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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1999
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 No. 000-21001
NMT MEDICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4090463
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
27 Wormwood Street, Boston, Massachusetts 02210
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 737-0930
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 per share
(Title of Class)
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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on April 7, 2000 was $30,536,363, based on the last reported sale
price of the registrant's Common Stock on the Nasdaq National Market on that
date. There were 10,908,421 shares of Common Stock outstanding as of April 7,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Document into which incorporated
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Portions of the Registrant's Proxy Items 10, 11, 12 and 13 of
Statement for the Annual Part III
Meeting of Stockholders to be held on
June 1, 2000
PART I
ITEM I. BUSINESS
OVERVIEW
NMT Medical, Inc. (together with its subsidiaries, "the Company" or "NMT"),
designs, develops and markets innovative medical devices that utilize advanced
technologies and are delivered by minimally invasive procedures. The Company's
products are designed to offer alternative approaches to existing complex
treatments, thereby reducing patient trauma, shortening procedure,
hospitalization and recovery times, and lowering overall treatment costs. The
Company's business is conducted through two divisions: Nitinol, which markets
septal repair devices, vena cava filters and self-expanding stents, and NMT
Neurosciences, which develops, manufactures and markets specialty implants and
instruments for neurosurgery, including cerebral spinal fluid ("CSF") shunts,
the Spetzler(TM) Titanium Aneurysm Clip and endoscopes and instrumentation for
minimally invasive neurosurgery. The Company's two operating segments are
managed separately. See Note 16 of Notes to the Consolidated Financial
Statements.
The Company was founded in July 1986 to develop and commercialize medical
devices using Nitinol, a nickel-titanium alloy with unique superelastic and
thermal shape memory characteristics. In April 1990, the Company obtained
clearance from the Food and Drug Administration (the "FDA") to market its
initial Nitinol-based product, the Simon Nitinol Filter ("SNF"), in the United
States. The Company entered into an exclusive distribution agreement with Bard
Radiology ("Bard") for distribution of the SNF in the United States and certain
other countries in May 1992. The Company's primary stent patent was issued in
November 1994 and, during the same month, the Company entered into an exclusive
license agreement with Boston Scientific to further develop, manufacture, market
and distribute NMT's Nitinol-based stents worldwide. In November 1995, the
Company expanded its relationship with Bard by granting Bard International the
right to distribute the SNF in most markets outside the United States. The
Company acquired the rights to the CardioSEAL Septal Occluder to expand its
product base and complement its core technologies in February 1996 and since
September 1999 has received notifications from the FDA of the approval of the
CardioSEAL under Humanitarian Use Designation regulations for three indications.
In furtherance of the Company's strategy to develop and commercialize a broad
range of advanced medical technologies for minimally invasive applications, in
July 1998, the Company acquired the neurosurgical instruments business of Elekta
AB (PUBL), a Swedish corporation ("Elekta").
In April 2000, the Company sold the Selector(R) Ultrasonic Aspirator,
Ruggles (TM) Surgical Instruments and cryosurgery product lines of its NMT
Neurosciences division to companies controlled by Integra LifeServices Holdings
Corporation for $12 million in cash. The Company used the proceeds of the
transaction for debt reduction and for general working capital requirements.
The Company's Consolidated Financial Statements for the fiscal year ended
December 31, 1999 treat these businesses, as well as its distribution of high
speed power surgical tools, as discontinued operations. See Note 3 of Notes to
the Consolidated Financial Statements.
PRODUCTS
Nitinol Division
The Company's Nitinol division markets the following devices:
. septal repair devices
. vena cava filters
. stents.
Septal Repair Devices.
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In February 1996, the Company acquired the exclusive rights to its
CardioSEAL Septal Occluder, which is designed for the repair of intracardiac
shunts commonly known as "holes in the heart." Intracardiac shunts are common
medical problems, occurring primarily in children, that result in abnormal blood
flow through the chambers of the heart. The most common defects occur in either
the arterial ("ASD") or ventricular ("VSD") septum which divide the left and
right pumping chambers of the heart. The CardioSEAL Septal Occluder is designed
to be a minimally invasive, less costly alternative to open heart surgery.
Another common septal defect is the Patent Foramen Ovale ("PFO"), a transient
hole which may open under straining efforts (coughing, defecating, etc.). PFO
has been implicated as a possible cause of embolic stroke. Current treatment
for patients who have experienced embolic strokes is lifelong anticoagulation
therapy, which may result in significant side effects and/or patient
noncompliance with the treatment regimen. Recently, some institutions have
begun advocating open heart surgery to close PFOs to prevent additional strokes.
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The CardioSEAL Septal Occluder is a catheter-delivered cardiac implant
designed to close septal defects. The framework is made of MP35N, which has
superior characteristics as an implant material (biocompatibility and corrosion
and fatigue resistance), and is covered with two pieces of knitted polyester
fabric, which promotes normal tissue in growth. The product is designed to be
manufactured in five diameter sizes ranging from 17mm to 40mm. The CardioSEAL
Septal Occluder is delivered to the site of the defect through a puncture of the
femoral vein in the leg. Once the position of the CardioSEAL Septal Occluder is
confirmed, the physician detaches the delivery system and removes it from the
patient. To date, the CardioSEAL implant procedures have taken approximately
one hour to complete, with patients returning home and able to perform normal
activity just one or two days later.
An earlier version of the septal repair device, named the Clamshell, was
developed by Bard in collaboration with Children's Hospital of Boston. Between
1989 and 1991 Bard sponsored clinical trials of the Clamshell in over 700
patients with a variety of cardiac conditions. In 1991, Bard discovered
fractures of the stainless steel framework in certain of the devices implanted
during such clinical trials and, following such discovery, suspended its
clinical trials. However, Bard subsequently submitted, and the FDA approved, a
revised IDE to permit the continued use of the Clamshell for patients with
limited therapeutic alternatives and whose status of being at high risk for
surgery made their use of the Clamshell particularly necessary. The Company is
not aware of any significant adverse clinical consequences resulting from the
observed fractures. Extensive engineering redesign and testing, including the
use of MP35N for the framework, resulted in significant improvements in both the
fatigue and corrosion resistance of the device. In 1995, Bard donated the
technology and associated assets to Children's Hospital of Boston which
subsequently licensed the technology to InnerVentions. The Company acquired the
rights to develop and commercialize the current septal repair device in February
1996. In connection with the acquisition, the Company acquired all of the
existing development, manufacturing and testing equipment, patent licenses,
know-how and documentation necessary to manufacture septal repair devices which
had been originally developed by Bard.
The Company introduced design enhancements to the CardioSEAL Occluder, the
STARflex centering system, in the fall of 1998. The design of the STARflex
centering system allows the device to self-adjust to variations in the anatomy
of a septal defect without deforming the septum and interfering with the heart
valves. These features accommodate easier implantation and the closure of
larger defects which would otherwise not be possible. STARflex was awarded the
CE Mark in September 1998 and commercialization began internationally in October
1998.
The Company believes the CardioSEAL Septal Occluder may be suitable for
approximately 55,000 patient implants annually for congenital heart defects and
approximately 145,000 adult patients annually with PFOs. Such estimates are
based on industry reports of the total numbers of patients diagnosed with such
conditions and the Company's own analysis of the portions of such populations
for whom its device may be suitable.
The CardioSEAL is sold commercially in Europe and other international
markets. In the United States, the FDA classifies the septal repair device as a
Class III medical device, which requires receipt of pre-market approval prior to
marketing. In August 1996, NMT received approval of its IDE from the FDA to
conduct a multi-center pivotal clinical trial of the CardioSEAL for ASDs at a
number of major hospitals and research centers in the United States (and one in
Canada). Implants of the device began in October 1996 and were completed in
February 1999. These patients were followed for a year while the Company
collected data on a control group of patients who had open heart surgery for the
closure of their ASDs for comparison to the CardioSEAL data. In addition, in the
fall of 1999 implants of the device with the STARflex centering system began,
with enrollment to be completed in the second quarter of 2000. The clinical data
from these trials will then be used for the submission of a pre-market approval
("PMA") Application with the FDA for the CardioSEAL.
In addition, the Company filed an IDE with the FDA in February 1998 to
pursue clinical studies for the PFO indication in the United States, and also
began PFO trials in Canada in 1998. The FDA's approval of the IDE had been
conditioned on the incorporation by the Company of certain protocol
modifications requested by the FDA. Some of the participating hospitals have
received independent institutional review board ("IRB") approval. On July 27,
1998, the Company announced that it had established an international registry to
support the clinical use of the CardioSEAL Septal Occlusion System in patients
having PFO as the likely pathway of an embolic stroke or transient ischemic
attack. The Transcatheter Occlusion of PFO In Stroke ("TOPIS") Registry allows
physicians around the world to pool their data on PFO closure in an organized
manner so as to generate a sizable database to demonstrate that closure of PFOs
with the CardioSEAL is preferable to surgery, or to a lifetime of taking
anticoagulant therapy, such as coumadin. The TOPIS registry complements the PFO
clinical trials operated in the United States and Canada by the Company.
The Company has received notifications from the FDA of the approval of the
CardioSEAL(R) Septal Occluder under Humanitarian Use Designation ("HUD")
regulations for three indications. Under HUD regulations, medical devices that
provide safe treatment for limited populations of patients can be granted
approval by the FDA based on more limited clinical experience than that required
for a full Pre-Market Approval ("PMA"). Additionally, under these regulations,
only one product can be approved for each indication. Boston Children's
Hospital worked with the Company to generate the clinical data necessary for the
approvals and on the approval application.
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The first approval was granted in September 1999 for use of the CardioSEAL
for closing fenestrated Fontan procedures. The fenestrated Fontan procedure is
a surgical procedure utilizing a baffle material (e.g. PTFE) performed in
patients born with seriously malformed hearts. As a part of this procedure, a
fenestration, or hole, is placed in the baffle to allow the patient to adjust
over time to the new hemodynamics created by the surgery, thereby reducing post-
operative morbidity and mortality. After the patient has adjusted, the closure
of the fenestration is desirable. However, re-operation of these patients to
close the fenestration can carry significant risk. The second approval, also
granted in September 1999, was granted for use of the CardioSEAL for closing
muscular ventricular septal defects in patients at high risk of morbidity or
mortality resulting from surgery. Muscular ventricular septal defects
("holes"), located at the rear of the septum or at the base of the heart, are
particularly difficult to close surgically due to poor visualization by the
surgeon. In February 2000, the Company received FDA approval under HUD
regulations for use of the CardioSEAL(R) in treating PFO in patients with
recurrent cryptogenic stroke due to presumed paradoxical embolism through a PFO
and who have failed conventional drug therapy such as coumadin. Each of the
three approved indications allows for the treatment of up to 4,000 patients per
year. A selling price of $5,500 for each device was approved.
The CardioSEAL Septal Occluder is marketed by the Company's direct sales
force in Europe and through selected distributors worldwide.
Vena Cava Filters.
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Vena cava filters are used for the prevention of pulmonary embolism (a
blood clot lodged in the vessels supplying blood to the lungs). These emboli
(clots), which often develop initially in the veins of the legs, can break loose
and travel up the vena cava, through the heart and into the blood vessels of the
lungs, causing acute respiratory and circulation problems. Vena cava filters
are intended to trap these clots before they can reach the lungs. Patients at
high risk for pulmonary embolism include post-operative orthopedic and
neurosurgery patients, cancer patients undergoing surgery and chemotherapy and
severe trauma victims. There are 600,000 incidents of pulmonary embolism
diagnosed in the United States each year, with 125,000 to 150,000 deaths per
year. While usually treated initially with anticoagulant drugs, patients at
high risk for pulmonary embolism may be treated using vena cava filters in cases
where drug therapy has failed or is contraindicated. Factors influencing the
performance of vena cava filters include coverage of the vena cava and the
pattern of the filtering method. Additionally, the variety of entry site
options and the size of the delivery system affect ease of deployment of the
vena cava filter.
Simon Nitinol Filter. The Company has developed a Nitinol vena cava filter
which possesses highly efficient clot filtering characteristics. The Company
has engineered the thermal shape-memory characteristics of Nitinol to provide
for ease of delivery of a vena cava filter which can be easily implanted in the
patient by a minimally invasive procedure using the Company's patented catheter-
based delivery systems. The Company's vena cava filter transforms into its
intended shape once deployed into the body. The SNF can be implanted from the
veins in the leg or neck, and is the only currently available vena cava filter
which can also be implanted from the veins in the arm.
The Company received FDA 510(k) clearance to market the SNF, and commenced
sales, in April 1990. All 510(k) notifications with respect to subsequent
modifications to the SNF have also been accepted by the FDA. In November 1995,
the Company introduced a simplified, straight line catheter-based delivery
system for its SNF. In November 1996, the Company received 510(k) clearance for
the implementation of the SNF through the subclavian vein in the shoulder. On
January 27, 1998, the CE Mark was granted for the SNF, which authorized the
Company to sell the SNF in the European Union beginning in July 1998.
Removable Vena Cava Filter. Currently available vena cava filters are
permanent implants which can only be removed surgically. Therefore, patients
who are at risk for pulmonary embolism for a defined period of time (post-
operative recovery, recovery from trauma, etc.) and receive a vena cava filter
have the implant in place for life. There is often a psychological resistance
to implantation of a permanent device. As a result, a vena cava filter is often
not used until a patient at risk has experienced his or her first pulmonary
embolism. However, controlled studies conducted by others of the prophylactic
use of currently available permanent vena cava filters in severe trauma patients
have demonstrated a significant reduction in morbidity and mortality in this
category of patients at high risk of pulmonary embolism. The Company believes
that the availability of a removable vena cava filter may result in greater
prophylactic use, and may be used in lieu of a permanently implanted device in
certain circumstances.
In September 1999 the Company received CE Mark approval for its unique,
Recovery(TM) removable vena cava filter device. This innovative new device is
the first implantable vena cava filter that can be removed with a simple
catheter removal procedure early after implant. If desired, the Recovery(TM)
filter may be left as a permanent filter. The approval is for the filter
implant and the filter delivery system. A separate CE Mark application for the
removal catheter was approved in December, 1999. The Company is currently
completing the validation of its manufacturing process for the product at its
Boston facility.
The Company entered into an exclusive distribution agreement in May 1992
with Bard for distribution of the SNF in the United States and certain other
countries. Beginning November 30, 1995, Bard International was granted the
exclusive right to distribute the SNF in most markets outside the United States.
Bard will begin limited distribution of the Recovery(TM) vena cava filter device
in the second quarter of 2000 and expansion of sales to broader markets will
begin later in 2000. Each of the
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distribution agreements with Bard is for an initial five year term. Bard may
renew, at its option, its agreement thereafter for periods of five years, which
it did in November 1996. The Company's agreement with Bard International renews
automatically for successive one year periods unless terminated by either party.
Both distributors are obligated to make annual minimum purchases and have agreed
not to sell competing vena cava filters during the term of the respective
distribution agreements. Bard has also agreed not to compete for an additional
two years after its distribution agreement with the Company has terminated. In
addition, the Company has granted Bard a right of first offer for any of NMT's
new devices which may be marketed to interventional radiologists and for which
NMT desires to enter into an exclusive distributorship within the United States.
Stents.
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Stents are used increasingly as adjuncts or alternatives to a variety of
medical procedures because it is believed that they are beneficial to overall
patient outcome and may, over time, reduce total treatment costs. To date, most
stents have been used for the treatment of atherosclerotic plaque in the
coronary arteries. The Company has developed and patented a Nitinol stent (the
Hex-cell stent) which relies on a novel hexagonal cell (hex-cell) design. NMT's
stents can be customized into a variety of sizes, shapes, flexibilities and
radial force characteristics for use in treating specific indications. The
Company believes that its stents may offer advantages over currently available
stents in flexibility, radial strength and placement.
In November 1994, NMT licensed to Boston Scientific, a worldwide leader in
sales of minimally invasive medical devices, exclusive worldwide rights to
develop, manufacture, market and distribute the Company's stent technology.
Under the terms of this agreement, Boston Scientific funds, and has control
over, product development, manufacturing scale-up, clinical trials, marketing
and distribution worldwide and has the sole right to use the patents and
technical information owned by NMT related to stents. Boston Scientific is not
prohibited from selling competing stents and has established a broad-based stent
program, including rights to Medinol, Ltd.'s stent technology. NMT receives a
sales royalty, milestone payments, minimum license fees, manufacturing cost
reduction incentives and reimbursement of development costs.
Boston Scientific commercially launched the Company's stents for peripheral
vascular use in Europe in January 1997 and in the United States in June 1997 for
biliary use under the name Symphony. During 1998 Boston Scientific also began
enrollment in a multi-center clinical trial for the Symphony stent in peripheral
arteries. These trials are designed to gain approval for expanded labeling for
the Symphony stent in the United States. Boston Scientific has completed a
scale-up of its peripheral vascular stent manufacturing capabilities in the
United States to enable it to manufacture NMT's stents in quantities to support
initial commercialization in certain markets. The Company and Boston Scientific
are currently pursuing projects to develop the Company's stents for a variety of
applications.
Boston Scientific is responsible for applying for registrations and
regulatory approvals it deems necessary for NMT's stents. The Company believes
that each of the vascular indications for the stent (coronary arteries, carotid
arteries, peripheral vascular, abdominal aortic and peripheral vascular stent
grafts) will require separate PMA applications prior to commercialization in the
United States.
NMT Neurosciences Division
The Company's NMT Neurosciences division develops, manufactures and markets
specialty implants and instruments for neurosurgery. The Company's
neurosurgical products business includes the following primary product lines:
. Implantable valves (shunts) and other accessories used in the management
of hydrocephalus.
. Titanium aneurysm clips for the management of intracranial aneurysms.
Shunts.
