SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(MARK ONE)
[X]
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-28440
ENDOLOGIX, INC.
DELAWARE
(STATE OF INCORPORATION) |
68-0328265
(I.R.S. EMPLOYER IDENTIFICATION NO.) |
13900 ALTON PARKWAY, SUITE 122, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 595-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $.001 PAR VALUE.
Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
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As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $63,324,000 (based upon the closing price for shares of the Registrants Common Stock as reported by the NASDAQ National Market for June 30, 2003, the last trading date of our second fiscal quarter). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On March 11, 2004, approximately 31,676,945 shares of the Registrants Common Stock, $.001 par value, were outstanding.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events and trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions including, among other things:
| research and development of our products; | |||
| development and management of our business and anticipated trends on our business; | |||
| our ability to attract, retain and motivate qualified personnel; | |||
| our ability to attract and retain customers; | |||
| the market opportunity for our products and technology; | |||
| the nature of regulatory requirements that apply to us, our suppliers and competitors and our ability to obtain and maintain any required regulatory approvals; | |||
| our future capital expenditures and needs; | |||
| our ability to obtain financing on commercially reasonable terms; | |||
| our ability to compete; | |||
| general economic and business conditions; and | |||
| other risks set forth under Risk Factors in this Annual Report on Form 10-K. |
You can identify forward-looking statements generally by the use of forward-looking terminology such as believes, expects, may, will, intends, plans, should, could, seeks, pro forma, anticipates, estimates, continues, or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions.
Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, either as a result of new information, future events or otherwise after the date of this Annual Report on Form 10-K. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements.
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PART I
Introduction
We develop, manufacture, sell and market minimally invasive therapies for
the treatment of cardiovascular disease. Our products, the PowerLink System
and PowerWeb System, are catheter-based alternative treatments 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 AAAs is approximately 75%, making it the
13th leading cause of death in the United States today.
The PowerLink System, and its predecessor the PowerWeb 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, which is accessed 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. We believe that
implantation of our products will reduce the mortality and morbidity rates
associated with conventional AAA surgery, as well as provide a clinical
alternative to many patients that could not undergo conventional surgery.
Prior to developing the PowerLink System, we developed various
catheter-based systems to treat cardiovascular disease. We licensed our
proprietary Focus balloon technology to Guidant Corporation for use in
Guidants coronary stent delivery systems. Sales of our PowerLink System in
Europe and royalties from the Guidant license are the primary source of our
current revenues.
We were incorporated in California in March 1992 under the name
Cardiovascular Dynamics, Inc. and reincorporated in Delaware in June 1993. In
January 1999, we merged with privately held Radiance Medical Systems, Inc. and
changed our name to Radiance Medical Systems, Inc. and in May 2002, we merged
with privately held Endologix, Inc., and changed our name to Endologix, Inc.
We file periodic electronic reports with the Securities Exchange
Commission. You may read and copy any materials the Company files with the SEC
at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
We also maintain an internet site (www.endologix.com) at which we make
electronic copies of our most recently filed reports available as soon as
reasonably practicable after filing such material with the SEC or you may
request copies by writing to us at: Endologix, Inc., attention: Investor
Relations, 13900 Alton Parkway, Suite 122, Irvine, CA 92618.
Industry Background
Atherosclerosis is a type of arteriosclerosis. Atherosclerosis 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.
Atherosclerosis also can reduce the integrity and strength of the vessel
wall, causing the vessel wall to expand or balloon out. This is an aneurysm.
Aneurysms are commonly diagnosed in the aorta, which is the bodys 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 either a combination of medical therapy
and non-invasive monitoring, or they must undergo a major surgery procedure to
repair the aneurysm.
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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 an 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.
We believe 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
patients abdomen, withdrawal of the patients 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%. 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. Our 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. Many patients can be treated utilizing only local anesthesia.
These benefits led many physicians and commercial concerns to invest time,
money and energy to develop these technologies.
Market Opportunity
In the United States alone, an estimated 1.7 million people have an AAA,
yet there are only about 220,000 diagnosed each year. 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. Once an AAA 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%. We estimate that each year, of those patients diagnosed
with AAA, approximately 60,000 undergo conventional surgery, 15,000 to 20,000
are treated with a commercially available ELG and the remainder are put under
watchful waiting. AAAs generally are more prevalent in people over the age
of 60 and are more common in men than in women. The market opportunity outside
of the U.S. for these technologies is estimated to be equal in size to that in
the U.S.
Patients diagnosed with an AAA larger than five centimeters can be
classified into one of three categories: those patients opting for elective
surgery, patients who refuse surgery due to the clinical risks of an open
procedure, and those who are considered at high risk for an open procedure.
These high-risk patients and those refusing surgery will populate the initial
patient pool for less invasive techniques. In addition, we believe that ELGs
could be applied to as much as 60% of the approximately 60,000 surgeries
performed in the United States each year.
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Endologixs Products
PowerLink System
Our PowerLink System consists of 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.
We believe the PowerLink System is a superior design that overcomes the
inherent limitations of early generation devices and offers the following
advantages:
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Limitations of Earlier Technology
Our technology is dramatically different than devices currently available
commercially. Despite enthusiasm by physicians and patients alike for
minimally invasive technology, we believe early generation devices have
achieved a limited market penetration due to design limitations and related
complications. The published clinical literature details many of the
deficiencies of these approaches. In our opinion, early generation devices
have the following limitations:
PowerLink Products
Variations in patient anatomies require an adaptive technology. We
designed our PowerLink System, with multiple aortic cuffs, limb extensions,
bifurcated main body lengths and diameters to simplify procedures, 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 Systems
. 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. The
infrarenal device is made of a stainless steel cage covered by thin-walled
ePTFE and attaches below the renal arteries
.
We use thin-walled ePTFE to permit
the graft to be used in a wide range of neck diameters, which allows us to
treat a wide variety of anatomies with a standard device making it easier for
hospital purchasing patterns. During 2003 approximately 55% of our AAA product
sales were from infrarenal product sales. Based upon managements views
regarding physician preferences for infrarenal and suprarenal devices and sales
trends for our legacy products, we expect infrarenal product sales to account
for approximately 50% of our sales when selling both the infrarenal and
suprarenal devices in a market. We have obtained the CE Mark for this product
in Europe, and are in the follow-up portion of an arm of a Phase II pivotal
trial in the United States. We anticipate obtaining United States Food and Drug
Administration, or FDA marketing approval for this system in the second half of
2004.
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 that
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. We expect this product to
account for approximately 40% of our sales. We have obtained the CE Mark for
this product in Europe, and are
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currently enrolling patients in an arm of a Phase II pivotal trial in the
U.S. Assuming that our Phase II data for our infrarenal device will support
the filing of a supplemental PMA application for the suprarenal device, we
believe that we will complete enrollment in the suprarenal arm of the study in
the second half of 2004 and we would be approved for marketing in the second
half of 2005.
PowerLink Aorto-Uni-iliac Systems
. 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
Systems are available in an infrarenal or suprarenal configuration. We have
obtained the CE Mark for these products in Europe.
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. We have obtained the CE Mark for this
product in Europe, and these devices are included in the follow-up portion of
an arm of a Phase II pivotal trial in the United States. We anticipate
obtaining FDA marketing approval for these products in the second half of 2004.
XL Bifurcated System
. The XL Bifurcated System is a stent graft that can
treat large aortic diameters less than or equal to 32 millimeters in diameter
in AAA patients with large aortic necks. We have obtained the CE Mark for this
product in Europe.
Clinical Trials
PowerLink and PowerWeb Systems
The PowerLink System and the PowerWeb System have been implanted in
clinical trials and post regulatory approval in more than 1,400 patients
worldwide. Clinical investigators so far are reporting successful short to
long-term results. Trial results from key studies are summarized below.
Pivotal U.S. Phase II Clinical Trial
. We believe that the requisite
patient enrollment has been achieved in the infrarenal arm of our two arm U.S.
pivotal Phase II trial which is studying the PowerLink System for elective
endovascular aneurysm repair. As of March 2003, 193 patients had been treated
with the infrarenal PowerLink System . On January 8, 2004, Endologix submitted
its completed pre-market approval, or PMA, application to the FDA, reporting
results on 184 patients. The completed PMA application includes the pivotal
clinical trial results as the final step in the modular PMA process. Two of
the four previously submitted modules have already been reviewed and accepted.
On February 13, 2004, the FDA accepted the PMA application as fileable.
Acceptance of the filing means that the FDA has made a threshold determination
that the PMA application is sufficiently complete to move forward in the FDA
review and approval process. Queries regarding the remaining two modules in
addition to the clinical results will be addressed during the final PMA review
period. The fileable date marks the continuance of a 180-day review period,
which began January 8, 2004. We expect to meet with the FDA in April to
discuss any major issues from the agencys review. At that time, the FDA will
also determine the need for an FDA panel meeting before moving forward with its
decision regarding U.S. marketing approval.
In December 2002, preliminary data on the pivotal clinical trial was
reported in the Journal of Vascular Surgery by study investigator Dr. Jeffrey
Carpenter. We believe that the data submitted in the PMA application is not
materially different than the preliminary data previously reported. The
pivotal clinical study cohort presented in the PMA application consists in part
of the following fundamental data:
Enrollment of 259 patients: 193 PowerLink test patients and 66 surgical
controls:
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One year clinical follow up was submitted on 184 patients:
(4) 2.2% to treat device related obstructions
CT scans were analyzed by an Independent Core Lab:
As
of March 2004, of the 193 patient enrollees required for the second arm
of U.S. Pivotal Phase II clinical trial, 66 patients had been treated with the
suprarenal PowerLink System and 46 have completed the required 12 month
follow-up period. The infrarenal and suprarenal devices are similar, except
that the wire stent in the suprarenal device is extended above the graft
material to allow the physician to anchor the top of the device above the renal
arteries without obstructing them.
Europe
. In September 2002, we completed clinical trials in France.
Fourteen centers used the PowerLink System for elective endovascular aneurysm
repair in 64 patients recruited during a 13-month interval. Seven patients had
intra-operative complications and all were treated successfully. Within one
month of follow-up, two adverse events required reintervention. One surgical
conversion and one endovascular procedure of proximal cuff placement were
performed. The stent graft demonstrated a low endoleak rate and there were no
aneurysm ruptures, device migration or materials failure. Survival rate free
from severe complication was reported to be 97%.
Japan
.
Shonin Clinical Trial on the PowerWeb System
. In November 2001, we
completed the first AAA clinical trial in Japan, including the required 6 month
follow up. Six centers used our earlier generation device, the PowerWeb
System, for elective endovascular aneurysm repair in 79 patients. The patient
age range was 40 to 89 years, with a mean age range of 70 to 79 years. The
effectiveness of the PowerWeb System was measured based on whether there was a
persistent endoleak, device migration, device damage, or change in aneurysm sac
shape over a 6 month follow period. Only 2.9% of all patients and 1.7% of
patients implanted with bifurcated devices experienced these problems. Safety
of the PowerWeb System was based on adverse events, which occurred in 22
patients after treatment, of which five were device related. The total safety
evaluation ratings demonstrated that 68 patients (98.5%) were treated safely.
In conclusion, trial results showed a combined rating of effectiveness and
safety for 66 patients (95.6%) and the clinicians recommended approval of the
PowerWeb System as a low invasive medical device for aneurysms.
Along with Cosmotec Co., Ltd., our Japanese distributor, we 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. Professor Ishimaru has published extensively and
participates as a faculty member for many surgical congresses.
In July 2002, we submitted our PowerWeb System for approval by the
Japanese Ministry of Health, or MOH . We were the first company to submit for
the Shonin utilizing a complete Japanese patient cohort, and we anticipate that
approval will be received in the second half of 2004. We will then file the
necessary Partial Change to update the ELG to a current configuration, as well
as submit the dossier necessary to be eligible to obtain hospital
reimbursement. We expect the device will be eligible for insurance
reimbursement sometime in the second half of 2005.
The PowerWeb System is the predecessor to the PowerLink System. The
difference between the PowerLink and PowerWeb Systems designs is mainly that
wire segments are linked together by shaping the wire in the PowerLink design
to form the device, whereas the wire segments are sutured together in the
PowerWeb design.
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RDX System
Prior to our merger with the private company (former) Endologix, Inc., we
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 incorporated 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.
We have completed a U.S. pivotal trial for the RDX System and anticipate
submitting safety data only for submission to the FDA in April 2004. Following
our 2001 restructuring, we decided not to pursue approval to market the RDX
System from the FDA (see Note 14 to consolidated financial statements). As part
of the restructuring, we discontinued our pursuit of Japanese clinical trials
and stopped sales and marketing of the device in Europe and elsewhere.
We have also completed a feasibility trial for sapheneous vein grafts and
peripheral vascular use of the RDX System, and the final report was submitted
to the FDA in February 2004. We do not plan to file for a Phase II trial for
SVG, peripheral or any other application of the device.
Our Strategy
Our objective is to become a premier supplier of endovascular surgery
products that repair diseased or damaged vascular structures as an alternative
to open surgery. As part of our core strategy, we intend to:
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Marketing and Sales
PowerLink System
United States.
We anticipate a U.S. product launch for the infrarenal
PowerLink in the second half of 2004. 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 1,000 to 1,500 potential general and vascular
surgeons, and a limited number of interventional cardiologists and
radiologists, in approximately 1,000 hospitals. Upon receipt of an FDA
marketing approval we will conduct a limited product launch to demonstrate the
effectiveness of our sales model and product acceptance.
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. We have obtained the
right to affix the CE Mark to our family of PowerLink products. Europe
represents a smaller market opportunity due to capitated hospital budgets and a
selling price that is typically less than in the U.S. We currently sell our
devices through independent distributors or sell direct on a limited basis. We
will participate in and share the costs of attending key cardiovascular
conferences in Europe. We expect to continue to interface with key opinion
leaders in Europe.
Rest of World, excluding Japan
. We have obtained marketing approval in a
number of countries, including China, Australia, Argentina, Brazil and South
Africa and have initial clinical experience in each of these locales.
PowerWeb System
Japan
. We believe we will be the first company to enter the Japanese
market for ELGs with a commercial device in the second half of 2005, depending
upon the Ministry of Healths approval our device and ELG reimbursement.
Cosmotec will market our 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.
Legacy Products
In late 2001, three companies published the first clinical study data for
drug-coated stents, a competing technology to our radiation catheter system.
While our RDX system used 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. Considering the efficacy, ease of use
and probable cost effectiveness of drug-coated stents compared to our radiation
catheter system, we determined that the market for the radiation based system
likely will be limited. The other products we sold at the end of 2001, our
Focus technology products, were nearing the end of their marketable lives due
to competing products.
As a result, in order to conserve cash and to position ourselves to take
advantage of strategic alternatives, we decided in September 2001 to
restructure our operations. In December 2001, we discontinued all sales and
marketing activities for our Focus technology coronary stents, coronary stent
delivery systems, balloon dilatation catheters and RDX radiation therapy
catheter systems.
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. The original territory for the license was the United States
and Canada, but has expanded with the expiration of distribution relations in
other countries. Under the agreement, technology developed by either party was
to be owned by that party while technology developed jointly was to be owned
jointly and included in the license at no additional cost to Guidant. If for
any calendar year, after timely written notice by us to Guidant of a shortfall
in royalty payments below the
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annual minimum royalty required, they elect not to pay us at least the
minimum royalty, we can cancel the agreement. Also, as Guidant has paid to date
the aggregate payment amount required under the contract, they can at any time,
with or without cause, terminate the agreement upon thirty days notice. We are
entitled to receive royalties on Guidants sales. In the year ended December
31, 2003, we recorded $2.6 million in royalties. We anticipate that royalties
from Guidant will continue to decline substantially in 2004 and thereafter as
competition from drug-coated stents, which began in the second quarter of 2003,
increases and as Guidant introduces more non-licensed products.
Manufacturing
We manufacture our endovascular products at our facilities in Irvine,
California. Based upon our forecasted production requirements, we believe that
our current manufacturing facilities will be sufficient for our needs through
2005.
Our current manufacturing process is labor intensive and involves shaping
and forming a stainless steel wire cage, sewing graft material together to form
the outside skin of the device and suturing the graft material on to the cage.
While we plan to make process improvements in 2004 to reduce the labor
component of the production, the majority of the direct cost comes from the
ePTFE graft material, which has pricing set by our agreement with Impra, Inc.
Impra, Inc.
In February 1999, we entered into a supply agreement with
Impra, Inc., a subsidiary of C.R. Bard, Inc for the supply of ePTFE. The
supply agreement expires in December 2007 and is automatically renewable on a
year-by-year basis, for additional one-year periods, unless either party gives
the other party notice of its intention not to renew within 30 days from the
expiration date of the applicable renewal period. Under the terms of the
agreement, we have agreed to purchase certain quantities of ePTFE for our
endovascular products, with built in annual quantity increases. In January
2002, the agreement was amended, increasing the minimum purchase requirements
for 2002 and thereafter, and increasing the prices each year after 2002
according to the general increase in the Consumer Price Index, with an
additional increase if we receive FDA approval to commercially distribute our
devices in the U.S.
Legacy Products
. We stopped production of our non-PowerLink products, in
Irvine, California in December 2001. We also terminated our manufacturing
agreement with Bebig GmbH for the production of RDX catheters in Europe due to
our decision to restructure operations in late 2001.
Patents and Proprietary Information
We have an aggressive program to develop intellectual property in the
United States, Europe and Asia. We are building a portfolio of apparatus and
method patents covering various aspects of our current and future technology.
In the AAA area, we have 14 U.S. patents issued, covering 296 claims, and 9
pending U.S. patent applications. Our current AAA area patents begin expiring
in 2017 and the last patent expires in 2019. We intend to continue to file for
patent protection to strengthen our intellectual property position as we
continue to develop our technology.
In addition to our AAA intellectual property, we own or have the rights to
37 issued U.S. patents, one issued European patent and one Japanese patent
relating to intravascular radiation, stents, and various catheter technologies.
The non AAA patents begin expiring in 2012 and the last patent expires in 2018.
Our technology license to Guidant is supported by seven U.S. patents and one
Japanese patent. These patents begin expiring in 2014 and the last patent
expires in 2016.
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
require our employees, consultants and advisors to execute confidentiality
agreements in connection with their employment, consulting or advisory
relationships. We also require employees, consultants and advisors who may
work on our products to agree to disclose and assign to us all inventions
conceived during the work day, using our property or which relate to 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.
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Competition
We believe that the primary competitive factors in the market for AAA devices are:
We expect that significant competition in the endovascular grafting market
will develop over time. Three manufacturers, Medtronic, W.L. Gore, and Cook
have obtained FDA marketing approval for their ELGs. However, we believe that
our 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. We believe deliverability of
the device, dependability of the clinical results and the durability of the
product design are the most important product characteristics. The PowerLink
System is the only available one-piece bifurcated, fully supported ELG, and we
believe that the PowerLink System will offer improved deliverability,
dependability, and durability.
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. We
believe that our 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.
Below is a chart that details the stent graft characteristics of the
minimally-invasive AAA stent grafts being sold in Europe and/or the United
States. We believe that earlier generation technology devices experienced
material failures and complications due to their reliance on multi-piece
designs, designs that did not include a stent cage to support the entire graft,
or designs with hooks or barbs to hold their devices in place (See the section
above entitled Limitations of Earlier Technology for a discussion of these
factors). Because our PowerLink and PowerWeb stent grafts are single piece,
fully supported designs that use radial force and column strength to maintain
fixation, we believe that our grafts may offer us a competitive advantage.
Because material failures that have been experienced typically occur over the
first few years of the implant, and we have a limited amount of long-term
clinical data, it is difficult to determine if our design will continue to show
a low incidence of material failure.
12
In addition to the competitors mentioned above, the following devices are
known to have development programs for new devices: Terumo-Vascutek and Boston
Scientific.
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. We may be
unable to compete effectively against such competitors and other potential
competitors based upon their manufacturing, marketing and sales resources.
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. 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 AAA include deliverability, safety, efficacy,
ease of use, reliability, service and price. 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 and products 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. 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.
In October 2000, the CMS issued a guideline regarding the proper coding of
our procedures for billing purposes. CMS instructed that code 39.71, for
endovascular graft repair of aneurysm, be utilized. For purposes of hospital
reimbursement, the majority of patients using the PowerLink System device will
be classified under DRG 110, Major Cardiovascular Procedures with
Complication/Comorbidity. In the
13
latest data published by CMS, the national average reimbursement for DRG
110 exceeded $21,000. In Europe, reimbursement for the procedure, including the
device, typically comes from the hospitals general fund and is usually from
about half to three-quarters of the reimbursement available in the U.S.
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.
Upon obtaining the Shonin in Japan, equivalent to FDA approval of a PMA
application in the U.S., our next step will be to establish the level of
reimbursement, which will drive hospital pricing. We believe that the level of
reimbursement in Japan will approximate that of the United States.
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 our products without U.S. or foreign
government regulatory 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 FDA has not called for a 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.
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 PowerLink System is subject to this PMA process.
14
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.
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.
Our international sales are subject to regulatory requirements in the
countries in which our products are sold. 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.
In Europe, we 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.
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. In February 2003, we received ISO 9001:1994 and ISO
13485:1996 certification. These certifications demonstrate 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. 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.
Product Liability
The manufacture and marketing of medical devices carries the risk of
financial exposure to product liability claims. Our products 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 $3.0 million per occurrence and $3.0 million per year in the
aggregate. We cannot assure you that our product liability insurance is
adequate or that such insurance
15
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 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, 2003, we had 41 employees, including sixteen in
manufacturing, nine in research and development, seven in clinical affairs, two
in sales and marketing and seven in administration. 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 $6.7 million in 2003, $6.2 million in 2002, and $14.6 million in
2001 on research and development, including clinical studies. During 2003, we
spent $6.1 million on the development of PowerLink AAA products and $561,000 on
the development of the RDX.
Our focus is to continually develop innovative and cost effective medical
device technology for the treatment of aortic aneurysms, specifically abdominal
aortic aneurysms. To achieve the dynamics required to rapidly implement these
projects, our research and development is structured into three main
development areas: New Product Development, Current Product Enhancements and
Process Improvements. The objective is to bring a specific focus to each
critical area of development and to facilitate multiple projects on parallel
paths.
Current Projects
Item 2. Properties
Currently, we lease facilities aggregating approximately 20,000 square
feet in Irvine, California under various lease agreements that expire in March
2005. We believe that our facilities are adequate to meet our operational
requirements through the term of our lease.
Item 3. Legal Proceedings
On September 15, 1999, EndoSonics Corporation, which was a wholly-owned
subsidiary of Jomed N.V. until July 2003, 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 our
Focus balloon technology with 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 were entitled to recover approximately $468,000 of our legal fees
and costs we had previously expensed, plus interest. In May 2001,
Jomed-EndoSonics appealed the judgment, and in January 2003 the appeals court
upheld the judgment in our favor. In February 2003, we agreed to accept
16
payment of the judgment for legal fees and costs of $468,000, which was
recorded as a reduction to general and administrative expenses, and interest
due of $94,000, all of which was collected by March 31, 2003.
In July 2002, we terminated our contracts with two of our European
distributors of PowerLink products for non-performance. In October 2002, we
commenced an arbitration proceeding against the distributors to recover
delinquent receivables of $376,000. In response, the distributors filed
counterclaims for breach of contract, intentional and negligent
misrepresentation and concealment of material facts in which they claim damages
of $1.0 million. In February 2003, the parties agreed to a mutual release of
claims made in the arbitration action and signed a new distribution agreement.
The European distributors paid $320,000 to us in full settlement of delinquent
receivables, net of product returns for $47,000 and expense reimbursement of
$17,000. We also accepted a one-time exchange of products valued at $80,000.
We are 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 our consolidated financial position,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was conducted on October 28, 2003. The
following actions were taken at this meeting:
a. In the election of directors, the following is a tabulation
of the votes:
The following directors continued their terms on the Board following the annual
meeting: Maurice Buchbinder, M.D., Paul McCormick, Jeffrey ODonnell and
Michael Henson (Filling a vacancy, Gregory D. Waller was appointed to the Board
on November 11, 2003. Michael Henson resigned from the Board and was replaced
by Roderick de Greef on November 26, 2003.).
