into Endologix Common Stock.
(i) Registration Rights Agreement. Radiance shall have
received signed Registration Rights Agreements in the form of Exhibit A from the
holders of shares of Endologix Common Stock.
(j) Lock-Up Agreements. Radiance shall have received
signed Lock-Up Agreements from each officer and director of Endologix.
(k) Escrow Agreement. Radiance shall have received a
signed Escrow Agreement from the Escrow Agent and Franklin D. Brown as Holders'
Representative.
7.3 Conditions to Obligation of Endologix to Effect the Merger.
The obligation of Endologix to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by Endologix
in its sole discretion):
(a) Representations and Warranties. Each of the
representations and warranties made by Radiance and Sub in this Agreement shall
be true and correct in all material respects as of the Closing Date as though
made on and as of the Closing Date or, in the case of representations and
warranties made as of a specified date earlier than the Closing Date, on and as
of such earlier date, and Radiance and Sub shall each have delivered to
Endologix a certificate, dated the Closing Date and executed on behalf of
Radiance by its Chairman of the Board, Chief Executive Officer, President or any
Executive or Senior Vice President and on behalf of Sub by its President or any
Vice President, to such effect.
(b) Performance of Obligations. Radiance and Sub shall
have performed and complied with, in all material respects, each agreement,
covenant and obligation required by this Agreement to be so performed or
complied with by Radiance, or Sub at or prior to the Closing, and Radiance and
Sub shall each have delivered to Endologix a certificate, dated the Closing Date
and executed on behalf of Radiance by its Chairman of the Board, President or
any Executive or Senior Vice President and on behalf of Sub by its Chairman of
the Board, President or any Vice President, to such effect.
(c) Orders and Laws. There shall not have been issued,
enacted, promulgated or deemed applicable to the Radiance, its Subsidiaries, the
Surviving Corporation or the
30
transactions contemplated by this Agreement any Order or Law of any Governmental
or Regulatory Authority which is then in effect and which could be reasonably
expected to result in a material diminution of the benefits of the Merger to
Endologix or its stockholders, and there shall not be pending or threatened on
the Closing Date any action, suit or proceeding in, before or by any
Governmental or Regulatory Authority which could be reasonably expected to
result in any such issuance, enactment, promulgation or deemed applicability of
any such Order or Law or of any Order or Law.
(d) Registration Rights Agreement. The Registration Rights
Agreements in the form of Exhibit A shall have been entered into by Radiance.
(e) No Material Adverse Change. Since the date of this
Agreement, there shall have been no changes in the business, condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities (including contingent liabilities) or results of operations of
Radiance and its Subsidiaries taken as a whole, which have had or may be
reasonably expected to have, a Material Adverse Effect on Radiance and its
Subsidiaries taken as a whole.
(f) Proceedings. All proceedings to be taken on the part
of Radiance and Sub in connection with the transactions contemplated by this
Agreement and all documents incident thereto shall be reasonably satisfactory in
form and substance to Endologix, and Endologix shall have received copies of all
such documents and other evidences as Endologix may reasonably request in order
to establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
(g) Opinion of Counsel. Endologix shall have received the
opinion of Stradling Yocca Carlson & Rauth, counsel to Radiance and Sub, dated
the Closing Date, in form reasonably acceptable to Endologix.
(h) Escrow Agreement. The Escrow Agreement shall have been
executed by Radiance are delivered to Franklin D. Brown, as Holders'
Representative.
(i) Lock-Up Agreements. Radiance shall have received
signed Lock-Up Agreements from each of Maurice Buchbinder, M.D., Michael R.
Henson, Jeffrey F. O'Donnell and Jeffrey H. Thiel.
(j) Cash Balance. Radiance shall have an amount of cash or
cash equivalents of a least Eight Million Five Hundred Thousand ($8,500,000) in
its bank accounts as of the Closing, after payment of the cash portion of the
Merger Consideration.
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated, and the
transactions contemplated hereby may be abandoned, at any time prior to the
Effective Time:
(a) by mutual written agreement of the parties hereto duly
authorized by action taken by or on behalf of their respective Boards of
Directors;
31
(b) by either Endologix or Radiance upon notification to
the non-terminating party by the terminating party:
(i) at any time after August 31, 2002, if the
Merger shall not have been consummated on or prior to such date and such failure
to consummate the Merger is not caused by a breach of this Agreement by the
terminating party;
(ii) if any Governmental or Regulatory Authority,
the taking of action by which is a condition to the obligations of either
Endologix or Radiance to consummate the transactions contemplated hereby, shall
have determined not to take such action and all appeals of such determination
shall have been taken and have been unsuccessful;
(iii) if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the
non-terminating party set forth in this Agreement which breach has not been
cured within ten (10) business days following receipt by the non-terminating
party of notice of such breach from the terminating party or assurance of such
cure reasonably satisfactory to the terminating party shall not have been given
by or on behalf of the non-terminating party within such ten (10) business day
period;
(iv) if any court of competent jurisdiction or
other competent Governmental or Regulatory Authority shall have issued an Order
making illegal or otherwise restricting, preventing or prohibiting the Merger
and such Order shall have become final and nonappealable;
(v) if the requisite shareholder vote of Endologix,
or Radiance approving the principal terms of this Agreement, the Agreement of
Merger and the Merger in accordance with applicable law and the Certificate of
Incorporation and Bylaws of Endologix or Radiance, as applicable, is not
obtained;
(vi) if the closing price of the Radiance Common
Stock as reported on Nasdaq on the trading day immediately preceding the
Effective Date shall be less than ninety cents ($0.90) per share; or
(vii) if the aggregate number of Dissenting Shares
(as defined in Section 2.2) exceeds five percent of the total number of shares
of Endologix Common Stock on an as-converted, fully diluted basis immediately
prior to the Effective Time.
8.2 Effect of Termination. If this Agreement is validly
terminated by either Endologix or Radiance pursuant to Section 8.1, this
Agreement will forthwith become null and void and there will be no liability or
obligation on the part of either Endologix or Radiance (or any of their
respective Representatives or affiliates), except that (i) the provisions of
Sections 6.1(b) and 6.8 will continue to apply following any such termination
and (ii) nothing contained herein shall relieve any party hereto from liability
for willful breach of its representations, warranties, covenants or agreements
contained in this Agreement, as further specified in Section 9.2(e).
8.3 Amendment. This Agreement may be amended, supplemented or
modified by action taken by or on behalf of the respective Boards of Directors
of the parties hereto at any time prior to the Effective Time. No such
amendment, supplement or modification shall be effective unless set forth in a
written instrument duly executed by or on behalf of each party hereto.
32
8.4 Waiver. At any time prior to the Effective Time any party
hereto, by action taken by or on behalf of its Board of Directors, may to the
extent permitted by applicable law (i) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties of the other parties hereto
contained herein or in any document delivered pursuant hereto or (iii) waive
compliance with any of the covenants, agreements or conditions of the other
parties hereto contained herein. No such extension or waiver shall be effective
unless set forth in a written instrument duly executed by or on behalf of the
party extending the time of performance or waiving any such inaccuracy or
non-compliance. No waiver by any party of any term or condition of this
Agreement, in any one or more instances, shall be deemed to be or construed as a
waiver of the same or any other term or condition of this Agreement on any
future occasion.
ARTICLE 9
GENERAL PROVISIONS
9.1 Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties, covenants and agreements contained
in Sections 3.6, 3.16, 3.17, 4.6, 4.9 and 4.10 of this Agreement shall survive
the Effective Time and shall continue in full force and effect for a period of
one year following the Effective Time (the "Indemnification Period"). All other
representations, warranties, covenants and agreements contained in this
Agreement shall terminate as of the Effective Time.