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The full line of CSF shunts sold by the Company were originally developed
by Cordis Neuroscience. CSF shunts are used to drain cerebral spinal fluid from
the brain to maintain normal fluid balance in a variety of conditions where
normal drainage is impaired. The most common condition in which these products
are used is in the management of hydrocephalus. Hydrocephalus affects
approximately one in 500 new-born children; the failure to treat this condition
leads to severe neurological complications and can be life-threatening. The
Company's product line includes a range of differential pressure valves,
including the Hakim(R) Valve, which has been the industry standard for 30 years,
and the Orbis-Sigma(R) Valve. An improved version of the Orbis-Sigma Valve, the
OSV II, was released in 1998. The OSV II is unique in its ability to regulate
both CSF flow and pressure. The Company's products also include horizontal-
vertical lumbar valves and an all-plastic valve known as the Atlas(R). The
accessories include products for the control of the over-drainage with
differential valves, as well as basic tubing and connectors.
In December 1998, the Company entered into an agreement with CS Fluids,
Inc. ("CS Fluids") of Los Altos, California to cooperatively develop and
manufacture a shunt device designed specifically to treat Alzheimer's Disease.
Under the terms of the
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agreement, NMT Neurosciences will work with CS Fluids to utilize the Company's
patented shunt technology to develop, manufacture and clinically evaluate a
shunt device with parameters specific to the Alzheimer's population. If the
device proves clinically useful, CS Fluids has the option to enter into a
manufacturing and supply relationship with NMT Neurosciences, and NMT
Neuroscienses has first rights of negotiation for distribution of the device
after the necessary regulatory approvals have been obtained. In early 1998 CS
Fluids initiated Investigational Device Exemption ("IDE") approved clinical
studies at Stanford University to examine the effects of utilizing CSF shunts in
patients with Alzheimer's Disease. Expanded trials using the NMT Neurosciences
shunt technology are expected to commence in mid 1999.
Aneurysm Clips.
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The Company's Spetzler(TM) Titanium Aneurysm Clip is used for the
management of intracranial aneurysms. The Company believes that this clip is the
only clip on the market made from commercially pure titanium, which provides
complete compatibility with modern magnetic resonance imaging. Because the clip
does not move in the high magnetic field or distort the image, the Company
believes it is safer and more effective than competing products. The
Spetzler(TM) Titanium Aneurysm Clip was developed in collaboration with Biotek
Engineering, Inc. ("Biotek") under an exclusive worldwide royalty bearing
license to the patents owned by Biotek. The clip is CE Marked, and the Company
has obtained ISO 9000 certification of the Boston manufacturing facility for its
production.
Because of the long product life cycles of the products produced by the
Neurosciences division, the Company does not anticipate making large investments
in research and development of these products. The Company's current research
and development efforts are focused on developing products that fulfill specific
identified unmet needs of neurosurgeons or making incremental improvements to
products currently within the Neurosciences division's portfolio. Research and
development for the Company's CSF Shunts and aneurysm clips are conducted at the
Company's Biot, France and Boston facilities, respectively.
Marketing and Sales Strategy.
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NMT Neurosciences has developed a dedicated sales force in neurosurgery.
The Company has direct sales forces in the United States and in Europe and
supplements its direct selling efforts with distributors and manufacturers'
representatives where direct coverage is inappropriate or not currently
feasible. The North America selling activity is managed through the division's
United States operations in Atlanta, Georgia. The Asian region is managed from
the Company's Hong Kong office with a Distributor Manager. Sales for the rest
of the world are managed through divisional headquarters in Biot, France.
MANUFACTURING
The Company manufactures the CardioSEAL Septal Occluder at its facility in
Boston, which includes a Class 10,000 clean room. The Company has received ISO
9000 certification and has also received permission to affix the CE mark to its
products.
The Company has contracted with Lake Region Manufacturing ("Lake Region")
for the production of the filter component of the SNF. The Company's agreement
with Lake Region grants Lake Region the right to manufacture a certain
percentage of the Company's worldwide requirements of the current filter until
June 30, 2001. The Company is obligated to order a minimum quantity of the
current filters and pay Lake Region a fixed price per unit. Lake Region has
agreed not to manufacture filters for a third party for a period of two years
after the termination of the agreement. Final assembly of the vena cava filter
system is conducted by the Company in its facility in Boston. The Company is
currently completing the validation of its manufacturing process for the
Recovery(TM) vena cava filter at its Boston facility.
The Company manufactures its neurosurgical instruments in a manufacturing
facility located in Biot, France. The facility has received ISO 9001 and EN
46001 certification, which are based on adherence to established standards in
the areas of quality assurance and manufacturing process control, and has also
received permission to affix the CE Mark to its products. A variety of products
utilized for the management of hydrocephalus and drug delivery are manufactured
at the Biot facility. The Spetzler(TM) Titanium Aneurysm Clip is manufactured at
the Company's manufacturing facility in Boston. The Biot facility also has a
contract manufacturing agreement with Johnson & Johnson until April 2002 for the
manufacturing of temporary pacing leads catheters.
COMPETITION
The Company believes that four companies, AGA Medical Corp., Microvena
Corporation, Dr. Osypka GmbH, and Pediatric Cardiology Custom Medical Devices
have developed devices that compete with CardioSEAL and which are being sold in
Europe and other international markets, and that AGA and Microvena are also
conducting clinical trials in the United States.
Boston Scientific, among others, currently competes with the Company in
sales of vena cava filters. Boston Scientific introduced the Greenfield Filter
to the market in the mid-1970's and is still the market leader with more than
half of current unit sales
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of vena cava filters in the United States. Since the introduction of the SNF in
1990, NMT has achieved the second highest level of sales in the United States
due primarily to its distribution agreement with Bard Radiology and the
introduction of a new simplified delivery system. Other competitors in this
market include Cook, Inc. and B. Braun.
Competition in the stent market is intense and is expected to increase.
Current competitors include Pfizer Inc./Schneider, Johnson & Johnson
Interventional Systems Co., Cook, Inc., Guidant Corporation/ACS, Arterial
Vascular Engineering, Inc., Medtronic, Inc., Boston Scientific (Medinol,
Strecker and Radius/T/) and Bard/Angiomed.
The Company believes that it has three principal competitors in the shunt
market: Medtronic, J&J Professional and Neurocare. The Company has three
principal competitors in the aneurysm clip market: Aesculap, Mizuho, and Codman.
In addition, the clip market is currently influenced by competing devices,
principally intracranial coils, to treat aneurysms.
DISCONTINUED OPERATIONS
In April 2000 the Company sold the U.K. operations of its NMT Neurosciences
division, including the Selector(R) Ultrasonic Aspirator and cryosurgery product
lines, its leased facility in Andover, England, and the Ruggles(TM) Surgical
Instruments product line to companies controlled by Integra LifeSciences
Holdings Corporation for $12 million in cash. The ultrasonic aspirator, which is
sold under the Selector(R) trademark, utilizes multiple ultrasonic frequencies
to selectively destroy and then aspirate or remove the tumor tissue. In 1998,
the Company released a more compact unit known as the Selector II, which allows
the direct attachment of the microsurgical handpiece. The Ruggles(TM) Surgical
Instruments are used in cranial and spinal surgery. Prior to the disposition of
this business the Company distributed instruments procured from instrument
makers located mostly in the United States and Germany and worked closely with
neurosurgeons to design specialty set instruments, with the name of the
neurosurgeons typically an additional trademark on the products. The
cryosurgical products are marketed under the Spembly tradename and include both
liquid nitrogen and gas expansion technologies, which have applications in
ophthalmic, general, gynecological, urological and cardiac surgery. The
Company's Consolidated Financial Statements for the fiscal year ended December
31, 1999 and 1998 reflect these product lines as discontinued operations.
In connection with the sale of the U.K. operations of its NMT Neurosciences
division, the Company decided to eliminate the distribution of its capital-
intensive product lines, specifically the high speed power surgical tools. The
Company distributed the Sodem Systems line of powered surgical tools for cranial
and spinal neurosurgery, known as the NMT High Speed System, pursuant to an
exclusive distribution agreement entered into in July 1998. The powered surgical
tools are used by neurosurgeons to create minimally invasive working channels
through the bone of the skull and spine to access the surgical site. The
Company's Consolidated Financial Statements also reflect this product line as
discontinued operations.
INVESTMENT IN IMAGE TECHNOLOGIES CORPORATION
The Company has a 41 percent ownership interest in Image Technologies
Corporation. ITC, a privately held company, is developing a line of advanced
imaging products for minimally invasive surgery which require less equipment,
are easier to use, reduce procedure time and personnel requirements, improve
operating room efficiency and reduce overall treatment costs. In addition, the
Company has extended to ITC an approximately $2.2 million senior credit line,
which is convertible into preferred stock of ITC at rates ranging from $.50 to
$9.97 per share. During 1999, ITC also issued the Company a warrant to purchase
10,030 shares of ITC's Series A Preferred Stock at an exercise price of $9.97
per share in connection with a debt financing.
Thomas M. Tully, former President and Chief Executive Officer of the
Company, was the Chairman and Chief Executive Officer of ITC until April 10,
2000 and William J. Knight, Vice President of Finance and Administration and
Chief Financial Officer of the Company, was its Chief Financial Officer until
December 15, 1999. ITC is located in leased space immediately adjacent to the
Company's facilities.
The principal products under development by ITC are:
(i) TroView, a compact, computerized image viewing system allowing for
easy, surgeon controlled enhancement of endoscopic images, including
the recording and remote transmission of both still and full motion
video. The TroView has full zoom capabilities to minimize the number
of manipulations that have to take place with the device.
(ii) TroCam/TT, an advanced endoscopic camera system for use with the
TroView. The TroCam, unlike currently available systems, places the
camera and lighting directly into the surgical field, allowing the
surgeon to personally control the field of view by pivoting the
camera and zooming in or out on the surgical field using a simple
fingertip remote control device. The camera system is protected
during surgery by a sterile, optically clear, disposable molded
plastic cover that eliminates the need to re-sterilize the camera
after each use.
6
(iii) EndoCam, an endocoupler/camera system that allows rigid or flexible
endoscopes from other manufacturers to be used in conjunction with
the TroView. The coupler is a sterile, single use device, which
eliminated the need to re-sterilize the camera after each use.
(iv) Operative TroCam, an endoscopic surgical system for use with the
TroView that allows the camera system and surgical instruments to be
inserted into the body through a single puncture site.
(v) GynaCam, a disposable device for use of the camera and TroView system
for examination of the cervix.
(vi) SteriCam, an endocoupler/camera system that allows endoscopes from
other manufacturers to be used with the TroView for the estimated 10
million endoscopic surgeries performed worldwide each year. The
coupler is a sterile, single use device, which eliminates the need to
re-sterilize the camera after each use.
In November 1998, ITC began commercialization of its first products. ITC
was awarded the CE Mark for the TroView and SteriCam products in October 1998,
and in January 1999 received 510(k) approval for sale in the United States from
the FDA for both products. With these approvals, the TroView and SteriCam
products may now be sold in most international markets. Shipments to
distributors have been initiated, and clinical demonstrations of the product to
hospital customers have also begun.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company seeks to protect its technology through the use of patents and
trade secrets. The Company is the owner or licensee of 34 issued United States
patents, and corresponding foreign patents, relating to its neurosurgical
instruments products, stents, the SNF, the septal repair device, nitinol
radiopaque markers and other cardiovascular devices. In addition, the Company
has pending applications for additional patents in the United States and abroad.
The Company's owned United States and foreign patents and patent applications
cover its neurosurgical instruments products, stents, methods of manufacturing
its stents, methods and devices for inserting its neurosurgical instruments
products, stents and its SNF. The expiration dates of the Company's patents
relating to its neurosurgical instruments range from 2003 to 2015. The
expiration dates of the Company's patents relating to its stents range from 2012
to 2013. The patent for its vena cava filters expires in 2001, and the patent
for its radiopaque markers expires in 2014. In addition, the Company is the
exclusive licensee under certain patents relating to the CardioSEAL Septal
Occluder and methods for repairing cardiac and vascular defects. The Company
also holds licenses to certain technology used in the SNF and in nitinol septal
repair devices.
The Company also relies on trade secrets and technical know-how in the
development and manufacture of its devices, which it seeks to protect, in part,
through confidentiality agreements with its employees, consultants and other
parties. The Company has 14 trademarks, 11 of which are registered with the
United States Patent and Trademark Office.
LICENSED TECHNOLOGY; ROYALTY OBLIGATIONS
In connection with its septal repair device, the Company has obtained an
exclusive worldwide license from Children's Medical Center Corporation under
United States patents entitled "Occluder and Method for Repair of Cardiac and
Vascular Defects" and "Occluder for Repair of Cardiac and Vascular Defects" and
the respective corresponding foreign patents, patent applications and associated
know-how. The license agreement provides for royalty payments of five percent
based on net sales of the Company's CardioSEAL Septal Occluder until either the
end of the term of the patents or termination of the agreement. The patents
expire in September 2012 and June 2012, respectively. Pursuant to the license
agreement, the Company is required to achieve certain milestones in exploiting
the patent rights. The Company has achieved all required milestones to date.
If the Company fails to achieve the milestones, Children's Medical Center
Corporation may terminate the license agreement. The Company also has a
royalty-free, worldwide sublicense under the U.S. patent entitled "System for
the Percutaneous Transluminal Front-End Loading Delivery and Retrieval of a
Prosthetic Occluder" and its corresponding foreign patents and associated know-
how. The sublicense is exclusive in the field of the repair of atrial septal
defects and nonexclusive in certain other fields. The Company has also obtained
an exclusive worldwide license from Lloyd A. Marks, M.D. under the United States
patent entitled "Aperture Occlusion Device." The license agreement with Dr.
Marks provides for royalty payments based on net sales of nitinol septal repair
devices which are covered by the patent until the end of term of the patent in
2011. Certain minimum royalty payments must be paid regardless of net sales.
In connection with the SNF, the Company entered into a Technology Purchase
Agreement dated April 14, 1987 with Morris Simon, M.D., the Company's Chief
Scientific Director and co-founder and a current Director of the Company.
Pursuant to the agreement, Dr. Simon assigned all the technology relating to the
SNF to the Company in exchange for certain royalty payments based on net sales
of technology invented by Dr. Simon relating to the SNF, to continue perpetually
unless the agreement is sooner terminated. Dr. Simon agreed not to compete with
the Company in the vena cava filter market during the term of the agreement In
connection with the agreement, Beth Israel Hospital Association granted the
Company an exclusive worldwide license under the
7
United States patent entitled "Blood Clot Filter." In consideration for the
license, Dr. Simon assigned a percentage of his royalty payments from the
Company to Beth Israel Hospital Association.
Pursuant to his employment agreement, the Company has agreed to pay
royalties of one to five percent to Mr. Stephen J. Kleshinski based on sales or
licenses of products where Mr. Kleshinski was the sole or joint inventor.
GOVERNMENT REGULATION
The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulations in the United
States. Medical devices are regulated in the United States by the FDA under the
Federal Food, Drug and Cosmetic Act (the "FDC Act") and generally require pre-
market clearance or pre-market approval prior to commercial distribution. In
addition, certain material changes or modifications to medical devices also are
subject to FDA review and clearance or approval. Pursuant to the FDC Act, the
FDA regulates the research, testing, manufacture, safety, labeling, storage,
record keeping, advertising, distribution and production of medical devices in
the United States. Noncompliance with applicable requirements can result in
failure of the government to grant pre-market clearance or approval for devices,
withdrawal of approvals, total or partial suspension of production, fines,
injunctions, civil penalties, recall or seizure of products, and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Generally, Class III devices
are those that must receive pre-market approval by the FDA to ensure their
safety and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices, or new devices which have not been found to be substantially equivalent
to legally marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA
also has the authority to require clinical testing of Class I and Class II
devices. A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class III device for which the FDA has called for such applications.
If human clinical trials of a device are required and if the device
presents a "significant risk," the manufacturer or distributor of the device is
required to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically the
results of animal and, possibly, mechanical testing. If the IDE application is
approved by the FDA, human clinical trials may begin at a specific number of
investigational sites with a maximum number of patients, as approved by the
agency. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such costs do not exceed
recovery of the costs of manufacture, research, development and handling. The
clinical trials must be conducted under the auspices of an independent IRB
established pursuant to FDA regulations. If one or more IRBs determine that a
clinical trial involves a "nonsignificant risk" device, the sponsor of the study
is not required to obtain FDA approval of an IDE application before beginning
the study. However, prior IRB approval of the study is required and the study
must be conducted in compliance with the applicable FDA regulations, including,
but not limited to, FDA regulations regarding the protection of human subjects.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
pre-market notification ("510(k) notification") submission or approval of a PMA
application. If a medical device manufacturer or distributor can establish that
a device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device for which the FDA has not called for PMAs, the
manufacturer or distributor may seek clearance from the FDA to market the device
by filing a 510(k) notification. The 510(k) notification may need to be
supported by appropriate data establishing the claim of substantial equivalence
to the satisfaction of the FDA. The FDA's Modernization Act of 1997 (the
"Modernization Act") was adopted with the intent of bringing better definition
to the process for clearing 510(k) submissions. Although it is expected that
the Modernization Act will result in shorter cycle times for clearances of
510(d) submissions, there can be no assurance that the FDA review process will
not involve delays or that such clearances will be granted on a timely basis.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek pre-market approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
extensive data, including preclinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device. The
Modernization Act allows the filing of a PMA to be modular, permitting the FDA
to initiate review of the submission prior to completion of all sections. Under
the FDC Act, the FDA has 180 days to review a filed PMA application. Again,
although the changes in the PMA application review process are designed to
shorten review times, there can be no assurance that delays will be eliminated
or that PMA clearances will be granted on a timely basis.