17
The total outstanding shares available for voting at the meeting was
27,976,540.
PART II
ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters
Our common stock commenced trading on the NASDAQ National Market on June
20, 1996 and is traded under the symbol ELGX. The following table sets forth
the high and low sale prices for our common stock as reported on the NASDAQ
National Market for the periods indicated.
On
March 11, 2004 the closing sale price of our common stock on the NASDAQ
National Market was $5.50 per share and there were 317 record holders of our
common stock.
Dividend Policy
We have never paid any dividends. We currently intend to retain all
earnings, if any, for use in the expansion of our business and therefore do not
anticipate paying any dividends in the foreseeable future.
18
ITEM 6
.
Selected Financial Data
19
Summarized Quarterly Data (unaudited)
(1)
In the quarters ended June 30, and September 30, 2002, we recorded a
charge of $4.4 million and $63,000, respectively, for acquired in-process
research and development relating to our merger with the former Endologix.
These charges represent the portion of the purchase price allocated to the
acquired research and development projects, which, at the date of the
acquisition, were in process, had not reached technological feasibility and had
no alternative future use (Note 2 to the Consolidated Financial Statements).
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
Selected Consolidated Financial Data and our Consolidated Financial
Statements and the related notes included in this Annual Report on Form 10-K.
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 and elsewhere in this Annual
Report on Form 10-K.
20
Overview
Our Business
We are engaged in the development, manufacture, sales and marketing of
minimally invasive therapies for the treatment of vascular disease. Our primary
focus is the development of the PowerLink System, a catheter-based alternative treatment to surgery for 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 PowerLink System is a catheter and endoluminal graft, or ELG system.
The self-expanding stainless steel 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 aneurismal section of the
aorta, reducing pressure and the potential for the aorta to rupture. We
believe that implantation of the PowerLink System will reduce the mortality and
morbidity rates associated with conventional AAA surgery.
We completed Japanese clinical trials for our AAA technology in November
2001 and have submitted for Japanese MOH approval to commercialize the product.
As the clinical trial in Japan was completed in 2001, only minor expenses
relating to the clinical trial are included in our results for 2003. We believe
that Japanese MOH review should be completed in the second half of 2004. We
will then file the necessary partial change to update the ELG to a current
configuration, as well as submit the dossier necessary to be eligible to obtain
hospital reimbursement. We expect the device will be eligible for insurance
reimbursement sometime in the second half of 2005.
We believe that the requisite patient enrollment has been achieved in the
infrarenal arm of our two arm U.S. pivotal Phase II trial which is studying the
PowerLink System for elective endovascular aneurysm repair. On January 8,
2004, we submitted our completed PMA application to the FDA. The completed PMA
application includes the pivotal clinical trial results as the final step in
the modular PMA process. Two of the four previously submitted modules have
already been reviewed and accepted. On February 13, 2004, the FDA accepted the
PMA application as fileable. Acceptance of the filing means that the FDA has
made a threshold determination that the PMA application is sufficiently
complete to move forward in the FDA review and approval process. Queries
regarding the remaining two modules in addition to the clinical results will be
addressed during the final PMA review period. The fileable date marks the
continuance of a 180-day review period, which began January 8, 2004. During
this review period, Endologix expects to meet with the FDA in April to discuss
any major issues from the agencys review. At that time, the FDA will also
determine the need for an FDA panel meeting before moving forward with its
decision regarding U.S. marketing approval, which we anticipate in the second
half of 2004.
We are continuing to enroll patients in the other arm of our Phase II U.S.
clinical trial, for a suprarenal version of the PowerLink System, to support a
PMA application with the FDA in order to market it in the United States. We
have to follow all of the patients for 12 months, following their enrollment in
the study, before final data collection and submission for PMA to the FDA. The
infrarenal and suprarenal devices are similar, except that the wire stent in
the suprarenal device is extended above the graft material to allow the
physician to anchor the top of the device above the renal arteries without
obstructing them.
Prior to the acquisition of the former Endologix and the restructuring
that occurred during the third and fourth quarters of 2001 (see below under the
captions
Merger with Former Endologix, Inc
. and
Company Restructuring
and
Notes 2 and 14 to the Consolidated Financial Statements), we were researching,
developing and marketing a radiation therapy catheter for the treatment of
blockages in arteries after angioplasty, or restenosis. Prior to that we
developed, manufactured and marketed other catheter and stent products for
treatment of cardiovascular disease.
Over the past few years, our source of revenues has shifted gradually from
direct sales of catheter and stent products to royalties from licenses of our
stent delivery technology. In June 1998, we licensed Guidant Corporation
rights 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 know-how 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 more
information on the Guidant agreement.
21
We have experienced an operating loss for each of the last five 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 operating results depend upon several
factors, including:
During 2004, we will continue enrolling patients in a pivotal clinical
trial in the U.S., begin one or two other trials in the U.S. and prepare for
and begin actively marketing our AAA products in the U.S. As a result, we
anticipate that our expenses will be substantially higher and result in
operating losses through at least 2004.
Company Restructuring
In late 2001, three companies published the first clinical study data for
drug-coated stents, a competing technology to our radiation catheter 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. Considering the efficacy, ease of
use and probable cost effectiveness of drug-coated stents compared to our
radiation catheter system, we determined that the market for the radiation
based system likely will be limited.
As a result, in order to conserve cash and to position ourselves to take
advantage of strategic alternatives, we restructured our business and later
decided not to file a PMA for the radiation catheter system but to still
complete the clinical studies. We submitted the final reports for the coronary
and saphenous vein graft feasibility trials to the FDA in the first quarter of
2003 and expect to submit the final reports for the remaining studies, the
pivotal coronary and peripheral trials, in the first quarter
of 2004.
Merger with Former Endologix, Inc.
Reasons for the Merger
In September 2001, as part of a restructuring plan driven by the success
of drug-coated stents, we began investigating other medical device technologies
for commercialization. In the fourth quarter of 2001, we began discussions
with Endologix, Inc. (former Endologix), a privately held developer and
manufacturer of the PowerLink System, an endoluminal stent graft for minimally
invasive treatment of AAAs. Based on our investigation of the PowerLink
System, we believed that it was a novel device for treatment of abdominal
aortic aneurysms, 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 that were currently on the market.
We believed that the acquisition of former Endologixs technology would provide
us with a new and unique medical device technology for a promising and
potentially lucrative market.
Merger Transaction
In May 2002, we acquired all of the capital stock of former Endologix. We
paid stockholders of former Endologix $0.75 cash for each share of former
Endologix common stock, for an aggregate of $8.4 million, and issued one share
of our common stock for each share of former Endologix common stock, for an
aggregate of 11,140,541 shares.
In addition, we agreed to pay contingent consideration in the amount of
$5.6 million in the event a PMA approval is received in the U.S. for the
PowerLink System on or before March 31, 2004, or $2.8 million if a 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. As
of December 31, 2003, a
22
PMA approval has not yet been obtained and such contingent consideration
has not been recorded in the consolidated financial statements.
In the course of negotiations of the merger, we agreed to forgive a loan
of $100,000 and accrued interest of $37,000 owed by our former chief executive
officer, as an incentive for him to assist with the post-closing transition and
integration issues given that he would no longer have an ongoing executive
management position with us. As a result of this arrangement, we expensed
$137,000 to administrative expenses.
We accounted for the acquisition for as a purchase under SFAS No. 141,
Business Combinations. In accordance with SFAS No. 141, we allocated the
purchase price based on the fair value of the assets acquired and liabilities
assumed. In the merger, we acquired, in addition to the net tangible assets of
the business, intangible assets such as the PowerLink and PowerWeb (an earlier
version of the PowerLink) technologies, both developed and in-process, the
Endologix trade name and PowerLink and PowerWeb trademarks, and goodwill. We
employed valuation techniques reflecting recent guidelines from the AICPA on
approaches and procedures for identifying and allocating the purchase price to
assets to be used in research and development activities, including acquired
in-process research and development, or IPR&D. To value IPR&D and developed
technology, we estimated their future net cash flows and discounted them to
their present value. To value trademarks and tradenames, we estimated the
royalties that would have been paid for their use and discounted them to their
net present value.
To determine the proper allocation of purchase price to technology assets,
we first determined whether technological feasibility had been reached for a
particular technology based upon whether it had been approved for sale by the
appropriate regulatory body, or, in the absence of regulatory approval, whether
there existed any material costs yet to be incurred, material changes to the
technology to be completed or material risks of approval for sale. Then, we
considered whether the technology had any alternative future uses.
If technological feasibility of projects had not been reached and the
technology had no alternative future uses, we considered the technology to be
IPR&D. 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, research and development efforts towards
U.S. commercialization and expansion of the PowerLink product line to include a
larger size of the device.
We then estimated that we would spend $6,700 to complete the regulatory
process for U.S. commercialization of the PowerLink System by mid-2004. We
also estimated that we would spend $6,600 to complete the research and
development and regulatory approval process for a larger size PowerLink System
for commercialization in Europe by late 2002, and in the U.S. by mid-2007.
We then determined the weighted average stage of completion for IPR&D
projects was approximately 60% for U.S. commercialization of the PowerLink
System and 33% for the development and commercialization of the larger size of
the PowerLink System as of merger date. 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 technologys net cash flows were
40%, based upon the level of risk associated with a particular technology and
the current return on investment requirements of the market.
The amount of merger consideration allocated to IPR&D was then determined
by estimating the stage of completion of each IPR&D project at the date of the
merger, estimating the cash flows for the future research and development,
clinical trials and release of products employing these technologies, all as
described above, and discounting the net cash flows to their present values.
As a result of the foregoing determinations, we expensed the portion of the
purchase price allocated to IPR&D of $4.5 million during the year ended
December 31, 2002.
We also determined the fair value of developed technology at the merger
date to be $14.1 million, which represents the acquired, aggregate fair value of
individually identified technologies that were fully
23
developed at the time of the merger. As with the IPR&D, the developed
technology was valued using the income approach and a discount rate of 30%, in
context of the business enterprise value of the former Endologix. We
determined a value of $2.7 million for trademarks and tradenames based upon the
estimated royalty that would have to be paid for the right to use these assets
if they had not been acquired by us, and a discount rate of 35%. The residual
amount of $3.6 million was allocated to goodwill. The developed
technology that we acquired consisted of a large diameter
(34 mm) cuff, which would be used to adapt a PowerLink System to
patients with larger diameter aortas, and the PowerLink System. Although we do not
believe that there has been a material change to
the development timeline or costs for the technologies our
development of the European market for these technologies has taken
longer than we expected. As a result, we have not realized the sales
revenue and operating results originally projected for 2003 and do
not expect to meet the projected results for 2004 due to a later than
expected U.S. regulatory approval date for the PowerLink System. We
originally projected U.S. regulatory approval for the infrarenal
PowerLink System in the first half of 2004 but it appears that
approval will not occur, if it is granted, until the second half of
2004. As a result, we believe that product sales and operating
results for 2004 will be adversely affected. We do not, however,
believe that the projected results over the lives of the products
will be adversely affected. Failure to achieve projected
results, which could for example result from delays in the
development of the technology, or our inability to gain regulatory
approval in key markets will adversely affect our future operating results and financial
condition and may result in a write-down or write-off of intangible assets
acquired in the merger. The trademarks and trade names have an indefinite life
and the developed technology is being amortized over ten years. See Note 2 to
the consolidated financial statements for further description of the accounting
for the merger.
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 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.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
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 customers payment history. If
additional information becomes available to us indicating the financial
condition of the customer is deteriorating, additional allowances may be
required. 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 products 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. 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 (i.e., record an expense) to better reflect our current
estimate of its value. Our goodwill will be tested for impairment annually, or
more frequently if events or changes in circumstances indicate that the
goodwill is impaired. Factors that may impact whether there is a potential
impairment include a significant decrease in our stock price and our evaluation
of a control premium that may be used when estimating our total fair value. Our
stock price may continue to decline, or other factors may arise, which could
result in goodwill impairment in future periods.
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, the
valuation allowance would be reduced, resulting in increased income in the
period such determination was made.
24
Results of Operations
Comparison of Years Ended December 31, 2002 and 2003
Product Sales
.
Sales increased 67% to $1.4 million in the year ended
December 31, 2003 from $834,000 in the year ended December 31, 2002. While
adversely impacted by lower U.S. clinical trial sales, product revenue for 2003
significantly increased, primarily due to the impact in 2003 of a full year of
PowerLink product sales, compared with seven months of PowerLink product sales
in 2002, following the merger with former Endologix. Our U.S. clinical trial
sales for 2003 decreased, compared with 2002 as we completed enrollment in the
infrarenal arm of our pivotal U.S. clinical trial in the first quarter of 2003,
and we stopped enrollment in the suprarenal arm of the trial for six months
while we awaited review of the interim results by our data safety monitoring
board, which occurred in November 2003. We anticipate that product sales for
2004 will be substantially higher than for 2003, assuming that we receive FDA
approval to market our PowerLink infrarenal products in the second half of
2004.
License Revenue.
License revenue decreased 60% to $2.6 million in the year
ended December 31, 2003 from $6.6 million in the year ended December 31, 2002.
Our technology license agreement with Guidant resulted in
$2.3 million and $6.0 million in royalties in 2003 and 2002, respectively. We recognized $196,000 in
minimum royalties in 2002 and $261,000 in minimum royalties in 2003, under our
agreement with Escalon Medical Corporation (Escalon). 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 of collection. We recognized $360,000 in deferred distributor fees
in 2002 and none in 2003 under a distribution agreement with Cosmotec Ltd. of
Japan (Cosmotec), regarding the distribution of our radiation therapy
products in Japan through our joint venture. In December 2002 we agreed with
Cosmotec not to distribute the products and to dissolve the joint venture, at
which time we recognized the remaining deferred distributor fee of $299,000 as
revenue.
Changes in Guidants 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. In September 2002, we believe that Guidant replaced certain licensed
products with unlicensed products in the U.S. market and, as a result,
royalties on licensed products sales decreased materially from quarter to
quarter, thereafter. We believe that the introduction of drug-coated stents in
the first half of 2003 has also had a material negative effect on Guidants
sales of licensed products, and we anticipate a continuing reduction in
royalties from Guidant in 2004.
Cost of Product Revenue
. The cost of product revenue increased 36% to
$625,000 in the year ended December 31, 2003 from $460,000 in the year ended
December 31, 2002. This increase was attributable primarily to having a full
year of AAA product sales in 2003 and only seven months of AAA product sales in
2002. Secondarily, the cost of product revenue for 2002 includes a $64,000
write-off of RDX product inventory. We do not expect our inventory
reserves to increase significantly in the future based upon our
projected demand for the infrarenal PowerLink System after we obtain FDA
approval, which is expected in the second half of 2004.
Gross Profit.
Gross profit decreased 52% to $3.4 million in the year
ended December 31, 2003 from $6.9 million in the year ended December 31, 2002.
The decrease in gross profit was due primarily a decrease in royalties received
from Guidant, which do not have an associated cost of product revenue.
Gross profit on product sales increased 106% to $770,000 in the year ended
December 31, 2003 from $374,000 in the year ended December 31, 2002,
attributable primarily to having a full year of AAA product sales in 2003 and
only seven months of AAA product sales in 2002. 2002 results include an $80,000
charge for product exchanges as part of the settlement and release agreement
with two European distributors (See Note 15 to consolidated financial
statements regarding the settlement and release agreement).
Research and Development
. Research and development expenses increased 9%
to $6.7 million in the year ended December 31, 2003 from $6.2 million in the
year ended December 31, 2002. The increase resulted primarily from an increase
in PowerLink technology development expenses of $3.2 million, partially offset
by a decrease of $2.7 million in spending on radiation technology development
as we are nearing the completion of the related clinical studies. Though the
costs for the infrarenal PowerLink
25
System clinical study will decrease substantially for 2004, because we
anticipate continuing the suprarenal PowerLink System clinical study through
2004 and we are planning to begin one or two more U.S. clinical trials in 2004,
the first of which should begin in the second quarter, we anticipate that
research and development expenses for 2004 will be comparable or higher than in
2003, depending upon the number of clinical studies we begin in 2004 .
Marketing and Sales
. Marketing and sales expenses decreased 20% to
$787,000 in the year ended December 31, 2003 from $982,000 in the year ended
December 31, 2002. This decrease was primarily the result of a reduction in
sales and marketing administrative staffing. We anticipate that 2004 marketing
and sales expenses will be materially higher compared to the total expenses for
2003 as we will be staffing for a limited U.S. sales launch for the PowerLink
infrarenal products in the second half of 2004.
General and Administrative
. General and administrative expenses decreased
14% to $2.1 million in the year ended December 31, 2003 from $2.4 million in
the year ended December 31, 2002. The decrease resulted primarily from a
reimbursement in 2003 of legal costs and expenses of $468,000, which were
previously expensed as general and administrative expenses, as part of a legal
settlement with Jomed-Endosonics, now part of Volcano Therapeutics. A further
reduction in general and administrative expenses resulting from bad debt
recoveries of $136,000 and lower legal costs of $122,000, which was offset by
increases in outside service costs of $131,000, including strategic advisor
fees, insurance costs of $114,000 and audit costs of $50,000. We anticipate
that general and administrative expenses will be materially higher in 2004,
compared with 2003, not only because of the 2003 expense reduction from a
$468,000 legal costs and expenses reimbursement, but also because of increases
in expenses to help support the U.S. product launch.
Charge for Acquired In-Process Research and Development.
We recognized a
charge of $4.5 million in the year ended December 31, 2002 as a result of the
merger with the former Endologix (See Note 2 to consolidated financial
statements).
Restructuring Charges
. We recognized restructuring charges totaling
$168,000 in the year ended December 31, 2002 based upon our reassessment and
elimination of estimated sub-lease income we anticipated receiving to offset
rent expenditures for non-cancelable lease commitments.
Other Income (Expense).
Other income decreased 60% to $285,000 for the
year ended December 31, 2003 from $708,000 in the year ended December 31, 2002.
The decrease in other income was due primarily to the decrease in interest
income of $306,000, resulting from a 39% lower average cash balance and a lower
average interest rate on invested cash. Secondarily, the decrease was due to a
$103,000 decrease in net gains on the sale of assets, $85,000 of which resulted
from changes in realized net gains on the sale of marketable securities.
Comparison of Years Ended December 31, 2001 and 2002
Product Sales
. Sales decreased 25% to $834,000 in the year ended December
31, 2002 from $1.1 million in the year ended December 31, 2001, as a result of
the discontinuance of manufacturing and marketing of our Focus technology and
RDX products as part of our 2001 restructuring plan. The discontinuance of
those product lines was partially offset by product sales for seven months of
2002 of our AAA products, following the merger with the former Endologix.
License Revenue.
License revenue increased 1% to $6.6 million in the year
ended December 31, 2002 from $6.5 million in the year ended December 31, 2001.
Our technology license agreement with Guidant resulted in $6.4 million and $6.0
million in royalties in 2001 and 2002, respectively. We recognized $17,000 in
minimum royalties in 2001 and $196,000 in minimum royalties in 2002, under our
agreement with Escalon. 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 of collection. We
recognized $81,000 in deferred distributor fees in 2001 and $360,000 in 2002
under a distribution agreement with Cosmotec regarding the distribution of our
radiation therapy products in Japan through our joint venture. In December
2002, we agreed with Cosmotec not to distribute the products and to dissolve
the joint venture, at which time we recognized the remaining deferred
distributor fee of $299,000 as revenue.
26
Cost of Product Sales
. The cost of product sales decreased 60% to $460,000
in the year ended December 31, 2002 from $1.1 million in the year ended
December 31, 2001. This decrease was attributable primarily to a lower average
cost of sales for AAA products, compared with that for our former Focus
technology and RDX products sold in 2001, partially offset by a one-time
$80,000 charge for product exchanges as part of the settlement and release
agreement with European distributors (See Note 15 to consolidated financial
statements regarding the settlement and release agreement), and a 25% decrease
in product sales to $834,000 in 2002 from $1.1 million in 2001.
Cost of Sales from Restructuring.
Due to our restructuring and
discontinuance of the marketing of existing products (i.e., Focus technology
and RDX 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 did not have any corresponding write-offs of inventory in 2002 due
to the restructuring.
Gross Profit.
Gross profit increased 18% to $6.9 million in the year
ended December 31, 2002 from $5.9 million in the year ended December 31, 2001.
The increase in gross profit was due primarily an inventory write off of
$601,000 in 2001 as a result of the restructuring and to sales of higher margin
AAA products in 2002.
Gross profit on product sales increased to $374,000 in the year ended
December 31, 2002 from $(38) in the year ended December 31, 2001, due primarily
to sales of higher margin AAA products in 2002, partially offset by an $80,000
charge for product exchanges as part of the settlement and release agreement
with two European distributors (See Note 15 to consolidated financial
statements regarding the settlement and release agreement), and an inventory
write off of $601,000 in 2001 as a result of the restructuring.
Research and Development
. Research and development expenses decreased 58%
to $6.2 million in the year ended December 31, 2002 from $14.6 million in the
year ended December 31, 2001. The decrease was primarily due to discontinued
research and development projects as part of our September 2001 restructuring
plan. Corresponding expenses on AAA research and development did not commence
until the merger with the former Endologix.
Marketing and Sales
. Marketing and sales expenses decreased 25% to
$982,000 in the year ended December 31, 2002 from $1.3 million in the year
ended December 31, 2001. This decrease was primarily the result of our
discontinuance of marketing and sales of our then existing products as part of
our September 2001 restructuring plan.
General and Administrative
. General and administrative expenses decreased
6% to $2.4 million in the year ended December 31, 2002 from $2.6 million in the
year ended December 31, 2001. The decrease was due primarily to lower legal
expenses relating mainly to the EndoSonics Corporation lawsuit (See Note 15 to
the consolidated financial statements), and lower bad debt expense in 2002, as
bad debt expense of $131,000, net of recoveries, in 2001 was due primarily to
the restructuring.
Charge for Acquired In-Process Research and Development.
We recognized a
charge of $4.5 million in the year ended December 31, 2002 as a result of the
merger with the former Endologix (See Note 2 to consolidated financial
statements).
Restructuring Charges
. As a result of the restructuring we began in
September 2001, 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, a $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. We recognized restructuring charges totaling $168,000 in the
year ended December 31, 2002 based upon our reassessment and elimination of
estimated sub-lease income we anticipated receiving to offset rent
expenditures for non-cancelable lease commitments.
27
Other Income (Expense).
Other income decreased 53% to $708,000 for the
year ended December 31, 2002 from $1.5 million in the year ended December 31,
2001. The decrease in other income was due
primarily to the decrease in interest income of $818,000, resulting from
the use of $8.4 million in cash as merger consideration to the shareholders of
the former Endologix in 2002, coupled with continuing losses from operations.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily by:
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. In 1996, we closed our initial public offering of common stock, with net
proceeds of approximately $42.8 million after deducting underwriting discounts
and commissions and other expenses of the offering.
In 1997 we raised an aggregate of $577,000 through private sales of common
stock to strategic partners.
In 1999, we granted Cosmotec 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. As part of the transaction with
Cosmotec, in August 1999 we acquired a 51% interest, for $233,000, in a joint
venture with an affiliate of Cosmotec. The joint venture was formed to gain
regulatory approval of and provide distribution for the radiation catheter
system in Japan. However, under the 2001 restructuring plan, we discontinued
preparations for Japanese clinical trials. In December 2002, we agreed with
Cosmotec and its affiliate to dissolve the joint venture.
In June 2000, we borrowed $1.0 million from Cosmotec and recorded $1.4
million in debt to reflect the fair value of the 5%, $1.0 million face amount
convertible debenture. In September 2000, Cosmotec converted the debenture
into 142,857 shares of our common stock at $7.00 per share.
In October 2000, we sold in a secondary offering 686,000 shares of our
common stock held in treasury and 814,000 shares of our newly issued common
stock. We received $13.0 million in net proceeds, after deducting underwriting
discounts, commissions and other expenses.
As a result of our company restructuring beginning in September 2001, we
expended the following amounts during the years ended December 31, 2001 through
2003 (See
Company Restructuring, in the Overview section, above, for additional
information)
:
In July 2002, the board of directors authorized a program for repurchases
of our outstanding common stock of up to $l.5 million under certain parameters.