9.2 Indemnification.
(a) Indemnification of Radiance. Subject to the provisions
of this Article 9, Endologix shall indemnify Radiance from and against any and
all damage, loss, liability and expense (including without limitation reasonable
expenses of investigation and reasonable attorneys' fees and reasonable expenses
in connection with any action, suit or proceeding) incurred or suffered by
Radiance arising out of any breach of the representations, warranties, covenants
or agreements of Endologix set forth in Sections 3.6, 3.16 and 3.17 herein (the
"Radiance Indemnifiable Damages"). Notwithstanding the foregoing, Radiance shall
not be entitled to indemnification hereunder until the Radiance Indemnifiable
Damages exceed $100,000 and thereafter shall be entitled to indemnification for
all Radiance Indemnifiable Damages, up to the amount of the Milestone Payment
actually earned. Radiance may obtain indemnification for any Radiance
Indemnifiable Damages to which this Section 9.2(a) relates only if it makes a
claim for indemnification within the Indemnification Period defined in Section
9.1.
(b) Indemnification by Radiance of Endologix. Subject to
the provisions of this Article 9, Radiance agrees to indemnify the stockholders
of Endologix after the Effective Time from and against any and all damage, loss,
liability and expense (including without limitation reasonable expenses of
investigation and reasonable attorneys' fees and reasonable expenses in
connection with any action, suit or proceeding) incurred or suffered by the
stockholders of Endologix arising out of any breach of the representations,
warranties, covenants or agreements of Radiance and Sub set forth in Sections
4.6, 4.9 and 4.10 herein (the "Endologix Indemnifiable Damages").
Notwithstanding the foregoing, the stockholders of Endologix shall not be
entitled to indemnification hereunder until the Endologix Indemnifiable Damages
exceed $100,000 and thereafter shall be entitled to indemnification for all
Endologix Indemnifiable Damages, up to the amount of the Milestone Payment
actually earned. The stockholders of Endologix may obtain indemnification for
33
any Endologix Indemnifiable Damages to which this Section 9.2(b) relates only if
a stockholder or stockholders of Endologix makes a claim for indemnification
within the Indemnification Period defined in Section 9.1.
(c) Indemnification Procedures. A party seeking
indemnification (the "Indemnitee") shall use its best efforts to minimize any
liabilities, damages, deficiencies, claims, judgments, assessments, costs and
expenses in respect of which indemnity may be sought under this Agreement. The
Indemnitee shall give prompt written notice to the party from whom
indemnification is sought (the "Indemnitor") of the assertion of a claim for
indemnification, but in no event longer than twenty (20) days after service of
process in the event litigation is commenced against the Indemnitee by a third
party, or sixty (60) days after the assertion of such claim, whichever shall
first occur. No such notice of assertion of a claim shall satisfy the
requirements of this Section 9.2(c) unless it describes in reasonable detail and
in good faith the facts and circumstances upon which the asserted claim for
indemnification is based. If any action or proceeding shall be brought in
connection with any liability or claim to be indemnified hereunder, the
Indemnitee shall provide the Indemnitor twenty (20) calendar days to decide
whether to defend such liability or claim. During such period, the Indemnitee
shall take all necessary steps to protect the interests of itself and the
Indemnitor, including the filing of any necessary responsive pleadings, the
seeking of emergency relief or other action necessary to maintain the status
quo, subject to reimbursement from the Indemnitor of its expenses in doing so.
The Indemnitor shall (with, if necessary, reservation of rights) defend such
action or proceeding at its expense, using counsel selected by the insurance
company insuring against any such claim and undertaking to defend such claim, or
by other counsel selected by it and approved by the Indemnitee, which approval
shall not be unreasonably withheld or delayed. The Indemnitor shall keep the
Indemnitee fully apprised at all times of the status of the defense and shall
consult with the Indemnitee prior to the settlement of any indemnified matter.
The Indemnitee agrees to use reasonable efforts to cooperate with the Indemnitor
in connection with its defense of indemnifiable claims. In the event the
Indemnitee has a claim or claims against any third party arising out of or
connected with the indemnified matter, then upon receipt of indemnification, the
Indemnitee shall fully assign to the Indemnitor the entire claim or claims to
the extent of the indemnification actually paid by the Indemnitor and the
Indemnitor shall thereupon be subrogated with respect to such claim or claims of
the Indemnitee.
(d) No Liability of Endologix Stockholders. Radiance
agrees that the sole and exclusive remedy of Radiance after the Effective Time
for any damage, loss, liability or expense under this Agreement, including,
without limitation, for Radiance Indemnifiable Damages pursuant to Article 9 or
in connection with the transactions contemplated hereunder, shall be limited to
the stock and other property held in escrow, pursuant to the terms of the Escrow
Agreement, provided however, any such claims must be brought by Radiance within
the Indemnification Period. Subject to the provisions of this Section 9.2,
Radiance shall be entitled to offset any Radiance Indemnifiable Damages from the
amount payable by Radiance under the Milestone Payment in the event such claims
have been finally adjudicated in Radiance's favor prior to the time the
Milestone Payment is earned.
(e) Indemnification Prior to Effective Time.
Notwithstanding any other provision of this Article 9, in the event of a
termination by either Radiance or Endologix pursuant to Section 8.(1)(b)(iii)
prior to the Effective Time, such party shall be entitled to payment of all
Radiance Indemnifiable Damages or Endologix Indemnifiable Damages, as the case
may be, provided that such terminating party gives written notice of any claim
on or before thirty days from the date of termination. If written notice of a
claim is not made within thirty days, then all
34
representations, warranties, covenants and agreements contained in this
Agreement shall terminate, except that the provisions of Sections 6.1(b) and 6.8
will continue to apply following any termination.
9.3 Knowledge. With respect to any representations or warranties
contained herein which are made to the knowledge of Endologix or Radiance or any
Subsidiary, as the case may be, the actual knowledge of the officers and
directors of Endologix or Radiance, as the case may be, shall be imputed to
Endologix or Radiance, as the case may be.
9.4 Notices. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile transmission or nationally recognized
overnight courier service (such as Federal Express) or mailed (first class
postage prepaid) to the parties at the following addresses or facsimile numbers:
If to Radiance, Sub or the Surviving Corporation, to:
Radiance Medical Systems, Inc.
13900 Alton Parkway, Suite 122
Irvine, California 92618
Attn: Chief Executive Officer
Facsimile No.: (949) 457-9561
with a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attn: Lawrence B. Cohn
Facsimile No.: (949) 725-4100
If to Endologix, to:
Endologix, Inc.
13700 Alton Parkway, Suite 160
Irvine, California 92618
Attn: Chief Executive Officer
Facsimile No.: (949) 380-8372
with a copy to:
Rutan & Tucker
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626-1998
Attn: Vicki Dallas
Facsimile No.: (714) 546-9035
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by nationally recognized overnight courier or by mail in the manner described
above to the address
35
as provided in this Section 9.4, be deemed given upon receipt (in each case
regardless of whether such notice, request or other communication is received by
any other person to whom a copy of such notice, request or other communication
is to be delivered pursuant to this Section 9.4). Any party from time to time
may change its address, facsimile number or other information for the purpose of
notices to that party by giving notice specifying such change to the other
parties hereto.
9.5 Entire Agreement. This Agreement, together with the exhibits
hereto, supersedes all prior discussions and agreements among the parties hereto
with respect to the subject matter hereof and contains the sole and entire
agreement among the parties hereto with respect to the subject matter hereof.