Certain Class III devices that were on the market before May 28, 1976
("preamendments Class III devices"), and devices that are determined to be
substantially equivalent to them, can be brought to market through the 510(k)
process until the FDA, by regulation, calls for PMA applications for the
devices. Generally, the FDA will not grant 510(k) clearance for such devices
unless the facilities at which they are manufactured successfully undergo an FDA
pre-approval GMP inspection. In addition, the FDC Act
8
requires the FDA either to down-classify preamendments Class III devices to
Class I or Class II, or to publish a classification regulation retaining the
devices in Class III. Manufacturers of preamendments Class III devices that the
FDA retains in Class III must have PMA applications accepted by the FDA for
filing within 90 days after the publication of a final regulation in which the
FDA calls for PMAs. If the FDA calls for a PMA for a preamendments Class III
device, a PMA must be submitted for the device even if the device has already
received 510(k) pre-market clearance; however, if the FDA down-classifies a
preamendments Class III device to Class I or Class II, a PMA application is not
required. The FDA's reclassification determinations are to be based on safety
and effectiveness information that manufacturers of certain preamendments Class
III devices are required to submit to the FDA as set forth in two FDA orders
published in August 1995.
With the passage of the Safe Medical Devices Act of 1990, Congress sought
to improve the framework to regulate medical devices. Congress recognized that
for diseases and conditions affecting small populations, a device manufacturer's
research and development costs could exceed its market returns, thereby making
development of such devices unattractive. The HUD regulations were created to
provide an incentive for development of devices to be used in the treatment of
diseases or conditions affecting small numbers of patients. Under HUD
regulations, medical devices that provide safe treatment and a reasonable
assurance of effectiveness may be made available to small numbers of patients
(up to 4,000 patients in the U.S. per year) on more limited clinical
experience than that required for a PMA. In addition, under HUD regulations
only one product can be approved for each indication.
The current regulatory environment in Europe for medical devices differs
significantly from that in the United States. There are several different
regulatory regimes operating within the different European countries. Regulatory
requirements for medical devices range from no regulations in some countries to
rigorous regulations approaching the requirements of the FDA's regulations for
Class III medical devices. Several countries require that device safety be
demonstrated prior to approval for commercialization. The regulatory environment
in certain European countries has undergone major changes as a result of the
creation of medical device directives by the European Union. In particular, the
European Union has promulgated rules which provide that medical products may not
be marketed and sold commercially in the countries in the European Economic Area
unless they receive a CE mark. The Company's Symphony stent, SNF, Recovery
filter and CardioSEAL, and ITC's TroView and SteriCam have received approval for
CE Marking.
THIRD PARTY REIMBURSEMENT
Health care providers in the United States, such as hospitals and
physicians, that purchase medical devices such as shunts and stents, generally
rely on third party payers, principally Medicare, Medicaid and private health
insurance plans, to reimburse all or part of the costs and fees associated with
the Company's devices. Major third party payers reimburse inpatient medical
treatment, including all operating costs and all furnished items or services,
including devices such as the Company's, at a prospectively fixed rate based on
the diagnosis-related group ("DRG") that covers such treatment as established by
the federal Health Care Financing Administration. For interventional
procedures, the fixed rate of reimbursement is based on the procedure or
procedures performed and is unrelated to the specific devices used in that
procedure. The amount of profit relating to the procedure may be reduced by the
use of the Company's devices. If a procedure is not covered by a DRG, certain
third party payers may deny reimbursement. Alternatively, a DRG may be assigned
that does not reflect the costs associated with the use of the Company's
devices, resulting in underreimbursement. If, for any reason, the Company's
products were not to be reimbursed by third party payers, the Company's ability
to sell its products may be materially adversely affected. Mounting concerns
about rising health care costs may cause more restrictive coverage and
reimbursement policies to be implemented in the future. Several states and the
federal government are investigating a variety of alternatives to reform the
health care delivery system and further reduce and control health care spending.
These reform efforts include proposals to limit spending on health care items
and services, limit coverage for new technology and limit or control directly
the price health care providers and drug and device manufacturers may charge for
their services and products. The Company believes that domestic health care
providers currently are reimbursed for the cost of purchasing the Company's SNF.
In the international market, reimbursement by private third party medical
insurance providers, including governmental insurers and providers, varies from
country to country. In certain countries, the Company's ability to achieve
significant market penetration may depend upon the availability of third party
governmental reimbursement. The Company's independent distributors, and the
health care providers to whom such distributors sell, obtain any necessary
reimbursement approvals.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. The
Company maintains product liability insurance with coverage limits of $1 million
per occurrence per policy year and an umbrella policy of $10 million.
EMPLOYEES
As of December 31, 1999, NMT employed 313 full-time employees and 21 part-
time employees. The Company believes it maintains good relations with its
employees.
9
ITEM 2. PROPERTIES
The Company currently leases an approximately 27,000 square foot
manufacturing, laboratory and administrative facility in Boston, Massachusetts.
The Company also owns an approximately 80,000 square foot, state-of-the-art
plant located in Biot, France, and leases an 11,500 square foot warehousing
facility in Deluth, Georgia to house the United States operations, sales and
marketing activities of the NMT Neurosciences division.
The Company's principal executive offices are located at 27 Wormwood
Street, Boston, Massachusetts 02210, and its telephone number is (617) 737-0930.
ITEM 3. LEGAL PROCEEDINGS
In March 1999, the Company filed a patent infringement suit in the U.S.
District Court for Massachusetts against AGA Medical Corp. ("AGA"), claiming
that AGA's Amplatzer Septal Occlusion device violates U.S. Patent No. 5,108,420,
which is licensed exclusively to the Company. The Company is seeking to prevent
further infringement of its patent as well as monetary damages. In April 1999,
AGA served its Answer and Counterclaims denying liability and alleging that the
Company has engaged in false or misleading advertising and in unfair or
deceptive business practices. AGA's counterclaims seek an injunction and an
unspecified amount of damages. In May 1999, the Company answered AGA's
counterclaims denying liability. The case is currently in the early states of
discovery.
In papers dated November 24, 1999 Elekta AB (publ) filed a request for
arbitration in the London Court of International Arbitration ("LCIA") alleging
that the Company breached its payment obligation under the Sale and Purchase
Agreement between the parties dated May 8, 1998 pursuant to which the Company
purchased certain assets from Elekta. Elekta seeks approximately $1.6 million
in damages. On January 14, 2000, the Company filed its response with the LCIA
in which the Company denied Elekta's claims and indicated that it would assert a
counterclaim for approximately $2.5 million for Elekta's breach of the same
contract. On February 17, 2000 an arbitrator was appointed, and a Statement of
the Case was sent to the LCIA by Elekta on March 23, 2000. The parties are
currently in the pleadings stage.
On January 21, 2000, a personal injury suit was filed in the Supreme Court
of the State of New York, County of New York by Martin B. Levi, et. al. against
Johnson & Johnson, Inc., et. al., including a subsidiary of the Company,
claiming damages from placement of a defective Palmaz-Schatz coronary stent
during a cardiac catherization procedure. Plaintiffs seek damages in excess of
$31 million. The Company has requested that plaintiffs dismiss the Company's
subsidiary from the action on the basis that the subsidiary never manufactured
and/or distributed the stent product.
Other than as described above, the Company has no material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
10
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The executive officers of the Company and their ages as of April 11, 2000
are as follows:
NAME AGE POSITION
---- --- --------
C. Leonard Gordon 70 Acting President, Chief Executive Officer
and Director
David A. Chazanovitz 49 President, NMT Neurosciences Division
William J. Knight 50 Vice President of Finance and
Administration, Chief Financial Officer,
Secretary and Treasurer
C. LEONARD GORDON was appointed Acting President and Chief Executive
Officer of NMT in April 2000. Mr. Gordon, a co-founder of the Company, served as
the Company's Chief Executive Officer and President, from August 1990 to January
1996 and as Chairman of the Board from January 1996 until January 1998. Mr.
Gordon has served as a director of the Company since its inception in 1986. Mr.
Gordon has been engaged in venture capital enterprises for more than 10 years,
particularly in the field of new medical technologies and devices. He was
co-founder and Chief Executive Office of (i) Oxigene, Inc. a publicly-traded
company engaged in the design and development of drugs and (ii) Biofield Corp.,
a publicly-traded medical device company that has developed a breast cancer
detection system. Mr. Gordon served as Chairman of the Board and Chief
Executive Officer of Immunotherapy, Inc., a privately-held biotechnology company
and as President and Chief Executive Officer of Vacold LLC, a developmental
biotechnology company.
DAVID A. CHAZANOVITZ has served as President, NMT Neurosciences Division
since July 1998. From January 1996 to July 1998, Mr. Chazanovitz served as
President of NMT's Septal Repair Division. Prior to joining the Company, Mr.
Chazanovitz served as President and Chief Executive Officer of InnerVentions
from April 1995 until January 1996. Mr. Chazanovitz was employed by Bard from
1979 to 1995 in various positions including President of the USCI Angiography
Division, Bard Electrophysiology Division and Bard Ventures Division where he
was a founder. During his last two and one-half years at Bard, Mr. Chazanovitz
had overall responsibility for the septal defect repair program.
WILLIAM J. KNIGHT has served as Vice President of Finance and
Administration and Chief Financial Officer since September 1998. From August
1996 until September 1998, Mr. Knight held the position of Vice President
Administration and Chief Financial Officer of Zoll Medical Corporation, a
medical device manufacturer. From September 1989 to February 1996, Mr. Knight
was Vice President, Corporate Controller of Analytical Technology, Inc., a
manufacturer of scientific instrumentation, which was acquired by ThermoElectron
Corporation in December 1995.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Prices and Recent Sales of Unregistered Securities
The Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol NMTI. There were approximately 100 stockholders of record of
the Company's Common Stock on April 7, 2000. The following table lists for the
periods indicated the high and low bid prices for the Company's Common Stock.
Period High Low
------ ---- ---
1998
----
First quarter............ 11 1/8 6 3/4
Second quarter........... 10 1/2 5 1/4
Third quarter............ 7 13/16 2 15/16
Fourth quarter........... 5 5/8 2 1/2
1999
----
First quarter............ 5 5/8 3 1/4
Second quarter........... 4 1/2 2 3/8
Third quarter............ 7 1/2 1 3/4
Fourth quarter........... 3 1/8 1 3/4
During the fiscal year ended December 31, 1999, the Company issued the
following unregistered securities:
In April 1999, the Company issued a warrant to purchase 25,000 shares of
Common Stock at an exercise price of $3.41 per share, to a noteholder of the
Company. The warrants may be exercised at any time and from time to time until
February 14, 2001. The warrant contains weighted-average anti-dilution price
protection. These securities were offered and issued in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended.
Dividend Policy
- ---------------
The Company did not declare or pay any cash dividends on shares of its
Common Stock during the fiscal years ended December 31, 1998 and December 31,
1999 and does not anticipate declaring or paying cash dividends in the
foreseeable future. The Company expects that any earnings which it may realize
will be retained for use in its business.
12
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data. The following selected consolidated
financial data are derived from the Company's Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP, independent public accountants.
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the other financial information appearing elsewhere in this
Annual Report on Form 10-K.
Year Ended December 31,
1995 1996 1997 1998 1999
-------- --------- --------- --------- ----------
STATEMENT OF OPERATIONS DATA: In thousands, except per share data
Revenues:
Product sales $ 2,716 $ 4,557 $ 8,565 $ 23,024 $ 32,949
License fees and royalties 625 2,375 1,500 2,029 2,130
Product development 492 92 61 1 --
------- ------- ------- -------- --------
3,833 7,024 10,126 25,054 35,079
Expenses:
Cost of product sales 1,264 2,387 3,765 10,819 15,215
Research and development 871 2,662 2,974 3,640 4,462
General and administrative 871 2,284 2,873 5,043 9,050
Selling and marketing 169 311 1,010 4,391 8,428
In-process research and development -- 1,111 2,449 4,710 --
Write-down of note receivable from
Image Technologies Corporation -- -- -- -- 1,364
Impairment of long-lived asset -- -- -- -- 6,801
Merger and integration charge -- -- -- 687 --
Restructuring charge -- -- 194 -- --
------- ------- ------- -------- --------
3,175 8,755 13,265 29,290 45,320
------- ------- ------- -------- --------
Income(loss) from operations 658 (1,731) (3,139) (4,236) (10,241)
Equity in loss of affiliate -- -- -- (437) (489)
Currency transaction (loss) gain -- -- (15) (88) 105
Interest income (expense), net (29) 568 1,546 (293) (2,335)
------- ------- ------- -------- --------
Income(loss) before provision for income taxes 628 (1,163) (1,608) (5,054) (12,960)
Extraordinary loss on early extinguishment of debt -- -- -- -- (2,618)
Provision for income taxes 44 -- 230 745 180
------- ------- ------- -------- --------
Net gain (loss) from continuing operations 584 (1,163) (1,838) (5,799) (15,758)
Net gain (loss) from discontinued operations -- -- -- 2,120 (3,295)
------- ------- ------- -------- --------
Net income(loss) $ 584 $(1,163) $(1,838) $ (3,679) $(19,053)
======= ======= ======= ======== ========
Cash dividends declared per common share $ .03 $ -- $ -- $ -- $ --
======= ======= ======= ======== ========
Basic income (loss) per share:
Continued operations $.16 $(.21) $(.19) $(.57) $(1.47)
Discontinued operations -- -- -- .21 (.31)
------- ------- ------- -------- --------
Net income (loss) $.16 $(.21) $(.19) $(.36) $(1.77)
======= ======= ======= ======== ========
Diluted income (loss) per share $.15 $(.21) $(.19) $(.36) $ (1.77)
======= ======= ======= ======== ========
Weighted average common shares outstanding
Basic 3,764 6,749 9,596 10,193 10,751
======= ======= ======= ======== ========
Diluted 3,983 6,749 9,596 10,193 10,751
======= ======= ======= ======== ========
13
At December 31,
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
In Thousands
BALANCE SHEET DATA:
Cash and cash equivalents $ 533 $ 4,082 $ 5,561 4,007 3,533
Short-term investments -- 25,273 20,822 5,114 --
Working capital (deficit) (1,277) 30,301 29,262 17,343 8,765
Total assets 1,661 34,930 35,006 63,715 38,747
Long-term obligations -- 416 612 18,903 14,853
Stockholders' equity (deficit) (844) 33,320 32,772 34,169 14,161
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. This Annual Report on Form 10-K contains forward-looking
statements based on our current expectations, assumptions, estimates and
projections about the Company and our industry. These forward-looking
statements are usually accompanied by words such as "believes," "anticipates,"
"plans," "expects" and similar expressions. Forward-looking statements involve
risks and uncertainties, and our actual results may differ materially from the
results anticipated in these forward-looking statements as a result of certain
factors, as more fully described in this section under the caption "Certain
Factors That May Affect Future Results."
OVERVIEW
Since its inception in 1986, the Company has focused its efforts of the
design, development and commercialization of medical technologies which are
delivered by minimally invasive procedures. Products and products under
development include septal repair devices, vena cava filters and self-expanding
stents. In July 1998, the Company acquired the neurosurgical instruments
business ("ENI") of Elekta AB (PUBL) and operated the business as the Company's
NMT Neurosciences division. In April 2000, following a decision by the
Company's board of directors to discontinue the U.K. operations of its NMT
NeuroSciences division, the Company sold certain assets of that division,
including the Selector(R) Ultasonic Aspirator, and Ruggles(TM) Surgical
instruments products. This sale reflected the Company's strategic decision to
refocus its efforts on its core septal repair, filter and stent products.
The Company recorded a $3.5 million loss on this sale comprised of
proceeds of $12 million, estimated transaction and other costs of $3.7 million
and net assets sold of $11.8 million. The transaction costs consisted
principally of legal and accounting fees, severance arrangements with certain
employees and other estimated costs associated with discontinuing the operation
and consummating the sale.
The Company's initial product, a vena cava filter system, received FDA
clearance in 1990. This product is distributed in the United States and certain
other countries by Bard and in other markets outside the United States by Bard
International. Both distributors are obligated to make annual minimum
purchases. The filter component of the current vena cava filter system is
manufactured by Lake Region. The Company currently purchases components of its
delivery systems of the vena cava filter system under purchase orders with third
party suppliers. Final assembly of the vena cava filter system is done by the
Company.
In November 1994, the Company entered into an agreement with Boston
Scientific pursuant to which Boston Scientific obtained exclusive worldwide
rights to develop, manufacture, market and distribute the Company's stent
technology and products which incorporate such technology. Under this license
agreement, Boston Scientific is responsible for performing clinical trials for
stents under development and for reimbursing the Company for stent development
costs incurred by the Company. These reimbursements are classified as product
development revenues in the Consolidated Statement of Operations. The Company
also receives license fees, including milestone payments, royalties based upon
product sales and certain manufacturing cost reduction incentive payments from
Boston Scientific under the license agreement, which are included in the
Company's revenues. See "Results of Operations." Most of the Company's costs
associated with its stents are included in research and development expenses.
In February 1996, the Company acquired, through the issuance of Common
Stock, the rights to develop and commercialize its septal repair device. The
Company commenced sales of the CardioSEAL Septal Occluder at the end of
September 1996 in connection with clinical trials of the device, and the device
has been sold commercially in Europe and other international markets since July
1997. Since September 1999, the FDA has granted approval for use of the
CardioSEAL product under HUD regulations for three indications. The Company
manufactures this device at its facility in Boston.
The Company has agreed to make certain royalty payments to Children's
Medical Center Corporation based on net sales of the CardioSEAL Septal Occluder.
The Company has also agreed to pay certain royalties to Morris Simon, M.D., the
Company's Chief Scientific Director, co-founder and a current Director, and to
Beth Israel Hospital, Boston, based on sales of products using the technology
invented by Dr. Simon relating to the SNF. In addition, pursuant to the
Company's employment agreement with Mr. Stephen J. Kleshinski the Company has
agreed to pay certain royalties based on sales or licenses of products where Mr.
Kleshinski was the sole or joint inventor.
In July, 1998, the Company acquired the neurosurgical instruments business
of Elekta AB (PUBL), a Swedish corporation, for approximately U.S. $33 million
in cash. In connection with the acquisition, the Company issued a total of
675,000 shares of Common Stock to J.H. Whitney & Co. and to one of its
affiliates at a purchase price of $5.80 per share. Jeffrey R. Jay, a director of
the Company, is a general partner of J.H. Whitney & Co. and Jeffrey F. Thompson,
also a director of the Company, is a Vice President of J.H. Whitney & Co.