As of December 31, 2003, we have repurchased an aggregate of 495,000 shares
for $661,000.
In October 2002, we repaid a 10%, $1.0 million convertible debenture and
accrued interest due to Cosmotec that was assumed in the merger with the former
Endologix.
28
In July 2003, we closed a private placement of 4,000,000 shares of our
common stock at $2.25 per share. The proceeds of the private placement, net of
issuance costs, amounted to $8.4 million.
In March 2004, we closed a private placement of 3,200,000 shares of our
common stock at $5.10 per share, which resulted in aggregate net proceeds of
$15.3 million, after deduction of transaction expenses.
Net cash used by operating activities was $5.0 million for the year ended
December 31, 2003, compared with $2.2 million for the same period of 2002. The
increase for 2003 reflects a full year of operations supporting the development
of the PowerLink System products, following the merger with the former private
company Endologix at the end of May 2002.
At December 31, 2003, we had cash, cash equivalents and marketable
securities available for sale of $12.8 million. We expect to continue to incur
substantial costs and cash outlays in 2004 to support our research and
development efforts.
For the years ended December 31, 2003 and 2002, we have incurred net
losses of $5.9 million and $6.6 million, respectively. As of December 31,
2003, we had an accumulated deficit of approximately $73.9 million. We believe
that current cash and cash equivalents, marketable securities and cash
generated by operations are sufficient to meet anticipated cash needs for
operating and capital expenditures through at least June 30, 2005.
Unanticipated reductions in royalty revenue, failure of the market to accept
our products, or failure to reduce certain discretionary expenditures, if
necessary, could have a material adverse effect on the our ability to achieve
our intended business objectives.
Our future capital requirements will depend on many factors, including:
We believe that the funds received as part of our private placement
completed in March 2004 and the funds we had at the time will be sufficient to
support operations, including a limited U.S. market launch of the PowerLink
System, through at least June 30, 2005. Thereafter, we may need to raise
additional funds to support operations through additional financings, including
debt, private or public equity 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. Equity financings may dilute the
interests of the existing shareholders. If we obtain funds through arrangements
with collaborative partners or others, we may be required to grant rights to
certain technologies or products that we would not otherwise grant.
Accounts Receivable
. Trade accounts receivable, net, decreased 62% to
$239,000 at December 31, 2003 from $622,000 at December 31, 2002. The decrease
is due primarily to the settlement of a legal action with our European
distributor and their payment of cash of $320,000, returns allowed of $47,000
and a credit for expenses incurred of $17,000, reducing their outstanding
receivables that had been outstanding at December 31, 2002.
Other Receivables
. Other receivables decreased 35% to $656,000 at December
31, 2003 from $1.0 million at December 31, 2002 due primarily to a decrease of
the royalty receivable from Guidant of $358,000. See
Comparisons of Years Ended
December 31, 2002 and 2003
in subsections
License Revenue
, regarding Guidant
royalty revenues, above.
Inventories
. Inventories increased 36% to $2.8 million at December 31,
2003 from $2.0 million at December 31, 2002. The increase was due primarily to
Impra component inventory purchases, based upon contractual minimum quantity
purchase requirements, in excess of total material usage in products sold.
29
We
anticipate inventory levels will continue to grow during 2004, as contractual
minimum quantity purchase requirements will exceed the amount of materials
utilized in products sold until 2005. As our component cost will materially
increase if the PowerLink receives FDA approval, and we believe that we
will be able to utilize the inventory on hand at December 31, 2003, as
well as our minimum purchase total for 2004, we will consider component
purchases in excess of the minimum requirement prior to approval, which we
anticipate in the second half of 2004. See discussion of minimum purchase
requirements regarding Impra contract, above, within the
Liquidity and Capital
Resource section.
Intangibles
. Intangibles, net decreased to $14.5 million at December 31,
2003 from $15.9 million at December 31, 2002. The decrease in intangibles is
due to amortization of $1.4 million.
Accounts Payable and Accrued Expenses
. Accounts payable and accrued
expenses decreased 37% to $1.5 million at December 31, 2003 from $2.3 million
at December 31, 2002. This decrease was attributable to lower accruals for
restructuring charges of $672,000, including $619,000 for involuntary employee
terminations and $53,000 for non-cancelable commitments, and clinical expenses
of $624,000, partially offset by an increase in accounts payable and other
expense accruals of $532,000.
Minority Interest
. Minority interest decreased to zero at December 31,
2003, from $83,000 at December 31, 2002. In December 2002, we agreed with
Cosmotec, and its affiliate, our joint venture partner, to release each other
from the distribution and joint venture agreements, respectively, as we had no
plans to pursue regulatory approval of the RDX product, and to dissolve the
joint venture, Radiatec. The dissolution of the joint venture was completed in
May 2003 (see Note 3 to the Consolidated Financial Statements).
Commitments
In February 1999, the former Endologix agreed to purchase a key component
for its PowerLink product from Impra, Inc., a subsidiary of C.R. Bard, Inc. and
then a related party, under a supplier agreement that expires in December 2007,
and then automatically renews, on a year by year basis, for additional one year
periods without notice, unless a party provides notice not to renew within
thirty days from the expiration of the renewal period. Under the terms of the
agreement, we have agreed to purchase certain unit quantities of the component,
with built in annual quantity increases, or the agreement may be canceled. In
January 2002, the agreement was amended to increase the minimum quantity
purchase requirements for 2002 and thereafter and increase the prices each year
after 2002 according to the general increase in the Consumer Price Index. For
the year ended December 31, 2003, we have purchased or committed to purchase
$1.0 million under the supplier agreement. In 2004, we anticipate purchasing a
total of approximately $1.4 million in materials. However, if we receive FDA
approval to commercially distribute devices using the component and we have not
received a commitment from the supplier to provide the component at the current
price, the total price that we believe we will pay Impra for the component will
materially increase and could cost as much as approximately $2.0 million. We
believe that U.S. commercialization will occur during 2004. We are
economically dependent on this vendor as it is the sole source for the key
component.
As of December 31, 2003, expected future cash payments related to
contractual obligations and commercial commitments were as follows:
30
Risk Factors
Certain factors may affect our business and future results. Some of the
information included herein contains forward-looking statements. These
statements can be identified by the use of forward-looking terms such as may,
will, expect, anticipates, estimate, continue, or other similar
words. These statements discuss future expectations, projections or results of
operations or of financial condition or state other forward-looking
information. When considering these forward-looking statements, you should
keep in mind the risk factors and other cautionary statements we make. These
risk factors could cause our actual results to differ materially from those
contained in any forward-looking statement. If any of the following risks
actually occur, our business could be harmed and the trading price of our
common stock could decline.
Risks Related To Our Business
We expect to incur losses for the foreseeable future and may never achieve
profitability
.
From our formation in 1992 to December 31, 2003, we have incurred a
cumulative net loss of approximately $73.9 million. We incurred a net loss of
$5.9 million for the year ended December 31, 2003 and incurred a net loss of
$6.6 million for the year ended December 31, 2002. As we do not anticipate
receiving FDA approval until the second half of 2004, we do not expect to be
profitable in 2004, and it is possible that we may never achieve profitability.
We cannot assure you that we will be able to obtain regulatory approvals
for the PowerLink AAA system.
We need to complete a U.S. pivotal human clinical trial for the PowerLink
system. The PowerLink system is the only product we have under development and
it has not been approved for marketing by the FDA. Prior to granting approval,
the FDA may require more information or clarification of information provided
in our regulatory submissions, or more clinical studies, which could require
significant additional expenditures. If granted, the FDA may impose limitations
on the uses for which or how we may market the PowerLink system. Should we
experience delays or be unable to obtain regulatory approvals, we may never
generate significant revenues, and our business prospects will be substantially
impaired.
In Japan, we have completed our clinical trials for the PowerWeb System
and are working with the Ministry of Health for regulatory approval. While we
believe that we will receive regulatory approval in Japan in the
second half of
2004, because this is the first AAA device submitted for approval, it is
difficult for us to determine when or whether the device will be approved and
if approved, when and whether the technology will obtain hospital
reimbursement from the Japanese Medical authorities and permit
commercialization.
In
addition, any design, vendor or material change to the PowerWeb or
PowerLink System may require regulatory approval. If we do not
receive regulatory approval, we may not be able to commercialize the
product.
If we receive regulatory approval for our products and decide to market
them, we will need to grow rapidly. Rapid growth may strain the
capabilities of our managers, operations and facilities and,
consequently, could harm our business
.
If we obtain the required U. S. regulatory approval for the PowerLink
system, commercial-scale production will require us to expand our operations.
Rapid growth may strain our managerial and other
31
organizational resources. Our
ability to manage our growth will depend on the ability of our officers and key
employees to:
We rely on a single vendor to supply our graft material for the PowerLink
system, and any disruption in our supply could delay or prevent us from
completing our clinical trials or from producing the product for sale.
Currently, we rely on Impra, a subsidiary of C.R. Bard, to supply us with
graft , which is a primary component for the PowerLink system. Our reliance on
a sole source supplier exposes our operations to disruptions in supply caused
by:
Although we retain a significant stock of the graft material, the
occurrence of any of the above disruptions in supply or other unforeseen events
that could cause a disruption in supply from our sole source graft supplier may
cause us to halt or delay our clinical trials. Because we do not have
alternative suppliers, our sales and profitability would be harmed in the event
of a disruption.
We are currently only developing a single technology, the PowerLink
system.
Because of limited resources, we are currently only developing a single
technology, the PowerLink system. If we are unable to commercialize the
PowerLink system and reach positive cash flow from operations, we may not be
able to fund development and commercialization of an alternative technology.
Our operations are capital intensive, and we may need to raise additional
funds in the future to fund our operations.
Our activities are capital intensive. Although we believe that our
existing cash resources and anticipated cash generated from operations will be
sufficient to meet our planned capital requirements through at least June 30,
2005, we will require additional capital to fund on-going operations, including
our anticipated full market product launch in the U.S. in 2005. Our cash
requirements in the future may be significantly different from our current
estimates and depend on many factors, including:
32
To finance these activities, we may seek funds through additional rounds
of financing, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. We may be unable to raise
funds on favorable terms, or not at all. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. If we issue debt securities, these securities could have rights
superior to holders of our common stock, and could contain covenants that will
restrict our operations. We might have to obtain funds through arrangements
with collaborative partners or others that may require us to relinquish rights
to our technologies, product candidates or products that we otherwise would not
relinquish. If adequate funds are not available, we might have to delay, scale
back or eliminate one or more of our development programs, which would impair
our future prospects.
Our primary source of revenues is our Focus technology license agreement
with Guidant.
Our current and future revenues depend on the number of stent delivery
systems that incorporate our Focus technology that are sold by Guidant
Corporation. Under our license agreement with Guidant, we receive royalty
payments only from Guidants sale of products using the Focus technology.
Approximately 58% of our total revenues in the year ended December 31, 2003
were from Guidant. Our license revenues declined substantially following the
release of unlicensed products by Guidant and introduction of drug-coated
stents and may continue to decline precipitously. In any event, we expect that
our revenues from Guidant will decline over the next few years as technological
changes in the stent market make our Focus stent technology obsolete.
We will need to devote significant resources to market our products and
technology to physicians in order to achieve market acceptance. If we
fail to achieve market acceptance, our business will suffer.
Because the FDA and other regulatory agencies have approved other
minimally-invasive AAA graft systems, we believe that unless we can demonstrate
clinically superior results and are able to convince physicians of the
superiority of the device, we may not be able to successfully market the
products. Other companies may have superior resources to market similar
products or technologies or have superior technologies and products to market.
Therefore, even if our products gain regulatory approval, we will need to spend
significant resources prior to achieving market acceptance. Any failure of our
products to achieve commercial acceptance, or any inability on our part to
devote the requisite resources necessary to market our products, will harm our
business.
We may rely on third-party distributors to sell and market any product we
develop. They may do so ineffectively.
We may depend on medical device distributors and strategic relationships,
some of which may be with our competitors, to distribute the PowerLink system
or any other product we develop. Significant consolidation among medical
device suppliers has made it increasingly difficult for smaller suppliers like
us to distribute products effectively without a relationship with one or more
of the major suppliers. Consequently, we may enter into agreements with third
parties to distribute any product we develop. If we enter into such
relationships, we will depend directly on their efforts to market our product,
yet we will be unable to control their efforts completely. If our distributors
fail to market and sell our products effectively, our operating results and
business may suffer substantially, or we may have to make significant
additional expenditures to market our products.
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The market for our products is highly competitive, and competing medical
device technologies may prove more effective in treating these conditions
than our product candidates.
Competition in the market for devices used in the treatment of vascular
disease is intense, and we expect it to increase. The PowerLink system and
other potential products will compete with treatment methods that are well
established in the medical community, as well as treatments based on new
technologies. We face competition from manufacturers of other catheter-based
AAA graft devices and pharmaceutical products intended to treat vascular
disease.
The most significant devices that pose a competitive challenge to us
include:
Any of these treatments could prove to be more effective or may achieve
greater market acceptance than the PowerLink system. Even if these treatments
are not as effective as the PowerLink system, many of the companies pursuing
these treatments and technologies have:
In addition, we believe that many of the purchasers and potential
purchasers of our competitors products prefer to purchase medical devices from
a single source. Accordingly, many of our competitors will have an advantage
over us because of their size and range of product offerings.
Our future operating results are difficult to predict and may vary
significantly from quarter to quarter. This fluctuation may negatively
impact our stock price in the future.
Because the PowerLink system is still in the research and development
phase, we cannot predict when, if ever, we will have revenues based on the U.S.
sales of the PowerLink system. Also, our current revenues are attributable
primarily to a license agreement with Guidant, which limits our ability to
predict future revenues. Moreover, we expect revenues pursuant to the license
agreement with Guidant to diminish in the future as technology changes. In
addition to the foregoing factors, our quarterly revenues and results of
operations have fluctuated in the past and may fluctuate in the future due to:
34
Any unanticipated change in revenues or operating results is likely to
cause our stock price to fluctuate since such changes reflect new information
available to investors and analysts. New information may cause investors and
analysts to revalue our stock, which could cause a decline in value.
Risks Related To Our Industry
Our products and manufacturing activities are subject to extensive
governmental regulation that could make it more expensive and time
consuming for us to introduce new and improved products.
Our products must comply with regulatory requirements imposed by the FDA
and similar agencies in foreign countries. These requirements involve lengthy
and detailed laboratory and clinical testing procedures, sampling activities,
an extensive FDA review process and other costly and time-consuming procedures.
It often takes companies several years to satisfy these requirements,
depending on the complexity and novelty of the product. We also are subject to
numerous additional licensing and regulatory requirements relating to safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
Some of the most important requirements we face include:
Government regulation may impede our ability to conduct clinical trials
and to manufacture the PowerLink system and other prospective products.
Government regulation also could delay our marketing of new products for a
considerable period of time and impose costly procedures on our activities.
The FDA and other regulatory agencies may not approve any of our products on a
timely basis, if at all. Any delay in obtaining, or failure to obtain, such
approvals could impede our marketing of any proposed products and reduce our
product revenues.
In addition, even after receipt of approval and market launch, our
products remain subject to strict regulatory controls on manufacture, marketing
and use. We may be forced to modify or recall our product after release. Any
such action could have a material affect on the reputation of our products and
on our business and financial position.
Further, regulations may change, and any additional regulation could limit
or restrict our ability to use any of our technologies, which could harm our
business. We could also be subject to new federal, state or local regulations
that could affect our research and development programs and harm our business
in unforeseen ways. If this happens, we may have to incur significant costs to
comply with such laws and regulations.
We cannot predict the extent to which third-party payors may provide
reimbursement for the use of our products.
Our success in marketing products based on novel or innovative technology
depends in large part on whether domestic and international government health
administrative authorities, private health insurers and other organizations
will reimburse customers for the cost of our product. Reimbursement systems in
international markets vary significantly by country and by region within some
countries, and reimbursement approvals must be obtained on a country-by-country
basis. Further, many international
35
markets have government managed healthcare systems that control
reimbursement for new devices and procedures. In most markets there are
private insurance systems as well as government-managed systems. We cannot
assure you that sufficient reimbursement will be available for any product that
we may develop, in either the United States or internationally, to establish
and maintain price levels sufficient to realize an appropriate return on the
development of our new products.
If government and third party payors do not provide adequate coverage and
reimbursement for our new products, it will be very difficult for us to market
our products to doctors and hospitals, and we may not achieve commercial
success.
We may be unable to protect our intellectual property from infringement.
A failure to protect our technology may affect our business negatively.
The market for medical devices is subject to frequent litigation regarding
patent and other intellectual property rights. It is possible that our patents
or licenses may not withstand challenges made by others or protect our rights
adequately.
Our success depends in large part on our ability to secure effective
patent protection for our products and processes in the United States and
internationally. We have filed and intend to continue to file patent
applications for various aspects of our technology. However, we face the risks
that:
We also own trade secrets and confidential information that we try to
protect by entering into confidentiality agreements with other parties. We
cannot be certain that any of the confidentiality agreements will be honored
or, if breached, that we would have sufficient remedies to protect our
confidential information. Further, our competitors may independently learn our
trade secrets or develop similar or superior technologies. To the extent that
our consultants, key employees or others apply technological information to our
projects that they develop independently or others develop, disputes may arise
regarding the ownership of proprietary rights to such information such disputes
may not be resolved in our favor. If we are unable to protect our intellectual
property adequately, our business and commercial prospects likely will suffer.
If our current products or licensed products infringe upon the
intellectual property of our competitors, the sale of these products may
be challenged and we may have to defend costly and time-consuming
infringement claims.
We may need to engage in expensive and prolonged litigation to assert any
of our rights or to determine the scope and validity of rights claimed by other
parties. With no certainty as to the outcome, litigation could be too
expensive for us to pursue. Our failure to pursue litigation could result in
the loss of our rights that could hurt our business substantially. In
addition, the laws of some foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States, if at all.
Our failure to obtain rights to intellectual property of third parties or
the potential for intellectual property litigation could force us to do one or
more of the following:
36
We may face product liability claims that could result in costly
litigation and significant liabilities.
Clinical testing, manufacturing and marketing of our products may expose
us to product liability claims. Although we have, and intend to maintain
insurance, the coverage limits of our insurance policies may not be adequate
and one or more successful claims brought against us may 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.
Other Risks
The price of our stock may fluctuate unpredictably in response to factors
unrelated to our operating performance.
The stock market periodically experiences significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations may cause the market price of our
common stock to drop. In particular, the market price of securities of small
medical device companies, like ours, has been very unpredictable and may vary
in response to:
Some provisions of our charter documents may make takeover attempts
difficult, which could depress the price of our stock and inhibit your
ability to receive a premium price for your shares.
Provisions of our amended and restated certificate of incorporation could
make it more difficult for a third party to acquire control of our business,
even if such change in control would be beneficial to our stockholders. Our
amended and restated certificate of incorporation allows our board of directors
to issue up to five million shares of preferred stock and to fix the rights and
preferences of such shares without stockholder approval. Any such issuance
could make it more difficult for a third party to acquire our business and may
adversely affect the rights of our stockholders. In addition, our board of
directors is divided into three classes for staggered terms of three years.
These provisions may delay, deter or prevent a change in control of us,
adversely affecting the market price of our common stock.
37
Substantial future sales of our common stock in the public market may
depress our stock price and make it difficult for you to recover the full
value of your investment in our shares.
We have approximately 31,677,000 shares of common stock outstanding, net
of treasury stock, most of which are freely tradable. The market price of our
common stock could drop due to sales of a large number of shares or the
perception that such sales could occur. These factors also could make it more
difficult to raise funds through future offerings of common stock.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is effective
for financial instruments entered into or modified after May 31, 2003 (except
for mandatorily redeemable noncontrolling interests). For all instruments that
existed prior to May 31, 2003, SFAS 150 is effective at the beginning of the
first interim period beginning after June 15, 2003 (except for mandatorily
redeemable noncontrolling interests). For mandatorily redeemable noncontrolling
interests, the FASB has deferred certain provisions of SFAS 150. The adoption
of SFAS 150 did not have a material effect on our consolidated financial
position, results of operations or cash flows.
In December 2003 the SEC issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition. SAB No. 104 revises and rescinds certain sections of SAB
No. 101 in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
Accordingly there is no impact to our results of operations, financial position
or cash flows as a result of the issuance of SAB No. 104.
In December 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46R). FIN 46R requires the application of
either FIN 46 or FIN 46R by Public Entities to all Special Purpose Entities
(SPE) created prior to February 1, 2003 as of December 31, 2003 for calendar
year-end companies. FIN 46R is applicable to all non-SPEs created prior to
February 1, 2003 at the end of the first interim or annual period ending after
March 15, 2004. For all entities created subsequent to January 31, 2003,
Public Entities were required to apply the provisions of FIN 46. The adoption
of FIN 46 did not have a material impact on our consolidated financial
position, results of operations or cash flows. The adoption of FIN 46R for
SPEs did not have an impact to our consolidated financial position, results of
operations or cash flows, and we do not believe the adoption of FIN 46R for
non-SPEs will have a material impact to our consolidated financial position,
results of operations or cash flows.
Item 7A. 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, 2003, our investment portfolio included only high-grade corporate bonds and
commercial paper and government bonds all with remaining maturities of less
than two years and denominated in U.S. dollars.
38
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:
Foreign Currency Exchange Risk
. We do not currently have material foreign
currency exposure as the majority of our assets are denominated in U.S.
currency and our foreign-currency based transactions are not material.
Accordingly, we do not have a significant currency exposure at December 31,
2003.
Item 8. Financial Statements
The financial statement schedule listed under Part IV, Item 15, is filed
as part of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report, pursuant to
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures,
as of the end of the period covered by this report, were effective in timely
alerting them to material information relating to us required to be included in
our periodic SEC filings. There has been no change in our internal control over
financial reporting during the fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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PART III
Item 10. Directors and Officers of the Registrant
The following table sets forth information as of March 11, 2004 with
respect to our directors and executive officers:
Franklin D. Brown
. Mr. Brown serves as our Executive Chairman and has
been a director since 1997. Following the merger with the former Endologix in
May 2002, Mr. Brown was our Chief Executive Officer and Chairman until January
2003, when he was elected Executive Chairman. Mr. Brown previously served as
the Chairman and Chief Executive Officer of the former Endologix, Inc. since
joining that company in 1998. From October 1994 until the sale of the company
in September 1997, Mr. Brown served as Chairman, President and Chief Executive
Officer at Imagyn Medical, Inc. From 1986 until the sale of the company in
1994, Mr. Brown served as President and Chief Executive Officer of Pharmacia
Deltec, Inc., an ambulatory drug delivery company. Mr. Brown also serves on
the boards of directors of Triage Medical, Inc. and ATI Medical, Inc., both
private companies.
Paul McCormick
. Mr. McCormick is our President and Chief Executive
Officer and has been a director since May 2002. Mr. McCormick has more than 24
years in the medical device industry. The majority of his career has been in
emerging medical technologies. Mr. McCormick joined the former Endologix in
January 1998 as Vice President of Sales and Marketing, and served as President
and Chief Operating Officer from January 2001 until the merger in May 2002. He
then served in the same position with us until January 2003 when he became
President and Chief Executive Officer. Previously, he held various sales and
marketing positions at Progressive Angioplasty Systems, Heart Technology,
Trimedyne Inc., and United States Surgical Corporation.
David M. Richards
. Mr. Richards joined us in September 1996 and serves as
our Chief Financial Officer and Corporate Secretary. From September 1996 to
October 2001, Mr. Richards served as our Controller.
Stefan G Schreck, Ph.D.
Dr. Schreck joined us in February 2004 and serves
as our Vice President of Research and Development. Dr. Schreck has more than
20 years of experience in research and development of medical products. Prior
to joining Endologix, Dr. Schreck held increasingly more responsible R&D
management positions in the medical device industry. From May 1995 to April
2000, Dr. Schreck served as Director of Research in Baxter Healthcares Heart
Valve Division. From April 2000 to August 2002, Dr. Schreck served as Senior
Director R&D at Edwards Lifesciences and was responsible for the development of
all surgical heart valve repair and replacement products. From August 2002 to
February 2004, Dr. Schreck served as President & CEO of MediMorph Solutions
Inc., an engineering and management consulting firm for the medical device
industry that he founded.