9.6 Public Announcements. Except as otherwise required by law or
the rules of The Nasdaq National Market, so long as this Agreement is in effect,
Radiance and Endologix will not, and will not permit any of their respective
Representatives to, issue or cause the publication of any press release or make
any other public announcement or otherwise cause or permit the release in any
manner which could reasonably be expected to cause such information to be known
to the public with respect to the transactions contemplated by this Agreement
without the written consent of the other party, which consent shall not be
unreasonably withheld, provided however, that the parties may make such
announcements and releases to the extent the content of such announcements or
releases was contained in a prior approved announcement or release. Radiance and
Endologix will cooperate with each other in the development and distribution of
all press releases and other public announcements with respect to this Agreement
and the transactions contemplated hereby, and will furnish the other with drafts
of any such releases and announcements as far in advance as practicable.
9.7 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and except as provided in Sections
2.1 to 2.5, 6.2, 6.3, 6.9, 9.2, 9.7 and 9.8 (which are intended to be for the
benefit of the persons entitled to therein, and may be enforced by any of such
persons), it is not the intention of the parties to confer third-party
beneficiary rights upon any other person.
9.8 No Assignment; Binding Effect. Prior to Closing, neither this
Agreement nor any right, interest or obligation hereunder may be assigned by any
party hereto without the prior written consent of the other parties hereto and
any attempt to do so will be void, except that Sub may assign any or all of its
rights, interests and obligations hereunder to another direct or indirect
wholly-owned Subsidiary of Radiance. Subject to the preceding sentence, this
Agreement is binding upon, inures to the benefit of and is enforceable by the
parties hereto and the third party beneficiaries to the extent set forth in
Section 9.7 and their respective successors and assigns, provided however, that
Radiance shall cause any such successor or assign to either (i) pay the
Milestone Payment (if still remaining to be earned) if not assumed within 10
days of such assignment, or (ii) expressly assume in writing all Radiance's
obligations hereunder, including the obligation to pay the Milestone Payment
when due.
9.9 Headings. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof
9.10 Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future law,
and if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (i) such provision
36
will be fully severable, (ii) this Agreement will be construed and enforced as
if such illegal, invalid or unenforceable provision had never comprised a part
hereof, (iii) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom and (iv) in lieu of such
illegal, invalid or unenforceable provision, there will be added automatically
as a part of this Agreement a legal, valid and enforceable provision as similar
in terms to such illegal, invalid or unenforceable provision as may be possible.
9.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to a
contract executed and performed in such State, without giving effect to the
conflicts of laws principles thereof.
9.12 Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
9.13 Arbitration. All claims, controversies, differences or
disputes between or among any of the parties hereto arising from or relating to
this Agreement shall be determined solely and exclusively by arbitration in
accordance with the rules of commercial arbitration then in effect of the
American Arbitration Association, or any successors hereto ("AAA"), in Orange
County, California, unless the parties otherwise agree in writing. Each of the
parties consents to venue for such arbitrations in Orange County, California and
to service of process by certified or registered mail. Upon commencement of any
arbitration pursuant hereto, the parties shall jointly select an arbitrator. In
the event the parties fail to agree upon an arbitrator within twenty (20) days,
then each party shall select an arbitrator and such arbitrators shall then
select a third arbitrator to serve as the sole arbitrator; provided that if
either party, in such event, fails to select an arbitrator within seven (7)
days, such arbitrator shall be selected by the AAA upon application of either
party. Judgment upon the award of the agreed upon arbitrator or the so chosen
third arbitrator, as the case may be, shall be binding and shall be entered into
by a court of competent jurisdiction. The parties agree to abide by any decision
rendered in any such arbitration as final and binding and waive the right to
submit the dispute to a public tribunal for a jury or nonjury trial. The Civil
Discovery Act of 1986 contained in Article 3 (commencing with Section 2016) of
Chapter 3 of Title III of Part IV of the California Code of Civil Procedure
shall be applicable to such arbitration proceedings, and all rights, remedies,
obligations, liabilities and procedures set forth in said Article 3 shall be
available to the parties. Each party shall be entitled to discovery which shall
be conducted in accordance with the provisions of Section 2020 and 2025 of the
California Code of Civil Procedures. The prevailing party shall be entitled to
reasonable attorney fees in connection with such arbitration.
37
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
signed by its officer thereunto duly authorized as of the date first above
written.
RADIANCE MEDICAL SYSTEMS, INC.
By:
---------------------------------
Name: Jeffrey H. Thiel
Title: Chief Executive Officer
RMS ACQUISITION CORP.
By:
---------------------------------
Name: Jeffrey H. Thiel
Title: Chief Executive Officer
ENDOLOGIX, INC.
By:
---------------------------------
Name: Franklin D. Brown
Title: Chief Executive Officer
38
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and
entered into as of _________________, 2002 by and among Radiance Medical
Systems, Inc., a Delaware corporation (the "Company"), and the former
Stockholders of Endologix, Inc., a Delaware corporation, listed on Exhibit A
hereto (the "Former Endologix Holders").
R E C I T A L S:
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of
February __, 2002, (the "Merger Agreement"), by and among the Company, RMS
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Sub"), and Endologix, Inc., a Delaware corporation ("Endologix"),
the Company has agreed to issue and the Former Endologix Holders have agreed to
accept shares of Common Stock of the Company, par value $0.001 per share (the
"Radiance Common Stock"), in consideration for their shares and/or options of
Endologix.
WHEREAS, pursuant to the terms of, and in partial consideration for
Endologix's agreement to enter into the Merger Agreement, the Company has agreed
to provide the Former Endologix Holders with certain registration rights with
respect to the Radiance Common Stock;
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, representations, warranties and covenants of the parties hereto and
subject to the terms and conditions set forth herein, the Company and the Former
Endologix Holders agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings. Other capitalized terms used but
not defined herein shall have the meanings ascribed to such terms in the Merger
Agreement.
"Commission" or "SEC" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Holder" shall include the Former Endologix Holders and any
transferee of Registrable Securities which have not been sold to the public to
whom the registration rights conferred by this Agreement have been transferred
in compliance with Section 8 of this Agreement.
"Holders' Representative" shall have the meaning set forth in
Section 2.1(b)(v) of the Merger Agreement.
The terms "register," "registered" and "registration" shall refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registrable Securities" shall mean: (i) all shares of Radiance
Common Stock which may be issued to the Former Endologix Holders pursuant to the
Merger Agreement, including,
without limitation, shares of Radiance Common Stock which may be issued as a
Milestone Payment pursuant to Section 2.1(b)(iii) of the Merger Agreement; (ii)
any securities into which or for which any such shares referenced in (i) above
shall have been converted or exchanged pursuant to any recapitalization,
reorganization or merger; and (iii) any securities issued with respect to any of
the foregoing pursuant to a stock split or stock dividend.
"Registration Expenses" shall mean all expenses to be incurred by
the Company in connection with the Holders' exercise of their registration
rights under this Agreement, including, without limitation, all registration and
filing fees, printing expenses, Nasdaq listing fees, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company).
"Registration Statement" shall have the meaning set forth in
Section 2(a) herein.
"Regulation D" shall mean Regulation D promulgated under the
Securities Act, as amended from time to time.
"Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
"Selling Expenses" shall mean all underwriting discounts and
selling commissions and transfer taxes, if any, applicable to the sale of
Registrable Securities and all fees and disbursements of counsel for Holder not
described within "Registration Expenses."