15
The acquisition was financed with $13 million of cash, plus approximately
$3.1 million of acquisition costs, and a $20 million subordinated note issued to
an affiliate of a significant stockholder of the Company. The subordinated note
is due September 30, 2003 with quarterly interest payable at 10.101% per annum.
The subordinated debt includes certain restrictive covenants relating to
maintenance of certain ratios and cash levels. On September 13, 1999, the
Company entered into a $10 million senior secured debt facility with a bank, $8
million of the proceeds of which was used to reduce the principal amount of the
$20 million subordinated note. The Company also used $6 million of its own cash
to further reduce the principal amount of the $20 million subordinated note. The
balance outstanding under the subordinated note at December 31, 1999 was
approximately $5.2 million. The remaining $2 million of the senior secured debt
facility is available to be drawn down by the Company for working capital
purposes, as needed. The facility has a term of three years with interest
payable monthly at the bank's prime lending rate on U.S. borrowings and an
equivalent market rate on foreign currency borrowings. As of December 31, 1999,
the Company was not in compliance with certain of the debt covenants contained
in both the subordinated note agreement and the senior secured debt agreement.
As a result, the Company negotiated a waiver of default with each of these
debtholders. Additionally, subsequent to year end, the Company used the proceeds
from its sale of the U.K. operations and certain other assets of the NMT
Neurosciences division (See Note 3(a) of the Notes to Consolidated Financial
Statements in the accompanying financial statements) to reduce the subordinated
note payable and the senior secured debt by $500,000 and $7.3 million,
respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues for the year ended December 31, 1999 increased to $35.1
million from $25.1 million for the year ended December 31, 1998. Product sales
increased to $32.9 million for the year ended December 31, 1999 from $23.0
million for the year ended December 31, 1998. The increase is primarily
attributable to the effect of including a full year's revenues related to the
Company's NMT Neurosciences division during 1999 when compared to 1998 as the
Company acquired this division on July 8, 1998. Additionally the Company had
increased unit sales of vena cava filters and CardioSEAL Septal Occluders in the
year ended December 31, 1999 as compared with the year ended December 31, 1998.
Finally, in September 1999, the Company received approvals from the FDA for use
of the CadioSEAL Septal Occluder under certain HUD regulations which contributed
to the increased unit sales of that product during the year ended December 31,
1999.
License fees and royalties for the year ended December 31, 1999 amounted to
$2.1 million and consist of royalty payments of $1.5 million and cost-sharing
payments received from Boston Scientific of approximately $300,000 and patent
license payments of approximately $400,000. The Company recorded $2.0 million in
license fees and royalties from Boston Scientific related to its stent
technology in the year ended December 31, 1998, consisting of $300,000 of
milestone payments, $1.5 million of royalty payments, and $200,000 of cost-
sharing payments received from Boston Scientific.
Cost of Product Sales. Cost of product sales increased to $15.2 million for
the year ended December 31, 1999 from $10.8 million for the year ended December
31, 1998. The increase is primarily attributable to the effect of including a
full year's cost of sales related to the Company's NMT Neurosciences division
during 1999 when compared to the partial year in 1998. Also contributing to
this increase were costs attributable to the Company's increased unit sales of
vena cava filters and CardioSEAL Septal Occluders in the year ended December 31,
1999 as compared with the year ended December 31, 1998. Cost of product sales,
as a percent of product sales, remained relatively consistent at 46% for the
year ended December 31, 1999 as compared with 47% for the year ended December
31, 1998.
Research and Development. Research and development expense increased to $4.5
million for the year ended December 31, 1999 from $3.6 million for the year
ended December 31, 1998. The increase is primarily attributable to the effect
of including a full year of research and development expenses related to the
Company's NMT Neurosciences division during 1999 when compared to the partial
year in 1998. Also contributing to this increase in research and development
expense were increased regulatory and clinical trial expenses relating to
clinical trials of the CardioSEAL Septal Occluder, as well as for more recent
clinical trials related to fenestrated Fontan procedures (FEF), and ventricular
septal defects (VSDs) for which the Company received FDA approval under HUD
regulations in September 1999. In addition, the Company has had increased
activity in the Company's development programs for vena cava filters, including
CE Mark approval for its removable vena cava filter in September 1999, and for
other products under development.
General and Administrative. General and administrative expenses increased to
$9.1 million for the year ended December 31, 1999 from $5.0 million for the year
ended December 31, 1998. The increase is primarily attributable to the effect
of including a full year of general and administrative expenses related to the
Company's NMT Neurosciences division during 1999 when compared to the partial
year in 1998. In addition, the Company had increased professional fees and
travel expenses related to supporting the operations of the Company's NMT
Neurosciences division for the full year ended December 31, 1999 as compared to
the partial year for the year ended December 31, 1998.
16
Selling and Marketing. Selling and marketing expenses increased to $8.4
million for the year ended December 31, 1999 from $4.4 million for the year
ended December 31, 1998 primarily attributable to the effect of including a full
year of selling and marketing expenses related to the Company's NMT
Neurosciences division during 1999 when compared to the partial year in 1998.
During 1998, marketing activities related to the CardioSEAL Septal Occluder
relating to clinical trials and the commencement of commercial sales of the
CardioSEAL Septal Occluder that began in June 1997 in European and other
international markets increased. During 1999, the marketing efforts related to
these clinical trials decreased as the trials were coming to completion.
However, marketing efforts were increased for new clinical trials relating to
fenestrated Fontan procedures (FEF), and ventricular septal defects (VSDs) for
which the Company received FDA approval under HUD regulations in September 1999.
Write Down of Notes Receivable from Image Technologies Corporation. During
the year ended December 31, 1999, the Company performed a detailed review of the
ITC operations. Based upon this analysis and discussion with ITC's management
and other investors, the Company determined that there was a significant risk
that the Company's notes receivable from ITC would not be repaid. The analyses
and discussions indicated that at September 30, 1999, (1) ITC had insufficient
cash resources to fund its operations, (2) ITC's product revenue had declined
during the year ended December 31, 1999 and was significantly below planned
levels and (3) ITC was seeking additional capital from numerous sources and that
any future financings would likely be dilutive to the Company's equity position
and could contain a security interest senior to the Company. Accordingly, the
Company charged the carrying value of the notes receivable to operations during
the year ended December 31, 1999.
Impairment of Long-lived Asset. In connection with the sale of the U.K.
operations and certain other assets of its NMT Neurosciences division on April
5, 2000 (See Note 3(a) of the Notes to Consolidated Financial Statements in the
accompanying financial statements as of December 31, 1999), the Company recorded
at December 31, 1999 a $6.8 million impairment charge for goodwill recorded upon
the acquisition of NMT Neurosciences in July 1998. This impairment charge was
determined based upon the Company's analysis of estimated cash flows of NMT
Neurosciences and the carrying value of all of the long-lived assets of NMT
Neurosciences which were not sold in April 2000. The Company's assessment of the
value of the assets of NMT Neurosciences was corroborated by independent outside
parties.
Equity in Net Loss of Image Technologies Corporation. During the year ended
December 31, 1999 and 1998, the Company recorded $489,000 and $437,000,
respectively, as its equity in the loss of ITC. The carrying value of the note
receivable from ITC has been reduced by these amounts and charged to operations
during the year ended December 31, 1999. See Note 4 of the Notes to
Consolidated Financial Statements in the accompanying financial statements as of
December 31, 1999.
Interest Expense. Interest expense was $2.8 million for the year ended
December 31, 1999 as compared to $1.5 million for the year ended December 31,
1998. The increase was primarily the result of the Company's acquisition of ENI
on July 8, 1998 for which the Company borrowed $20 million of subordinated debt,
which accrues interest at 10.101% per annum. In addition, the amortization of
original issue discount related to the subordinated note of $531,000 and
$293,000 for the years ended December 31, 1999 and 1998, respectively, is
included in interest expense in the statements of operations. See Note 9 of the
Notes to Consolidated Financial Statements in the accompanying Financial
Statements as of December 31, 1999. In April 2000, the Company repaid
approximately $7.3 million of outstanding debt obligations from proceeds
received from the sale of the U.K. operations and certain other assets of the
NMT Neurosciences division. Accordingly, the Company expects interest expense to
decrease in 2000. The Company did not allocate interest expense associated with
the senior secured debt and subordinated notes to discontinued operations.
Interest Income. Interest income was $480,000 for the year ended December 31,
1999 as compared to $1.2 million for the year ended December 31, 1998. The
decrease was due to the Company's lower cash balances as a result of its
financing the acquisition of ENI on July 8, 1998 with cash of $13 million, plus
approximately $3.1 million of acquisition costs.
Extraordinary Loss on Early Extinguishment of Debt. In connection with the
$14 million reduction in September 1999 of its $20 million subordinated note
payable to an affiliate of a significant stockholder of the Company (see Note 9
of the Notes to Consolidated Financial Statements in the accompanying financial
statements as of December 31, 1999), the Company recorded a $2.6 million
extraordinary loss on the early extinguishment of debt in the statement of
operations which primarily relates to the accelerated pro-rata write-off of the
original issue discount and deferred financing costs of the subordinated note
payable.
Provision for Income Taxes. The Company had a provision for income taxes of
$180,000 for the year ended December 31, 1999 which represents the taxes on
income generated in France by NMT Neuroscience. The Company generated a net
operating loss for federal and state income tax purposes in the United States in
the year ended December 31, 1999. The Company had a provision for income taxes
of $745,000 for the year ended December 31, 1998 based on an operating income
before the write-off of in-process research and development expenses of
$4,710,000, the equity in loss of ITC of $437,145 and other nondeductible items
and an estimated effective tax rate of approximately 40%.
Loss on Sale of Discontinued Operations. On April 5, 2000, the Company sold
the U.K. operations and certain other assets of the NMT Neurosciences division,
which consisted primarily of the Selector (R) Ultrasonic Aspirator, Ruggles(TM)
Surgical Instruments and cryosurgery product lines, including certain assets and
liabilities for $12.0 million in cash. The Company recorded a $3.5 million loss
on this sale, comprised of proceeds of $12.0 million less estimated transaction
costs of $3.7 million, and net assets sold of $11.8 million. The transaction
costs consisted principally of legal and accounting fees, severance arrangements
with certain employees and other estimated costs associated with discontinuing
the operation and consummating the sale. Consolidated Financial Statements in
the accompanying Financial Statements as of
17
December 31, 1999. Included in the loss on sale are the estimated operating
results of the discontinued operations for the period from January 1, 2000 to
April 1, 2000. The Company has not allocated interest expense to discontinued
operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased to $25.1
million from $10.1 million for the year ended December 31, 1997. Product sales
increased to $23.0 million for the year ended December 31, 1998 from $8.6
million for the year ended December 31, 1997. The increase is primarily
attributable to the effect of including revenues related to the Company's NMT
Neurosciences division during 1998 as the Company acquired this division on July
8, 1998. Additionally the increase is attributable to increased unit sales of
vena cava filters and CardioSEAL Septal Occluders in the year ended December 31,
1998 as compared with the year ended December 31, 1997.
License fees for the year ended December 31, 1998 amounted to $2.0 million and
consist of milestone payments of $300,000, royalty payments of $1.5 million and
cost-sharing payments received from Boston Scientific of approximately
$200,000. The Company recorded $1.5 million in license fees from Boston
Scientific related to its stent technology in the year ended December 31, 1997,
consisting of $300,000 of milestone payments, $1.0 million of royalty payments,
and $200,000 of cost-sharing payments received from Boston Scientific.
Cost of Product Sales. Cost of product sales increased to $10.8 million for
the year ended December 31, 1998 from $3.8 million for the year ended December
31, 1997. The increase is primarily attributable to the effect of including
cost of product sales related to the Company's acquisition of the products
comprising NMT Neurosciences division. Additionally, the increase is
attributable to increased unit sales of vena cava filters and CardioSEAL Septal
Occluders in the year ended December 31, 1998 as compared with the year ended
December 31, 1997. Cost of product sales, as a percent of product sales,
increased to 47% for the year ended December 31, 1998 from 44% for the year
ended December 31, 1997. This increase is due primarily to the inclusion of the
cost of sales of products of the Company's acquisition of the products
comprising NMT Neurosciences division which have a proportionately higher cost
of product sales than do the vena cava filter and the CardioSEAL Septal
Occluder.
Research and Development. Research and development expense increased to $3.6
million for the year ended December 31, 1998 from $3.0 million for the year
ended December 31, 1997. The increase is primarily attributable to the effect
of including research and development expenses related to the Company's NMT
Neurosciences division during 1998 as the Company acquired this division on July
8, 1998. The increase also reflects increased regulatory and clinical trial
expenses relating to clinical trials of the CardioSEAL Septal Occluder that
commenced in September 1996, as well as for clinical trials related to the
closure of patent foramen ovales (PFO's) and increased activity in the Company's
development programs for vena cava filters and other products under development.
General and Administrative. General and administrative expenses increased to
$5.0 million for the year ended December 31, 1998 from $2.9 million for the year
ended December 31, 1997. The increase is primarily attributable to the effect
of including research and development expenses related to the Company's
acquisition of the products comprising NMT Neurosciences division during 1998 as
the Company acquired this division on July 8, 1998.
Selling and Marketing. Selling and marketing expenses increased to $4.4
million for the year ended December 31, 1998 from $1.0 million for the year
ended December 31, 1997. The increase is primarily attributable to the effect of
including selling and marketing expenses related to the Company's acquisition of
the products comprising NMT Neurosciences division. The increase is also
attributable to increases in marketing activities related to both the CardioSEAL
Septal Occluder in connection with clinical trials and the commencement of
commercial sales of the CardioSEAL Septal Occluder which began in June 1997 in
European and other international markets.
Acquired In-Process Research and Development. For the year ended December 31,
1998, the Company recorded $4.7 million of in-process research and development
expenses related to the Company's acquisition of ENI. See Note 3(b) of the
Notes to Consolidated Financial Statements in the accompanying Financial
Statements as of December 31, 1999. On the date of acquisition, ENI's in-process
research and development value was comprised of five primary research and
development programs that were expected to reach completion between late 1998
and 2000. At the acquisition date, continuing research and development
commitments to complete the projects were expected to be approximately an
aggregate of $2.0 million through 2000 ($680,000, $888,000, and $383,000 in
1998, 1999, and 2000, respectively).
For the year ended December 31, 1997, because of the uncertainty relating to
the Company's realization of its investment in ITC, the Company recorded $2.4
million of in-process research and development expenses related to that
investment. See Note 4 of the Notes to Consolidated Financial Statements in the
accompanying Financial Statements as of December 31, 1999.
18
Merger and Integration Charge. As a result of the acquisition of ENI, the
Company reorganized certain of its operations. In connection with this
reorganization, the Company recorded merger and integration charges of $687,000
during the year ended December 31, 1998. See Note 6 of Notes to the
Consolidated Financial Statements in the accompanying Financial Statements as of
December 31, 1999.
Restructuring Charge. During the first half of 1997, the Company reorganized
its vena cava filter operations and brought the assembly of its straight-line
vena cava filters in-house. In connection with this reorganization, the Company
recorded a restructuring charge of $194,000 during the year ended December 31,
1997. See Note 5 of Notes to the Consolidated Financial Statements in the
accompanying Financial Statements as of December 31, 1999.
Equity in Net Loss of Image Technologies Corporation. During the year ended
December 31, 1998, the Company recorded $437,000 as its equity in the loss of
ITC. The carrying value of the note receivable from ITC has been reduced by the
amount of the loss recorded by the Company. See Note 4 of the Notes to
Consolidated Financial Statements in the accompanying Financial Statements as of
December 31, 1999.
Interest Expense. Interest expense was $1.5 million for the year ended
December 31, 1998 as compared to $46,000 for the year ended December 31, 1997.
The increase was primarily the result of the Company's acquisition of ENI on
July 8, 1998 for which the Company borrowed $20 million of subordinated debt,
which accrues interest at 10.101% per annum. In addition, the amortization of
original issue discount related to the subordinated note of $293,000 for the
year ended December 31, 1998 is included in interest expense in the statements
of operations. See Note 9 of the Notes to Consolidated Financial Statements in
the accompanying Financial Statements as of December 31, 1999
Interest Income. Interest income was $1.2 million for the year ended December
31, 1998 as compared to $1.6 million for the year ended December 31, 1997. The
decrease was due to the Company's lower cash balances as a result of its
financing the acquisition of ENI on July 8, 1998 with cash of $13 million, plus
approximately $3.1 million of acquisition costs.
Provision for Income Taxes. The Company had a provision for income taxes of
$745,000 for the year ended December 31, 1998 based on an operating income
before the $4,710,000 write-off of in-process research and development expenses,
the equity in loss of ITC of $437,145 and other nondeductible items and an
estimated effective tax rate of approximately 40%. For the year ended December
31, 1997 the Company had a provision for income taxes of $229,500 which reflects
the non-deductibility of the in-process research and development expenses of
$2,449,000, a portion of the $194,000 restructuring charge recorded in the
period then ended, and the utilization of carry-forward net operating losses
from previous years.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and marketable securities equal to
$3.5 million at December 31, 1999 as compared to $4.0 million as of December 31,
1998. During year ended December 31, 1999, the Company's operations used cash
of approximately $203,000 which consists of approximately $15 million of cash
used by operations prior to approximately $14 million of noncash charges
and before changes in working capital items.