Karen Uyesugi
. Ms. Uyesugi has 23 years of both domestic and
international regulatory experience in the medical device and pharmaceutical
industry. The majority of her career has been involved with a wide variety of
Class III and Class II medical devices ranging from implantable cardiovascular
devices, neurosurgery, and general surgery products. Ms. Uyesugi has served as
our Vice President, Clinical and Regulatory Affairs since the merger with the
former Endologix in May 2002. Prior to joining
40
the former Endologix in July 1998, Ms. Uyesugi held various positions in
regulatory, clinical, and quality assurance at Neuro Navigational Corporation,
Trimedyne, Inc., Baxter Healthcare, Shiley Inc., and Allergan Pharmaceuticals.
Maurice
Buchbinder, M.D.
Dr. Buchbinder has served on our Board of
Directors since January 1999. Dr. Buchbinder was a co-founder and member of
the board of directors of the (former) Radiance from August 1997 to January
1999. Since 1995, Dr. Buchbinder has served as the Director of Interventional
Cardiology at Sharp Memorial Hospital, San Diego, California and as the
Director of Interventional Cardiology at the Foundation for Cardiovascular
Research, Scripps Memorial Hospital, La Jolla, California. From 1985 to 1995,
Dr. Buchbinder served at various intervals as the Professor of Medicine and the
Associate Professor of Medicine, Cardiology Division, UCSD Medical Center, San
Diego, California. Dr. Buchbinder is Board certified, Diplomat, from the
American Board of Cardiovascular Diseases and the American Board of Internal
Medicine.
Roderick de Greef.
Mr. de Greef has served on our Board of Directors
since November 2003. Mr. de Greef has served as the Executive Vice President,
Chief Financial Officer and Secretary of Cardiac Science, Inc. since March
2001. From 1995 to 2001, Mr. de Greef provided corporate finance advisory
services to a number of early stage companies including Cardiac Science, where
he was instrumental in securing equity capital beginning in 1997, and advising
on merger and acquisition activity. From 1989 to 1995, Mr. de Greef was Vice
President and Chief Financial Officer of BioAnalogics, Inc. and International
BioAnalogics, Inc., both publicly held, development stage medical technology
companies located in Portland, Oregon. From 1986 to 1989, Mr. de Greef was
Controller and then Chief Financial Officer of publicly held Brentwood
Instruments, Inc. Mr. de Greef has a B.A. in Economics and International
Relations from California State University at San Francisco and an M.B.A. from
the University of Oregon. Mr. de Greef also serves on the boards of BioLife
Solutions, Inc. a public biotechnology company located in Binghamton, New York
and DentalView, Inc. an Irvine-based privately held medical device company.
Edward
M. Diethrich, M.D.
Dr. Diethrich has served on our Board of
Directors since May 2002. Dr. Diethrich was a Director for the former
Endologix, Inc. from 1997 until its merger with us on May 29, 2002. Dr.
Diethrich has been the Medical Director and Chief of Cardiovascular Surgery of
the Arizona Heart Hospital since 1997, and has been the Director and Chief of
Cardiovascular Surgery at the Arizona Heart Institute from 1971 to the present.
Jeffrey ODonnell
. Mr. ODonnell has served on our Board of Directors
since June 1998. Mr. ODonnell served as our President from January 1998 until
March 1999, and Chief Executive Officer from June 1998 until March 1999. From
November 1995 to January 1998, Mr. ODonnell served as our Vice President,
Sales and Marketing. Mr. ODonnell has served as President and Chief Executive
Officer of PhotoMedex since November 1999. From March 1999 to November 1999,
Mr. ODonnell served as the President and Chief Executive Officer of X-Site
Medical. From January 1994 to May 1995, Mr. ODonnell served as the President
and Chief Executive Officer of Kensey Nash Corporation, a diversified medical
device company. Mr. ODonnell is a member of the board of directors of Escalon
Medical Corporation, a publicly held manufacturer and distributor of
cardiovascular and ophthalmology devices, Cardiac Science, Inc., a publicly
held medical device manufacturer for external cardiac defibrillators and RMI, a
private medical device manufacturer.
Gregory D. Waller.
Mr. Waller has served on our Board of Directors since
November 2003. Mr. Waller has served as Vice President-Finance, Chief
Financial Officer and Treasurer of Sybron Dental Specialties, Inc., a
manufacturer and marketer of consumable dental products, since August 1993 and
was formerly the Vice President and Treasurer of Kerr, Ormco and
Metrex. Mr. Waller joined Ormco in December 1980 as Vice President and Controller and
served as Vice President of Kerr European Operations from July 1989 to August
1993. Mr. Waller has an MBA with a concentration in accounting from California
State University, Fullertion
Audit Committee and Audit Committee Financial Expert
The members of our audit committee are Gregory D. Waller, Roderick de
Greef and Jeffrey F. ODonnell, all of whom satisfy the independence and
financial literary standards established by the Securities and Exchange
Commission and the NASDAQ National Market. Our Board of Directors has
41
determined that Messrs. Waller, de Greef and ODonnell all qualify as an
audit committee financial expert as that term is defined by the rules and
regulations of the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
The members of our Board of Directors, our executive officers and persons
who hold more than 10% of our outstanding common stock are subject to the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934
which requires them to file reports with respect to their ownership of the
common stock and their transactions in such common stock. Based upon (i) the
copies of Section 16(a) reports that Endologix received from such persons for
their 2003 fiscal year transactions in the common stock and their common stock
holdings and/or (ii) the written representations received from one or more of
such persons that no annual Form 5 reports were required to be filed by them
for the 2003 fiscal year, we believe that all reporting requirements under
Section 16(a) for such fiscal year were met in a timely manner by our executive
officers, Board members and greater than ten-percent stockholders, with the
following exceptions:
Sales of common stock on September 23 and 24 , 2003 by Michael Henson, a
former director, were reported on a Form 4 filed on October 7, 2003;
Sales of common stock from September 29 through October 14 , 2003 by
Jeffrey ODonnell were reported on a Form 4 filed on
October 20, 2003 and a gift to an irrevocable trust not under
investment control by Jeffrey ODonnell on September 5, 2003 was
reported on a Form 5 filed on March 24, 2004;
Automatic annual option grants to Jeffrey ODonnell, Edward Diethrich,
M.D. and Maurice Buchbinder for their service on the Board of Directors,
which were granted on October 28, 2003 was reported on a Form 4 filed on
November 12, 2003, in the case of Messrs. ODonnell and Diethrich and
November 13, 2003, in the case of Mr. Buchbinder;
A sale of common stock on November 17 , 2003 by Franklin Brown was
reported on a Form 4 filed on November 20, 2003.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer and principal accounting officer. A copy
of our code of ethics is attached as Exhibit 14 to this Annual Report Form
10-K. We intend to satisfy the disclosure requirement under Item 10 of Form
8-K regarding an amendment to, or waiver from, a provision of this code of
ethics by posting such information on our website, www.endologix.com.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth the salary and bonus earned for the three
fiscal years ended December 31, 2003, by our Chief Executive Officer and our
executive officers whose salary and bonus exceeded $100,000 for the 2003 fiscal
year. All of the individuals named in the table are referred to as the Named
Executive Officers.
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43
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the number and potential realizable value
of options granted to each of the Named Executive Officers during the year
ended December 31, 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth information with respect to the exercise of
options held by the Named Executive Officers during the year ended December 31,
2003.
Compensation of Directors
Non-employee directors each receive a fee of $1,000 per quarter, $1,000
for each Board meeting attended and reimbursement for certain travel expenses
and other out-of-pocket costs. Members of Committees of the Board each receive
an additional fee of $500 for each Committee meeting attended. Non-employee
Board members are eligible to receive periodic option grants under the
Automatic Option Grant Program in effect under our 1996 Stock Option/Stock
Issuance Plan. Each individual who first becomes a non-employee Board member,
whether elected by the stockholders or appointed by the Board, automatically
will be granted, at the time of such initial election or appointment, an option
to purchase 25,000 shares of Common Stock at the fair market value per share of
Common Stock on the grant date. Each option has a maximum term of ten years.
On the date of each Annual Meeting of Stockholders, each individual who is to
continue to serve as a non-employee Board member after the Annual meeting will
receive an additional option grant to purchase 15,000 shares of Common Stock,
provided such individual has been a member of the Board for at least six
months
.
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Each initial option grant vests over four
years, with 25% of the options vesting after one year and the remaining options
vesting on a pro rata basis over the next 36 months thereafter, and each annual
option grant vests upon the completion of one year of Board service. The
option grants also vests immediately upon the optionees death or permanent
disability or an acquisition of Endologix by merger or asset sale or a hostile
change in control of Endologix.
There are no arrangements or understandings involving any director or any
nominee regarding such person status as a director or nominee.
Management Contracts and Termination of Employment and Change in Control
Agreements
We entered into an employment agreement with Mr. Brown, our Executive
Chairman, effective October 18, 2002. The agreement has a three-year term and
it automatically renews for successive one-year terms thereafter. The
agreement provides for annual increases in base salary as may be determined by
the Compensation Committee of our Board of Directors. Mr. Browns base salary
is $200,000, and he is eligible to receive incentive-based stock options. The
agreement includes executive fringe benefits as is customary for our other
executives. If we terminate Mr. Browns employment without cause, he is
entitled to his base salary and continued benefits for six months.
Additionally, Mr. Browns stock options that would have vested over the
following six months will vest immediately upon his termination. Lastly, Mr.
Brown would be entitled to a prorated payment equal to the target bonus amount
for which he would have been eligible for the year of termination. In the event
Mr. Browns employment is terminated in connection with a change in control, he
is entitled to his base salary and continued benefits for twelve months and all
of his stock options will accelerate and vest and all of our rights to
repurchase his restricted stock will terminate. Finally, Mr. Brown would be
entitled to a prorated payment equal to the target bonus amount for which he
would have been eligible for the year of termination.
We entered into an employment agreement with Mr. McCormick, our Chief
Executive Officer and President, effective October 18, 2002. The agreement has
a three-year term and it automatically renews for successive one-year terms
thereafter. The agreement provides for annual increases in base salary as may
be determined by the Compensation Committee of our Board of Directors. Mr.
McCormicks base salary is $260,000 and he is eligible to receive an annual
cash bonus of up to 35% of his base salary as well as incentive-based stock
options. The agreement includes executive fringe benefits as is customary for
our other executives. If we terminate Mr. McCormicks employment without
cause, he is entitled to his base salary and continued benefits for six months.
Additionally, Mr. McCormicks stock options that would have vested over the
following six months will vest immediately upon his termination. Lastly, Mr.
McCormick would be entitled to a prorated payment equal to the target bonus
amount for which he would have been eligible for the year of termination. In
the event Mr. McCormicks employment is terminated in connection with a change
in control, he is entitled to his base salary and continued benefits for twelve
months and all of his stock options will accelerate and vest and all of our
rights to repurchase his restricted stock will terminate. Finally, Mr.
McCormick would be entitled to a prorated payment equal to the target bonus
amount for which he would have been eligible for the year of termination.
We entered into an employment agreement with Mr. Richards, our Chief
Financial Officer and Secretary, effective October 18, 2002. The agreement has
a three-year term and it automatically renews for successive one-year terms
thereafter. The agreement provides for annual increases in base salary as may
be determined by the Compensation Committee of our Board of Directors. Mr.
Richards base salary is $141,440, and he is eligible to receive an annual cash
bonus of up to 30% of his base salary as well as incentive-based stock options.
The agreement includes executive fringe benefits as is customary for our other
executives. If we terminate Mr. Richards employment without cause, he is
entitled to his base salary and continued benefits for six months and all stock
options that would have vested over the following six months will vest
immediately upon his termination. Mr. Richards would also be entitled to a
prorated payment equal to the target bonus amount for which he would have been
eligible for the year of termination. In the event Mr. Richards employment is
terminated in connection with a change in control, he is entitled to his base
salary and continued benefits for twelve months and all of his stock options
will accelerate and vest and all of our rights to repurchase his restricted
stock will terminate. Finally, Mr. Richards would be entitled to a prorated
payment equal to the target bonus amount for which he would have been eligible
for the year of termination.
45
We entered into an employment agreement with Ms. Uyesugi, Vice President
of Clinical and Regulatory Affairs, effective October 18, 2002. The agreement
has a three-year term and it automatically renews for successive one-year terms
thereafter. The agreement provides for annual increases in base salary as may
be determined by the Compensation Committee of our Board of Directors. Ms.
Uyesugis base salary is $176,800, and she is eligible to receive an annual
cash bonus of up to 30% of her base salary as well as incentive-based stock
options. The agreement includes executive fringe benefits as is customary for
our other executives. If we terminate Ms. Uyesugis employment without cause,
she is entitled to her base salary and continued benefits for six months and
all stock options that would have vested over the following six months will
vest immediately upon her termination. Lastly, Ms. Uyesugi would be entitled
to a prorated payment equal to the target bonus amount for which she would have
been eligible for the year of termination. In the event Ms. Uyesugi is
terminated in connection with a change in control, she is entitled to her base
salary and continued benefits for twelve months and all stock options will
accelerate and vest and all of our rights to repurchase her restricted stock
will terminate. Finally, Ms. Uyesugi would be entitled to a prorated payment
equal to the target bonus amount for which she would have been eligible for the
year of termination.
We entered into an employment agreement with Mr. Schreck, Vice President
of Research and Development, effective February 23, 2004. The agreement
expires on October 18, 2005, unless sooner terminated pursuant to the terms and
provisions of the agreement. Unless thirty days notice is provided by either
party before the expiration date, the agreement automatically renews for
successive one-year terms thereafter. The agreement provides for annual
increases in base salary as may be determined by the Compensation Committee of
our Board of Directors. Mr. Schrecks base salary is $170,000, and he is
eligible to receive an annual cash bonus of up to 30% of his base salary as
well as incentive-based stock options. The agreement includes executive fringe
benefits as is customary for our other executives. If we terminate Mr.
Schrecks employment without cause, he is entitled to his base salary and
continued benefits for six months and all stock options that would have vested
over the following six months will vest immediately upon her termination.
Lastly, Mr. Schreck would be entitled to a prorated payment equal to the target
bonus amount for which she would have been eligible for the year of
termination. In the event Mr. Schreck is terminated in connection with a change
in control, he is entitled to his base salary and continued benefits for twelve
months and all stock options will accelerate and vest and all of our rights to
repurchase his restricted stock will terminate. Finally, Mr Schreck would be
entitled to a prorated payment equal to the target bonus amount for which he
would have been eligible for the year of termination.
Compensation Committee Members
Franklin D. Brown and Edward M. Diethrich, M.D. are the compensation
committee members. Mr. Brown currently serves as our Executive Chairman and up
until December 31, 2002 served as our Chief Executive Officer, both of which
are officer positions.
Compensation Committee Interlocks and Insider Participation
None of our executive officers served on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or Compensation Committee.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors makes recommendations
to the full Board with respect to the base salary and bonuses to be paid to our
executive officers each fiscal year. In addition, the Compensation Committee
has the authority to administer the Endologix 1996 Stock Option/Stock Issuance
Plan with respect to option grants and stock issuances made thereunder to
officers and other key employees. The following is a summary of the policies
of the Compensation Committee that affect the compensation paid to executive
officers, as reflected in the tables and text set forth elsewhere in this
Annual Report on Form 10-K.
General Compensation Policy
. Our compensation policy is designed to
attract and retain qualified key executives critical to our success and to
provide such executives with performance-based incentives tied to the
achievement of certain milestones. One of the Compensation Committees primary
objectives is to have a substantial portion of each officers total
compensation contingent upon our performance as well
46
as upon the individuals contribution to our success as measured by his
personal performance. Accordingly, each executive officers compensation
package is comprised primarily of three elements.
The following are the principal factors that the Compensation Committee
considered in establishing the components of each executive officers
compensation package for the 2003 fiscal year. However, the Compensation
Committee may in its discretion apply different factors, particularly different
measures of financial performance, in setting executive compensation for future
fiscal years.
Base Salary
. The base salary levels for the executive officers were
established by the Board for the 2003 fiscal year on the basis of the following
factors: personal performance, the estimated salary levels in effect for
similar positions at a select group of companies with which we compete for
executive talent, and internal comparability considerations. Although the
Compensation Committee reviewed various compensation surveys, the Board did not
rely upon any specific survey for comparative compensation purposes. Instead,
the Board made its decisions as to the appropriate market level of base salary
for each executive officer on the basis of its understanding of the salary
levels in effect for similar positions at those companies with which we compete
for executive talent. The Compensation Committee on an annual basis will
review base salaries, and adjustments will be made in accordance with the
factors indicated above.
Annual Incentive Compensation
. The Endologix Employee Bonus Plan provides
the Board of Directors with discretionary authority to award cash bonuses to
executive officers and employees in accordance with recommendations made by the
Compensation Committee. The Compensation Committees recommendations are based
upon the extent to which financial and performance targets (established
semi-annually by the Compensation Committee) are met and the contribution of
each such officer and employee to the attainment of such targets. For fiscal
year 2003, the performance targets for each of the executive officers included
gross sales, cash flow, engineering product goals and regulatory goals. The
weight given to each factor varied from individual to individual.
Long-Term Incentive Compensation
. The 1996 Stock Option/Stock Issuance
Plan also provides the Board with the ability to align the interests of the
executive officer with those of the stockholders and provide each individual
with a significant incentive to manage Endologix from the perspective of an
owner with an equity stake in the business. The number of shares subject to
each option grant is based upon the officers tenure, level of responsibility
and relative position in Endologix. We have established general guidelines for
making options grants to the executive officers in an attempt to target a fixed
number of unvested option shares based upon the individuals position with
Endologix and their existing holdings of unvested options. However, we do not
adhere strictly to these guidelines and will vary the size of the option grant
made to each executive officer as it feels the circumstances warrant. Each
grant allows the officer to acquire shares of our common stock at a fixed price
per share (the market price on the grant date) over a specified period of time
(up to 10 years from the date of grant). The option normally vests in periodic
installments over a four-year period, contingent upon the executive officers
continued employment with us. Accordingly, the option will provide a return to
the executive officer only if he or she remains in our employ and the market
price of our common stock appreciates over the option term.
CEO Compensation
. The Compensation Committee set the base salary for Paul
McCormick, our Chief Executive Officer at a level which is designed to provide
a salary competitive with salaries paid to chief executive officers of
similarly-sized companies in the industry and commensurate with each such
individuals experience. Mr. McCormicks experience at the (former) Endologix,
given the central role of the CEO in commercializing the technology acquired in
the merger, was an important determinant in setting his compensation. As the
Companys activities for 2003 were mainly for research and development, the
Compensation Committee did not intend to have the base salary component of
compensation affected to
47
any significant degree by our financial performance, but by the Companys
achievement of clinical and regulatory milestones.
Compensation Committee
Franklin D. Brown
48
Stock Performance Graph
The graph depicted below shows Endologixs stock price as an index
assuming $100 invested on December 31, 1998, along with the composite prices of
companies listed on the CRSP Total Return Index for National Association of
Securities Dealers Automated Quotation (NASDAQ) Stock Market, and the NASDAQ
Medical Device Manufacturers Index.
2004 PROXY PERFORMANCE GRAPH DATA
SCALED PRICES: Stock and index prices scaled to 100 at 12/31/98
49
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us regarding
the ownership of our common stock as of March 11, 2004 by: (i) each
stockholder known to us to be a beneficial owner of more than five percent (5%)
of our common stock; (ii) each director; (iii) each Named Executive Officer;
and (iv) all of our current directors and officers as a group.
50
Securities Authorized for Issuance under Equity Compensation Plans as of
December 31, 2003
Equity Compensation Plan Information
1997 Supplemental Stock Option Plan
.
This stock option plan is used to provide compensation to non-employees,
typically as part of a consulting services arrangement. The plan authorizes
the issuance of non-qualified stock options only. 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 (See Note 1 and 11 to the
consolidated financial statements for additional information on recognition of
expense associated with non-employee option grants under the 1997 Supplemental
Stock Option Plan).
Item 13. Certain Relationships and Related Transactions
In May 2002, we merged with (former) Endologix. Under the terms of the
merger agreement, we paid $0.75 for each share of Endologix common stock, for
an aggregate amount of $8.4 million, and issued one share of our common stock
for each share of Endologix common stock, not to exceed an aggregate issuance
of 11,140,541 shares. In addition, we are obligated to pay contingent
consideration in the amount of $2.8 million in the event pre-market approval,
or PMA, is received for our PowerLink System on or before June 30, 2004. We
may choose to pay the contingent consideration, if payable, in cash or common
stock at our sole discretion.
51
As set forth below, some of our officers and directors may be entitled to
receive milestone payments due to their ownership of common stock of the
(former) Endologix at the time of the merger. The payment would be due if we
receive FDA approval of our PMA application for the PowerLink System on or
before June 30, 2004.
Item 14. Principal Accountant Fees and Services
The audit committee reviews and pre-approves all non-audit services to be
performed by our independent auditors, PricewaterhouseCoopers LLP. Such
pre-approval is on a project by project basis and therefore the our Audit
Committee has not adopted a pre-approval policy with respect to such non-audit
services.
The following table sets forth the aggregate fees billed to us by
PricewaterhouseCoopers LLP for the fiscal years ended December 31, 2002 and
December 31, 2003:
(1) Includes fees for professional services rendered for the audit of our
annual financial statements, reviews of the financial statements
included in quarterly reports on Form 10-Q, and issuance of consents.
(2) Includes
fees for review of 2002 merger transaction.
PART IV
Item 15. Exhibits, Financial Statement Schedules, And Reports on Form 8-K
(a) The following documents are filed as a part of this Annual Report on Form
10-K:
1. Financial Statements.
52
2. Financial Statement Schedule.
II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required to be set forth herein as such information
is included in the Consolidated Financial Statements or the notes
thereto.
3. Exhibits
.
Reference is made to Item 15(c) of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K.
We filed a Report on Form 8-K as of November 7, 2003 announcing the
financial results for the 3
rd
quarter of 2003.
(c) EXHIBITS.
53
54
*
Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to the Companys application
requesting confidential treatment under Rule 24b-2 of the Securities Exchange
Act of 1934.
(1) Previously filed as Exhibit 2.4 to the Companys Report on Form 8-K
filed with the Securities and Exchange Commission as of November 12, 1998.
(2) Previously filed as Exhibit 2 to the Companys Report on Form 8-K filed
with the Securities and Exchange Commission as of February 5, 1999.
(3) Previously filed as an exhibit to the Companys Report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 2001.
(4) Previously filed as Annex I to the Companys Proxy Statement on Schedule
14A filed with the Securities Exchange Commission on April 26, 2002.
(5) Previously filed as Exhibit 3.4 to the Companys Report on Form 10-Q filed
with the Securities and Exchange Commission on November 16, 1998.
(6) Previously filed as an exhibit to Amendment No. 2 to the Companys
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.
(7) Previously filed as an exhibit to the Companys Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(8) Previously filed as an exhibit to the Companys Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on December 12,
1997.
(9) Previously filed as Exhibit 10.24 to the Companys Report on Form 10-Q
filed with the Securities and Exchange Commission as of August 11, 1998.
(10) Previously filed as Annex III to the Companys Proxy Statement on Schedule
14A filed with the Securities and Exchange Commission on December 18, 1998.
(11) Previously filed as Exhibit 99.2 to the Companys Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on February 17,
1999.
55
(12) Previously filed as Exhibit 10.36 to Amendment No. 1 to the Companys
Registration Statement on Form S-2 filed with the Securities and Exchange
Commission on September 11, 2000.
(13) Previously filed as an exhibit to the Companys Report on Form 10-Q
filed with the Securities and Exchange Commission on August 14, 2002.
(14) Previously filed as an exhibit to the Companys Report on Form 10-Q
filed with the Securities and Exchange Commission on November 13, 2002.
(15) Previously filed as an exhibit to the Companys Report on Form 10-K filed
with the Securities and Exchange Commission on March 27, 2003.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
We, the undersigned directors and officers of Endologix, Inc., do hereby
constitute and appoint Paul McCormick and David M. Richards, and each of them,
as our true and lawful attorney-in-fact and agents with power of substitution,
to do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney-in-fact and agent
may deem necessary or advisable to enable said corporation to comply with the
Securities and Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically but without limitation,
power and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto; and we do hereby ratify and confirm all that said attorney-in-fact and
agent, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report below.