2. Registration Requirements. The Company shall file with the
Commission, not later than ten (10) business days after the Closing Date, a
registration statement covering the resale of the Registrable Securities, and
shall take all action necessary to qualify the Registrable Securities under
state "blue sky" laws as hereinafter provided. The Company shall use its
diligent best efforts to effect the foregoing registration (including, without
limitation, the execution of an undertaking to file amendments and
post-effective amendments, appropriate qualification under and compliance with
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) all in accordance
with this Agreement. Such best efforts by the Company shall include, without
limitation, the following:
(a) The Company shall file (i) registration statements with the
Commission pursuant to Rule 415 under the Securities Act on Form S-3 under the
Securities Act and the Company shall use its best efforts to qualify for the use
of such Form (or in the event that the Company is ineligible to use such form,
such other form as the Company is eligible to use under the Securities Act)
covering all of the Registrable Securities to be so registered (each, a
"Registration Statement"); (ii) such blue sky filings as shall be reasonably
requested to permit such sales, provided, however, that the Company shall not be
required to register the Registrable Securities in any jurisdiction that would
subject it to general service of process in any such jurisdiction where it is
not then so subject or subject the Company to any tax in any such jurisdiction
where it is not then so subject or require the Company to qualify to do business
in any jurisdiction where it is not then so qualified; and (iii) required
filings with the National Association of Securities Dealers, Inc. ("NASD") and
any exchange where the Shares are traded. The Company shall use its diligent
best
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efforts to have the Registration Statement and other filings declared effective
as soon as practicable after the filing of such Registration Statement.
(b) The Company shall make available for inspection and review by
the Holders, the Holders' Representative, any underwriter participating in any
disposition pursuant to a Registration Statement, and any attorney or accountant
retained by any Holder, the Holders' Representative or underwriter, any such
registration statement or amendment or supplement or any blue sky, NASD or other
filing, all financial and other records, pertinent corporate documents and
properties of the Company as they may reasonably request for the purpose, and
cause the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with such Registration Statement; provided, however,
that the relevant Holder shall first agree in writing with the Company that any
information that is reasonably and in good faith designated by the Company in
writing as confidential at the time of delivery of such information shall be
kept confidential by the Holder and that the Holder will use his or her best
efforts to cause its representatives, the Holders' Representative, and such
other persons to keep such information confidential, unless (i) disclosure of
such information is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities, (ii) disclosure of such
information is required by law (including any disclosure requirements pursuant
to Federal securities laws in connection with the filing of any Registration
Statement or the use of any prospectus referred to in this Agreement), (iii)
such information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by any such person, (iv) such
information becomes available to any such person from a source other than the
Company and such source, to the knowledge of such persons, is not bound by a
confidentiality agreement with the Company, or (v) such information was known to
or is developed by such persons without reference to such confidential
information of the Company.
(c) The Company will keep the Holders and the Holders'
Representative advised in writing as to initiation of each registration and as
to the completion thereof.
(d) The Company shall keep such registration effective for the
period ending on the earliest to occur of (i) on the third anniversary of the
Closing Date, (ii) when the Holders have completed the distribution of the
Registrable Securities described in the registration statement relating thereto,
or (iii) the date on which all the Registrable Securities are salable pursuant
to Rule 144 promulgated under the Securities Act, without regard to any
limitation on volume.
(e) The Company shall promptly notify the Holders' Representative
in writing by telecopier of any stop order, injunction or other order or
requirement of the SEC or any other governmental agency is issued which suspends
the effectiveness of any such registration.
(f) The Company shall promptly furnish such number of
prospectuses and other documents incident thereto as the Holders from time to
time may reasonably request.
(g) The Company shall promptly notify the Holders' Representative
in writing by telecopier if any registration statement with respect to any
Registrable Securities is no longer current or includes an untrue statement of
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, in which
case the Holders shall suspend use of such registration statement until notified
by the Company. In such
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event, the Company shall use its best efforts to correct any such matter as soon
as practicable so that such registration statement may again be used.
(h) The Company shall furnish, at the request of any Holder, on
the date that the registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the Holders (provided however that no opinion shall be required with respect
to the accuracy of the factual disclosures in such registration statement), and
(ii) to the extent permitted by the rules of the AICPA, a letter dated such
date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
Holders.
3. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Agreement shall be borne by the Company, and all Selling Expenses shall be borne
by the Holder.
4. Indemnification.
(a) Company Indemnity. The Company will indemnify the Holders,
any officers, directors and partners of any Holder, and each person controlling
any Holder within the meaning of Section 15 of the Securities Act and the rules
and regulations thereunder, and each underwriter, if any, and each person who
controls, within the meaning of Section 15 of the Securities Act and the rules
and regulations thereunder, any underwriter, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any registration
effected pursuant to this Agreement, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or any violation by the Company of
the Securities Act or any state securities law or in either case, any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration, and
will reimburse the Holders, any officers, directors and partners of any Holder,
and each person controlling any Holder, each such underwriter and each person
who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending any such
claim, loss, damage, liability or action; provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission (or alleged untrue statement or omission) based upon written
information furnished to the Company by the Holders' Representative or any
Holder and stated to be specifically for use therein. The indemnity agreement
contained in this Section 4(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company (which consent will not be withheld
unreasonably).
(b) Holder Indemnity. Each Holder severally but not jointly with
other Holders will, if Registrable Securities held by it are included in a
registration statement effected pursuant to this Agreement, indemnify the
Company, each of its directors, officers, partners, each person who controls the
Company within the meaning of Section 15 of the Securities Act and the rules and
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regulations thereunder, each other Holder, and each of their officers, directors
and partners, and each person controlling such other Holder, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document incident to any registration of Registrable Securities pursuant
to this Agreement, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by the Holder and
stated to be specifically for use therein; provided, however, that the
obligations of the Holder shall not apply to amounts paid in settlement of any
such claims, losses, damages or liabilities if such settlement is effected
without the consent of the Holder (which consent shall not be withheld
unreasonably). Notwithstanding anything to the contrary in this Section 4, any
Holder's liability under this Section 4(b) with respect to any particular
registration shall be limited to an amount equal to the proceeds received by
such Holder from the Registrable Securities sold in such registration.
(c) Procedure. Each party entitled to indemnification under this
Section 4 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at its own expense, and provided, further, that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section except to
the extent that the Indemnifying Party is actually prejudiced by such failure to
provide notice. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of the Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to all
Indemnified Parties of a release from all liability in respect of such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as any Indemnifying Party may reasonably request
in writing.
5. Contribution. If the indemnification provided for in Section 4 herein
is unavailable to the Indemnified Parties in respect of any losses, claims,
damages or liabilities referred to herein, then each Indemnifying Party, in lieu
of indemnifying the Indemnified Parties, shall contribute to the amount paid or
payable by such Indemnified Parties as a result of such losses, claims, damages
or liabilities as between the Company on the one hand and the Indemnified
Parties on the other, in such proportion as is appropriate to reflect, the
relative fault of the Company on the one hand, and of the Indemnified Parties on
the other hand, in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations.
-5-
The relative fault of the Company on the one hand, and of the
Holder on the other hand, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
omission to state a material fact relates to information supplied by the Company
or by the Holder or its representative, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 4 exceed the amount that such Indemnifying Party
would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 4(a) or 4(b) hereof had been
available under the circumstances.
The Company and the Holder agree that it would not be just and
equitable if contribution pursuant to this Section 4 were determined by pro rata
allocation (even if the Indemnified Parties were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraphs.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraphs shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
6. Survival. The indemnity and contribution agreements contained in
Sections 4 and 5 shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of any Indemnified Party or by or
on behalf of the Company or (ii) the consummation of the sale or successive
resales of the Registrable Securities.
7. Information By Holder and Any Underwriters. The Holders'
Representative shall furnish to the Company, within five (5) business days of
the Company's request therefor, such information regarding the Holders or
underwriters, as the case may be, and the distribution proposed by such Holders
or underwriters as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement.