In July 1998, the Company financed a portion of the acquisition of ENI with
$16.1 million of the Company's cash and a $20 million subordinated note issued
to an affiliate of a significant stockholder of the Company. The subordinated
note is due September 30, 2003 with quarterly interest payable at 10.101% per
annum, The subordinated debt includes certain covenants relating to maintenance
of certain ratios and cash levels. On September 13, 1999, the Company entered
into a $10 million senior secured debt facility with a bank, $8 million of the
proceeds of which was used to reduce the principal amount of the $20 million
subordinated note. The Company also used $6 million of its own cash to further
reduce the principal amount of the $20 million subordinated note. The balance
outstanding under the subordinated note at December 31, 1999 was approximately
$5.2 million. The remaining $2 million of the senior secured debt facility is
available to be drawn down by the Company for working capital purposes, as
needed. The facility has a term of three years with interest payable monthly at
the bank's prime lending rate on U.S. borrowings and an equivalent market rate
on foreign currency borrowings. As of December 31, 1999, the Company was not in
compliance with certain of the debt covenants contained in both the subordinated
note agreement and the senior secured debt agreement. As a result, the Company
negotiated a waiver of default with each of these debtholders. Additionally,
subsequent to year end, the Company used the proceeds from the sale of the U.K.
operations and certain other assets of the NMT Neurosciences division (See Note
3(a) of the Notes to Consolidated Financial Statements in the accompanying
financial statements) to reduce the subordinated note payable and the senior
secured debt by $500,000 and $7.3 million, respectively.
Purchases and capitalized leases of property and equipment for use in the
Company's research and development and general and administrative activities
amounted to $518,000 for the year ended December 31, 1999. The Company also
spent approximately $1.1 million on purchases of property and equipment in 1999
primarily in connection with the Company's implementation of new management
information systems, which was financed through capital lease arrangements.
Additionally the Company has entered into a finance facility agreement with a
bank for borrowings of approximately $475,000 under which borrowings of $428,000
are outstanding as of December 31, 1999. See Note 9(c) of the Notes to
Consolidated Financial Statements in the accompanying financial statements.
19
The Company is party to various contractual arrangements including royalty
arrangements and employment and consulting agreements with current employees and
consultants which are likely to increase as additional agreements are entered
into and additional personnel are retained. Subsequent to year-end, Thomas M.
Tully, President and Chief Executive Officer, resigned from the Company. The
amount of his severance of approximately $300,000 will be charged to operations
during the second quarter of 2000.
The Company also has committed to purchase certain minimum quantities of the
vena cava filter from a supplier through June 2001. See Note 10 of Notes to the
Consolidated Financial Statements in the accompanying Financial Statements. All
of these arrangements require cash payments by the Company over varying periods
of time. Certain of these arrangements are cancelable on short notice and
certain require termination or severance payments as part of any early
termination.
The Company may require additional funds for its research and product
development programs, preclinical and clinical testing, operating expenses,
regulatory processes, manufacturing and marketing programs and potential
licenses and acquisitions. Any additional equity financing may be dilutive to
stockholders, and additional debt financing, if available, may involve
restrictive covenants. The Company's capital requirements will depend on
numerous factors, including the sales of its products, the progress of its
research and development programs, the progress of clinical testing, the time
and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any collaborative, licensing and other similar
arrangements that the Company may establish.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the "euro" as their national currency unit and irrevocably
established fixed conversion rates between their existing sovereign currencies
and the euro. During the three-year transition period between January 1, 1999
and January 1, 2002, the euro will be a "cashless" currency, existing only as a
unit of account. Payments made to accounts in these member states may be made
either in the denominated legacy currency unit of the account or in euros.
Beginning on January 1, 2002, euro banknotes and coins will be introduced, and
legacy currency banknotes and coins will be withdrawn from circulation. No
later than July 1, 2002, the euro will be the sole national currency unit in
these member states, and the legacy currency banknotes and coins will no longer
be accepted as legal tender.
The Company conducts a substantial portion of its business within the member
countries of the European Union, and accordingly its existing systems are
generally capable of accommodating multiple currencies, including the euro.
The Company is assessing the potential impact from the euro conversion in a
number of areas, including the following: (1) the competitive impact of cross-
border price transparency, which may make it more difficult for businesses to
charge different prices for the same products on a country-by-country basis; (2)
the impact on currency exchange costs and currency exchange rate risk; and (3)
the impact on existing contracts.
As of December 31, 1999, the impact of the euro conversion has not had a
material impact on the operations of the Company.
20
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
WE HAVE HISTORICALLY FAILED TO MEET COVENANTS IN OUR LOAN AGREEMENTS AND MAY
FACE DIFFICULTIES IN MEETING THEM IN THE FUTURE.
We financed a significant portion of the acquisition of our neurosurgical
instruments business with $20 million of subordinated debt borrowed from an
affiliate of J.H. Whitney & Co., one of our significant stockholders.
Subsequently, we entered into a $10 million senior secured debt facility with
Brown Brothers Harriman & Co. In connection with this refinancing, we
negotiated covenants relating to the operation of our business. As of December
31, 1999, we were not in compliance with certain of the debt covenants. In
connection with our recent sale of a portion of the neurosurgical instruments
business, we obtained a waiver of default from each lender. Although we believe
that we will be able to satisfy the covenants as modified, our failure to meet
our financial plan could result in our breach of certain of the covenants. If we
breach any of these covenants and are not successful in obtaining a waiver,
either noteholder could demand immediate repayment of the note. In addition, in
the event of a breach of certain of the covenants, the interest rate we owe in
connection with the debt may increase. We may seek to refinance this debt. We
cannot be certain that we will be able to refinance on terms that are favorable
to us or at all.
WE MAY FACE DIFFICULTIES IN SATISFYING OUR FUTURE CAPITAL REQUIREMENTS.
In the event that we are unable to obtain access to additional capital on
terms that are favorable to us or at all, we may fail to meet our financial
plan. Moreover, our failure to meet our financial plan could result in our
breach of certain debt covenants. Our capital requirements will depend on a
number of factors, including:
. product sales;
. progress of research and development programs and preclinical and
clinical testing;
. cost and time involved in obtaining regulatory approvals, and cost of
filing; prosecuting, defending and enforcing patent claims and other
intellectual property rights; and
. unanticipated needs for capital, such as, a successful claim for
indemnification by the buyer of our neurosurgical instruments business
against us under the purchase agreement.
WE FACE CHALLENGES IN REFOCUSING OUR BUSINESS STRATEGY.
In connection with the commercialization of our CardioSEAL product and the
recent sale of a portion of our neurosurgical instruments business, we have had
to refocus our business strategy. This refocusing has placed significant demands
on management and other resources. Our future success will depend on our ability
to manage and implement our refocused business strategy effectively, including
by:
. developing and improving our operational, financial and other internal
systems;
. improving our sales and marketing capabilities; and
. continuing to train, motivate and manage our employees.
WE FACE UNCERTAINTIES WITH RESPECT TO COMMERCIALIZATION, PRODUCT DEVELOPMENT AND
MARKET ACCEPTANCE OF OUR PRODUCTS.
Before certain of our products can be marketed and sold in the United
States, including our CardioSEAL product, we may be required to conduct further
research, product development, preclinical and clinical testing and obtain
additional governmental regulatory approvals. We cannot be certain that our
current products, or products currently under development, will achieve or
continue to have market acceptance. Certain of the medical indications that can
be treated by our devices can also be treated by surgery, drugs or other medical
devices. Currently, the medical community widely accepts many alternative
treatments, and these other treatments have a long history of use. We cannot be
certain that our devices and procedures will be able to replace such established
treatments or that either physicians or the medical community, in general, will
accept and utilize our devices or any other medical products that we may
develop. In addition, our future success depends, in part, on our ability to
develop additional products. Even if we determine that a product candidate has
medical benefits, the cost of commercializing that product candidate may be too
high to justify development. In addition, competitors may develop products that
are more effective, cost less or are ready for commercial introduction before
our products. If we are unable to develop additional, commercially viable
products, our future prospects will be limited.
21
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY BECAUSE OF INTENSE COMPETITION AND
RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY.
The medical device industry is characterized by rapidly evolving technology
and intense competition. Existing and future products, therapies, technological
approaches and delivery systems will continue to compete directly with our
products. Many of our competitors have substantially greater capital resources,
greater research and development, manufacturing and marketing resources and
experience and greater name recognition than we do. In addition, new surgical
procedures and medications could be developed that replace or reduce the
importance of current or future procedures that utilize our products. As a
result, any products that we develop may become obsolete before we recover any
expenses incurred in connection with development of these products.
OUR FUTURE SUCCESS MAY DEPEND IN PART UPON MAINTENANCE OF BUSINESS RELATIONSHIPS
WITH COLLABORATORS.
We have entered into distribution agreements with Bard Radiology and Bard
International granting them exclusive distribution rights to our SNF, and into a
license agreement with Boston Scientific granting Boston Scientific exclusive
worldwide rights to develop, manufacture, market and distribute our stent
technology, along with products incorporating such technology. Although Bard
Radiology and Bard International have agreed not to sell competing filters,
Boston Scientific is not prohibited from selling other stents and, in fact,
manufactures and licenses from others a variety of stents that may compete with
our stents. Boston Scientific may choose to emphasize such other stents in its
developmental and marketing efforts. We cannot be certain that our arrangements
will be renewed or that our existing relationships with Bard Radiology, Bard
International or Boston Scientific will continue in their current form. Our
business could be materially adversely affected if these arrangements prove
unsuccessful or if these companies terminate their arrangements with us,
negotiate lower prices, sell additional competing products, whether manufactured
by themselves or others, or otherwise alter the nature of their relationships
with us.
OUR LIMITED MANUFACTURING HISTORY, DEPENDENCE ON THIRD PARTY MANUFACTURERS AND
THE POSSIBILITY OF NON-COMPLIANCE WITH MANUFACTURING REGULATIONS RAISE
UNCERTAINTIES WITH RESPECT TO OUR ABILITY TO COMMERCIALIZE FUTURE PRODUCTS.
We use third parties to manufacture and distribute certain of our products.
If our third party manufacturers experience delays or difficulties in producing,
packaging or distributing our products, market introduction and subsequent sales
of such products would be adversely affected, and we might have to seek
alternative sources of supply. We cannot be certain that we will be able to
enter into alternative supply arrangements at commercially acceptable rates, if
at all. If we are unable to obtain or retain third party manufacturers on
commercially acceptable terms, we may not be able to commercialize medical
products as planned.
The FDA and other regulatory authorities require that our products be
manufactured according to rigorous standards including, but not limited to, Good
Manufacturing Practice and ISO 9000. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If we, or a third party manufacturer, change our approved manufacturing
process, the FDA will require a new approval before that process could be used.
Failure to develop our manufacturing capabilities may mean that even if we
develop promising new products, we may not be able to produce them profitably,
as a result of delays and additional capital investment costs.
WE MAY BE UNABLE TO SUCCESSFULLY MARKET OUR PRODUCTS DUE TO LIMITED MARKETING
AND SALES EXPERIENCE.
Our neurosurgical implants and septal repair devices are generally marketed
directly through our direct sales force. Because we have marketed our older
products through third parties, we have limited experience marketing our
products. In order to market directly the CardioSEAL Septal Occluder and any
related products, we will have to develop a marketing and sales organization
with technical expertise and distribution capabilities.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND MAY FACE
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS.
Our success will depend, in part, on our ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. We cannot be certain that:
. any pending patent applications or any future patent application will
result in issued patents;
. the scope of any patent protection will exclude competitors or provide
competitive advantages to us;
. any of our patents will be held valid if subsequently challenged; or
. others will not claim rights in or ownership of the patents and other
proprietary rights held by us.
Furthermore, we cannot be certain that others have not or will not develop
similar products, duplicate any of our products or design around any patents
issued or that may be issued in the future to us or to our licensors. Whether
or not patents are issued to us or to our licensors, others may hold or receive
patents which contain claims having a scope that covers products developed by
us. We could incur substantial costs in defending any patent infringement suits
or in asserting any patent rights, including those granted by
22
third parties. In addition, we may be required to obtain licenses to patents or
proprietary rights from third parties. There can be no assurance that such
licenses will be available on acceptable terms, if at all.
AS A RESULT OF GOVERNMENT REGULATIONS, WE MAY EXPERIENCE LOWER SALES AND
EARNINGS.
The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulations in the United
States. Medical devices generally require pre-market clearance or pre-market
approval prior to commercial distribution. Certain material changes or
modifications to medical devices are also subject to regulatory review and
clearance or approval. The regulatory approval process is expensive, uncertain
and lengthy. If granted, the approval may include significant limitations on
the indicated uses for which a product may be marketed. In addition, any
products that we manufacture or distribute are subject to continuing regulation
by the FDA. We cannot be certain that we will be able to obtain necessary
regulatory approvals or clearances for our products on a timely basis or at all.
The occurrence of any of the following events could have a material adverse
effect on our business, financial condition and results of operations:
. delays in receipt of, or failure to receive, regulatory approvals or
clearances;
. the loss of previously received approvals or clearances;
. limitations on the intended use of a device imposed as a condition of
regulatory approvals or clearances; or
. our failure to comply with existing or future regulatory requirements.
In addition, sales of medical device products outside the United States are
subject to foreign regulatory requirements that vary widely from country to
country. Failure to comply with foreign regulatory requirements also could have
a material adverse effect on our business, financial condition and results of
operations.
WE FACE UNCERTAINTIES WITH RESPECT TO THE AVAILABILITY OF THIRD PARTY
REIMBURSEMENT.
In the United States, Medicare, Medicaid and other government insurance
programs, as well as private insurance reimbursement programs, greatly affect
revenues for suppliers of health care products and services. Such third party
payors may affect the pricing or relative attractiveness of our products by
regulating the maximum amount, if any, of reimbursement which they provide to
the physicians and clinics using our devices, or any other products that we may
develop. If, for any reason, the third party payors decided not to provide
reimbursement for our products, this would materially adversely affect our
ability to sell our products. Moreover, mounting concerns about rising health
care costs may cause the government or private insurers to implement more
restrictive coverage and reimbursement policies in the future. In the
international market, reimbursement by private third party medical insurance
providers and by governmental insurers and providers varies from country to
country. In certain countries, our ability to achieve significant market
penetration may depend upon the availability of third party governmental
reimbursement.
WE MAY NOT HAVE SUCCESSFULLY REDESIGNED THE CLAMSHELL SEPTAL REPAIR DEVICE.
Between 1989 and 1991, Bard sponsored trials of an earlier version of the
septal repair device, known as the Clamshell. In 1991, Bard discovered
fractures of the stainless steel framework in certain of the devices implanted
during such clinical trials and, following such discovery, suspended its
clinical trials worldwide except for patients whose status of being at high risk
for surgery made their use of the Clamshell particularly necessary. We
determined that the fractures were caused by "metal fatigue", resulting from
higher than anticipated forces acting on the Clamshell. Our redesign efforts
resulted in the design of the current version of the septal repair device.
Although the CardioSEAL Septal Occluder has undergone in vitro testing and has
obtained limited humanitarian use designation by the FDA, we cannot be certain
that such testing accurately simulates the actual forces in the human body or
that similar fractures will not occur with the CardioSEAL Septal Occluder. If
such fractures occur with adverse clinical consequences, our efforts to
commercialize the CardioSEAL Septal Occluder may be significantly delayed, as we
may be required to invest significant resources in further design and
engineering of the device, or we may even have to discontinue development
efforts.
PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS AND UNINSURED OR UNDERINSURED
LIABILITIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
The testing, marketing and sale of implantable devices and materials carry
an inherent risk that users will assert product liability claims against us or
our third party distributors. In these lawsuits, users might allege that their
use of our devices had adverse effects on their health. A product liability
claim or a product recall could have a material adverse effect on our business,
financial condition and results of operations. Certain of our devices are
designed to be used in life-threatening situations where there is a high risk of
serious injury or death. Although we currently maintain limited product
liability insurance coverage, we cannot be certain that in the future we will be
able to maintain such coverage on acceptable terms or that current insurance or
insurance subsequently obtained will provide adequate coverage against any or
all potential claims. Furthermore, we cannot be certain that we will avoid
significant product liability claims and the attendant adverse publicity. Any
product liability claim or other claim with respect to
23
uninsured or underinsured liabilities could have a material adverse effect on
our business, financial condition, and results of operations.
INTENSE INDUSTRY COMPETITION FOR QUALIFIED EMPLOYEES THREATENS OUR ABILITY TO
ATTRACT AND RETAIN NECESSARY, QUALIFIED PERSONNEL.
In the medical device field, there is intense competition for qualified
personnel, and we cannot be assured that we will be able to continue to attract
and retain the qualified personnel necessary for the development of our
business. Both the loss of the services of existing personnel as well as the
failure to recruit additional qualified scientific, technical and managerial
personnel in a timely manner would be detrimental to our anticipated growth and
expansion into areas and activities requiring additional expertise such as
marketing. The failure to attract and retain such personnel could adversely
affect the our business.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. Interest rate risk is immaterial to the Company. As an
international concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time and could
have a material adverse impact on the Company's financial condition and results
of operations. The Company's most significant foreign currency exposures relate
to the United Kingdom and France, as a result of its manufacturing activities
and assets in those countries. The accounts of the Company's foreign
subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency
Translation. In translating the accounts of the foreign subsidiaries into U.S.
dollars, assets and liabilities are translated at the rate of exchange in effect
at the end of each reporting period, while stockholders' equity is translated at
historical rates. Revenue and expense accounts are translated using the
weighted average exchange rate in effect during the year. The Company's foreign
currency transaction gains or losses are included in the accompanying
consolidated statements of operations and amounted to a foreign currency
transaction gain of $105,000 for the year ended December 31, 1999 as compared
with a foreign currency transaction loss of $88,000 for the year ended December
31, 1998. The Company records the effects of changes in balance sheet items
(i.e., cumulative foreign currency translation gains and losses) as a component
of consolidated stockholders' equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial statements required to be filed hereunder are filed as
Appendix A hereto, are listed under Item 14(a) and are incorporated herein by
this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in part under the caption "Executive
Officers of the Company" in Part I of this Annual Report on Form 10-K and in
part in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on June 1, 2000 (the "2000 Proxy Statement") under the
caption "Proposal 1 -- Election of Directors," which section is incorporated
herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, is contained in the
2000 Proxy Statement under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the 2000 Proxy Statement under
the caption "Proposal 1 -- Election of Directors," which section is incorporated
herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is contained in the 2000 Proxy Statement under
the caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is contained in the 2000 Proxy Statement under
the caption "Certain Transactions," which section is incorporated herein by this
reference.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements. The following documents are filed as Appendix A
--------------------
hereto and are included as part of this Annual Report on Form 10-K:
Financial Statements of NMT Medical, Inc.:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules. The Company is not filing any financial
-----------------------------
statement schedules as part of this Annual Report on Form 10-K because such
schedules are either not applicable or the required information is included in
the financial statements or notes thereto.