57
Report of Independent
Auditors
To the Board of Directors and Stockholders
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Endologix, Inc. and its subsidiaries at December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys 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
F-1
ENDOLOGIX, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-2
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
[Continued from above table, first column(s) repeated]
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Basis of Presentation and Summary of Significant Accounting
Policies
Business and Basis of Presentation
Endologix, Inc. (formerly named Radiance Medical Systems, Inc. and
Cardiovascular Dynamics, Inc. and referred to as Endologix or the Company)
was incorporated in California in March 1992 and reincorporated in Delaware in
June 1993. In January 1999, the Company merged with privately held Radiance
Medical Systems, Inc. (former Radiance), and changed its name to Radiance
Medical Systems, Inc. In May 2002, the Company merged with privately held
Endologix, Inc., and changed its name to Endologix, Inc. (Note 2).
Since the merger in May 2002, the Company has been engaged in the
development, manufacture, sales and marketing of minimally invasive therapies
for the treatment of vascular disease. The Companys primary focus is the
development of the PowerLink System, a catheter-based alternative treatment for
abdominal aortic aneurysms, or AAA. AAA is a weakening of the wall of the
aorta, the largest artery of the body.
Prior to restructuring in September 2001 (Note 14) and the merger in May
2002 (Note 2) 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 also manufactured, licensed and sold angioplasty catheters and
stent products primarily through medical device distributors.
The consolidated financial statements include the accounts of the Company
and its wholly and majority-owned subsidiaries. Intercompany transactions have
been eliminated in consolidation. The Company operates in a single business
segment.
For the years ended December 31, 2003 and 2002, the Company has incurred
net losses of $5.9 million and $6.6 million, respectively. As of December 31,
2003, the Company had an accumulated deficit of approximately $73.9 million.
In March 2004, the Company closed a private placement of 3,200,000 shares of common
stock at $5.10 per share, which resulted in aggregate net proceeds of
$15.3 million, after deduction of transaction expenses
(Note 17). Management believes that
current cash and cash equivalents, and marketable securities are sufficient to
meet anticipated cash needs for operating and capital expenditures through at
least December 31, 2004. Unanticipated reductions in royalty revenue, failure
of the market to accept the Companys products, failure to raise capital to
fund operations beyond 2004, or failure to reduce certain discretionary
expenditures, if necessary, could have a material adverse effect on the
Companys ability to achieve its intended business objectives.
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.
Cash and Cash Equivalents
Cash
and cash equivalents includes cash on hand, demand deposits, money
market funds and debt securities with original maturities of three months or less from
the date of purchase.
F-6
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Companys 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 of $70, $69 and $-0- for the years ended December 31, 2001, 2002
and 2003, respectively, are included in other income. The cost of securities
sold is based on the specific identification method.
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 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 in September 2001
(Note 14), 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
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill and other intangible assets with indeterminate lives are not subject
to amortization but are tested for impairment annually or whenever events or
changes in circumstances indicate that the asset might be impaired. The
Company performed their annual impairment analysis as of June 30, 2003 and will
continue to test for impairment annually as of June 30. No impairment was
indicated. Other intangible assets with finite lives are subject to
amortization, and impairment reviews are performed in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Intangible assets, totaling $20,360, were acquired in the acquisition of the
(former) Endologix. Specifically, $3,602, $2,708 and $14,050 was recorded as
goodwill, trademarks and tradenames and developed technology, respectively, and
$4,501 was expensed as acquired in-process research and development. The
developed technology is being amortized over its estimated useful life of 10
years. During the years ended December 31, 2002 and 2003, the Company recorded
$819 and $1,405 in amortization expense for the developed technology.
Prior to SFAS No. 142, intangible assets acquired in connection with
business combinations were amortized on the straight-line method over their
estimated useful lives. Intangible assets, totaling $4,567, from the 1998
purchase of a controlling interest in and 1999 acquisition of privately held
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 recorded as developed technology
and covenants not to compete, respectively. During the years ended December 31,
2001 and 2002, the Company recorded $675
F-7
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and $-0- of amortization expense, respectively, for developed technology and
covenants not to compete (see Note 14 for discussion of restructuring
activities and impairment of these assets).
Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets and intangible assets
with determinate lives 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 Companys 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 14).
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 Guidant the right to manufacture and distribute
products using the Companys Focus technology for stent deployment. During
2001, 2002 and 2003, the Company recognized royalty revenue from Guidant of
$6,429, $6,010 and $2,334, respectively, which represented 84%, 81% and 58% of
total revenues, respectively (Note 5). There are no other customers or
licensees who represented greater than 10% of the Companys total revenues. As
of December 31, 2002 and 2003, receivables from Guidant amounted to $887 and
$530, respectively.
As of December 31, 2002 and 2003, accounts receivable from Bolton Medical
Distribution S.A. amounted to $329 and $87, respectively, and accounts
receivable from Klinikum Nurnberg Nord amounted to $11 and $28, respectively.
No other single customer accounted for more than 10% of the Companys accounts
receivable balance at December 31, 2002 or 2003.
F-8
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Product Sales by Geographic Region
The Company had product sales by region as follows:
U.S. product sales for the year ended December 31, 2002 and 2003 were for sales of
the PowerLink System product to hospitals that are conducting
clinical trials. During 2003, approximately 55% and 45% of our AAA
products sales were from infrarenal and suprarenal products,
respectively. Product sales in the year ended December 31, 2001 were for products which have
been discontinued.
Revenue Recognition
The
Company sells directly to hospitals and to distributors. 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 has no post delivery obligations to its customers other
than a limited warranty, which is discussed under
Product
Warranty
below.
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 5).
Shipping Costs
Shipping costs billed to customers are included in revenue with the
related costs in costs of goods sold.
Foreign Currency Translation
The local currency is the functional currency for the Companys 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. Gains and losses resulting from foreign currency transactions, which
are denominated in a currency other than the respective entity's functional currency are
included in the consolidated statement of operations.
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 (SFAS No.
123), Accounting for Stock-Based Compensation, and amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, 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
Companys employee stock options is less than the market price of the
underlying stock on the date of grant. Pro forma
F-9
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Because the Companys 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 managements 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 4.3%, 2.7% and 2.8%; a dividend yield of 0%, 0% and 0%;
volatility of the expected market price of the Companys common stock of 70.0%,
80.0% and 79.0%; and a weighted-average expected life of the options of 5.0,
5.0 and 5.0 years for 2001, 2002 and 2003, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Companys
pro forma information for the years ended December 31, 2001, 2002 and 2003
follows:
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 taxable income.
F-10
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2001, 2002 and 2003, 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 261,000 shares, 122,000 shares and 366,000
shares for the years ended December 31, 2001, 2002 and 2003, respectively.
However, options to purchase approximately 1,337,000 shares at a weighted
average exercise price of $5.73, 1,521,000 shares at a weighted average
exercise price of $4.06, and 1,496,000 shares at a weighted average exercise
price of $4.50 that were outstanding during 2001, 2002 and 2003, 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.
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.
Product Warranty
Customers may request, within six months of shipment to end users,
replacement products for products they receive that do not meet the
manufacturers 60 days of shipment to distributors and within product
specifications. No other warranties are offered and the Company disclaims
responsibility for any consequential or incidental damages associated with the
use of the products. Historically, the Company has not experienced a material
amount of returns as a result of its product warranty. The Company records an
accrual for an estimate of returns at the time revenue is recognized. To date,
such returns have been insignificant.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is effective
for financial instruments entered into or modified after May 31, 2003 (except
for mandatorily redeemable noncontrolling interests). For all instruments that
existed prior to May 31, 2003, SFAS 150 is effective at the beginning of the
first interim period beginning after June 15, 2003 (except for mandatorily
redeemable noncontrolling interests). For mandatorily redeemable noncontrolling
interests, the FASB has deferred certain provisions of SFAS 150. The adoption
of SFAS 150 did not have a material effect on the Companys consolidated
financial position, results of operations or cash flows.
In December 2003 the SEC issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition. SAB No. 104 revises and rescinds certain sections of SAB
No. 101 in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
Accordingly there is no impact to the Companys results of operations,
financial position or cash flows as a result of the issuance of SAB No. 104.
F-11
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46R). FIN 46R requires the application of
either FIN 46 or FIN 46R by Public Entities to all Special Purpose Entities
(SPE) created prior to February 1, 2003 as of December 31, 2003 for calendar
year-end companies. FIN 46R is applicable to all non-SPEs created prior to
February 1, 2003 at the end of the first interim or annual period ending after
March 15, 2004. For all entities created subsequent to January 31, 2003,
Public Entities were required to apply the provisions of FIN 46. The adoption
of FIN 46 did not have a material impact on the Companys consolidated
financial position, results of operations or cash flows. The adoption of FIN
46R for SPEs did not have an impact to the Companys consolidated financial position,
results of operations or cash flows, and the Company does not believe the
adoption of FIN 46R for non-SPEs will have a material impact to the Companys
consolidated financial position, results of operations or cash flows.
2. Merger and Sale of Assets
Endologix, Inc.
Reasons for the Merger
In September 2001, the Company decided to search for additional commercial
opportunities by evaluating technologies outside of vascular radiation therapy,
then the primary operational focus. Positive data had been presented, and was
continuing to be presented, from several major medical device companies, on the
effectiveness of drug-coated stents to prevent restenosis, or re-blockage of
arteries. As a result, the Company believed the market for its radiation
catheter would be limited.
In the fourth quarter of 2001, the Company began discussions with
Endologix, Inc. (former Endologix), a privately held developer and
manufacturer of the PowerLink System, an endoluminal stent graft for minimally
invasive treatment of abdominal aortic aneurysms. Based on its investigation
of the PowerLink System, the Company believed that it was a novel device 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 on the market.
The Company believed that the acquisition of former Endologixs technology
would provide the Company with a new and different medical device technology
for a promising and potentially lucrative market.
Merger Transaction
In May 2002, the Company acquired all of the capital stock of former
Endologix. The Company paid stockholders of former Endologix $0.75 cash for
each share of former Endologix common stock, for an aggregate of $8,355, and
issued one share of Radiance common stock for each share of former Endologix
common stock, for an aggregate of 11,141,000 shares. The results of former
Endologix have been included in the consolidated financial statements since May
2002.
In addition, the Company agreed to pay contingent consideration in the
amount of $5,579 in the event pre-market approval, or PMA, is received in the
U.S. for the PowerLink System on or before March 31, 2004, or $2,790 if PMA
approval is received by June 30, 2004. The Company may choose to pay the
contingent consideration, if payable, in cash or common stock at its sole
discretion. As of December 31, 2003, PMA approval has not yet been obtained
and such contingent consideration has not been recorded in the consolidated
financial statements. Any contingent payment made will be capitalized as an
addition to the purchase price.
The acquisition was accounted for as a purchase under SFAS No. 141,
Business Combinations. In accordance with SFAS No. 141, the Company
allocated the purchase price based on the fair value of the assets acquired and
liabilities assumed. In the merger, the Company acquired, in addition to the
net
F-12
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tangible assets of the business, intangible assets such as the PowerLink and
PowerWeb (an earlier version of the PowerLink) technologies, both developed and
in-process, the Endologix trade name and PowerLink and PowerWeb trademarks, and
goodwill. The Company employed valuation techniques reflecting recent
guidelines from the AICPA on approaches and procedures for identifying and
allocating the purchase price to assets to be used in research and development
activities, including acquired in-process research and development, or IPR&D.
To value IPR&D and developed technology, the Company estimated their future net
cash flows and discounted them to their present value. To value trademarks and
tradenames, the Company estimated the royalties that would have been paid for
their use and discounted them to their net present value.
To determine the proper allocation of purchase price to technology assets,
the Company first determined whether technological feasibility had been reached
for a particular technology based upon whether it had been approved for sale by
the appropriate regulatory body, or, in the absence of regulatory approval,
whether there existed any material costs yet to be incurred, material changes
to the technology to be completed or material risks of approval for sale.
Then, the Company considered whether the technology had any alternative future
uses.
If technological feasibility of projects had not been reached and the
technology had no alternative future uses, the Company considered the
technology to be IPR&D. 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, research and development
efforts towards U.S. commercialization and expansion of the PowerLink product
line to include a larger size of the device.
The Company then estimated that it would spend $6,700 to complete the
regulatory process for U.S. commercialization of the PowerLink System by
mid-2004. The Company also estimated that it would spend $6,600 to complete
the research and development and regulatory approval process for a larger size
PowerLink System for commercialization in Europe by late 2002, and in the U.S.
by mid-2007.
The Company then determined the weighted average stage of completion for
IPR&D projects was approximately 60% for U.S. commercialization of the
PowerLink System and 33% for the development and commercialization of the
larger size of the PowerLink System as of merger date. 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 technologys net cash flows were
40%, based upon the level of risk associated with a particular technology and
the current return on investment requirements of the market.
The amount of merger consideration allocated to IPR&D was then determined
by estimating the stage of completion of each IPR&D project at the date of the
merger, estimating the cash flows for the future research and development,
clinical trials and release of products employing these technologies, all as
described above, and discounting the net cash flows to their present values.
As a result of the foregoing determinations, the Company expensed the portion
of the purchase price allocated to IPR&D of $4,501 during the year ended
December 31, 2002.
The Company also determined the fair value of developed technology at the
merger date to be $14,050, which represents the acquired, aggregate fair value
of individually identified technologies that were fully developed at the time
of the merger. As with the IPR&D, the developed technology was valued using
the income approach and a discount rate of 30%, in context of the business
enterprise value of the former Endologix. The Company determined a value of
$2,708 for trademarks and tradenames based upon the estimated royalty that
would have to be paid for the right to use these assets if they had not been
acquired by the Company, and a discount rate of 35%. The residual amount of
$3,602 was allocated to goodwill. The trademarks and tradenames have an
indefinite life and the developed technology is being amortized over ten years.
The Company recognized amortization expense on intangible assets of $819 and
F-13
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$1,405 during the years ended December 31, 2002 and 2003, respectively. The
amortization expense on intangible assets for the next five years will be
$1,405 per year.
The components of the purchase price and allocation are as follows:
*- Determined as the Nasdaq average closing price for the three business
days before, the day of the merger announcement, and the three business days
thereafter.
The following pro forma data summarizes the results of operations for the
periods indicated as if the Endologix merger had been completed as of the
beginning of the periods presented. The pro forma data gives effect to actual
operating results prior to the merger, adjusted to include the pro forma effect
of amortization of identified intangible assets.
The above pro forma calculations do not include the charge of $4,501 for
acquired IPR&D.
Sale of Vascular Access Assets
In January 1999, the Company sold substantially all of the properties and
assets used exclusively in its Vascular Access product line to Escalon under an
Assets Sale and Purchase Agreement (Agreement). Under the terms of the
Agreement, the Company was entitled to receive royalty payments upon the sale
of products for a five-year period beginning in 1999. In 2000, the Company
recognized as revenue the pro-rata minimum royalty due 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.
F-14
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additionally, the Company received a prime (4.0% at December 31, 2003)
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 royalty 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, $34
and $22 was recognized in 2001, 2002 and 2003, respectively. The Company did
not recognize royalty revenue from the agreement in 2001, but did recognize
royalty revenue of $196 in 2002 and $261 in 2003.
3. Deferred Revenue
Deferred Distributor Fees
In June 1999, the Company granted Cosmotec distribution rights to market
its vascular radiation therapy products in Japan. The Company received $1,000
as cash payment in exchange for the distribution rights and was recognizing the
payment as revenue ratably over the estimated seven-year term of the
distribution agreement. The cash received in excess of revenue recognized had
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. In December 2002, the Company and Cosmotec agreed to mutually release
their obligations under the distribution agreement due to discontinuance of
plans to distribute the Companys vascular radiation therapy products in Japan.
As a result, the then remaining deferred revenue of $299 was recorded as
revenue. The Company recognized $81 and $360 of revenue during the years ended
December 31, 2001 and 2002, respectively.
In December 2002, the Company and its 51% owned joint venture partner
agreed to commence the dissolution of the joint venture, which was completed in
May 2003. Included in the Companys balance sheet for this joint venture at
December 31, 2002 is $173 in cash and $83 in minority interest.
4. Note Payable
In September 2001, the former Endologix issued a $1,000 unsecured
subordinated convertible note to Cosmotec. The note was assumed by the Company
in its merger with former Endologix. The note bore interest at 10% and the
total in principal and interest of $1,106 was paid in full in October 2002.
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, the Company received the non-exclusive,
royalty-free right to utilize certain of EndoSonics product regulatory filings
to obtain regulatory approval of the Companys products (Note 15).
Guidant Corporation
In June 1998, the Company signed a technology license agreement with
Guidant granting Guidant the right to manufacture and distribute stent delivery
products using the Companys 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. For the years ended December 31, 2001, 2002 and
2003, the Company recorded $6,429, $6,010, and $2,334, respectively, in
royalties under the agreement. At December 31, 2002 and 2003, $887
F-15
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and $530, respectively, due under this agreement are included in other
receivables on the consolidated balance sheet.
6. Marketable Securities Available-for-Sale
The Companys investments in debt securities are diversified among high
credit quality securities in accordance with the Companys investment policy. A
major financial institution manages the Companys investment portfolio. As of
December 31, 2003, $8,166 and $211 of the Companys debt securities had
contractual maturities more than 90 days and less than one year and between one to two years,
respectively.
7. Inventories
Inventories consisted of the following:
8. Intangibles
Intangibles consisted of the following:
The intangibles were acquired in the merger with the former Endologix
(Note 2).
F-16
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
At December 31, 2002, accrued restructuring charges are comprised of $248
in non-cancelable commitments (Note 14).
10. Commitments and Contingencies
Sole-Source, Related-Party Supplier Agreement
In February 1999, the former Endologix agreed to purchase a key component for
its PowerLink product from Impra, Inc., a subsidiary of C.R. Bard, Inc., which
at the time was a significant shareholder and thus a related party, under a
supplier agreement that expires in December 2007, and which then automatically
renews, on a year by year basis, for additional one year periods without
notice, unless a party provides notice not to renew within thirty days from the
expiration of the renewal period. Under the terms of the agreement, the
Company has agreed to purchase certain unit quantities of the component, with
built in annual quantity increases. In January 2002, the agreement was
amended, increasing the minimum quantity purchase requirements for 2002 and
thereafter and increasing the prices each year after 2002 according to the
general increase in the Consumer Price Index. For the year ended December 31,
2003, the Company purchased $906 and is committed to purchase an additional
$140 of the key component under the supplier agreement. During 2004, the
Company is required under the supplier agreement to purchase a minimum number
of units, which depending on the units purchased, could range in cost from
$1,357 to $2,001. If the Company receives FDA approval to commercially
distribute devices using the component, the price that the Company will pay
Impra for the component will materially increase. The Company believes that
U.S. commercialization could occur during 2004.
The Company is economically dependent on this vendor as it is the sole source
for the key component.
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 and require the Company to pay operating costs,
including property taxes, insurance and maintenance as prescribed by the
agreements.
Future minimum payments by year under non-cancellable operating leases
with initial terms in excess of one year were as follows as of December 31,
2003:
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. During the fourth
quarter of 2002, the Company reassessed its restructuring accrual for
non-cancelable lease commitments in light of diminished opportunity for
sublease arrangements prior to the lease term expirations in October 2003, and
recorded an additional charge of $168 (Note 14).
F-17
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rental expense charged to operations for all operating leases during the
years ended December 31, 2001, 2002 and 2003, was approximately $487, $295 and
$301, respectively, exclusive of restructuring costs.
The Company subleased some of its facilities through November 2003. Rental
income recorded for all subleased facilities during the years ended December
31, 2001, 2002 and 2003, was approximately $100, $207 and $209, respectively.
Employment Agreements and Retention Plan
The Company has entered into employment agreements with its officers and
one manager (key employees) under which severance payments and benefits would
become payable in the event of termination by the Company for any reason other
than cause or upon a change in control or corporate transaction, or by the key
employee for good reason, as such terms are defined in the agreement. If due,
the severance payment will generally be equal to six months of the key
employees then current salary for termination by the Company without cause or
by the key employee for good reason, and generally be equal to twelve months of
salary upon a change in control or corporate transaction.
Additionally, in December 2002, the Board of Directors approved an
employee retention plan. In the event of a sale of the Company, employees other
than those with employment agreements would receive a severance payment equal
to two to three months of their then current salary.
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. The agreement was amended
in July 2000, February 2001 and May 2001. Under the agreement as amended, the
Company paid an aggregate of $1,620 in 2001, including $194 related to the
cancellation of the arrangement in connection with the Companys restructuring
in 2001(Note 14).
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 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 14). 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, 2003.
11. Stockholders Equity
Authorized Shares of Common Stock
In October 2003, shareholders approved an increase in the number of
authorized shares of common stock from 30,000,000 to 50,000,000 shares.
Sale of Common Stock
In July 2003, the Company announced the completion of its private
placement of 4,000,000 shares of its common stock at a purchase price of $2.25
per share. The Company received aggregate gross proceeds
F-18
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of $9,000 for the newly issued shares of common stock. The proceeds of the
private placement, net of issuance costs, amounted to $8,357.
Treasury Stock
In July 2002, the board of directors authorized a program for repurchases
of the Companys outstanding common stock of up to $1,500 under certain
parameters. During the year ended December 31, 2002, the Company utilized
$205 to repurchase 227,000 shares of its common stock at a weighted average
share price of $.90 per share. During the year ended December 31, 2003, the
Company utilized $456 to repurchase 268,000 shares of its common stock at a
weighted average share price of $1.71 per share.
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 Companys 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 Companys 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 Companys common stock on the date of grant. At December 31, 2003,
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, 2003, the
Company had 225,975 shares and 1,500 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:
The following table summarizes information regarding stock options
outstanding at December 31, 2003:
F-19
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average grant-date fair value of options granted during 2001,
2002 and 2003 where the exercise price on the date of grant was equal to the
stock price on that date, was $4.64, $1.26, and $3.82, respectively.
Deferred compensation is being amortized over the vesting period of the
related non-employee options, which is generally four years. During the years
ended December 31, 2001, 2002 and 2003, $(97), $(22) and $75, respectively, was
recorded as compensation expense for the change in the fair value of unvested
non-employee option grants. During the years ended December 31, 2001, 2002 and
2003, 30,000, 20,000, and 20,000 options, respectively, were granted to
non-employees. As of December 31, 2001, 2002 and 2003, a total of 244,932,
182,600 and 283,600 non-employee stock options, respectively, were outstanding.
No compensation expense was recorded in the financial statements for stock
options issued to employees for 2001, 2002 and 2003 because the options were
granted with an exercise price equal to the market price of the Companys
common stock on the date of grant. On October 1, 2003, based upon an agreement
with a departing Board member, all of the members existing
options with an exercise price of $5.00 and below were cancelled and re-granted with a five-year life at the
original grant price (218,000 options at an average exercise price of $3.87) and
the existing options with an exercise price above $5.00 (95,000 options at an
average exercise price of $6.43) were cancelled. As a result of the regrant of
options, the Company recorded $77 in compensation expense in 2003, which
represented the difference between the original exercise price and fair value
of the Companys common stock on the date of the modification.
Stock Purchase Plan
Under the terms of the Companys 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
Companys common stock at the beginning or end of the applicable offering
period. In October 2003, an additional 200,000 shares of common stock were
approved for issuance under the Purchase Plan. During 2001, 2002 and 2003, a
total of approximately 52,000, 12,000, and 123,000 shares of common stock,
respectively, were purchased at an average price of $4.17, $1.35, and $0.77 per
share, respectively.
12. Income Taxes
Significant components of the Companys deferred tax assets and
(liabilities) are as follows at December 31:
Based upon the Companys history of continuing operating losses,
realization of its deferred tax assets does not meet the more likely than not
criteria under SFAS No. 109 and, accordingly, a valuation allowance for the
entire deferred tax asset amount has been recorded.
The valuation allowance increased by $5,889 in 2001, decreased by $446 in
2002 and increased by $1,963 in 2003.
F-20
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the acquisition of the former Endologix in May 2002,
the Company acquired deferred tax assets of $6,233 and deferred tax liabilities
of $6,675.