8. Transfer or Assignment of Registration Rights. The rights granted to
the Former Endologix Holders by the Company under this Agreement, to cause the
Company to register Registrable Securities, may be transferred or assigned, as
the case may be, to a transferee or assignee of any Registrable Securities;
provided that (i) the Company is given written notice by the assigning Former
Endologix Holder or the transferee or assignee of Holder at the time of or
within a reasonable time after such transfer or assignment, stating the name and
address and telecopier number of such transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned; (ii) the transferee or assignee of such rights is not deemed by the
Board of Directors of the Company in its reasonable judgment, to be a competitor
of the Company; and (iii) the transferee or assignee of such rights agrees to be
bound by this Agreement.
-6-
9. Rule 144 Requirements. The Company shall make and keep publicly
available and available to the Holders, pursuant to Rule 144 of the Commission
under the Securities Act, such information as shall be necessary to enable the
Holders to make sales of restricted securities, as defined in such rule,
pursuant to that rule. So long as a Holder owns any Registrable Securities, the
Company will furnish to any Holder, upon request made by such Holder at any time
after the undertaking of the Company in the preceding sentence shall have first
become effective, a written statement signed by the Company, describing briefly
the action the Company has taken or proposes to take to comply with the current
public information requirements of Rule 144. The Company will, at the request of
any Holder of Registrable Securities, upon receipt from such Holder of a
certificate certifying (i) that such Holder has held such Registrable Securities
for a period of not less than two (2) consecutive years, (ii) that such Holder
has not been an affiliate (as defined in Rule 144) of the Company at any time
during the preceding ninety (90) days, and (iii) as to such other matters as may
be appropriate in accordance with Rule 144, remove from the stock certificates
representing such Registrable Securities that portion of any restrictive legend
which relates to the registration provisions of the Securities Act.
10. Miscellaneous.
(a) Entire Agreement; Counterparts. This Agreement contains the
entire understanding and agreement of the parties with respect to the subject
matter hereof, and may not be modified or terminated except by a written
agreement signed by the Company and the Holders of at least a majority of the
Registrable Securities. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
(b) Notices. All notices, requests, consents, and other
communications hereunder shall be in writing and shall be deemed to have been
properly given or made on the date personally delivered or on the date mailed,
by first class registered or certified mail with postage prepaid, by private
nationally recognized courier service or by facsimile and confirmed, if
delivered, mailed, courier or facsimile to the Holders at the address or
telecopier number, if any, indicated on the records of the Company or to the
Company at the following addresses:
Radiance Medical Systems, Inc.
13900 Alton Parkway, Suite 170
Irvine, CA 92618
Attention: Chief Executive Officer
FAX: (949) 457-9561
With a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Attention: Lawrence B. Cohn
FAX: (949) 725-4100
Any party hereto may designate a different address by providing written notice
of such new address to the other parties hereto.
-7-
(c) Governing Law; Consent of Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of the State of
California, without giving effect to principles of conflicts of laws thereof.
Each of the Company and the Holders (i) hereby irrevocably submits to the
exclusive jurisdiction of State or federal courts of the Orange County,
California for the purposes of any suit, action or proceeding arising out of or
relating to this Agreement and (ii) hereby waives, and agrees not to assert in
any such suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of such court, that the suit, action or proceeding is
brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper.
(d) Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
(e) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(f) Remedies. In the event of a breach by the Company of its
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate.
(g) Registrable Securities Held by the Company. Whenever the
consent or approval of Holders of Registrable Securities is required pursuant to
this Agreement, Registrable Securities held by the Company shall not be counted
in determining whether such consent or approval was duly and properly given by
such Holders.
(h) Term. The agreements of the Company contained in this
Agreement shall continue in full force and effect so long as any Holder holds
any Registrable Securities.
(i) No Inconsistent Agreements. The Company has not previously
entered into any agreement with respect to its Common Stock granting any
registration rights to any Person inconsistent with this Agreement, and will not
on or after the date of this Agreement enter into any agreement with respect to
its securities which grants demand registration rights inconsistent with this
Agreement to anyone or which is inconsistent with the rights granted to the
Holders of Registrable Securities in this Agreement or otherwise conflicts with
the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
COMPANY:
RADIANCE MEDICAL SYSTEMS, INC.
-8-
By:
---------------------------------
Its:
--------------------------------
FORMER ENDOLOGIX HOLDERS
------------------------------------
------------------------------------
------------------------------------
------------------------------------
------------------------------------
------------------------------------
-9-
EXHIBIT B
Name Name
---- ----
EXHIBIT B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made as of February ___,
2002 by and among RADIANCE MEDICAL SYSTEMS, INC., a Delaware corporation
("Radiance"), the Holders' Representative (as defined in Section 7 below) on
behalf of the persons listed on Schedule A of Exhibit A hereto (collectively,
the "Holders") and Commonwealth Land Title Company (the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, Radiance, RMS Acquisition Corp., a Delaware corporation, and
ENDOLOGIX, Inc., a Delaware corporation ("Endologix"), have entered into an
Agreement and Plan of Merger dated as of February 8, 2002 (the "Merger
Agreement"), a copy of which has been delivered to the Escrow Agent and to the
Holders (all capitalized terms not otherwise defined in this Agreement having
the meanings set forth in the Merger Agreement); and
WHEREAS, Section 2.1(b)(v) of the Merger Agreement provides that
Radiance may issue the Milestone Payment in the names of the Holders and deliver
it to the Escrow Agent to be held in the escrow fund for the purpose of securing
Radiance's claims for indemnification pursuant to Section 9.2 of the Merger
Agreement; and
WHEREAS, the Escrow Agent is willing to act as escrow agent for Radiance
and the Holders on the terms and conditions set forth herein:
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
conditions set forth herein, the parties agree as follows:
1. Establishment of Escrow; Escrow Share Certificates. In the event of a
claim for Radiance Indemnifiable Damages and in accordance with the procedures
set forth in Sections 2.1(b)(v) and 9.2 of the Merger Agreement, Radiance will
deposit the Milestone Payment or a portion thereof (the "Escrow Fund"), which
may include shares of Radiance Common Stock (the "Escrow Shares") in the names
of the Holders, or in the name of the Holders' Representative (as defined in
Section 7 below) as agent for the Holders, with the Escrow Agent, and the
Holders (or the Holders' Representative, as applicable) shall execute
assignments in blank with respect to the Escrow Shares and cause them to be
delivered to the Escrow Agent. Such deposit shall equal an amount of Escrow
Shares and Cash equal to the amount of the then pending claim for Radiance
Indemnifiable Damages. For such purposes, Escrow Shares shall be valued in
accordance with the provisions of Section 2.1(b)(iv) of the Merger Agreement.
The Milestone Payment shall be held by the Escrow Agent in escrow subject to the
terms and conditions set forth herein. Radiance will cooperate with the Escrow
Agent, including making any written instructions required by its stock transfer
agent, to permit the Escrow Agent to make any necessary exchanges of Radiance
stock certificates so as to facilitate any distribution of Escrow Shares
pursuant to this Agreement.
The Holders (or the Holders' Representative, as applicable) shall
deliver to Radiance's stock transfer agent at or shortly after the Closing a
letter, substantially in the form of Exhibit A hereto, instructing the transfer
agent to distribute all distributions in respect of the Escrow Shares, other
than taxable dividends, to the Escrow Agent pursuant to Section 3 of this
Agreement.
2. Claims Against Escrow Fund. Pursuant to Section 9.2 of the Merger
Agreement, Radiance is entitled to make claims against the Escrow Fund for
Radiance Indemnifiable Damages. Unless this Agreement is terminated at an
earlier date, Radiance shall be entitled to make claims against the Escrow Fund
for such purpose at any time through and including May __, 2003 (one year after
the Effective Time) (the "Escrow Period") (unless this Agreement is terminated
at an earlier date pursuant to Section 5 hereof), but not thereafter.