(c) Exhibits. The exhibits filed as part of this Annual Report on
--------
Form 10-K are listed in the Exhibit Index immediately preceding such exhibits,
and are incorporated herein by this reference. The Company has identified with
asterisks in the Exhibit Index each management contract and compensation plan
filed as an exhibit to this Annual Report on Form 10-K in response to Item 14(c)
of Form 10-K.
(d) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
-------------------
during the fiscal quarter ended December 31, 1999.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NMT MEDICAL, INC.
By: /s/ C. Leonard Gordon
____________________________________________
C. Leonard Gordon
Acting President and Chief Executive Officer
Dated: April 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ C. Leonard Gordon Acting President and Chief Executive April 13, 2000
______________________ Officer and Director (Principal
C. Leonard Gordon Executive Officer)
/s William J. Knight Vice President of Finance and April 13, 2000
______________________ Administration and Chief
William J. Knight Financial Officer (Principal
Financial and Accounting Officer)
/s/ R. John Fletcher Director April 13, 2000
______________________
R. John Fletcher
/s/ Jeffrey R. Jay, M.D. Director April 13, 2000
______________________
Jeffrey R. Jay, M.D.
/s/ Morris Simon, M.D. Director April 13, 2000
______________________
Morris Simon, M.D.
/s/ Robert A. Van Tassel, M.D.
_______________________ Director April 13, 2000
Robert A. Van Tassel, M.D.
/s/ Jeffrey F. Thompson Director April 13, 2000
_______________________
Jeffrey F. Thompson
Appendix A
----------
NMT MEDICAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NMT MEDICAL, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants................................... A-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............... A-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998, and 1997.................................................. A-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997..................................... A-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998, and 1997.................................................. A-6
Notes to Consolidated Financial Statements................................. A-7
A-1
Report of Independent Public Accountants
To NMT Medical, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of NMT Medical,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NMT Medical, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 5, 2000
A-2
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
------------------------
1999 1998
---- ----
Current assets:
Cash and cash equivalents $ 3,533,475 $ 4,007,014
Marketable securities -- 5,113,537
Accounts receivable, net of allowances
for doubtful accounts of $913,000 and
$871,000 in 1999 and 1998, respectively 7,900,099 10,273,861
Inventories 4,634,348 5,283,432
Prepaid expenses and other current assets 2,429,016 3,308,610
------------ -----------
Total current assets 18,496,938 27,986,454
------------ -----------
Property, plant and equipment, at cost:
Land and Buildings 4,650,000 4,650,000
Leasehold improvements 3,154,763 3,469,063
Laboratory and computer equipment 2,583,691 2,209,252
Equipment under capital lease 2,258,982 1,144,982
Office furniture and equipment 893,199 1,203,953
------------ -----------
13,540,635 12,677,250
Less--Accumulated depreciation and
amortization 2,522,588 939,102
------------ -----------
11,018,047 11,738,148
------------ -----------
Long-term investments in marketable
securities -- 1,009,401
Notes receivable from Image Technologies
Corporation -- 1,600,898
Goodwill and other intangible assets -- 6,975,010
Other assets 839,733 1,128,218
Net assets from discontinued operations 8,392,448 13,277,000
------------ -----------
$ 38,747,166 $63,715,129
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,100,081 $ 6,226,190
Accrued expenses 4,629,366 4,215,500
Current portion of long-term debt
obligations 1,002,877 202,248
------------ -----------
Total current liabilities 9,732,324 10,643,938
------------ -----------
Long-term debt obligations, net of current
portion 13,570,355 17,544,743
Deferred tax liability 1,283,008 1,357,808
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $.001 par value--
Authorized--3,000,000 shares
Issued and outstanding--none -- --
Common stock, $.001 par value--
Authorized--30,000,000 shares
Issued and outstanding--10,783,278 and
10,680,117 shares in 1999 and 1998,
respectively 10,784 10,681
Additional paid-in capital 41,439,959 40,999,277
Cumulative translation adjustment (708,253) 687,000
Accumulated deficit (26,581,011) (7,528,318)
------------ -----------
Total stockholders' equity 14,161,479 34,168,640
------------ -----------
$ 38,747,166 $63,715,129
============ ===========
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
A-3
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
Revenues:
Product sales $ 32,948,584 $23,023,287 $ 8,564,810
License fees and royalties 2,130,539 2,028,973 1,500,000
Product development 245 1,453 60,898
------------ ----------- -----------
35,079,368 25,053,713 10,125,708
------------ ----------- -----------
Expenses:
Cost of product sales 15,215,081 10,819,003 3,765,235
Research and development 4,462,359 3,639,728 2,973,755
General and administrative 9,050,244 5,043,872 2,873,477
Selling and marketing 8,427,357 4,390,739 1,010,123
Write-down of note receivable from Image
Technologies Corporation 1,364,369 -- --
Impairment of long-lived asset 6,801,000 -- --
Acquired in-process research and development -- 4,710,000 2,449,071
Merger and integration charge -- 687,242 --
Restructuring charge -- -- 193,636
------------ ----------- -----------
45,320,410 29,290,584 13,265,297
------------ ----------- -----------
Loss from operations (10,241,042) (4,236,871) (3,139,589)
Equity in net loss of Image Technologies Corporation (488,529) (437,145) --
Currency transaction gain (loss) 104,625 (87,596) (14,672)
Interest expense (2,814,211) (1,461,346) (46,152)
Interest income 479,617 1,168,056 1,591,922
------------ ----------- -----------
(2,718,498) (818,031) 1,531,098
------------ ----------- -----------
Loss before provision for income taxes (12,959,540) (5,054,902) (1,608,491)
Extraordinary loss on early extinguishment of debt (2,618,428) -- --
Provision for income taxes 180,000 744,538 229,500
------------ ----------- -----------
Net loss from continuing operations (15,757,968) (5,799,440) (1,837,991)
------------ ----------- -----------
Discontinued Operations:
Net income from discontinued operations, net
of income taxes of $265,000 and $142,000
during the years ended December 31, 1999
and 1998, respectively 236,827 2,120,000 --
Loss on sale of discontinued operations (3,531,552) -- --
------------ ----------- -----------
Net (loss) gain from discontinued operations (3,294,725) 2,120,000 --
------------ ----------- -----------
Net Loss $(19,052,693) $(3,679,440) $(1,837,991)
============ =========== ===========
Basic and diluted net (loss) gain per common share:
Continuing operations $(1.47) $(.57) $(.19)
Discontinued operations (.31) .21 --
------------ ----------- -----------
Net loss $(1.77) $(.36) $(.19)
============ =========== ===========
Basic and diluted weighted average common shares outstanding 10,751,070 10,192,663 9,595,969
============ =========== ===========
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
A-4
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock
-------------------- --------------------- Additional
Number $.001 Number $.001 Paid-in Accumulated
of Shares Par Value of Shares Par Value Capital Deficit
--------- --------- --------- --------- ------- -------
Balance, January 1, 1997 -- $ -- 9,435,922 $ 9,437 $35,321,821 $ (2,010,887)
Exercise of common stock options -- -- 322,485 322 535,706 --
Exercise of warrants -- -- 64,779 65 275,894 --
Compensation relating to
acceleration of vesting of
common stock options -- -- -- -- 111,576 --
Tax benefit related to exercise
of common stock options -- -- -- -- 366,000 --
Net loss -- -- -- -- -- (1,837,991)
--------- --------- ---------- ------- ----------- ------------
Total comprehensive loss
Balance, December 31, 1997 -- -- 9,823,186 9,824 36,610,997 (3,848,878)
Common stock issued under
the employee stock purchase
plan -- -- 11,972 12 69,221 --
Common stock issued as a finders'
fee in connection with the
acquisition of Elekta
Neurosurgical Instruments -- -- 113,793 114 659,885 --
Common stock issued for original
issue discount on subordinated
debt -- -- 561,207 561 3,254,440 --
Exercise of common stock options -- -- 169,959 170 303,055 --
Compensation relating to
acceleration of vesting of
common stock options -- -- -- -- 11,679 --
Cumulative translation adjustment -- -- -- -- -- --
Tax benefit related to exercise
of common stock options -- -- -- -- 90,000 --
Net loss -- -- -- -- -- (3,679,440)
--------- --------- ---------- ------- ----------- ------------
Total comprehensive loss
Balance, December 31, 1998 -- -- 10,680,117 10,681 40,999,277 (7,528,318)
Common stock issued under the
employee stock purchase plan -- -- 22,461 22 59,104 --
Common stock warrants issued in
connection with debt waivers -- -- -- -- 128,600 --
Exercise of common stock options -- -- 80,700 81 106,978 --
Compensation expense related to
nonemployee stock options -- -- -- -- 146,000 --
Cumulative translation
adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- (19,052,693)
--------- --------- ---------- ------- ----------- ------------
Total comprehensive loss
Balance, December 31, 1999 -- $ -- 10,783,278 $10,784 $41,439,959 $(26,581,011)
========= ========= ========== ======= =========== ============
Consolidated Statements of Stockholders' Equity - (continued)
Cumulative Total
Translation Stockholders' Comprehensive
Adjustment Equity Loss
---------- ------ ----
Balance, January 1, 1997 $ -- $ 33,320,371 $ --
Exercise of common stock options -- 536,028 --
Exercise of warrants -- 275,959 --
Compensation relating to
acceleration of vesting of
common stock options -- 111,576 --
Tax benefit related to exercise
of common stock options -- 366,000 --
Net loss -- (1,837,991) (1,837,991)
----------- ------------ ------------
Total comprehensive loss (1,837,991)
============
Balance, December 31, 1997 -- 32,771,943 --
Common stock issued under
the employee stock purchase
plan -- 69,233 --
Common stock issued as a finders'
fee in connection with the
acquisition of Elekta
Neurosurgical Instruments -- 659,999 --
Common stock issued for origninal
issue discount on subordinated
debt -- 3,255,001 --
Exercise of common stock options -- 303,225 --
Compensation relating to
acceleration of vesting of
common stock options -- 11,679 --
Cumulative translation adjustment 687,000 687,000 687,000
Tax benefit related to exercise
of common stock options -- 90,000 --
Net loss -- (3,679,440) (3,679,440)
----------- ------------ ------------
Total comprehensive loss (2,992,440)
============
Balance, December 31, 1998 687,000 34,168,640
Common stock issued under the
employee stock purchase plan -- 59,126 --
Common stock warrants issued in
connection with debt waivers -- 128,600 --
Exercise of common stock options -- 107,059 --
Compensation expense related to
extension of stock options vesting -- 146,000 --
Cumulative translation
adjustment (1,395,253) (1,395,253) (1,395,253)
Net loss -- (19,052,693) (19,052,693)
----------- ------------ ------------
Total comprehensive loss $(20,447,946)
============
Balance, December 31, 1999 $ (708,253) $ 14,161,479
=========== ============
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
A-5
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss $(19,052,693) $ (3,679,440) $(1,837,991)
Net (gain) loss from discontinued operations 3,294,725 (2,120,000) --
------------ ------------ -----------
Net loss from continuing operations $(15,757,968) $ (5,799,440) $(1,837,991)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities--
Acquired in-process research and development -- 4,710,000 2,449,071
Noncash warrant issuance 128,600 -- --
Equity in loss of Image Technologies Corporation 488,529 437,145 --
Expense recorded on acceleration and extension of stock options vesting 146,000 11,679 111,576
Depreciation and amortization 2,067,395 1,391,088 461,141
Noncash tax provision 180,000 674,000 --
Noncash interest expense relating to original issue discount 531,264 215,490 --
Noncash interest expense relating to early extinguishment of debt 2,358,970 -- --
Write-down of note receivable from Image Technologies Corporation 1,364,369 -- --
Impairment of long-lived asset 6,801,000 -- --
Increase in accounts receivable reserves 42,000 596,000 --
Deferred tax benefit (74,800) (1,019,692) --
Changes in assets and liabilities--
Accounts receivable 2,078,314 (2,582,685) (1,535,178)
Inventories 579,357 2,745,588 (325,288)
Prepaid expenses and other current assets 794,478 700,406 (500,254)
Accounts payable (1,821,804) (1,046,530) (254,176)
Accrued expenses (109,147) 2,714,238 673,966
Deferred revenue -- (300,000) 300,000
------------ ------------ -----------
Net cash (used in) provided by continuing operations (203,443) 3,447,287 (457,133)
------------ ------------ -----------
Net cash used in discontinued operations 1,589,828 (4,654,000) --
------------ ------------ -----------
Cash flows from investing activities:
Maturities (purchases) of marketable securities and
long-term investments 6,122,938 16,167,143 4,056,855
Purchases of property, plant and equipment (518,000) (193,432) (272,380)
Increase in other assets (497,213) (636,238) (81,855)
Increase in investment in Image Technologies Corporation -- (2,038,043) --
Cash paid for acquisition of Image Technologies Corporation,
net of cash acquired -- -- (2,449,071)
Cash paid for acquisition of Elekta Neurosurgical Instruments,
net of cash acquired -- (32,721,076) --
------------ ------------ -----------
Net cash provided by (used in) investing activities 5,107,725 (19,421,646) 1,253,549
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 107,059 303,225 811,986
Proceeds from issuance of common stock pursuant to employee
stock purchase plan 59,126 69,233 --
(Payments of)/proceeds from subordinated notes payable (14,000,000) 20,000,000 --
Borrowings under financing arrangements 428,000 -- --
Proceeds from secured notes payable, net 7,279,134 -- --
Cash paid for deferred financing costs -- (852,849) --
Payments of bank debt -- (523,000) --
Payments of capital lease obligations (252,816) (190,519) (129,443)
------------ ------------ -----------
Net cash (used in) provided by financing activities (6,379,497) 18,806,090 682,543
------------ ------------ -----------
Effect of exchange rate changes on cash (588,152) 267,838 --
Net (decrease) increase in cash and cash equivalents (473,539) (1,554,431) 1,478,959
Cash and cash equivalents, beginning of period 4,007,014 5,561,445 4,082,486
------------ ------------ -----------
Cash and cash equivalents, end of period $ 3,533,475 $ 4,007,014 $ 5,561,445
============ ============ ===========
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
A-6
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) (the Company)
designs, develops and markets innovative medical devices that utilize advanced
technologies and are delivered by minimally invasive procedures. The
Company's products are designed to offer alternative approaches to existing
complex treatments, thereby reducing patient trauma, shortening procedure,
hospitalization and recovery times and lowering overall treatment costs. The
Company's patented medical devices include self-expanding stents, vena cava
filters and septal repair devices (the CardioSeal Septal Occluder). The
Company's stents have been commercially launched in Europe and in the United
States (U.S.) for certain indications, its vena cava filters are marketed in
the U.S. and abroad and the CardioSEAL Septal Occluder is sold commercially in
the U.S. for certain humanitarian uses only, and in Europe and other
international markets. Through its NMT Neurosciences division, the Company
develops, manufactures, markets and sells specialty implants and instruments
for neurosurgery including cerebral spinal fluid shunts, the Spetzler Titanium
Aneurysm Clip and endoscopes and instrumentation for minimally invasive
surgery. On April 5, 2000, the Company sold the U.K. operations of its NMT
Neurosciences division including the Selector Ultrasonic Aspirator, Ruggles
Surgical Instruments and cryosurgery product lines, including certain assets
and liabilities, for approximately $12.0 million cash (see Note 3(a)). The
results of these discontinued operations have been included in the
accompanying financial statements for the years ended December 31, 1999 and
1998.
As of December 31, 1999, the Company was not in compliance with certain of the
debt covenants contained in both the subordinated note agreement and the
senior secured debt agreement discussed in Notes 9(a) and 9(b). The Company
obtained a waiver of default with each of these debtholders and also
subsequently paid down approximately $7.8 million of this debt from the
proceeds of the sale of the U.K. operations of NMT Neurosciences.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
A-7
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(b) Management 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, the reported
amounts of revenues and expenses during the reporting periods and disclosure
of contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
(c) Cash and Cash Equivalents, Marketable Securities and Long-Term
Investments in Marketable Securities
The Company considers all investments with maturities of 90 days or less from
the date of purchase to be cash equivalents and all investments with original
maturity dates greater than 90 days to be marketable securities. Marketable
securities are classified as current or long-term based on their remaining
maturity as of the balance sheet date.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified certain of its marketable securities as held-to-
maturity and available-for-sale and its long-term investments in marketable
securities as held-to-maturity. Held-to-maturity securities represent those
securities for which the Company has the intent and ability to hold to
maturity and are reported at amortized cost. Available-for-sale securities
represent those securities that do not meet the classification of held-to-
maturity, are not actively traded and are reported at fair market value with
unrealized gains and losses included in stockholders' equity. There were no
unrealized gains or losses as of December 31, 1999 or 1998.
Cash and cash equivalents, which are carried at cost and approximate market,
consist of cash and money market accounts.
A-8
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities and Long-Term
Investments in Marketable Securities--(continued)
Marketable securities, with a weighted average maturity of approximately
7 1/2 months at December 31, 1998, consist of the following:
AT DECEMBER 31,
-------------------------
1999 1998
---- ----
Held-to-maturity--
Eurodollar bonds $ -- $3,310,627
Corporate debt securities -- 502,063
Medium term notes -- 500,847
Commercial paper -- --
Zero coupon bonds -- --
---------- ----------
-- 4,313,537
Available-for-sale--
Taxable auction securities -- 800,000
---------- ----------
$ -- $5,113,537
---------- ==========
There were no realized gains or losses on the sale of available-for-sale
securities during 1999 and 1998.