The Companys effective tax rate differs from the statutory rate of 35%
due primarily to research and development and other tax credits offset by
federal and state losses that were recorded without tax benefit.
At December 31, 2003, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $56,821 and $18,457,
respectively, which begin to expire in 2009 and 2004, respectively. In
addition, the Company has research and development and other tax credits for
federal and state income tax purposes of approximately $2,418, and $1,957,
respectively, which begin to expire in 2005. The state research and
development credits do not expire for California purposes. In addition, the
Company has approximately $110 of California Manufacturers Investment Credits,
which begin to expire in 2005.
As of December 31, 2003, a portion of the state valuation allowance
related to the tax benefits of stock option deductions are included in the
Companys net operating loss carryforwards. At such time as the valuation
allowance is reduced (if at all, subject to the change in ownership
limitations described below), the benefit will be first credited to income tax
expense. Thereafter, the benefit will be credited to additional paid-in
capital.
Because of the change of ownership provision of the Tax Reform Act of
1986, utilization of the Companys 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, 2001, 2002 and
2003 include the net losses of the Companys wholly-owned German and
majority-owned Japanese subsidiaries of $93, $33, and $28, respectively.
13. Employee Benefit Plan
The Company provides a 401(k) Plan for all employees 21 years of age or
older with over 3 months of service. Under the 401(k) Plan, eligible employees
voluntarily contribute to the Plan up to 15% of their salary through payroll
deductions. Employer contributions may be made by the Company at its discretion
based upon matching employee contributions, within limits, and profit sharing
provided for in the Plan. No employer contributions were made in 2001, 2002 or
2003.
14. Restructuring Charges
In September 2001, two companies published clinical study data for
drug-coated stents, a competing technology to the Companys radiation catheter
system. That data demonstrated the high level of efficacy of drug-coated
stents in preventing restenosis. Considering that efficacy, and the ease of
use and probable cost effectiveness of drug-coated stents compared to the
Companys radiation catheter system, the Company determined that the market for
the radiation-based system likely would be limited.
As a result, in order to conserve cash prior to assessing the outcome of
its clinical study on its radiation catheter and deciding whether to make a PMA
filing, and to be in position 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 radiation catheter in Europe and other international
markets in the third quarter of 2001, b) discontinue marketing and
manufacturing of products using the Companys other stent and catheter
technology, subject to the fulfillment of outstanding orders, which was
completed in the fourth quarter of 2001, c) cease preparations for clinical
trials for the radiation catheter in Japan, d) terminate 55 employees on an
involuntary basis, which was completed in the first quarter of 2002, and e)
search for additional commercial opportunities by evaluating technologies
outside of radiation therapy. The involuntarily
F-21
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
terminated employees consisted of 28 employees in manufacturing, 19 employees
in research and development, 3 employees in sales and marketing and 5 employees
in administration.
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, the Companys
former third-party European manufacturer for its radiation catheter products,
$20 in other non-cancelable commitments, $601 for the write-off of inventory
that will not be used to fulfill the outstanding product orders, $1,093 for
employee termination benefits and $42 for other exit costs.
The Company concluded that no future cash flows were expected to be
generated from the radiation catheter technology. As a result, the net
carrying value of the Companys equipment related to the 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, during 2001.
The Company also evaluated the estimated cash flows expected to be
generated from equipment used in the production of its other discontinued
products, including any possible cash flows associated with the equipments
eventual disposition and recorded a charge of $40 based on estimated discounted
cash flows, and revised the estimated useful life of the equipment.
The Company also wrote off $269 for the carrying value of furniture,
computers, software and leasehold improvements that were 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. During the fourth
quarter of 2002, the Company reassessed its restructuring accrual for
non-cancelable lease commitments in light of diminished opportunity for
sublease arrangements prior to the lease term expirations in October 2003, and
recorded an additional $168 restructuring charge.
The following is a summary of the restructuring-related liability payments
and adjustments during the years ended December 31, 2001, 2002 and 2003:
F-22
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Legal Matters
On September 15, 1999, EndoSonics Corporation, which was a wholly-owned
subsidiary of Jomed N.V. until July 2003, 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 the
Companys 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 Companys 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 was entitled to recover
approximately $468 of its legal fees and costs it had previously expensed, plus
interest. In May 2001, Jomed-EndoSonics appealed the judgment, and in January
2003 the appeals court upheld the judgment in the favor of the Company. In
February 2003, the Company agreed to accept payment of the judgment for legal
fees and costs of $468, which was recorded as a reduction to general and
administrative expenses, and interest due of $94, all of which was collected by
March 31, 2003.
In July 2002, the Company terminated its contracts with two of its
European distributors of PowerLink products for non-performance. In October
2002, the Company commenced an arbitration proceeding against the distributors
to recover delinquent receivables of $376. In response, the distributors filed
counterclaims for breach of contract, intentional and negligent
misrepresentation and concealment of material facts in which they claim damages
of $1,000. In February 2003, the parties agreed to a mutual release of claims
made in the arbitration action and signed a new distribution agreement. The
European distributors paid $320 to the Company in full settlement of delinquent
receivables, net of product returns for $47 and expense reimbursement of $17.
The Company also accepted a one-time exchange of products valued at $80.
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 Companys consolidated financial
position, results of operations or cash flows.
16. Related Party Transactions
Notes Receivable from Officers
In September 1998, an officer of the former Endologix purchased common
stock and the former Endologix accepted as payment a $174 five-year, 6% note
receivable, which was acquired by the Company in the merger with former
Endologix. The note receivable was paid in July 2002.
In January 1997, the Company loaned $100 to its then president. The note
was collateralized by a second trust deed on the executives home and had a
five-year term with interest compounding semi-annually at 6%. The principal and
interest was originally due January 2002 and had been extended to January 2004.
As part of the separation agreement with the officer following the merger with
the former Endologix in May 2002, the debt, including interest, totaling $137
was forgiven and expensed to general and administrative expenses.
F-23
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 1997, former Radiance loaned $10 to its then director of
research and development. When former Radiance was acquired, the loan was
continued and former Radiances director of research and development became the
Companys vice president of clinical affairs. The note was 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 had been extended to
March 2003. In April 2002, the loan and interest due of $13, was paid in full.
17. Subsequent Event
On March 10, 2004, the Company announced the completion of its private
placement of 3,200,000 shares of its common stock at a price of $5.10 per
share. The Company received aggregate gross proceeds of $16,320 for the newly
issued shares of common stock. The proceeds of the private placement, net of
commissions and other expenses, amounted to approximately $15,300.
F-24
(b) FINANCIAL STATEMENT SCHEDULE
ENDOLOGIX, INC.
F-25
EXHIBIT INDEX
II-1
II-2
* Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to the Companys application
requesting confidential treatment under Rule 24b-2 of the Securities Exchange
Act of 1934.
(1) Previously filed as Exhibit 2.4 to the Companys Report on Form 8-K
filed with the Securities and Exchange Commission as of November 12, 1998.
(2) Previously filed as Exhibit 2 to the Companys Report on Form 8-K filed
with the Securities and Exchange Commission as of February 5, 1999.
(3) Previously filed as an exhibit to the Companys Report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 2001.
(4) Previously filed as Annex I to the Companys Proxy Statement on Schedule
14A filed with the Securities Exchange Commission on April 26, 2002.
(5) Previously filed as Exhibit 3.4 to the Companys Report on Form 10-Q filed
with the Securities and Exchange Commission on November 16, 1998.
(6) Previously filed as an exhibit to Amendment No. 2 to the Companys
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.
(7) Previously filed as an exhibit to the Companys Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(8) Previously filed as an exhibit to the Companys Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on December 12,
1997.
(9) Previously filed as Exhibit 10.24 to the Companys Report on Form 10-Q
filed with the Securities and Exchange Commission as of August 11, 1998.
(10) Previously filed as Annex III to the Companys Proxy Statement on Schedule
14A filed with the Securities and Exchange Commission on December 18, 1998.
(11) Previously filed as Exhibit 99.2 to the Companys Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on February 17,
1999.
II-3
(12) Previously filed as Exhibit 10.36 to Amendment No. 1 to the Companys
Registration Statement on Form S-2 filed with the Securities and Exchange
Commission on September 11, 2000.
(13) Previously filed as an exhibit to the Companys Report on Form 10-Q
filed with the Securities and Exchange Commission on August 14, 2002.
(14) Previously filed as an exhibit to the Companys Report on Form 10-Q
filed with the Securities and Exchange Commission on November 13, 2002.
(15) Previously filed as an exhibit to the Companys Report on Form 10-K filed
with the Securities and Exchange Commission on March 27, 2003.
II-4
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In addition to the current pool of potential patients, we expect that the
number of persons seeking treatment for their condition will increase
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 rate
than the overall U.S. population. In the United States, the vast
majority of AAA procedures are performed in patients age 65 and
over.
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.
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Increased Screening Will Increase the Patient Pool
. Medical
journals report that AAA screening at age 65 reduces mortality from
AAA disease. A recently published article in the Lancet, a British
medical journal, demonstrated that population screening at age 65
can reduce the mortality associated with AAA and that the screening
is cost effective. We believe that like colonoscopy or mammography,
growth of the use of non-invasive, inexpensive testing and minimally
invasive alternatives for treatment of AAA will increase the number
of patients seeking screening for this serious medical condition.
Improved Endoluminal Devices
. We believe improved clinical
results of endoluminal repair devices should convert many watchful
waiting and surgical candidates to ELG procedures. Next generation
endovascular AAA repair systems address shortfalls of first and
second generation stent grafts, and longer follow-up should enhance
acceptance of ELGs as viable therapy.
One-Piece, Bifurcated ELG
. This eliminates many of the
problems associated with early generation multi-piece systems. Our
products eliminate 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. We believe this should result in continued long- term
exclusion of the aneurysm, and improved 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 requires only a small surgical incision in one leg. The
other leg needs only placement of a non-surgical introducer sheath,
three millimeters in diameter. Other ELGs typically need surgical
exposure of the femoral artery in both legs to introduce the
multiple components. Our unique delivery mechanism and downsizing
of the catheter permits our technology to be used in patients having
small or very tortuous access vessels. We believe 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 our
patent portfolio. This proprietary design expands to the proper
size of the target aorta and eliminates the need for hooks or barbs
for attachment. Based on our results to date, the PowerLink System
has an excellent record for successful deployments.
Single Wire and Long Main Body Design
. The long 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. In addition
the long main body places the PowerLink near or at the aortic
bifurcation, which minimizes the risk of device migration during the
follow up period.
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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 component detachment during the follow-up period. Component
detachment can lead to a leak and a re-pressurization of the sac.
We believe 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 ELGs 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 Individual Stents
. Early generation ELGs utilized
individual stents sutured together to create an endoskeleton or
cage, as opposed to the PowerLink System that is made of a single
stent body construction. Over the past two years, reports of suture
breakage in other competitors devices, 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.
We believe this was the primary cause for one manufacturer to recall
its product and to temporarily suspend its U.S. human clinical
trial.
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Deployment Success 97.8%
Mean Length of Hospital Stay 3.4 days
30 day Mortality (2) 1.09% (not device related)
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AAA Rupture 0
Secondary Procedures: (10) 5.4% to treat endoleaks
13.2% endoleak rate at one year, 5.6% endoleak at two years
> 5mm Device Migrations (5) 3.8%
Wire Fractures 0
Material Failure 0
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Demonstrate a Significant Technology Advantage
. Our 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.
Upon receipt of an FDA marketing approval we will conduct a limited
product launch to demonstrate the effectiveness of our sales model
and product acceptance.
Establish the PowerLink System as the Standard of Care for
AAA Repair
. We intend to establish our products as the standard of
care for elective treatment of AAAs. We plan to coordinate each
market rollout by selectively targeting top tier medical
institutions and training their staff at our various clinical
investigational sites.
Execute a Global Marketing Strategy and Address Key Markets
.
We have obtained the right to affix the CE Mark, and are evaluating
our distribution options in Europe. Because of limitations on device
reimbursement in Europe, we have sought to limit our capital
commitments by establishing sales through a distributor or to sell
direct, on a limited basis. We intend to establish a direct sales
organization in the United States upon receipt of FDA approval.
Increase Public Awareness
. When we receive regulatory
approval for our technology, we intend to promote our endovascular
procedure for patients by trying to increase public awareness of AAA
disease and by supporting the merits of early detection and
endovascular treatment. Recently published articles report that
baseline testing for AAA can reduce the incidence of rupture.
Continue to Develop Core Competencies
. We believe we have
demonstrated core competencies in developing catheter-based
solutions that address a large unmet clinical need that we
identified after close consultation with key physicians. Our focus
at this time is the aortic aneurysm. In the future, we intend to
develop additional devices to expand the application of our core
competencies.
Evaluate Opportunities Based on non-AAA Intellectual
Property
. We have an extensive patent portfolio that includes not
only patents involved with brachytherapy but many patents pertaining
to the delivery of substances into the bloodstream of the artery, or
direct delivery of
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substances into the wall of the artery. We plan on evaluating
product opportunities that may be available as a result of these
patents
.
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clinical effectiveness, as defined by product safety, ease of use, reliability and durability;
price;
availability of third-party reimbursement;
distribution capability;
time necessary to develop products successfully; and
ability to receive regulatory approval.
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Stent Graft Characteristics
Mfg.
Single Piece?
Fully Supported?
Fixation
FDA Status
PowerLink
Yes
Yes
Radial Force &
Column Strength
In Trial
AneuRx, Talent
No
Yes
Radial Force
Approved -AneuRx
In Trial - Talent
Zenith
No
Yes
Radial Force & Barbs
Approved
Excluder
No
Yes
Radial Force & Barbs
Approved
Fortron
No
Yes
Radial Force & Barbs
In Trial
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PowerLink XL
. It is estimated that 10% of the potential AAA
patients require a larger endoluminal graft device than our current
28 mm device. The PowerLink XL is a 34mm bifurcated device,
designed to compete in this market. The scope of this project
consists of two design variations, the PowerLink Bifurcated
Assembly, and the PowerLink Bifurcated Suprarenal Assembly.
TDC Delivery Catheter
. The goal of this project is to
improve the performance of the delivery catheter for simpler and
quicker deployment of the endoluminal graft, while remaining
compatible with all of our current stent-graft designs.
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Number of Shares
Name
For
Withheld
Broker Non-Votes
22,154,754
1,703,706
22,174,188
1,684,272
b.
Approval of amendment to Certification of Incorporation to increase
the number of authorized shares of common stock from 30,000,000 to
50,000,000 shares. The following is a tabulation of the votes:
Number of Shares
For
Against
Withheld
Broker Non-Votes
574,940
1,009,371
c.
Approval of amendment to Employee Stock Purchase Plan to increase the
number of authorized shares of common stock purchasable thereunder from
200,000 to 400,000 shares. The following is a tabulation of the votes:
Number of Shares
For
Against
Withheld
Broker Non-Votes
787,538
1,058,499
7,019,822
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d.
Ratification of PricewaterhouseCoopers LLP as independent auditors of
the Company for the fiscal year ending December 31, 2003. The following
is a tabulation of the votes:
Number of Shares
For
Against
Withheld
Broker Non-Votes
56,610
1,011,375
HIGH
LOW
$
2.10
$
1.25
1.43
.87
1.20
.72
1.35
.69
$
1.91
$
.91
3.44
1.50
4.15
2.77
4.04
3.43
$
7.26
$
3.73
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December 31,
1999
2000
2001
2002
2003
(In thousands)
$
2,051
$
6,311
$
3,327
$
2,606
$
4,402
20,004
24,046
16,983
7,104
8,377
9,793
23,202
15,111
9,411
15,020
29,873
38,454
23,330
33,907
35,343
(40,333
)
(45,796
)
(61,437
)
(68,004
)
(73,919
)
25,111
35,240
19,758
31,476
33,875
(1)
The charges for acquired in-process research and development for the year
ended December 31, 1999 relates to our acquisition of the former Radiance
Medical Systems, Inc. The charge for acquired in-process research and
development for the year ended December 31, 2002 relates to our merger
with the former Endologix, Inc. These charges represent the portion of the
purchase price allocated to the acquired research and development
projects, which, at the date of the acquisition, were in process, had not
reached technological feasibility and had no alternative future use (Note
2 to the Consolidated Financial Statements).
(2)
Due to the competitive market, in order to conserve cash prior to filing
a Pre-Market Approval Application with the FDA for our radiation catheter,
or RDX system, and to take advantage of strategic alternatives, we
decided in September 2001 to restructure our operations. The
restructuring plan included the discontinuance of product manufacturing
and marketing, Japanese clinical trials for the RDX system, and new
research and development projects, and the involuntary termination of 55
employees. As a result of the restructuring plan, we recorded a $344,000
charge, comprised of
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manufacturing facility set up and sub-license fees
and non-cancelable commitments under the agreements with our third party
manufacturer in Europe, Bebig GmbH, $20,000 in other non-
cancelable commitments, $601,000 for the write-off of inventory that would
not be used to fulfill outstanding catheter and stent technology product
orders, $1.1 million for employee termination benefits, and $42,000 for
other exit costs (Note 14 to the Consolidated Financial Statements).
In addition, we concluded that certain RDX technology equipment and
intangible assets, previously acquired in fiscal 1999 related to the RDX
technology, were impaired resulting in a charge of $390,000 and $2.1
million. We concluded the assets would not generate future cash flows.
Because we also decided to cease manufacturing of our other product lines,
subject to fulfillment of outstanding orders, we recorded a charge of
$40,000 for equipment used in the production of other catheter and stent
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, the Company completed
its evaluation of its facility needs and recorded a $309,000 restructuring
charge for non-cancelable lease commitments, net of estimated sublease
income of $256,000.
During the fourth quarter of 2002, we reassessed our restructuring accrual
for non-cancelable lease commitments in light of diminished opportunity for
sublease arrangements prior to the lease term expirations in October 2003,
and recorded an additional $168,000 restructuring charge.
March 31
June 30
September 30
December 31
(In thousands, except per share amounts)
$
490
$
295
$
285
$
325
1,162
989
919
920
905
881
786
793
(1,190
)
(1,653
)
(1,492
)
(1,580
)
(0.05
)
(0.07
)
(0.05
)
(0.06
)
$
$
140
$
387
$
307
1,768
1,940
2,133
1,558
1,699
1,857
1,963
1,420
548
(4,862
)
(1,178
)
(1,075
)
0.04
(0.28
)
(0.05
)
(0.04
)
0.04
(0.28
)
(0.05
)
(0.04
)
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the timing and amount of expenses associated with clinical
testing and development of the PowerLink system and remaining
clinical testing of the radiation catheter system;
the progress and success of clinical trials and regulatory approvals;
varying product sales by Guidant Corporation, our licensee;
our ability to penetrate markets following regulatory approval; and,
outcomes from future partnering or technology acquisition
agreements, if any.
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allowances for accounts receivable and inventory;
long-lived assets, including intangible assets;
indefinite lived assets; and,
income taxes.
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selling our equity securities;
licensing our technologies;
commercial sales, and
entering into international product distribution agreements.
2001
2002
2003
Totals
$
474,000
$
619,000
$
$
1,093,000
371,000
221,000
248,000
840,000
$
845,000
$
840,000
$
248,000
$
1,933,000
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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 emphasis on sales and marketing capabilities;
the establishment of collaborative relationships with other parties; and,
the ability to develop technology and to commercialize products.
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(a)
There are no contractual obligations that extend past 2007.
(b)
Represents estimates of obligations under Impra component purchase
contract. The actual amounts paid may be materially different primarily
due to the fact that the agreement provides that the
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component price to be
paid increases materially following FDA approval of the PowerLink System,
and we do not currently know when or if we will receive such FDA approval.
For the purpose of this forecast, we have assumed that we will purchase
all of the materials to meet the minimum purchase
requirement for 2004 before the PowerLink System is approved. Additionally,
the total cost of the components is determined by the mix of sizes of graft
material that we purchase, as well as the number of components purchased.
Under the agreement, each year we must buy 115% of the minimum or actual
number of units purchased, whichever is higher, in the prior year. The cost
of the component is determined by the size of the graft piece purchased, and
we do not currently know what sizes we will be purchasing after 2004. For
2005, we estimated the sizes to be purchased and for years thereafter until
the contract terminates at the end of 2007, we assumed that the minimum
amount purchased increased 15% each year. Please see the paragraph, above,
for more information on the Impra agreement.
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manage the simultaneous manufacture of different products
efficiently and integrate the manufacture of new products with
existing product lines;
address difficulties in scaling up production of new
products, including problems involving production yields, quality
control and assurance, component supply and shortages of qualified
personnel; and,
implement and improve our operational, management information
and financial control systems.
failure of our supplier to comply with regulatory requirements;
any strike or work stoppage;
disruptions in shipping;
a natural disaster caused by fire, floods or earthquakes;
a supply shortage experienced by our sole source supplier; and
the fiscal health and manufacturing strength of our sole source supplier.
the scope and results of our clinical trials;
the time and costs involved in obtaining regulatory approvals;
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the costs involved in obtaining and enforcing patents or any
litigation by third parties regarding intellectual property; the
establishment of high volume manufacturing and sales and marketing
capabilities; and,
our success in entering into collaborative relationships with
other parties.
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Medtronics AneuRx ,W. L. Gores Excluder, and the Cook Zenith AAA
system which are available in the U.S. and Europe;
Other AAA graft systems by Medtronic, Johnson and Johnson,
currently with more limited availability, and
other technologies in various phases of development, including
pharmaceutical solutions.
significantly greater financial, management and other resources;
more extensive research and development capability;
established market positions; and,
larger sales and marketing organizations.
the conduct of clinical trials;
the timing of regulatory approvals;
fluctuations in our expenses associated with expanding our operations;
new product introductions both in the United States and internationally;
variations in foreign exchange rates; and,
changes in third-party payors reimbursement policies.
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Therefore, we believe that period to period comparison of our operating
results may not necessarily be reliable indicators of our future performance.
It is likely that in some future period our operating results will not meet
your expectations or those of public market analysts.
FDA pre-market approval process;
California Department of Health Services requirements;
ISO 9001/EN46001 certification; and,
European Union CE Mark requirements.
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we may fail to secure necessary patents prior to or after obtaining
regulatory clearances, thereby permitting competitors to market
competing products; and
our already-granted patents may be re-examined, re-issued or
invalidated.
stop selling, making or using our products that use the disputed
intellectual property;
obtain a license from the intellectual property owner to continue
selling, making, licensing or using our products, which license may not
be available on reasonable terms, or at all;
redesign our products or services; and
subject us to significant liabilities to third parties.
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If any of the foregoing occurs, we may be unable to manufacture and sell
our products or license our technology and may suffer severe financial harm.
Whether or not an intellectual property claim is valid, the cost of responding
to it, in terms of legal fees and expenses and the diversion of management
resources, could harm our business.
announcements by us or our competitors concerning technological innovations;
introductions of new products;
FDA and foreign regulatory actions;
developments or disputes relating to patents or proprietary rights;
failure of our results of operations to meet the expectations
of stock market analysts and investors;
changes in stock market analyst recommendations regarding our common stock;
changes in healthcare policy in the United States or other countries; and
general stock market conditions.
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Fair Value at
December 31,
2004
2005
Total
2003
(in thousands, except interest rates)
$
4,311
$
4,311
$
4,306
0.25
%
0.25
%
$
8,127
$
200
$
8,327
$
8,377
1.94
%
6.21
%
2.04
%
$
12,438
$
200
$
12,638
$
12,683
1.36
%
6.21
%
1.43
%
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
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NAME
AGE
POSITION
60
Executive Chairman and Director
50
President and Chief Executive Officer and Director
44
Chief Financial Officer and Corporate Secretary
44
Vice President, Research and Development
48
Vice President, Clinical and Regulatory Affairs
50
Director
43
Director
68
Director
44
Director
54
Director
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Long Term
Compensation
Annual Compensation
Shares
Underlying
Salary
Bonus
Options
2003
$
200,000
$
2002
196,285
47,250
20,000
(b)
2001
2003
$
240,000
$
50,400
100,000
2002
119,583
29,025
2001
2003
$
141,000
$
35,151
2002
138,715
27,298
50,000
2001
125,000
15,000
2003
$
136,000
$
32,477
30,000
2002
119,231
24,713
50,000
2001
99,789
5,000
2003
$
170,000
$
38,250
30,000
2002
93,333
26,780
70,000
2001
(a)
Mr. Brown currently serves as our Executive Chairman. He served as our
Chief Executive Officer and Chairman following the merger with (former)
Endologix on May 29, 2002 until January 1, 2003.