Notwithstanding the foregoing, the Escrow Period shall be extended as it relates
to any claims for Radiance Indemnifiable Damages made during the Escrow Period
which remain in dispute and have not been resolved as of such date. Any claim by
Radiance against the Escrow Fund for Radiance Indemnifiable Damages during the
above time period shall be presented to the Escrow Agent as follows:
(a) Radiance shall notify the Escrow Agent and the Holders'
Representative in writing of any Radiance Indemnifiable Damages that Radiance
claims are subject to indemnification under Section 9.2 of the Merger Agreement.
The notice ("Notice of Claim") shall describe the claim and specify the amount
thereof.
(b) The Holders' Representative may contest Radiance's claim on
behalf of the Holders by giving the Escrow Agent and Radiance written notice of
such contest within 20 business days after receipt of such claim for
indemnification. If Radiance's indemnification claim remains in dispute and
unresolved for 30 days following Radiance's receipt of the written notice of
contest, the disputed claim shall be submitted to arbitration in accordance with
Section 8 below.
(c) If the Holders, or the Holders' Representatives, as
applicable, do not contest Radiance's indemnification claim pursuant to Section
2(b) above, then the Escrow Agent shall deliver to Radiance an amount from the
Escrow Fund equal to the dollar amount of the Radiance Indemnifiable Damages
claimed by Radiance in its Notice of Claim. For this purpose, Escrow Shares so
delivered shall be valued in accordance with the provisions of Section 2.1(b)(v)
of the Merger Agreement (the "Escrow Share Price"). In the event that the Escrow
Funds contains both Escrow Shares and cash, the Escrow Agent shall deliver both
Escrow Shares and cash to Radiance in the same ratio as then existing in the
Escrow Fund.
(d) If the Holders or the Holders' Representative, as applicable,
contest Radiance's indemnification claim pursuant to Section 2(b) above, the
Escrow Agent shall deliver an amount from the Escrow Fund to Radiance upon
receipt of either:
(i) a copy of a written settlement agreement signed by
both Radiance and the Holders' Representative, or
(ii) a copy of a final and nonappealable arbitration award
pursuant to the arbitration procedure in Section 8 below.
The amount to be delivered to Radiance by the Escrow Agent under
this Section 2(d) shall be equal to the dollar amount of Radiance Indemnifiable
Damages, as set forth in the settlement agreement or the arbitration award, as
applicable, determined using the Escrow Share Price, and shall be delivered in
the manner set forth in Section 2(c).
3. Dividends, Stock Splits, Interest and Other Distributions. Other than
taxable dividends (which shall be distributed to the Holders and shall not be
made part of the Escrow Fund), distributions declared in respect of the Escrow
Shares (including without limitation stock splits and
2
non-taxable stock dividends) and interest earned on any cash in the Escrow Fund
during the term of this Agreement shall be made part of the Escrow Fund. If the
Escrow Shares are reclassified or changed into other securities or property
pursuant to a reclassification of all shares of Radiance Common Stock or a
merger of Radiance, then such reclassified shares or other securities or
property, as the case may be, shall be made part of the Escrow Fund.
4. Voting Rights of Escrow Shares. Each Holder shall have the right to
vote his or her pro rata number of Escrow Shares in the Escrow Fund (as set
forth in Schedule A of this Agreement) on any issues that come for a vote before
the stockholders of Radiance. Prior to any vote of Radiance stockholders during
the term of this Agreement, Radiance shall cause to be delivered to the Holders
appropriate voting and proxy materials in the same manner as provided to other
stockholders of Radiance so as to permit the Holders to exercise their voting
rights with respect to the Escrow Shares.
5. Termination. This Agreement shall terminate and the Escrow Agent
shall have no further responsibilities hereunder upon the earlier to occur of:
(i) the expiration of the Escrow Period set forth in Section 2 above; and (ii)
Radiance's delivery to the Escrow Agent of written notice that Radiance has
elected to terminate this Agreement (which election shall be at Radiance's sole
option and in its sole discretion). Provided the Escrow Agent has received a
Notice of Claim within the Escrow Period, the Escrow Agent shall reserve from
the Escrow Fund an amount sufficient to pay any outstanding claims ("Reserve
Claims") of Radiance against the Escrow Fund on that date. For purposes of
establishing the reserve, any Escrow Shares so reserved shall be valued at the
Escrow Share Price, or if not traded on the Nasdaq, on the primary national
exchange on which such stock is traded, for the twenty trading days ending on
the trading day preceding the establishment of such reserve. This Agreement
shall continue in force as to the amount so reserved until the resolution of
such Reserve Claims upon receipt of either: (i) a copy of a written settlement
agreement signed by both Radiance and Holders' Representative; or (ii) a copy of
a final and nonappealable arbitration award pursuant to the arbitration
procedure set forth in Section 8 below (the "Final Resolution"). Upon the Final
Resolution of each Reserve Claim, on a claim-by-claim basis, the Escrow Agent
shall distribute to Radiance the amount that Radiance is entitled to receive
with respect to such Reserve Claim. Escrow Shares so delivered shall be valued
at the Escrow Share Price. Upon the Final Resolution of all Reserve Claims and
the distribution to Radiance of all reserved amounts to which Radiance is
entitled pursuant to such claims, all remaining reserved amounts shall be
promptly distributed to the Holders. Any distribution of any portion of the
Escrow Fund held in the name of the Holders' Representative shall be made to the
Holders according to the percentages shown in Schedule A of Exhibit A hereto.
6. The Escrow Agent.
(a) Radiance shall pay the Escrow Agent's fee for its ordinary
services under this Agreement in accordance with the fee schedule set forth on
Schedule B attached hereto.
(b) In performing any duties under this Agreement, the Escrow
Agent shall not be liable for damages, losses, or expenses, except for gross
negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (i) any act or failure to act made
or omitted in good faith, (ii) any action taken or omitted in reliance upon any
instrument, including any written statement or affidavit provided for in this
Agreement that such agent shall in good faith believe to be genuine, or (iii)
forgeries, fraud, impersonations, or determining the scope of any representative
authority. In addition, the Escrow Agent may consult
3
with legal counsel in connection with its duties under this Agreement and shall
be fully protected in any act taken, suffered, or permitted by it in good faith
in accordance with the advice of counsel. The Escrow Agent is not responsible
for determining and verifying the authority of any such person acting or
purporting to act on behalf of any party to this Agreement.
(c) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold the Escrow Fund and may wait for settlement of any such controversy by
arbitration pursuant to Section 8 hereof, by final appropriate legal proceedings
or other means as, in the Escrow Agent's discretion, may be required, despite
what may be set forth elsewhere in this Agreement. In such event, the Escrow
Agent will not be liable for interest or damage. Furthermore, the Escrow Agent
may at its option, file an action of interpleader requiring the parties to
answer and litigate any claims and rights among themselves. Upon initiating such
action, the Escrow Agent shall be fully released and discharged of and from all
obligations and liabilities imposed by the terms of this Agreement, except for
obligations or liabilities arising by reason of the prior gross negligence or
willful misconduct on the part of the Escrow Agent.
(d) The Holders, to the extent of the Escrow Fund only, and
Radiance shall indemnify and hold harmless the Escrow Agent and shall share
equally any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and attorneys' fees) which it may incur or
which may be imposed on it in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement, but not including losses, claims, damages,
liabilities or expenses arising out of gross negligence or willful misconduct on
the part of the Escrow Agent.