Long-term investments in marketable securities, with a weighted average
maturity of approximately 15 months at December 31, 1998, are carried at
cost, which approximates market, and consist of the following:
AT DECEMBER 31,
-------------------------
1999 1998
---- ----
Held-to-maturity--
Medium-term notes $ -- $1,009,401
Corporate debt securities -- --
---------- ----------
$ -- $1,009,401
---------- ==========
A-9
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities and Long-Term
Investments in Marketable Securities--(continued)
In addition, the following amounts of interest receivable generated from the
Company's cash and cash equivalents, marketable securities, and long-term
investments in marketable securities are included in prepaid expenses and
other current assets in the accompanying consolidated balance sheets:
AT DECEMBER 31,
1999 1998
--------------------- -------------------
Short-term interest receivable $ -- $117,687
Long-term interest receivable -- 12,985
----- --------
$ -- $130,672
----- ========
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
AT DECEMBER 31,
1999 1998
------------------ -----------------
Components $2,379,474 $2,617,848
Finished goods 2,254,874 2,665,584
---------- ----------
$4,634,348 $5,283,432
========== ==========
Finished goods consist of materials, labor and manufacturing overhead.
(e) Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of an estimate of the fair value of certain financial instruments.
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, long-term investments in marketable securities,
accounts receivable and debt obligations. The estimated fair value of these
financial instruments approximates their carrying value at December 31, 1999
and 1998, respectively. The estimated fair values have been determined
through information obtained from market sources and management estimates.
A-10
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(e) Financial Instrument--(continued)
The Company does not have any material derivative or any other financial
instruments as defined by SFAS No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. Financial instruments that subject the Company to credit
risk consist primarily of trade accounts receivable. Accounts receivable
subject the Company to the potential for credit risk with customers in the
health care industry. The Company performs ongoing credit evaluations of its
customers' financial condition but does not require collateral.
Historically, the Company has not experienced significant losses related to
its accounts receivable. The Company utilizes primarily one distributor for
the sales of its filter products. This distributor had amounts due to the
Company of approximately $748,000 and $992,000 as of December 31, 1999 and
1998, respectively. This distributor accounted for 26%, 33%, and 65% of
product revenues for fiscal 1999, 1998 and 1997, respectively. The Company
also had one customer whose revenues accounted for 12% and 10% of product
revenues for fiscal 1999 and 1998. This customer's accounts receivable
balance represented 5% and 8%, respectively of total accounts receivable for
the years ended December 31, 1999 and 1998. The Company has a number of
accounts receivable denominated in foreign currencies that are translated at
year-end exchange rates. For the years ended December 31, 1999 and 1998,
foreign sales accounted for 48% and 45% of total revenues, respectively.
(g) Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 121 addresses accounting and reporting requirements for impairment
of long-lived assets based on their fair market values.
A-11
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(g) Impairment of Long-Lived Assets--(continued)
The carrying value of intangible assets, principally goodwill, is
periodically reviewed by the Company based on the expected future
undiscounted operating cash flows of the related business unit. At December
31, 1999, the Company recorded a $6,801,000 impairment charge for goodwill
recorded upon the acquisition of NMT Neurosciences in July 1998. This
impairment charge was determined based upon the Company's analysis of
estimated future cash flows of NMT Neurosciences and the carrying value of
all of the long-lived assets of NMT Neurosciences which were sold in April
2000. The Company's assessment of the value of the assets of NMT
Neurosciences was corroborated by independent outside parties.
(h) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations using the straight-line method, which allocates the cost of
property, plant and equipment over the following estimated useful lives:
Estimated
Asset Classification Useful Life
-------------------- -----------
Buildings 30 Years
Leasehold improvements Life of Lease
Laboratory and computer equipment 3-7 Years
Equipment under capital lease Life of Lease
Office furniture and equipment 5-10 Years
(i) Revenue Recognition
The Company records product sales upon shipment to the customer. Products
sold to the Company's distributors are not subject to a right of return for
unsold product. License fees, royalties and product development revenue are
recognized as earned.
A-12
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(j) Net Loss per Common and Potential Common Share
The Company applies SFAS No. 128, Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common
stock. In accordance with Staff Accounting Bulletin (SAB) No. 98, the
Company has determined that there were no nominal issuances of common stock
or potential common stock in the periods prior to the Company's initial
public offering. Diluted loss per share is the same as basic loss per share
as the effects of the Company's potential common stock (2,066,956, 1,933,273
and 1,746,861 shares for the years ended December 31, 1999, 1998 and 1997,
respectively) are antidilutive.
(k) Foreign Currency
The accounts of the Company's subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation. Accordingly, the accounts of the
Company's foreign subsidiaries are translated from their local currency,
which is the functional currency, into U.S. dollars, the reporting currency,
using the exchange rate at the balance sheet date. Income and expense
accounts are translated using an average rate of exchange during the period.
Cumulative foreign currency translation gains or losses are reflected as a
separate component of consolidated stockholders' equity and amounted to a
cumulative loss of approximately $708,000 for the year ended December 31,
1999 and a cumulative gain of $687,000 for the year ended December 31, 1998.
There was no foreign currency translation gains or losses for the year ended
December 31, 1997. Additionally, the Company had a foreign currency exchange
transaction gain of approximately $105,000 for the year ended December 31,
1999 and foreign currency losses of approximately $88,000 and $15,000 for the
years ended December 31, 1998 and 1997, respectively. Foreign currency
transaction gains and losses result from differences in exchange rates
between the functional currency and the currency in which a transaction is
denominated and are included in the consolidated statement of operations in
the period in which the exchange rate changes.
A-13
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(l) Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. If presented on the statement of
operations, comprehensive net loss would have increased the reported net loss
by $1,395,000 for the year ended December 31, 1999 and decreased the net loss
by $687,000 for the year ended December 31, 1998.
(m) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 as amended by SFAS No. 137, Deferral of the effective date of the FASB
Statement No. 133 is effective for fiscal quarters beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting disclosure standards
for derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for hedging
activities. The Company does not expect adoption of this statement to have a
material impact on its consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulletin established
guidelines for revenue recognition. The Company does not expect the adoption
of this methodology to have a material impact on the financial condition or
results of operations.
(n) Pension Obligations
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. The statement is effective for
fiscal years beginning December 15, 1997. During the year ended December 31,
1998, the Company adopted the provisions of SFAS No. 132, which establishes
accounting and reporting disclosure standards for pension and other
postretirement benefit plans. As part of the acquisition of Elekta
Neurosurgical Instruments (ENI) (See Note 3(b)), the Company assumed a
defined benefit plan covering substantially all of its U.K. employees. This
defined benefit plan was included in liabilities assumed by the purchaser of
the Company's U.K. operations in April 2000 (see Note 3(a)).
A-14
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(n) Pension Obligation--(continued)
In October 1996, the Company adopted a qualified defined contribution plan,
the Nitinol Medical Technologies, Inc. 401(k) Plan (the 401(k) Plan) pursuant
to which U.S. employees may defer up to 15% of their salary, subject to
certain limitations. The Company did not make any employee matching or other
discretionary contributions to the 401(k) Plan for the years ended December
31, 1999, 1998 and 1997.
(o) Prior-Year Account Balances
Certain prior-year account balances have been reclassified to be consistent
with the current year's presentation.
A-15
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(p) Noncash Investing and Financing Activities
The following table summarizes the supplemental disclosures of the Company's
noncash financing and investing transactions for the periods indicated below:
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest $ 1,983,001 $ 1,371,912 $ 46,152
============= ============ ========
Income Taxes $ 121,148 $ 728,324 $ 32,000
============= ============ ========
Supplemental disclosure of noncash financing and investing transactions:
Equipment acquired under capital lease obligations $ 1,100,000 $ 195,827 $400,091
============= ============ ========
Noncash tax benefit relating to exercise of stock options $ -- $ 90,000 $366,000
============= ============ ========
Abandonment of leasehold improvements $ -- $ -- $111,472
============= ============ ========
Original issue discount recorded related to stock warrant issued in
connection with subordinated notes payable $ -- $ 3,255,001 $ --
============= ============ ========
Acquisition of Elekta Neurosurgical Instruments (ENI):
Fair value of identifiable assets acquired $ -- $ 26,475,000 $ --
Goodwill and other intangibles $ -- 14,396,075 --
In-process research and development $ -- 4,710,000 --
Liabilities assumed $ -- (10,007,000) --
Issuance of Common Stock in connection with acquisition $ -- (659,999) --
Cash acquired -- (2,193,000) --
------------- ------------ --------
Cash paid for purchase of ENI, net of cash acquired $ -- $ 32,721,076 $ --
============= ============ ========
(3) NMT NEUROSCIENCES DIVISION
(a) Sale of U.K. Operations of NMT Neurosciences Division
On April 5, 2000, the Company sold the U.K. operations of its NMT
Neurosciences division including the Selector Ultrasonic Aspirator, Ruggles
Surgical Instruments and cryosurgery product lines and certain assets and
liabilities for $12.0 million in cash. The Company recorded a $3.5 million
loss on this sale, comprised of net proceeds of $12.0 million less estimated
transaction and other costs of $3.7 million, and net assets sold of $11.8
million. The transaction costs consisted principally of legal and accounting
fees, severance arrangements with certain employees and other estimated
costs associated with discontinuing the operation and consummating the sale.
A-16
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) NMT NEUROSCIENCES DIVISION--(CONTINUED)
(a) Sale of U.K. Operations of NMT Neurosciences Division--(continued)
The net assets sold as of December 31, 1999 consist of the following:
Current assets $ 6,525,000
Property and equipment, net 1,273,000
Goodwill and other intangible assets, net 6,195,000
-----------
Total assets 13,993,000
Current liabilities (2,197,000)
-----------
$11,796,000
===========
The consolidated financial statements of the Company have been restated to
reflect the financial results of the U.K. entity as a discontinued operation
for the years ended December 31, 1999 and 1998. The Company did not allocate
interest expense associated with the senior secured debt and subordinated
notes discussed in Notes 9(a) and 9(b) to discontinued operations. The
discontinued operation is estimated to have break-even operating results for
the first quarter of 2000.
The Company used approximately $7.3 million of the proceeds from this sale to
fully pay down its senior secured debt agreement and $500,000 to pay down its
subordinated note agreement as discussed in Notes 9(a) and 9(b).
(b) Acquisition of Elekta Neurosurgical Instruments
On July 8, 1998, the Company acquired ENI, the neurosurgical instruments
business of Elekta AB (PUBL), a Swedish corporation, for approximately
$33 million, plus acquisition costs of approximately $3.1 million. The
acquisition has been accounted for as a purchase in accordance with the
requirements of Accounting Principles Board (APB) Opinion No. 16, Business
Combinations, and accordingly ENI's results of operations are included in
those of the Company beginning on the date of the acquisition. The
transaction was financed with $13 million of the Company's cash, $3.1 million
of acquisition costs and $20 million of subordinated debt borrowed from an
affiliate of a significant stockholder of the Company (see Note 9(a)). A
significant portion of the purchase price was identified as intangible assets
in an independent appraisal, using proven valuation procedures and
techniques.
A-17
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) NMT NEUROSCIENCES DIVISION--(CONTINUED)
(b) Acquisition of Elekta Neurosurgical Instruments--(continued)
These intangible assets included $4.7 million for acquired in-process
research and development for projects that did not have future alternative
uses. This allocation represents the estimated fair market value based on
risk-adjusted cash flows related to the in-process research and development
programs. The in-process research and development consists of five primary
research and development programs that were expected to reach completion
between late 1998 and 2000. At the acquisition date, continuing research and
development commitments to complete the projects were expected to be
approximately $2.0 million through 2000.
These estimates are subject to change given the uncertainties of the
development process. At the date of acquisition, the development of these
programs had not yet reached technological feasibility and the in-process
research and development had no alternative future uses. Accordingly, these
costs were written off during the year ended December 31, 1998. For income
tax purposes, a significant portion of the acquisition represented the
purchase of stock with a carryover tax basis. Accordingly, a deferred tax
liability has been established to account for the book and tax differences in
book value for building and leasehold improvements.
The remaining premium of approximately $17.2 million was allocated to the
following identifiable assets, goodwill and other intangibles and will be
amortized over periods of 7 to 30 years:
AMORTIZATION
AMOUNT PERIOD
------ ------
Land and buildings $ 4,650,000 30 years
Favorable lease 1,170,000 30 years
Goodwill and other intangibles 13,226,000 7-20 years
Deferred tax liability (1,896,000)
-----------
$17,150,000
===========
A-18
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) NMT NEUROSCIENCES DIVISION--(CONTINUED)
(b) Acquisition of Elekta Neurosurgical Instruments--(continued)
The total consideration allocated to the fair market value of assets and
liabilities acquired on the purchase date is as follows, net of cash acquired
of approximately $2.2 million:
Accounts receivable $ 5,578,000
Inventories 6,688,000
Prepaid expenses and other current assets 2,024,000
Property and equipment 9,992,000
Goodwill and other intangible assets 14,396,075
In-process research and development 4,710,000
Accounts payable and accrued expenses (7,324,000)
Senior debt (523,000)
Deferred tax liability (2,160,000)
-----------
$33,381,075
===========
The Company issued 113,793 shares of the Company's $.001 par value common
stock, valued at $5.80 per share, to a significant stockholder as a finders'
fee in connection with the acquisition. In addition, the Company incurred
direct acquisition costs of approximately $1.9 million. These amounts have
been included in the purchase price.
The following table presents selected unaudited financial information of the
Company and the neurosurgical division of Elekta AB, assuming the companies
combined on January 1, 1998. The unaudited pro forma results are not
necessarily indicative of either the actual results that would have occurred
had the acquisition been consummated on January 1, 1998 or of future results:
For the
Year Ended
December 31,
1998
----
(Unaudited)
Pro forma net revenues $35,315,000
===========
Pro forma net loss $(8,380,000)
===========
Basic and diluted weighted average
common shares outstanding 10,543,663
===========
Basic and diluted net loss per
common share $ (.79)
===========
A-19
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INVESTMENT IN IMAGE TECHNOLOGIES CORPORATION
In May 1997, the Company invested $2.3 million in Image Technologies
Corporation (ITC) in exchange for 345,722 shares of ITC's redeemable
convertible Series A preferred stock, $.01 par value per share, which
represented a 23% ownership interest in ITC. During the years ended
December 31, 1999 and 1998, the Company recorded $489,000 and $437,000,
respectively, as its equity in the net loss of ITC. Under the terms of this
agreement, the Company also extended to ITC a $2 million credit line that
bears interest at 10% per annum, payable monthly beginning March 31, 2001.
This $2 million senior note is secured by substantially all of the assets of
ITC. The principal amount of the note is convertible, at the option of the
Company, into additional shares of ITC Series A preferred stock at a price
per share of $2.54 at any time before January 1, 2001 and, if converted, any
interest accrued as of such date shall be forgiven. If not converted, the
note is payable on December 31, 2002. On December 30, 1998 and February 3,
1999, the Company amended its revolving credit note agreement with ITC to
provide for additional borrowings of $50,000 and $100,000, respectively,
under which ITC borrowed $38,043 and $100,000. The borrowings under the
$50,000 note were repaid in April 1999. The $100,000 note accrues interest at
10% per annum and is generally subject to the same terms as the $2 million
credit line agreement, except that it is convertible into additional shares
of ITC Series A preferred stock at a price per share of $9.97. In connection
with the issuance of the $100,000 note, ITC granted a warrant to the Company
to purchase 10,030 shares of ITC Series A preferred stock at $9.97 per share.
As of December 31, 1999, ITC borrowed $2.1 million under these agreements and
owes the Company accrued interest of $281,000. During the year ended
December 31, 1999, the Company performed a detailed review of the ITC
operations. Based upon this analysis and discussion with ITC's management and
investors, the Company determined that there was a significant risk that its
notes receivable would be repaid by ITC. The analyses and discussions
indicated that during the year ended December 31, 1999, ITC had insufficient
cash resources to fund its operations, that product revenue had declined
during 1999 and was far below planned levels and that ITC was seeking
additional capital from numerous sources and that any future financing would
possibly be dilutive to the Company's equity position and may contain a
security interest senior to the Company's notes receivable. Accordingly, the
Company charged the carrying value of the notes receivable to operations
during the year ended December 31, 1999.
A-20
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) RESTRUCTURING CHARGE
During 1997, the Company reorganized its vena cava filter operations and
brought the assembly of its straight-line vena cava filters in-house. In
connection with this restructuring, the Company reduced staff and incurred
other nonrecurring costs. The $194,000 restructuring charge in the
accompanying statements of operations includes a noncash charge of $112,000
for the accelerated vesting of certain stock options, cash severance and
benefits of $62,000, and $20,000 for the transfer of assembly technology.
Other start-up costs related to the in-house assembly of the straight-line
vena cava filter, including the training of manufacturing personnel and
associated materials and overhead, are included in cost of goods sold in the
accompanying statements of operations.
(6) MERGER AND INTEGRATION CHARGE
In connection with the acquisition of ENI on July 8, 1998, the Company
reorganized its operations and recorded approximately $687,000 in merger and
integration expenses during the year ended December 31, 1998. This amount
consists principally of employee severance and replacement costs of $374,000,
employee relocation costs of $152,000 and printing and corporate name change
costs of $161,000. As of December 31, 1998, the accompanying consolidated
balance sheet included approximately $235,000 of merger and integration
expenses that were incurred but not yet paid. There are no such accrued
expenses on the balance sheet as of December 31, 1999.
(7) INCOME TAXES
The Company provides for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes. Accordingly, a deferred tax asset
or liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities, as measured by the enacted
tax rates expected to be in effect when these differences reverse.