(b)
Options were granted before employment as our Chief Executive Officer
based upon Board participation.
(c)
Mr. Bishop resigned his position with us on January 9, 2004.
(d)
Ms. Uyesugi became our Vice President of Clinical and Regulatory Affairs
following the Merger with (former) Endologix on May 29, 2002.
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Potential Realizable Value
of Options At Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants
Option Term (4)
% of Total
Number of
Options
Securities
Granted To
Underlying
Employees
Exercise of
Options
in Fiscal
Base Price
Expiration
Name
Granted (1)
Year (2)
($/Share) (3)
Date
5% ($) (4)
10% ($) (4)
$
$
100,000
18.1
%
$
3.92
12/11/2013
246,527
624,747
30,000
5.5
%
$
3.92
12/11/2013
73,958
187,424
30,000
5.5
%
$
3.92
12/11/2013
73,958
187,424
(1)
The options listed in the table were granted under our 1996 Stock
Options/Stock Issuance Plan. The options have a maximum term of ten years
measured from the date of grant. Twenty-five percent (25%) of the options
are exercisable upon the optionees completion of one year of service
measured from the date of grant, and the balance are exercisable in a
series of successive equal monthly installments upon the optionees
completion of each additional month of service over the next 36 months
thereafter.
(2)
Based upon options granted for an aggregate of 550,000 shares to
employees in 2003, including the Named Executive Officers.
(3)
The exercise price may be paid in cash or in shares of our common stock
valued at fair market value on the exercise date.
(4)
The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no guarantee that the actual stock price
appreciation over the option term will be at the assumed 5% and 10% levels
or at any other defined level. Unless the market price of the Common
Stock appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
AND FISCAL YEAR-END OPTION VALUES
Number of Securities
Value of Unexercised In-the-
Shares
Aggregate
Underlying Unexercised
Money Options at
Acquired
Value
Options at FY-End
FY-End (2)
on
Realized $
Name
Exercise
(1)
Exercisable
Unexercisable
Exercisable
Unexercisable
$
51,667
10,833
$
30,657
$
25,891
100,000
3,000
165,939
46,561
69,623
64,999
12,500
25,375--
59,527
64,146
30,443
93901
20,416
50,863
2,917
76,667
9,043
145,568
(1)
Based on the fair market value on the date of exercise less the exercise
price payable for such shares.
(2)
Based on the fair market value of our common stock at year-end, $3.95 per
share, less the exercise price payable for such shares.
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base salary which reflects individual performance and
expertise and is designed to be competitive with salary levels in
the industry;
variable performance awards payable in cash and tied to our
achievement of certain goals; and
long-term stock-based incentive awards that strengthen the
mutuality of interests between the executive officers and our
stockholders.
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Edward M. Diethrich, M.D.
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ANNUAL DATA SERIES
Nasdaq Medical
Device
Nasdaq Stock Market
DATES
Endologix
Manufacturers
- U.S.
100.00
100.00
100.00
161.44
121.11
185.43
163.40
124.94
111.83
52.94
137.25
88.76
27.78
111.09
61.37
129.08
164.29
91.75
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Number of Shares
Percentage of
Name and Address (1)
Beneficially Owned (2)
Outstanding Shares (3)
4,155,556
13.1
%
468,033
1.5
%
468,304
1.5
%
93,506
*
43,140
*
25,625
*
970,640
3.0
%
*
1,008,000
3.2
%
213,533
*
*
3,290,781
10.2
%
*
Represents beneficial ownership of less than 1%
(1)
Unless otherwise indicated, the business address of each holder is: c/o
Endologix, Inc., 13900 Alton Parkway, Suite 122, Irvine, CA 92618.
(2)
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 11, 2004. Shares issuable pursuant to such options are
deemed outstanding for computing the ownership percentage of the person
holding such options but are not deemed to be outstanding for computing
the ownership percentage of any other person.
(3)
Applicable percentages are based on 31,676,945 shares outstanding on
March 11, 2004, plus the number of shares such stockholder can acquire
within 60 days after March 11, 2004.
(4)
Includes 53,333 shares subject to options exercisable within 60 days
after March 11, 2004, and 359,700 shares held in a family trust.
(5)
Includes 64,528 shares subject to options exercisable within 60 days
after March 11, 2004.
(6)
Includes 10,209 shares subject to options exercisable within 60 days
after March 11, 2004.
(7)
Includes 25,625 shares subject to options
exercisable within 90 days
after Mr. Bishops employment departure date of January 9,
2004.
(8)
Includes 249,440 shares subject to options exercisable within 60 days
after March 11, 2004, and 18,200 shares held in a family trust.
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(9)
Includes 1,002,375 held by T&L Investments L.P. Dr. and Mrs. Edward B.
Diethrich hold a total of 98% of the voting and dispositive power over the
shares through a 98% ownership of the capital stock of EBDFam, Inc., the
general partner in T&L Investments LP. Includes 5,625 shares subject to
options exercisable within 60 days after March 11, 2004.
(10)
Includes 211,250 shares subject to options exercisable within 60 days
after March 11, 2004.
(11)
Includes 620,010 shares subject to options exercisable within 60 days
after March 11, 2004.
Number of securities to be
Weighted average
Number of securities
issued upon exercise of
exercise price of
remaining available for
Plan category
outstanding options
outstanding options
future issuance
(a)
(b)
(c)
2,049,801
$
3.46
225,975
205,768
88,500
$
4.24
1,500
2,138,301
$
3.50
227,475
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Director or Officer
Amount Payable
$
240,000
108,750
37,500
312,500
15,000
December 31,
December 31,
2002
2003
$
113,900
$
150,360
115,425
$
229,325
$
150,360
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EXHIBIT
NUMBER
DESCRIPTION
Agreement and Plan of Merger dated November 3, 1998 by and between
CardioVascular Dynamics, Inc. and Radiance Medical Systems, Inc.
Assets Sale and Purchase Agreement dated January 21, 1999 by and between
the Company and Escalon Medical Corp.
Amendment and Supplement to Assets Sale and Purchase Agreement and
Release dated February 28, 2001 by and between the Company and Escalon
Medical Corp.
Short-Term Note, Exhibit 1, to Amendment and Supplement to Assents
Sale and Purchase Agreement and Release dated February 28, 2001 by and
between the Company and Escalon Medical Corp.
Long-Term Note, Exhibit 2, to Amendment and Supplement to Assents Sale
and Purchase Agreement and Release dated February 28, 2001 by and between
the Company and Escalon Medical Corp.
Agreement and Plan of Merger, dated as of February 8, 2002, by and among
the Company, RMS Acquisition Corp. and Endologix, Inc.
Restated Certificate of Incorporation as currently in effect.
Amended and Restated Bylaws
Specimen Certificate of Common Stock
Form of Indemnification Agreement entered into between the Registrant
and its directors and officers
The Registrants Employee Stock Purchase Plan and forms of agreement
thereunder
Industrial Lease dated February 23, 1995 by and between the Irvine
Company and the Company
Supplemental Stock Option Plan
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EXHIBIT
NUMBER
DESCRIPTION
License Agreement by and between the Company and Guidant dated June 19, 1998
1996 Stock Option/Stock Issuance Plan (as Amended and Restated as of
April 8, 1997, March 12, 1998 and November 3, 1998)
1997 Stock Option Plan (As Amended as of June 15, 1998) assumed by
Registrant pursuant to its acquisition of Radiance Medical Systems, Inc.
on January 14, 1999
Form of Employment Agreement dated August 21, 2000 by and between the
Company and Joseph A. Bishop
Supply Agreement dated as of February 12, 1999, and as amended
August 4, 1999, November 16, 1999, March 10, 2000, and January 31, 2001 by
and between the Company and Impra, Inc.
Amendment to Supply Agreement dated January 17, 2002 by and
between the Company and Impra, Inc.
Form of Indemnification Agreement dated October 1, 2002 by
and between the Company and its officers and directors.
Form of Employment Agreement dated October 18, 2002 by and
between the Company and its officers, excluding Joseph A. Bishop.
Schedule of Parties to the Employment Agreement.
Amendment to Employment Agreement dated October 18, 2002
by and between the Company and Franklin D. Brown, dated
December 17, 2003, which is attached as Exhibit 10.43.
Amendment to Employment Agreement dated October 18, 2002
by and between the Company and Paul McCormick, dated December 17, 2003,
which is attached as Exhibit 10.44.
Form of Employment Agreement dated February 26, 2004 by and between the
Company and Stefan G. Schreck, which is attached as Exhibit 10.45.
Form of the Code of Ethics for Our Chief Executive Officer and Principal
Financial Officers, which is attached as Exhibit 14.
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EXHIBIT
NUMBER
DESCRIPTION
List of Subsidiaries
Consent of PricewaterhouseCoopers LLP
Power of Attorney (included on signature page hereto)
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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ENDOLOGIX, INC.
By:
/s/ PAUL MCCORMICK
Paul McCormick
Chief Executive Officer and Director
(Principal Executive Officer)
SIGNATURE
TITLE
DATE
/s/ PAUL MCCORMICK
(Paul McCormick)
Chief Executive Officer
and Director
(Principal Executive Officer)
March 25, 2004
/s/ DAVID M. RICHARDS
(David M. Richards)
Chief Financial Officer, and
Secretary (Principal Financial
and Accounting Officer)
March 25, 2004
/s/ FRANKLIN D. BROWN
(Franklin D. Brown)
Executive Chairman and Director
March 25, 2004
/s/ MAURICE BUCHBINDER, M.D.
(Maurice Buchbinder, M.D.)
Director
March 25, 2004
/s/ RODERICK DE GREEF.
(Roderick de Greef)
Director
March 25, 2004
/s/ EDWARD DIETHRICH, M.D.
(Edward Diethrich, M.D.)
Director
March 25, 2004
/s/ JEFFREY F. ODONNELL
(Jeffrey F. ODonnell)
Director
March 25, 2004
/s/ GREGORY D. WALLER
(Gregory D. Waller)
Director
March 25, 2004
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of Endologix, Inc.
Orange County, California
March 10, 2004
Table of Contents
(In thousands, except share and per share amounts)
December 31,
2002
2003
$
2,606
$
4,402
5,053
8,166
622
239
1,004
656
2,043
2,780
431
245
11,759
16,488
195
209
30
54
225
263
(40
)
(122
)
185
141
2,051
211
3,602
3,602
15,939
14,534
371
367
$
33,907
$
35,343
$
2,348
$
1,468
2,348
1,468
83
2,431
1,468
24
28
99,495
108,279
(68,004
)
(73,919
)
(205
)
(661
)
166
148
31,476
33,875
$
33,907
$
35,343
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(In thousands, except per share amounts)
Year Ended December 31,
2001
2002
2003
$
1,111
$
834
$
1,395
6,528
6,565
2,595
7,639
7,399
3,990
1,149
460
625
601
1,750
460
625
5,889
6,939
3,365
14,605
6,155
6,711
1,305
982
787
2,582
2,435
2,083
4,501
4,617
168
(65
)
(27
)
(16
)
23,044
14,214
9,565
(17,155
)
(7,275
)
(6,200
)
1,426
608
302
89
111
8
(1
)
(11
)
(25
)
1,514
708
285
$
(15,641
)
$
(6,567
)
$
(5,915
)
$
(1.20
)
$
(0.33
)
$
(0.23
)
13,086
19,718
25,845
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(In thousands, except share amounts)
Common Stock
Additional
Treasury
Paid-In
Accumulated
Shares
Amount
Capital
Deficit
Shares
Amount
13,049,000
$
13
$
80,678
$
(45,796
)
$
21,000
38
52,000
216
(97
)
(15,641
)
13,122,000
13
80,835
(61,437
)
39,000
40
12,000
16
11,141,000
11
18,626
(227,000
)
(205
)
(22
)
(6,567
)
24,314,000
24
99,495
(68,004
)
(227,000
)
(205
)
139,000
184
123,000
95
4,000,000
4
8,353
(268,000
)
(456
)
75
77
(5,915
)
28,576,000
$
28
$
108,279
$
(73,919
)
(495,000
)
$
(661
)
Table of Contents
(In thousands)
Year Ended December 31,
2001
2002
2003
$
(15,641
)
$
(6,567
)
$
(5,915
)
4,501
3,453
168
1,057
867
1,494
(97
)
(22
)
75
77
131
(3
)
(139
)
(65
)
(27
)
(16
)
(19
)
(69
)
17
137
295
215
522
411
(575
)
(737
)
79
1,837
534
523
(2,331
)
(880
)
(81
)
(360
)
(9,954
)
(2,229
)
(4,968
)
(17,157
)
(9,510
)
(9,175
)
24,335
19,254
7,856
(329
)
(87
)
(42
)
(67
)
(7,033
)
6,849
2,624
(1,428
)
8,357
216
16
95
38
40
184
(1,000
)
(205
)
(456
)
254
(1,149
)
8,180
(133
)
33
12
(2,984
)
(721
)
1,796
6,311
3,327
2,606
$
3,327
$
2,606
$
4,402
$
25,664
4,501
(9,129
)
(12
)
(18,637
)
$
2,387
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(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Year Ended December 31,
2001
2002
2003
$
416
$
315
$
940
40
376
189
138
25
174
165
51
96
178
92
145
$
1,111
$
834
$
1,395
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(In Thousands, Except Share and Per Share Amounts)
2001
2002
2003
$
(15,641
)
$
(6,567
)
$
(5,915
)
77
(1,183
)
(361
)
(134
)
$
(16,824
)
$
(6,928
)
$
(5,972
)
$
(1.20
)
$
(0.33
)
$
(0.23
)
$
(1.29
)
$
(0.35
)
$
(0.23
)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
$
18,637
8,355
786
$
27,778
$
4,961
135
34
(2,387
)
174
4,501
14,050
2,708
3,602
$
27,778
Year Ended
December 31, 2001
December 31, 2002
$
10,674
$
8,688
$
(21,518
)
$
(5,378
)
$
(0.89
)
$
(0.22
)
24,226,000
24,266,000
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
December 31,
2002
2003
$
1,069
$
1,647
174
496
800
637
$
2,043
$
2,780
December 31,
2002
2003
$
14,050
$
14,050
(819
)
(2,224
)
13,231
11,826
2,708
2,708
$
15,939
$
14,534
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(In Thousands, Except Share and Per Share Amounts)
December 31,
2002
2003
$
740
$
662
871
511
248
405
225
84
70
$
2,348
$
1,468
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
(In Thousands, Except Share and Per Share Amounts)
Table of Contents
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(In Thousands)
Column A
Column B
Column C
Column D
Column E
Additions (Reductions)
Balance at
Charges to
Charged
Balance at
Beginning
Costs and
to Other
End of
Description
of Period
Expenses
Accounts
Deductions(a)
Period
$
165
$
(139
)
$
$
(10
)
$
16
$
1,158
$
(93
)
$
$
(983
)
$
82
$
19,547
$
1,963
$
$
$
21,510
$
244
$
(3
)
$
$
(76
)
$
165
$
985
$
238
$
$
(65
)
$
1,158
$
19,993
$
(446
)
$
$
$
19,547
$
113
$
131
$
$
$
244
$
343
$
817
$
$
(175
)
$
985
$
14,104
$
5,889
$
$
$
19,993
(a)
Deductions represent the actual write-off of accounts receivable balances
or the disposal of inventory.
Table of Contents
EXHIBIT
NUMBER
DESCRIPTION
Agreement and Plan of Merger dated November 3, 1998 by and between
CardioVascular Dynamics, Inc. and Radiance Medical Systems, Inc.
Assets Sale and Purchase Agreement dated January 21, 1999 by and between
the Company and Escalon Medical Corp.
Amendment and Supplement to Assets Sale and Purchase Agreement and
Release dated February 28, 2001 by and between the Company and Escalon
Medical Corp.
Short-Term Note, Exhibit 1, to Amendment and Supplement to Assents
Sale and Purchase Agreement and Release dated February 28, 2001 by and
between the Company and Escalon Medical Corp.
Long-Term Note, Exhibit 2, to Amendment and Supplement to Assents Sale
and Purchase Agreement and Release dated February 28, 2001 by and between
the Company and Escalon Medical Corp.
Agreement and Plan of Merger, dated as of February 8, 2002, by and among
the Company, RMS Acquisition Corp. and Endologix, Inc.
Restated Certificate of Incorporation as currently in effect.
Amended and Restated Bylaws
Specimen Certificate of Common Stock
Form of Indemnification Agreement entered into between the Registrant
and its directors and officers
The Registrants Employee Stock Purchase Plan and forms of agreement
thereunder
Industrial Lease dated February 23, 1995 by and between the Irvine
Company and the Company
Supplemental Stock Option Plan
License Agreement by and between the Company and Guidant dated June 19, 1998
1996 Stock Option/Stock Issuance Plan (as Amended and Restated as of
April 8, 1997, March 12, 1998 and November 3, 1998)
1997 Stock Option Plan (As Amended as of June 15, 1998) assumed by
Registrant pursuant to its acquisition of Radiance Medical Systems, Inc.
on January 14, 1999
Form of Employment Agreement dated August 21, 2000 by and between the
Company and Joseph A. Bishop
Supply Agreement dated as of February 12, 1999, and as amended
August 4, 1999, November 16, 1999, March 10, 2000, and January 31, 2001 by
and between the Company and Impra, Inc.
Amendment to Supply Agreement dated January 17, 2002 by and
between the Company and Impra, Inc.
Table of Contents
EXHIBIT
NUMBER
DESCRIPTION
Form of Indemnification Agreement dated October 1, 2002 by
and between the Company and its officers and directors.
Form of Employment Agreement dated October 18, 2002 by and
between the Company and its officers, excluding Joseph A. Bishop.
Schedule of Parties to the Employment Agreement.
Amendment to Employment Agreement dated October 18, 2002
by and between the Company and Franklin D. Brown, dated
December 17, 2003, which is attached as Exhibit 10.43.
Amendment to Employment Agreement dated October 18, 2002
by and between the Company and Paul McCormick, dated December 17, 2003,
which is attached as Exhibit 10.44.
Form of Employment Agreement dated February 26, 2004 by and between the
Company and Stefan G. Schreck, which is attached as Exhibit 10.45.
Form of the Code of Ethics for Our Chief Executive Officer and Principal
Financial Officers, which is attached as Exhibit 14.
Table of Contents
EXHIBIT
NUMBER
DESCRIPTION
List of Subsidiaries
Consent of PricewaterhouseCoopers LLP
Power of Attorney (included on signature page hereto)
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Table of Contents
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ENDOLOGIX, INC.,
A DELAWARE CORPORATION
ENDOLOGIX, INC., a Delaware corporation organized and existing under and by virtue of the Delaware General Corporation Law (the "Corporation"), does hereby certify:
FIRST: The Board of Directors of the Corporation, by unanimous written consent, duly adopted resolutions proposing and declaring advisable the following amendment to the Certificate of Incorporation of the Corporation, directing that said amendment be submitted to the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that Article IV, Section (A) of the Certificate of Incorporation is hereby amended to read in full as follows:
"ARTICLE IV
(A) Classes of Stock. This corporation is authorized to issue two classes of stock, to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that this corporation is authorized to issue is fifty-five million (55,000,000). The number of shares of Preferred Stock authorized to be issued is five million (5,000,000), par value $0.001 per share. The number of shares of Common Stock authorized to be issued is fifty million (50,000,000), par value $0.001 per share. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this corporation (the "Board of Directors") is expressly authorized to provide for the issue of all or any of the remaining shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such shares and as may be permitted by the General Corporation Law of the State of Delaware. Subject to compliance with applicable protective voting rights which have been granted to the Preferred Stock or series thereof in Certificates of Designation or the corporation's Certificate of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also expressly authorized to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status they had prior to the adoption of the resolution originally fixing the number of shares of such series."
SECOND: The amendment of the Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
[Signature page follows]
IN WITNESS WHEREOF, ENDOLOGIX, INC. has caused this Certificate of Amendment to be signed by its duly authorized Chief Financial Officer this 28th day of October, 2003.
/s/ David M. Richards ------------------------------------- David M. Richards, Chief Financial Officer |
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
RADIANCE MEDICAL SYSTEMS, INC.,
A DELAWARE CORPORATION
RADIANCE MEDICAL SYSTEMS, INC., a Delaware corporation organized and existing under and by virtue of the Delaware General Corporation Law (the "Corporation"), does hereby certify:
FIRST: The Board of Directors of the Corporation, by unanimous written consent, duly adopted resolutions proposing and declaring advisable the following amendment to the Certificate of Incorporation of the Corporation, directing that said amendment be submitted to the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that Article I of the Certificate of Incorporation is hereby amended to read in full as follows:
"ARTICLE I
The name of the corporation is Endologix, Inc."
SECOND: That thereafter, the holders of the necessary number of shares of capital stock of the Corporation gave their written consent in favor of the foregoing amendment in accordance with the provisions of Section 228 of the Delaware General Corporation Law.
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, RADIANCE MEDICAL SYSTEMS, INC. has caused this Certificate of Amendment to be signed by its duly authorized Chief Financial Officer this 31st day of May, 2002.
/s/ David M. Richards ------------------------------------- David M. Richards, Chief Financial Officer |
RESTATED
CERTIFICATE OF INCORPORATION
OF
RADIANCE MEDICAL SYSTEMS, INC.
(PURSUANT TO SECTIONS 242 AND 245 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE)
Radiance Medical Systems, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the "General Corporation Law").
DOES HEREBY CERTIFY:
FIRST: That this corporation was originally incorporated on June 2, 1993, pursuant to the General Corporation Law, under the name of Endosonics Acquisition Corp.
SECOND: That this Restated Certificate of Incorporation restates and integrates and does not further amend the Certificate of Incorporation of this corporation as theretofore amended and supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation.
THIRD: That the Restated Certificate of Incorporation of this corporation, as restated, is as follows:
ARTICLE I
The name of this corporation is Radiance Medical Systems, Inc.
ARTICLE II
The address of the registered office of this corporation in the State of Delaware is 2711 Centreville Road, Suite 400, Wilmington, Delaware, 19808 County of New Castle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
ARTICLE IV
(A) Classes of Stock. This corporation is authorized to issue two classes of stock, to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that this corporation is authorized to issue is thirty-five million (35,000,000). The number of shares of Preferred Stock authorized to be issued is five million (5,000,000), par value
$0.001 per share. The number of shares of Common Stock authorized to be issued is thirty million (30,000,000), par value $0.001 per share. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this corporation (the "Board of Directors") is expressly authorized to provide for the issue of all or any of the remaining shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such shares and as may be permitted by the General Corporation Law of the State of Delaware. Subject to compliance with applicable protective voting rights which have been granted to the Preferred Stock or series thereof in Certificates of Designation or the corporation's Certificate of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also expressly authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status they had prior to the adoption of the resolution originally fixing the number of shares of such series.
(B) Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
A director of this corporation shall not be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporation action further eliminating or limiting the personal liability of directors, then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of this corporation shall not adversely affect any right or protection of a director of this corporation existing at the time of such repeal or modification.
ARTICLE VI
This corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted to this reservation.
ARTICLE VII
The Board of Directors may from time to time make, amend, supplement or repeal the Bylaws; provided, however, that the stockholders may change or repeal any Bylaw adopted by the Board of Directors; and provided, further, that no amendment or supplement to the Bylaws adopted by the Board of Directors shall vary or conflict with any amendment or supplement adopted by the stockholders.
ARTICLE VIII
The number of directors of this corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders. The current Board of Directors shall be divided into three
(3) classes, as nearly equal in number as possible, designated Class I, Class II
and Class III. The number of directors constituting each Class shall be fixed
from time to time by a resolution duly adopted by the Board of Directors. Class
I directors shall hold office for an initial term expiring at the annual meeting
of stockholders in 1999. Class II directors shall hold office for an initial
term expiring at the annual meeting of stockholders in 2000, and Class III
directors shall hold office for a term expiring at the annual meeting of
stockholders in 2001. At each annual meeting of stockholders held thereafter,
directors shall be elected for a three-year term to succeed the directors of the
Class whose terms then expire.