(e) The Escrow Agent may resign at any time upon giving at least
30 days' written notice to the parties; provided, however, that no such
resignation shall become effective until the appointment of a successor escrow
agent which shall be accomplished as follows: The parties shall use their best
efforts to mutually agree on a successor escrow agent within 30 days after
receiving such notice. If the parties fail to agree upon a successor escrow
agent within such time, the Escrow Agent shall have the right to appoint a
successor escrow agent authorized to do business in the state of California. The
successor escrow agent shall execute and deliver an instrument accepting such
appointment, and it shall, without further acts, be vested with all the estates,
properties, rights, powers and duties of the predecessor Escrow Agent as if
originally named as the Escrow Agent. Upon such appointment, the predecessor
Escrow Agent shall be discharged from any further duties and liability under
this Agreement, except for obligations or liabilities arising by reason of the
prior gross negligence or willful misconduct on the part of the Escrow Agent.
(f) Any company into which the Escrow Agent may be merged or with
which it may be consolidated, or any company to whom the Escrow Agent may
transfer a substantial amount of its escrow business, shall be the successor to
the Escrow Agent without the execution or filing of any paper or any further act
on the part of any of the parties to this Agreement, anything herein to the
contrary notwithstanding.
(g) The Escrow Agent shall not sell, encumber or otherwise
dispose of the Escrow Shares held as a part of the Escrow Fund, except that the
Escrow Agent shall, upon the written direction of the Holders' Representative
and Radiance, effect a sale or other disposition of the Escrow Shares in a
transaction involving (i) the receipt by the stockholders of Radiance of cash in
4
any merger or reorganization in exchange or partly in exchange for shares of
Common Stock of Radiance; (ii) the sale of all or substantially all of the
assets of Radiance for cash and the distribution to stockholders of Radiance of
the proceeds of such sale as a liquidating distribution; or (iii) a cash tender
offer for all or a part of the shares of Common Stock of Radiance. In the event
of any receipt of cash by the Escrow Agent as a result of any of such
transactions or as a result of a Milestone Payment, the Escrow Agent shall
invest and reinvest all cash funds from time to time comprising the Escrow Fund,
together with the earnings thereon, in money market savings accounts or
certificates of deposit at the Escrow Agent which are insured by the Federal
Deposit Insurance Corporation up to applicable limits (a "Money Market Fund").
The Escrow Agent is authorized to liquidate in accordance with its customary
procedures any portion of the Escrow Fund consisting of investments to provide
for payments required to be made under this Agreement.
7. Holders' Representative. Franklin D. Brown, or such successor as may
be agreed upon by a majority in interest of the Holders and identified to
Radiance by such Holders in writing, shall act as representative of the Holders
(the "Holders' Representative"). The Holders' Representative may, but shall not
be required to, take any and all action that may be necessary or appropriate on
behalf of the Holders with respect to this Agreement, including, without
limitation, objecting to any claim by Radiance against the Escrow Fund, engaging
counsel to represent the Holders in connection with any such claim, engaging any
other professionals or other consultants in connection with any such claim,
negotiating and settling any such claim, supervising and directing counsel and
any other professionals or other consultants in connection with any such claim,
and authorizing the sale of any of the Escrow Shares. The Holders'
Representative may, on behalf of the Holders, take any action that the Holders'
Representative in good faith deems to be in the best interests of the Holders
and shall, on behalf of the Holders, take any action that the Holders'
Representative may be instructed or expressly authorized to take by a majority
in interest of the Holders, including contesting or settling any claim by
Radiance. To the maximum extent permitted by law, the Holders' Representative
shall have no liability of any kind or nature whatsoever with respect to any
action or omission taken by the Holders' Representative on behalf of the
Holders, where such action is taken either with the consent or the express
authorization of a majority in interest of the Holders or is otherwise taken in
good faith on behalf of the Holders.
8. Arbitration. All disputes or controversies arising under or in
connection with this Agreement shall be settled exclusively by final and binding
arbitration in accordance with Section 9.13 of the Merger Agreement.
9. Tax Reporting. Each Holder shall deliver to the Escrow Agent a
completed Form W-9 from which Escrow Agent shall prepare and file with the
Internal Revenue Service all tax reports that the Escrow Agent is required to
prepare, if any, on the Escrow Fund for the benefit of the Holders.
10. Governing Law. This Agreement shall be governed by the laws of the
State of California without regard to principles of conflicts of laws.
11. Amendments; Modifications. This Agreement may not be amended or
modified except pursuant to a written agreement signed by each of the parties
hereto.
12. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given on the same day if delivered personally, or by
facsimile transmission with voice confirmation of receipt, or shall be deemed
given on the date receipt is confirmed if mailed by
5
registered or certified mail or commercial overnight courier (e.g., Federal
Express, DHL, Network Courier, Sonic, etc.), return receipt or confirmation of
delivery requested, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
If to Radiance: Radiance Medical Systems, Inc.
13900 Alton Parkway, Suite 122
Irvine, California 92618
Attn: Chief Executive Officer
Facsimile No.: (949) 457-9561
with a copy to: Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attn: Lawrence B. Cohn
Facsimile No.: (949) 725-4100
If to the Holders'
Representative: Franklin D. Brown
c/o Endologix, Inc.
13700 Alton Parkway, Suite 160
Irvine, California 92618
Attn: Holders' Representative
Facsimile No.: (949) 457-9561
If to the
Escrow Agent:
--------------
--------------
--------------
13. Effect on Successors in Interest, Assignees. This Agreement shall
inure to the benefit of and be binding upon the heirs, administrators,
executors, assignees and successors of each of the parties hereto.
14. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
RADIANCE MEDICAL SYSTEMS, INC.
By
--------------------------------------
Title
-----------------------------------
HOLDERS' REPRESENTATIVE on behalf of
himself and as representative of the
individual shareholders of Endologix,
Inc.
----------------------------------------
Print Name: Franklin D. Brown
Holders' Representative
COMMONWEALTH LAND TITLE COMPANY
By
--------------------------------------
Title
-----------------------------------
7
EXHIBIT A
Chase Mellon Shareholder Services, LLC
400 South Hope Street
4th Floor
Los Angeles, CA 90071
Re: Radiance Medical Systems, Inc.
Ladies and Gentlemen:
The following shares of Common Stock of Radiance are currently being
held by _______________________, as Escrow Agent pursuant to that certain Escrow
Agreement, dated as of ________________ by and among Radiance, the undersigned
and the Holders (the "Escrow Agreement"):
Share certificate no. No. of Radiance shares
represented
[insert certif. numbers] [insert number of shares]
We hereby instruct you to pay and deliver any certificates representing
stock splits or non-taxable stock dividends, or any other form of distribution
made by Radiance in respect of the shares identified above (except for taxable
dividends) to ____________________, as Escrow Agent pursuant to the terms of the
Escrow Agreement.
-----------------------------------
[Names]
1
SCHEDULE A
Number of % of Total
Holder Name Escrow Shares Escrow Shares
-------------------------------- ----------------- -----------------
Total:
---------- ----------
100.0
1
SCHEDULE B
FEE SCHEDULE
See attached.
1
ANNEX II
FAIRNESS OPINION
February 8, 2002
Special Committee to the Board of Directors
c/o Radiance Medical Systems, Inc.
13900 Alton Parkway, Suite 122
Irvine, CA 92618
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to Radiance Medical Systems, Inc. ("Radiance" or the "Company") of the
consideration ("Consideration") to be received by the Company in the proposed
acquisition ("Transaction") of Endologix, Inc. ("Endologix") by Radiance
pursuant to the terms of the Agreement and Plan of Merger (the "Agreement"),
expected to be signed on or about February 8, 2002. The Consideration to be
received in the Transaction will consist of all of the existing shares of
capital stock of Endologix.