ARTICLE IX
Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide.
ARTICLE X
Meetings of stockholders may be held within or without the State of Delaware, the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the
statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation."
FOURTH: That the Restated Certificate of Incorporation was duly adopted
by the board of directors without a vote of the stockholders in accordance with
Section 245(b) of the General Corporation Law.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed by the Vice President, Finance and Administration, Chief Financial Officer as of March 12, 2001.
/s/ Stephen R. Kroll ---------------------------------- Stephen R. Kroll Vice President, Finance and Administration, Chief Financial Officer and Secretary |
Exhibit 10.43
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is made as of December 17, 2003, between Endologix, Inc., a Delaware corporation (the "Company"), and Franklin D. Brown, an individual ("Executive").
RECITALS
WHEREAS, the Company currently employs Executive pursuant to that certain Employment Agreement dated October 18, 2002 (the "Employment Agreement");
WHEREAS, the Company desires that Executive become the Executive Chairman of the Company and Executive desires to accept such position and assume the duties of that office; and
WHEREAS, the Company and Executive desire to amend the Employment Agreement to provide for the foregoing change in Executive's position with the Company;
NOW THEREFORE, in consideration of the mutual agreements and covenants hereinafter set forth and for other valuable consideration, the Company and Executive hereby agree as follows:
AGREEMENT
Definitions.
Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Employment Agreement.
Amendment to Section 1 of the Employment Agreement.
The first sentence of Section 1 of the Employment Agreement is hereby amended in its entirety to read as follows:
"1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the Executive Chairman of the Company, reporting to the Board of Directors of the Company, and the Executive accepts such employment and agrees that he shall provide approximately one-half of full-time services on such reasonable duties as shall be assigned to him by the Company commensurate with such position and that he shall not be eligible for participation in the Company's incentive bonus programs."
Miscellaneous.
CONTINUING FORCE AND EFFECT. EXCEPT AS HEREIN EXPRESSLY AMENDED, ALL TERMS, COVENANTS AND PROVISIONS OF THE EMPLOYMENT AGREEMENT ARE AND SHALL REMAIN IN FULL FORCE AND EFFECT AND ALL REFERENCES THEREIN TO SUCH EMPLOYMENT AGREEMENT SHALL HENCEFORTH REFER TO THE EMPLOYMENT AGREEMENT AS AMENDED BY THIS AMENDMENT. THIS AMENDMENT SHALL BE DEEMED INCORPORATED INTO, AND A PART OF, THE EMPLOYMENT AGREEMENT.
COUNTERPARTS. THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS, EACH OF WHICH SHALL BE DEEMED AN ORIGINAL, BUT ALL SUCH COUNTERPARTS TOGETHER SHALL CONSTITUTE BUT ONE AND THE SAME INSTRUMENT.
IN WITNESS WHEREOF, we have set our hands hereto as of the date first above written
ENDOLOGIX, INC.
/s/ Paul McCormick ----------------------------------------- By: Paul McCormick Its: Board Member, CEO and President |
EXECUTIVE
/s/ Franklin D. Brown ----------------------------------------- Franklin D. Brown |
Exhibit 10.44
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is made as of December 17, 2003, between Endologix, Inc., a Delaware corporation (the "Company"), and Paul McCormick, an individual ("Executive").
RECITALS
WHEREAS, the Company currently employs Executive pursuant to that certain Employment Agreement dated October 18, 2002 (the "Employment Agreement");
WHEREAS, the Company desires that Executive become the President and Chief Executive Officer of the Company and Executive desires to accept such position and assume the duties of that office; and
WHEREAS, the Company and Executive desire to amend the Employment Agreement to provide for the foregoing change in Executive's position with the Company;
NOW THEREFORE, in consideration of the mutual agreements and covenants hereinafter set forth and for other valuable consideration, the Company and Executive hereby agree as follows:
AGREEMENT
Definitions.
Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Employment Agreement.
Amendment to Section 1 of the Employment Agreement.
The first sentence of Section 1 of the Employment Agreement is hereby amended in its entirety to read as follows:
"1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the President and Chief Executive Officer of the Company, reporting to the Board of Directors of the Company, and the Executive accepts such employment and agrees to devote substantially all his business time and efforts and skills on such reasonable duties as shall be assigned to him by the Company commensurate with such position."
Miscellaneous.
CONTINUING FORCE AND EFFECT. EXCEPT AS HEREIN EXPRESSLY AMENDED, ALL TERMS, COVENANTS AND PROVISIONS OF THE EMPLOYMENT AGREEMENT ARE AND SHALL REMAIN IN FULL FORCE AND EFFECT AND ALL REFERENCES THEREIN TO SUCH EMPLOYMENT AGREEMENT SHALL HENCEFORTH REFER TO THE EMPLOYMENT AGREEMENT AS AMENDED BY THIS AMENDMENT. THIS AMENDMENT SHALL BE DEEMED INCORPORATED INTO, AND A PART OF, THE EMPLOYMENT AGREEMENT.
COUNTERPARTS. THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS, EACH OF WHICH SHALL BE DEEMED AN ORIGINAL, BUT ALL SUCH COUNTERPARTS TOGETHER SHALL CONSTITUTE BUT ONE AND THE SAME INSTRUMENT.
IN WITNESS WHEREOF, we have set our hands hereto as of the date first above written
ENDOLOGIX, INC.
/s/ Franklin D. Brown ------------------------------------ By: Franklin D. Brown Its: Executive Chairman |
EXECUTIVE
/s/ Paul McCormick ------------------------------------- Paul McCormick |
Exhibit 10.45
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of February 23, 2004 by and between ENDOLOGIX, INC., a Delaware corporation (the "Company"), and Stefan Schreck, Ph.D., an individual (the "Executive").
R E C I T A L
The Company desires to employ Executive in the capacity hereinafter stated, and the Executive desires to enter into the employ of the Company in that capacity pursuant to the terms and conditions set forth herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the Company and the Executive, intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the Vice President of Research and Development of the Company, reporting to the President and Chief Executive Officer of the Company, and the Executive accepts such employment and agrees to devote substantially all his business time and efforts and skills on such reasonable duties as shall be assigned to him by the Company commensurate with such position. The term of this Agreement shall commence on February 23, 2004 and expire on October 18, 2005, unless sooner terminated pursuant to the terms and provisions herein stated. This Agreement shall automatically be extended for additional one (1) year renewal terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of the preceding term.
2. STOCK OPTIONS: ACCELERATION OF OPTIONS. Notwithstanding any provisions of the Company's option or stock incentive plan, or of the Executive's stock option or restricted stock agreements, in the event of a "Corporate Transaction" or "Change in Control," as defined below, during the period of the Executive's employment with the Company, all of the Executive's stock options shall vest in full and all rights of the Company to repurchase restricted stock of the Executive shall terminate.
For purposes hereof, "Change in Control" shall mean a change in ownership or control of the Company effected through the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders to accept.
For purposes hereof, "Corporate Transaction" shall mean either of the following stockholder-approved transactions to which the Company is a party:
(A) A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or
(B) The sale, transfer or other disposition of all or substantially all of the Company's assets in complete liquidation or dissolution of the Company.
3. TERMINATION.
3.1 TERMINATION BY THE COMPANY FOR CAUSE. Any of the following acts or omissions shall constitute grounds for the Company to terminate the Executive's employment pursuant to this Agreement for "cause":
(a) Willful misconduct by Executive causing material harm to the Company but only if Executive shall not have discontinued such misconduct within 30 days after receiving written notice from the Company describing the misconduct and stating that the Company will consider the continuation of such misconduct as cause for termination of this Agreement,
(b) Any material act or omission by the Executive involving gross negligence in the performance of the Executive's duties to, or material deviation from any of the policies or directives of, the Company, other than a deviation taken in good faith by the Executive for the benefit of the Company,
(c) Any illegal act by the Executive which materially and adversely affects the business of the Company, provided that the Company may suspend the Executive with pay while any allegation of such illegal act is investigated, or
(d) any felony committed by Executive, as evidenced by conviction thereof, provided that the Company may suspend the Executive with pay while any allegation of such felonious act is investigated.
Termination by the Company for cause shall be accomplished by written notice to the Executive and, in the event of a termination pursuant to Sections 3.1(a), 3.1(b), and/or 3.1(c) above, shall be preceded by a written notice providing a reasonable opportunity for the Executive to correct his conduct.
3.2 TERMINATION FOR DEATH OR DISABILITY. In addition to termination for cause pursuant to Section 3.1 hereof, the Executive's employment pursuant to this Agreement shall be immediately terminated without notice by the Company (i) upon the death of the Executive or (ii) upon the Executive becoming totally disabled. For purposes of this Agreement, the term "totally disabled" means an inability of Executive, due to a physical or mental illness, injury or impairment, to perform a substantial portion of his duties for a period of one hundred eighty (180) or more consecutive days, as determined by a competent physician selected by the Company's Board of Directors and reasonably agreed to by the Executive, following such one hundred eighty (180) day period.
3.3 TERMINATION FOR GOOD REASON. Executive's employment pursuant to this Agreement may be terminated by the Executive for "good reason" if the Executive voluntarily terminates his employment as a result of any of the following:
(a) Without the Executive's prior written consent, a reduction in his then current Base Salary; or
(b) Without the Executive's prior written consent, the assignment to Executive of duties substantially and materially inconsistent with the position and nature of Executive's employment as set forth in Section 1 of this Agreement, or
(c) Without Executive's prior written consent, a relocation of the Executive's place of employment outside of Orange County, California.
3.4 TERMINATION WITHOUT CAUSE. The Company may terminate this Agreement, and the employment of the Executive under this Agreement, without cause, at any time upon at least thirty (30) days' prior written
notice to the Executive. This Section 3.4 shall not apply to a termination of the Executive by the Company as a result of a "Corporate Transaction" or "Change in Control", but, instead, the provisions of Section 3.5 below shall apply.
3.5 TERMINATION DUE TO CORPORATE TRANSACTION OR CHANGE IN CONTROL. The Company may terminate this Agreement and the employment of the Executive under this Agreement, upon at least thirty (30) days' prior written notice to the Executive in the event of a "Corporate Transaction" or "Change in Control," as defined in Section 2, during the period of the Executive's employment. The Executive may terminate this Agreement and the employment of the Executive under this Agreement upon at least thirty (30) days' prior written notice to the Company upon the occurrence of a "Corporate Transaction" or "Change in Control," as defined in Section 2, during the period of Executive's employment if any of the following occur as a result of the "Corporate Transaction" or "Change in Control": (i) a reduction in Executive's current Base Salary, (ii) the assignment to Executive of duties substantially and materially inconsistent with the position and nature of Executive's employment as set forth in Section 1 of this Agreement, (iii) the failure by the Company to obtain from any successor an agreement to assume and perform this Agreement; (iv) Executive is not offered a new employment agreement; or (v) Executive is not offered a new employment agreement on substantially the same terms as provided in this Agreement.
3.6 PAYMENTS UPON REMOVAL OR TERMINATION.
(a) If, during the term of this Agreement, the Executive resigns for one of the reasons stated in Section 3.3, or if the Company terminates Executive's employment pursuant to Section 3.4 above, the Executive shall be entitled to the following compensation: (i) the portion of his then current Base Salary which has accrued through his date of termination, (ii) any payments for unused vacation and reimbursement expenses, which are due, accrued or payable at the date of Executive's termination, (iii) severance payment in an amount of six-months equal to Executive's then-current Base Salary; (the "Severance Amount"), and (iv) to the extent not already vested under Section 2 or otherwise all of Executive's options to purchase shares of the Company's common stock and restricted stock shall vest by six additional months, and such options shall otherwise be exercisable in accordance with their terms. In addition, in such event, Executive shall be entitled to (a) a prorated payment equal to the target bonus amount for which Executive would be eligible for the year in which such resignation or termination occurred, and (b) continuation of the insurance benefits set forth in Exhibit A, for six-months. The payments provided by this paragraph 3.6(a) shall be Executive's complete and exclusive remedy for any such termination.
(b) If, during the term of this Agreement, the Company terminates Executive's employment pursuant to Section 3.5 above or the Executive terminates his employment pursuant to Section 3.5 above, the Executive shall be entitled to the following compensation: (i) the portion of his then current Base Salary which has accrued through his date of termination, (ii) any payments for unused vacation and reimbursement expenses, which are due, accrued or payable at the date of Executive's termination, (iii) severance payment in an amount of twelve-months equal to Executive's then-current Base Salary (the "Severance Amount"); and (iv) to the extent not already vested under Section 2 or otherwise all of Executive's options to purchase shares of the Company's common stock and restricted stock shall accelerate and automatically vest, and such options shall otherwise be exercisable in accordance with their terms. In addition, in such event, Executive shall be entitled to (a) a prorated payment equal to the target bonus amount for which Executive would be eligible for the year in which such resignation or termination occurred, and (b) continuation of the insurance benefits set forth in Exhibit A, for twelve-months. The payments provided by this paragraph 3.6(b) shall be Executive's complete and exclusive remedy for any such termination.
(c) All payments required to be made by the Company to the Executive pursuant to this Section 3 shall be paid on a regular basis in accordance with the Company's normal payroll procedures and policies, including, without limitation, the Severance Amount which shall be paid at such times and in such amounts consistent with the Company's normal payroll procedures and policies over the number of months immediately succeeding the date of termination that is equal to the number of months of Base Salary payable as the
Severance Amount. If the Company terminates the Executive's employment pursuant to Sections 3.1 or 3.2, or if the Executive voluntarily resigns (except as provided in Section 3.3 or Section 3.5), then the Executive shall be entitled to only the compensation set forth in items (i) and (ii) of Section 3.6(a).
(d) To the extent that any or all of the payments and benefits provided
for in this Agreement constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code (the "Code") and, but for this
paragraph, would be subject to the excise tax imposed by Section 4999 of the
Code, then at the Executive's election:
(i) The Executive shall receive all such payments and benefits the Executive is entitled to receive hereunder, and any liability for taxes pursuant to the above shall be the liability solely of the Executive; or
(ii) The aggregate amount of such payments and benefits shall be reduced such that the present value thereof (as determined under the Code and applicable regulations) is equal to 2.99 times the Executive's "base amount" (as defined in Section 280G of the Code).
The determination of any reduction or increase of any payment or benefits under this paragraph pursuant to the foregoing provision shall be made by a nationally recognized public accounting firm chosen by the Company in good faith, and such determination shall be conclusive and binding on the Company and the Executive.
4. ASSIGNMENT. This Agreement shall not be assignable, in whole or in part, by either party without the written consent of the other party, except that the Company may, without the consent of the Executive, assign its rights and obligations under this Agreement to an Affiliate or to any corporation, firm or other business entity (i) with or into which the Company may merge or consolidate, or (ii) to which the Company may sell or transfer all or substantially all of its assets. After any such assignment by the Company, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this Section 4.
5. SUCCESSORS. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate.
6. MISCELLANEOUS.
6.1 GOVERNING LAW. This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of California.
6.2 PRIOR AGREEMENTS. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understanding with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein.
6.3 ARBITRATION. In the event of any controversy, claim or dispute between the parties hereto arising out of or relating to this Agreement, the matter shall be determined by arbitration, which shall take place in Orange County, California, under the rules of the American Arbitration Association. The arbitrator shall be a retired Superior Court judge mutually agreeable to the parties and if the parties cannot agree such person shall be chosen in accordance with the rules of the American Arbitration Association. The arbitrator shall be bound by applicable legal precedent in reaching his or her decision. Any judgment upon such award may be entered in any court having jurisdiction thereof. Any decision or award of such arbitrator shall be final and binding upon the parties and shall not be appealable. The parties hereby consent to the jurisdiction of such arbitrator
and of any court having jurisdiction to enter judgment upon and enforce any action taken by such arbitrator. The fees payable to the American Arbitration Association and the arbitrator shall be paid by the Company.
6.4 WITHHOLDING TAXES. The Company may withhold from any salary and benefits payable under this Agreement all federal, state, city or other taxes or amounts as shall be required to be withheld pursuant to any law or governmental regulation or ruling.
6.5 AMENDMENTS. No amendment or modification of this Agreement shall be deemed effective unless made in writing signed by the parties hereto.
6.6 NO WAIVER. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.
6.7 SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted herefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect.
6.8 COUNTERPART EXECUTION. This Agreement may be executed by facsimile and in counterparts, each of which shall be deemed an original and all of which when taken together shall constitute but one and the same instrument.
6.9 ATTORNEYS FEES. Should any legal action or arbitration be required to resolve any dispute over the meaning or enforceability of this Agreement or to enforce the terms of this Agreement, the prevailing party shall be entitled to recover its or his reasonable attorneys fees and costs incurred in such action, in addition to any other relief to which that party may be entitled.
6.10 NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be personally served or sent by United States Mail, and shall be deemed to have been given when personally served or two days after having been deposited in the United States Mail, registered mail, return receipt requested, with first class postage prepaid and properly addressed as follows:
If to Executive:
STEFAN SCHRECK, PH.D.
13900 Alton Parkway, Suite 122
Irvine, CA 92618
If to the Company:
Endologix, Inc.
13900 Alton Parkway, Suite 122
Irvine, CA 92618
Attn: Chief Executive Officer
6.11 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Executive agrees to sign the Company's standard form of employee proprietary information and inventions agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year set forth above.
"COMPANY"
ENDOLOGIX, INC.,
A Delaware corporation
By:___________________________
__________________________________________________Its: President and CEO
"EXECUTIVE"
STEFAN SCHRECK, PH.D.
EXHIBIT A
STEFAN SCHRECK, PH.D. BENEFITS
--HEALTH INSURANCE
--DENTAL INSURANCE
--PRESCRIPTION DRUG INSURANCE
--GROUP LIFE INSURANCE
EXHIBIT 14
ENDOLOGIX, INC.
CODE OF ETHICS FOR
CHIEF EXECUTIVE OFFICER
AND
SENIOR FINANCIAL OFFICERS
OF
ENDOLOGIX, INC.
as adopted by
the Board of Directors of
Endologix, Inc.
on December 11, 2003
INTRODUCTION
Endologix's Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and other senior financial officers hold an important and elevated role in corporate governance in that they are uniquely capable and empowered to ensure that all stakeholders' interests are appropriately balanced, protected and preserved. This Code of Ethics (the "Code") embodies principles to which they are expected to adhere and advocate. These tenets for ethical business conduct encompass rules regarding both individual and peer responsibilities, as well as responsibilities to Endologix employees, the public and other stakeholders. The CEO, CFO and other senior financial officers are expected to abide by this Code as well as all applicable Endologix business conduct standards and policies or guidelines relating to areas covered by this Code. Any violations of this Code may result in disciplinary action, up to and including termination of employment.
STANDARDS OF CONDUCT
All officers covered by this Code will:
- Act with honest and integrity, avoiding actual or apparent conflicts of interest in their personal and professional relationships.
- Provide stakeholders with information that is accurate, complete, objective, fair, relevant, timely and understandable, including in filings with and other submissions to the U.S. Securities and Exchange Commission and other regulators and in other public communications made by Endologix.
- Comply with rules and regulations of federal, state and local governments, and other appropriate private and public regulatory agencies.
- Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgement to be subordinated.
- Respect the confidentiality of information except when authorized or otherwise legally obligated to disclose.
- Not use confidential information for personal advantage.
- Share knowledge and maintain professional skills important and relevant to stakeholders' needs.
- Actively promote and be an example of ethical behavior as a responsible partner among peers, in the work environment and in the community.
- Achieve responsible use, control and stewardship over Endologix assets and resources.
- Not unduly or fraudulently influence, coerce, manipulate, or mislead any authorized audit or interfere with any auditor engaged in the performance of an internal or independent audit of Endologix's financial statements or accounting books and records.
COMPLIANCE PROCEDURES
Any officer who becomes aware of any existing or potential situation or transaction that may be in conflict with the intent of this Code is required to promptly notify his or her immediate
supervisor or Endologix's Chief Executive Officer, the Ethics Compliance Officer or the chairperson of the Audit Committee. Failure to do so is, itself, a violation of this Code. The supervisor, or Endologix's chief executive officer, the Ethics Compliance Officer or the chairperson of the Audit Committee, as applicable, will determine what action, if any, is necessary, and will recommend that action for approval to the Board of Directors of Endologix.
The Ethics Compliance Officer and the Audit Committee will use every reasonable effort in order to protect the confidentiality of the identities of the officers reporting information to the Ethics Compliance Officer or the Audit Committee consistent with the need to perform an adequate investigation of any reported matter. However, an officer may also report information directly and confidentially to the Ethics Compliance Officer or Audit Committee on an anonymous basis, by:
Submitting the information to the Ethics Compliance Officer by email at ________@endologix.com or at the following address: Ethics Compliance Officer, Endologix, Inc.,13900 Alton Parkway, Suite 122, Irvine, CA 92618. Persons desiring to report anonymously via e-mail who want to ensure their anonymity should (i) set up an account with Hotmail or another third-party provider, and (ii) inform that third-party provider that the account holder information is confidential and should not be disclosed to anyone. This policy prohibits anyone from Endologix from attempting to determine the owner of such account.
Submitting the information to the Audit Committee in writing at the following address: The Audit Committee of the Board of Directors, Endologix, Inc., 13900 Alton Parkway, Suite 122, Irvine, CA 92618, Attention: Chairman.
If a violation of this Code is discovered, and the officer in question has acted in good faith, it is Endologix's policy to allow a reasonable amount of time for the officer to correct the situation.
To encourage officers to report all violations of this Code of Ethics and to raise questions concerning compliance with the Code of Ethics, Endologix will not permit retaliation or harassment for reports made or concerns raised in good faith. "Good faith" does not mean that a report or concern must be correct, but it does require that the officer making the report or raising the concern believes that he or she is providing truthful information.
All questions relating to how this Code should be interpreted or applied, recommendations for amendment to its provisions and/or action arising from a failure to abide by the terms set forth herein, should be directed to either the Ethics Compliance Officer or the chairperson of the Audit Committee.
WAIVERS OF THE CODE OF ETHICS AND CONDUCT FOR FINANCIAL PROFESSIONALS
Amendments to and waivers of the Code of Ethics may be made only by the Board of Directors of Endologix or a committee of the Board, and must be promptly disclosed to Endologix's stockholders to the extent and in the manner required by Section 406 of the Sarbanes-Oxley Act of 2002 or applicable rules of the Nasdaq Stock Market.
DISSEMINATION; DISTRIBUTION AND CERTIFICATION
This Code will be made publicly available in a manner consistent with the requirements under the applicable rules of the SEC and Nasdaq Stock Market. This Code and any amendments or waivers thereto will also be disseminated by Endologix as and to the extent required by the applicable rules of the SEC and Nasdaq Stock Market.
At commencement of employment, and on a periodic basis thereafter, the CEO, CFO and other senior financial officers will be provided with a copy of this Code and will be required to execute the attached Compliance Certificate.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
1. CVD/RMS Acquisition Corp., a Delaware corporation.
2. Radiance Medical Systems GmbH, a German corporation.
3. Radiatec, Inc., a Japanese corporation.
4. RMS Sideways Merger Corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-07959, No. 333-42161, No. 333-59305, No. 333-72531 and No. 333-52482) and the Registration Statements on Form S-3 (No. 333-107286, No. 333-35343, No. 333-33997, No. 333-71053, No. 333-52474, and No. 333-90960) of Endologix, Inc. of our report dated March 10, 2004, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Orange County, California March 23, 2004 |
EXHIBIT 31.1
CEO CERTIFICATION
I, Paul McCormick, certify that:
1. I have reviewed this annual report on Form 10-K of Endologix, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 25, 2004 /s/ Paul McCormick -------------------------------------------- Paul McCormick, Chief Executive Officer |
EXHIBIT 31.2
CFO CERTIFICATION
I, David M. Richards, certify that:
1. I have reviewed this annual report on Form 10-K of Endologix, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 25, 2004 /s/ David M. Richards --------------------------------------------- David M. Richards, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Endologix, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul McCormick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ PAUL MCCORMICK Paul McCormick Chief Executive Officer March 25, 2004 |
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Endologix, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David M. Richards, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ DAVID M. RICHARDS David M. Richards Chief Financial Officer March 25, 2004 |
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.