A.G. Edwards & Sons, Inc. ("A.G. Edwards"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. From time to time, A.G. Edwards has provided equity research
coverage of the Company and has been a market maker in the Company's common
stock. We are not aware of any present or contemplated relationship between A.G.
Edwards, the Company, the Company's directors and officers or its shareholders,
or between A.G. Edwards, Endologix, Endologix's directors and officers or
shareholders, which in our opinion would affect our ability to render a fair and
independent opinion in this matter.
In connection with this opinion, we have, among other things:
(i) reviewed a draft Agreement distributed February 6, 2002 and held
discussions with counsel representing the Company and the
Special Committee concerning the Agreement;
(ii) reviewed the business and operations of Radiance and Endologix
through interviews with the management of Radiance and
Endologix;
(iii) reviewed certain historical and forecasted financial statements
for Radiance as prepared by Radiance's management and auditors,
specifically the November 29, 2001 financial forecasts prepared
by Radiance management;
(iv) reviewed certain historical financial statements for Endologix
as prepared by Endologix's management and auditors;
Special Committee of Radiance Medical Systems, Inc. Holdings, Inc.
February 8, 2002
Page 2
(v) reviewed certain forecasted financial statements for Endologix
as prepared by Endologix's management, and reviewed and adjusted
by Radiance's management, some of whom are shareholders in
Endologix, specifically the January 29, 2002 financial forecasts
prepared by Radiance management;
(iv) investigated the current operations and future prospects of
Endologix, primarily through (a) discussions with the management
of Endologix and (b) interviews with members of the management
of Radiance;
(vi) reviewed the February 7, 2002 pro forma financial statements of
Radiance, as prepared by Radiance management, giving effect to
the Transaction (as proposed and with the assumptions noted
herein);
(vii) reviewed the market data for financings of private medical
device companies at similar stages of development as Endologix;
(viii) reviewed market data for stocks of public companies in the same
or similar markets as Endologix;
(ix) reviewed the financial terms of certain acquisitions which A.G.
Edwards deemed relevant for analytical purposes; and
(x) completed such other studies and analyses that we considered
appropriate.
In preparing our opinion, A.G. Edwards has assumed and relied upon the accuracy
and completeness of all financial and other information that was publicly
available, supplied or otherwise made available to us by Radiance and Endologix.
We have not been engaged to, and therefore we have not, verified the accuracy or
completeness of any such information. A.G. Edwards has relied upon the
assurances of the managements of Radiance and Endologix that they are not aware
of any facts that would make any financial or other information inaccurate or
misleading. A.G. Edwards has been informed and assumed that financial
projections supplied to, discussed with or otherwise made available to us
reflect the best currently available estimates and judgments of the managements
of the Company and Endologix as to the expected future financial performance of
the Company and Endologix, in each case on a stand-alone basis and after giving
effect to the Transaction. A.G. Edwards has not independently verified such
information or assumptions nor do we express any opinion with respect thereto.
A.G. Edwards has not made any independent valuation or appraisal of the assets
or liabilities of the Company or Endologix, nor have we been furnished with any
such appraisals. Edwards also did not independently attempt to assess or value
any of the intangible assets (including goodwill) or the estimated write-off of
in-process R&D of the Company or Endologix, nor did it make any independent
assumptions with respect to their application in the Transaction.
Special Committee of Radiance Medical Systems, Inc. Holdings, Inc.
February 8, 2002
Page 3
This opinion assumes that if Radiance is determined the acquiring company for
accounting purposes, no greater than 75% of the excess purchase price over the
net asset value of Endologix will be accounted for as in-process research and
development and written-off as a one time expense. The Company's independent
auditors and other advisors have not yet expressed an opinion with respect to
the determination of the acquiring company for accounting purposes or the
potential dollar value of any write-off of in-process research and development.
A.G. Edwards' opinion is necessarily based on the economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. The analyses performed by A.G. Edwards are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Our opinion as expressed
herein, in any event, is limited to the fairness, from a financial point of
view, to the Company, of the Consideration to be received in the Transaction
pursuant to the Agreement.
A.G. Edwards was not engaged to and did not review any alternative transaction
or strategic alternatives that may be available to the Company.
In rendering its opinion, A.G. Edwards assumed (a) subject to the assumptions
highlighted above, the Transaction will be accounted for in accordance with U.S.
Generally Accepted Accounting Principles and (b) that the Transaction will be
consummated on the terms contained in the draft Agreement without any waiver of
any material terms or conditions by Radiance.
It is understood that this letter is only for the information of the Special
Committee of the Board of Directors and does not constitute a recommendation as
to how any holder of the outstanding shares of the Company's common stock should
vote with respect to the Transaction. This opinion may not be summarized,
excerpted from or otherwise publicly referred to without our prior written
consent, except that this opinion may be included in its entirety in the proxy
materials to be distributed to the shareholders of the Company regarding the
Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof that the Consideration to be received by the Company in the Transaction,
pursuant to the Agreement is fair, from a financial point of view, to the
Company.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By:
---------------------------------
Timothy C. McQuay
Managing Director
PROXY
RADIANCE MEDICAL SYSTEMS, INC.
SPECIAL MEETING OF STOCKHOLDERS, MAY __, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of
the Notice of Special Meeting of Stockholders to be held on [May 29], 2002 and
the Proxy Statement, and appoints Jeffrey H. Thiel and David M. Richards, or
either of them, the proxy of the undersigned, with full power of substitution,
to vote all shares of common stock of Radiance Medical Systems, Inc.
("Radiance") which the undersigned is entitled to vote, either on his or her own
behalf or on behalf of an entity or entities, at the Special Meeting of
Stockholders of Radiance to be held at Radiance's executive offices at 13900
Alton Parkway, Suite 122, Irvine, California 92618 on Thursday, [May 29], 2002
at 10:00 a.m., and at any adjournment or postponement thereof, and to vote in
their discretion on such other business as may properly come before the Special
Meeting and any postponement or adjournment thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
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Please mark your votes as indicated in /X/ this example
1. ISSUANCE OF RADIANCE COMMON STOCK IN EXCHANGE FOR THE OUTSTANDING CAPITAL
STOCK OF ENDOLOGIX IN THE RELATED MERGER OF ENDOLOGIX WITH AND INTO A
WHOLLY-OWNED SUBSIDIARY OF RADIANCE.
FOR AGAINST ABSTAIN
/ / / / / /
2. AMENDMENT TO RADIANCE'S AMENDED & RESTATED CERTIFICATE OF INCORPORATION TO
CHANGE RADIANCE'S NAME FROM RADIANCE MEDICAL SYSTEMS, INC. TO ENDOLOGIX,
INC.
FOR AGAINST ABSTAIN
/ / / / / /
The independent committee of the board of directors recommends a vote FOR
Proposal No. 1 and the board of directors recommends a vote FOR Proposal No. 2.
This Proxy, when properly executed will be voted as specified above. This proxy
will be voted FOR Proposal Nos. 1 and 2 if no specification is made. This proxy
will also be voted at the discretion of the proxy holders on such matters other
than the two specific items as may come before the meeting.
PLEASE RETURN YOUR EXECUTED PROXY TO RADIANCE'S TRANSFER AGENT IN THE ENCLOSED
ENVELOPE, OR, IF NECESSARY, DELIVER IT TO RADIANCE, ATTENTION: SECRETARY.
Please print the name(s) appearing on each share certificate(s) over which you
have voting authority:
____________________________________
(Print name(s) as it (they) appear on certificate)
Dated:_____________________ Signature(s)______________________________________
Please sign exactly as your name(s) is (are) shown on the share certificate to
which the Proxy applies. When shares are held by joint tenants, both should
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title, as such. If a corporation, please sign in full corporate
name by the President or another authorized officer. If a partnership, please
sign in the partnership name by an authorized person.
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