The provision for income taxes in the accompanying consolidated statement of
operations for the years ended December 31, 1999 and 1998 consists of the
following:
At December 31,
--------------------
1999 1998
---- ----
Foreign - current $ 180,000 $ 701,192
Federal - current (300,000) 411,038
State - current -- 13,000
--------- ----------
(120,000) 1,125,230
--------- ----------
Foreign - deferred (75,000) (169,192)
Federal - deferred 375,000 (167,500)
State - deferred -- (44,000)
--------- ----------
300,000 (380,692)
--------- ----------
$ 180,000 $ 744,538
========= ==========
A-21
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has federal and state net operating loss carryforwards of
approximately $15 million to reduce to reduce federal and state taxable
income in future periods, if any and approximately $50,000 and $140,000 of
federal and state tax credit carryforwards, respectively, to reduce federal
and state income taxes in future periods, if any. These carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
their utilization may be limited by aggregate changes in significant
ownership of the Company over a three year period as prescribed by Section
382 of the Internal Revenue Code. These carryforwards expire on various dates
through 2019.
As of December 31, 1999, the Company has available foreign net operating loss
carryforwards of approximately $1.2 million. These operating losses were
acquired in connection with the purchase of ENI, as discussed in Note 3. The
Company did not allocate any of the purchase price to the net operating
losses due to the uncertainty surrounding the ability to utilize the losses
and the possibility that the losses are subject to review and possible
adjustments by foreign tax authorities. The Company was able to utilize
approximately $450,000 and $1.8 million of acquired operating losses during
the years ended December 31, 1999 and 1998, respectively and credited the
benefit of such losses of $180,000 and $674,000 to goodwill. The Company
recorded the tax effect of utilizing these loss carryforwards as a reduction
in the carrying value of the goodwill.
The provision for income taxes in the year ended December 31, 1999 represents
the taxes on income generated in France by NMT Neurosciences. The Company
generated a net operating loss for federal and state income tax purposes in
the United States in the year ended December 31, 1999.
The provision for income taxes in 1998 and 1997 is calculated on the income
before provision for taxes without taking into account the write-off of
acquired in-process research and development, the equity in the loss of ITC
and goodwill amortization. The acquired in-process write-off was
$4,710,000 and $2,449,071 for 1998 and 1997, respectively, the equity in the
net loss of ITC was $437,145 for 1998, and the goodwill amortization was
$140,000 and $0 for 1998 and 1997, respectively.
The tax effects of temporary differences that give rise to the significant
portions of the current deferred tax asset (included in prepaid expenses and
other current assets) and long-term deferred tax liability at December 31,
1999 and 1998 are as follows:
At December 31,
---------------------
1999 1998
---- ----
Net operating loss carryforwards $ 1,646,000 $ --
Tax credit carryforwards 190,000 --
Timing differences, including reserves
accruals, and write-offs 5,867,000 725,000
----------- -----------
7,703,000 725,000
Less - valuation allowance (7,703,000) (350,000)
----------- -----------
Net deferred tax asset -- 375,000
Deferred tax liability related to
acquisition of ENI (1,283,008) (1,357,808)
----------- -----------
Net deferred tax asset (liability) $(1,283,008) $ (982,808)
=========== ===========
A-22
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has provided a valuation allowance for its gross deferred tax
asset due to the uncertainty surrounding the ability to realize this asset.
The deferred tax liability relates primarily to the tax impact of the
difference in the tax basis and book basis of the building and leasehold
improvements resulting from the ENI purchase accounting. This difference in
basis will not be deductible in future years. See Note 3.
(8) DEFERRED REVENUE
On November 22, 1994, the Company licensed exclusive, worldwide rights,
including the right to sublicense to others, to develop, produce and market
its stent technology to an unrelated third party (the License Agreement).
Under the License Agreement the Company earned $1,829,000, $1,729,000 and
$1,200,000 in license revenues during the years ended December 31, 1999, 1998
and 1997, respectively.
(9) DEBT OBLIGATIONS
The Company has the following debt outstanding as of December 31, 1999 and
1998:
1999 1998
---- ----
Subordinated note payable $ 5,232,412 $16,960,489
Senior secured notes payable 7,279,134 --
Capital lease obligations 1,633,686 786,502
Line of credit facility 428,000 --
----------- -----------
14,573,232 17,746,991
Less-Current portion 1,002,877 202,248
----------- -----------
$13,570,355 $17,544,743
=========== ===========
(a) Subordinated Note Payable
The Company financed a significant portion of the acquisition of ENI (see
Note 3(b)) with $20 million of subordinated debt borrowed from an affiliate
of a significant stockholder of the Company. The subordinated debt is due
September 30, 2003 with quarterly interest payable at 10.101% per annum and
is subject to certain covenants, as amended.
On September 13, 1999, the Company entered into a $10 million senior secured
debt facility with a bank (See Note 9(b)), $8 million of the proceeds of
which was used to reduce the principal amount of the subordinated note. The
Company also used $6 million of its own cash to further reduce the principal
amount of this note. In conjunction with this transaction, the Company
recorded a $2.6 million extraordinary loss on the early extinguishment of
debt in the accompanying statement of operations which primarily relates to
the accelerated pro-rata write-off of the original issue discount and
deferred financing costs of the subordinated note payable. The remaining
original issue discount at December 31, 1999, is being amortized to interest
expense over the remaining term of the subordinated debt of 45 months. The
Company recorded approximately $531,000 of interest expense relating to the
amortization of original issue discount for the year ended December 31, 1999.
As of December 31, 1999, the Company was not in compliance with certain of
the debt covenants of the subordinated note payable and has obtained a waiver
of default from the holder of the note. Subsequent to year-end, the Company
paid down $500,000 of this note from the proceeds obtained in connection with
the sale of part of its Neurosciences division (see Note 3(a)).
A-23
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(b) Senior Secured Debt
On September 13, 1999, the Company entered into a $10 million senior secured
debt facility with a bank, $8 million of the proceeds of which was used to
reduce the principal amount of the Company's subordinated note payable (See
Note 9(a)). The remaining $2 million of the senior secured debt facility is
available to be drawn down by the Company for working capital purposes, as
needed. The facility has a term of three years with interest payable monthly
at the bank's prime lending rate (8.5% at December 31, 1999) on U.S.
borrowings and an equivalent market rate on foreign currency borrowings. As
of December 31, 1999, the Company had outstanding borrowings of $7.3 million
under this facility. As of December 31, 1999, the Company was not in
compliance with certain of the debt covenants of the secured debt facility
and has obtained a waiver of default from the bank. Subsequent to year-end,
the Company paid down this note in its entirety from the proceeds obtained in
connection with the sale of part of its Neurosciences division (see Note
3(a)).
(c) Capital Lease Obligations
In June 1996, the Company entered into a $1.5 million lease finance facility
agreement with a bank under which the Company leases equipment at an interest
rate that is 200 basis points above the bank's cost of funds. Leases under
this agreement are payable in equal monthly installments over a period of 36-
60 months and expire through November 2001. Borrowings of $572,000 were made
under this agreement, of which $202,000 was outstanding as of December 31,
1999.
Upon expiration of this agreement in June 1997, the Company entered into a
new agreement with the bank that provided the Company with similar terms and
the option to borrow up to $1 million in the aggregate for the Company and
ITC through March 31, 1998. Leases under this agreement are payable in equal
monthly installments over a period of 36-60 months and expire through
December 2002. Borrowings of $376,000 and $250,000 were made under this
agreement by the Company and ITC, respectively, of which $196,000 and
$113,000 were outstanding as of December 31, 1999.
A-24
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(c) Capital Lease Obligations--(continued)
On April 1, 1998, the Company entered into a new agreement with this bank
that provided the Company and ITC with similar terms and the option to borrow
up to $750,000 through March 31, 1999. Borrowings of $169,000 and $163,000
have been made under this new agreement by the Company and ITC, respectively,
of which $128,000 and $124,000 were outstanding as of December 31, 1999,
respectively. Leases under these agreements are payable in equal monthly
installments over a period of 60 months and expire through May 2004. The
Company guarantees the outstanding leases of ITC under these agreements.
In June 1999, the Company entered into a lease agreement with a bank for
approximately $150,000 to be used for equipment purchases. Borrowings under
this agreement accrue interest at 6.67%, are payable in monthly installments,
are collateralized by the equipment purchased, and expire in June 2002.
Approximately $105,000 is outstanding under this agreement as of December 31,
1999.
In December 1999, the Company entered into a lease agreement with a bank for
approximately $1 million to be used for equipment purchases. Borrowings
under this agreement accrue interest at 5.64%, are payable in monthly
installments, are collateralized by the equipment purchased, and expire in
December 2002. Approximately $1 million of borrowings are outstanding as of
December 31, 1999.
A-25
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(c) Capital Lease Obligations--(continued)
Future minimum lease payments under the capital lease obligations of the
Company as of December 31, 1999 are approximately as follows:
Year Ending Amount
----------- ------
2000 $ 728,961
2001 575,507
2002 446,920
2003 35,674
2004 1,854
-----------
Total minimum lease payments 1,788,916
Less--Amount representing interest 155,230
-----------
1,633,686
Less--Current portion 574,877
-----------
$ 1,058,809
===========
(d) Line-of-Credit Facility
In June 1999 the Company entered into a finance facility agreement with a
bank for approximately $475,000. Borrowings under this facility accrue
interest at a rate of 5.38% per annum and are collateralized by the Company's
accounts receivables. Borrowings of $428,000 under this line were
outstanding as of December 31, 1999.
A-26
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(e) Future Maturities of Debt Obligations
Future payments of the Company's subordinated note, senior secured debt, and
capital lease obligations are as follows:
Year Ending Amount
----------- ------
2000 $ 1,156,961
2001 575,507
2002 7,726,054
2003 6,035,674
2004 1,854
-----------
15,496,050
Less--Unamortized original issue discount (767,588)
Less--Amount representing interest (155,230)
-----------
$14,573,232
===========
(10) COMMITMENTS
(a) Manufacturing Agreement
The Company contracts with an unrelated third party for the manufacture of
certain components. Under the amended agreement dated February 15, 1996, the
Company is required to purchase minimum unit quantities through June 2001.
The aggregate minimum purchases under the agreement are approximately $2.6
million. In addition, in the event of an order cancellation or product
conversion, the Company has agreed to purchase all in-process materials and
all special materials purchased by the manufacturer for use in the production
of these components, limited to purchase orders through 180 days after
cancellation.
(b) Operating Leases
The Company has entered into operating leases for office and laboratory space
and for motor vehicle leases. These leases expire through 2006. The leases
require payment of all related operating expenses of the building, including
real estate taxes and utilities in excess of base-year amounts.
A-27
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) COMMITMENTS--(CONTINUED)
Future minimum rental payments due under operating lease agreements as of
December 31, 1999 are approximately as follows:
Year Ending Amount
----------- ------
2000 $ 608,000
2001 635,000
2002 677,000
2003 637,000
2004 551,000
Thereafter 872,000
----------
$3,980,000
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
approximately $602,000, $524,000 and $482,000, respectively. In addition,
the Company is a guarantor of the lease of office space for ITC (see
Note 9(c)).
(c) Royalties
The Company has entered into various agreements that require payment of
royalties based on specified percentages of future sales, as defined. In
addition, the Company has agreed to pay royalties to certain employees based
on sales or licenses of products where they were the sole or joint inventor.
Future minimum commitments under these agreements are approximately $15,000
per year. Royalty expense under royalty agreements was $838,000, $640,000
and $278,000 for the years December 31, 1999, 1998 and 1997, respectively.
In addition to the royalties discussed above, during the year ended December
31, 1998, the Company entered into an agreement to pay royalties of $87,500
per quarter to two individuals for a product for which these individuals own
the rights. Payment of these royalties began in the fourth quarter of 1998
and are to be paid each quarter through the quarter ending September 30,
2001. The Company paid $350,000 for such royalties during the year ended
December 31, 1999 of which approximately $50,000 has been expensed during
1999 and the remaining royalties will be expensed over the life of the
royalty arrangement.
Additionally, these individuals are also to receive $50,000 per quarter for
their product development and marketing consulting efforts. These payments
began in the third quarter of 1998 and will continue each quarter through the
quarter ended June 30, 2000. The Company recorded $200,000 and $100,000 for
such services during the years ended December 31, 1999 and 1998,
respectively.
(d) Legal Proceedings
In papers dated November 24, 1999 Elekta AB (publ) filed a request for
arbitration in the London Court of International Arbitration ("LCIA")
alleging that the Company breached its payment obligation under the Sale and
Purchase Agreement between the parties dated May 8, 1998 pursuant to which
the Company purchased certain assets from Elekta as discussed in Note 3(b).
Elekta seeks approximately $1.6 million in damages. On January 14, 2000, the
Company filed its response with the LCIA in which the Company denied Elekta's
claims and indicated that it would assert a counterclaim for approximately
$2.5 million for Elekta's breach of the
A-28
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
same contract. On February 17, 2000 an arbitrator was appointed, and a
Statement of the Case was sent to the LCIA by Elekta on March 23, 2000. The
parties are currently in the pleadings stage.
(11) STOCK OPTIONS AND WARRANTS
(a) Nonqualified Stock Options
The Company granted nonqualified options to various officers, directors,
employees, and/or consultants to purchase shares of common stock. The options
become exercisable in full or in part at issuance or within one to four years
of the date of issuance. All unexercised grants expire on the earlier of
approximately seven to ten years from date of issuance or 90 days after
termination of service as an officer, director, employee and/or consultant.
As of December 31, 1999, 1,097,068 shares are subject to outstanding options
at exercise prices of $.76-$14.00 per share.
(b) Stock Option Plans
1994 Stock Option Plan. In May 1994, the Board of Directors approved a
stock option plan (the 1994 Plan), which authorizes the Company to issue
options to purchase up to 315,789 shares of the Company's common stock. The
Company may grant options to officers, key employees, directors and
consultants of the Company at an exercise price not less than fair market
value as determined by the Board of Directors. Through December 31, 1999 the
Company has granted 308,368 options under this plan and does not intend to
grant any additional options under this plan. As of December 31, 1999,
58,880 shares are subject to outstanding options at exercise prices of $2.15-
$8.93 per share.
1996 Stock Option Plan. The Nitinol Medical Technologies, Inc. 1996 Stock
Option Plan (the 1996 Plan) was approved by the Company's stockholders in
July 1996. The 1996 Plan provides for the grant of options to acquire a
maximum of 600,000 shares of common stock. As of December 31, 1999, 586,284
shares are subject to outstanding options at exercise prices of $2.00-$14.63
per share. The Board of Directors has appointed a Stock Option Committee of
the Board as the Plan Administrator. The 1996 Plan permits the granting of
incentive stock options or nonstatutory stock options at the discretion of
the Plan Administrator. Subject to the terms of the 1996 Plan, the Plan
Administrator determines the terms and conditions of options granted under
the 1996 Plan. At December 31, 1999, 13,716 shares are available for future
grants under the 1996 Plan.
A-29
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The 1996 Director's Stock Plan. The Nitinol Medical Technologies, Inc. 1996
stock option plan for nonemployee directors (the 1996 Directors' Stock Plan)
was approved by the Company's stockholders in July 1996. The 1996 Directors'
Stock Plan provides for the automatic grant of nonstatutory stock options to
purchase shares of common stock to directors of the Company who are not
employees of the Company and who do not otherwise receive compensation from
the Company. Under the 1996 Directors' Stock Plan, 150,000 shares of common
stock have been reserved for issuance of options. Each eligible director
serving on the Board on the effective date of the 1996 Directors' Stock Plan
automatically received an option to purchase 10,000 shares of common stock at
a price equal to the initial public offering price, subject to vesting in
equal monthly installments over a period of three years.
In the future, each nonemployee director not otherwise compensated by the
Company who joins the Board will automatically receive an initial grant of
options to purchase 10,000 shares of common stock at an exercise price equal
to the fair market value per share at the date of grant, subject to vesting
in equal monthly installments over a three-year period.
In each year other than the year in which a director receives an initial
grant of options, such director will automatically receive options to
purchase 2,500 shares of common stock that shall become fully vested six
months after the date of grant. As of December 31, 1999, 87,500 shares are
subject to outstanding options at an exercise price of $3.38-$13.13 per
share, of which 83,056 shares are exercisable.
1998 Stock Incentive Plan. The Nitinol Medical Technologies, Inc. 1998
Stock Incentive Plan (the 1998 Plan) was approved by the Company's
stockholders during 1998. The 1998 Plan provides for the grant of options to
acquire a maximum of 800,000 shares of common stock. As of December 31,
1999, 237,225 shares are subject to outstanding options at exercise prices of
$2.75-$6.50 per share. The 1998 Plan permits the granting of incentive stock
options or nonstatutory stock options at the discretion of the Board of
Directors. Subject to the terms of the 1998 Plan, the Board of Directors
determines the terms and conditions of options granted under the 1998 Plan.
As of December 31, 1999, 562,775 shares are available for future grants under
the 1998 Plan.
A-30
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The following table summarizes all stock option activity under all of the
Company's stock option plans, including grants outside of the 1998, 1996 and
1994 Plans:
WEIGHTED
AVERAGE EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
------ -----
Balance, January 1, 1997 1,972,257 $ 3.56
Granted 141,500 12.04
Canceled (44,411) 9.72
Exercised (322,485) 1.68
--------- ------
Balance, December 31, 1997 1,746,861 4.44
Granted 459,600 7.20
Canceled (103,229) 9.19
Exercised (169,959) 1.79
--------- ------
Balance, December 31, 1998 1,933,273 5.05
--------- ------
Granted 281,675 3.70
Canceled (67,292) 8.67
Exercised (80,700) 1.33
--------- ------
Balance, December 31, 1999 2,066,956 $ 4.90
--------- ------
Exercisable, December 31, 1999 1,470,903 $ 4.32
========= ======
Exercisable, December 31, 1998 1,286,891 $ 3.67
========= ======
Exercisable, December 31, 1997 1,037,188 $ 2.99
========= ======
The following detail pertains to outstanding options of the Company at
December 31, 1998:
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE PRICE REMAINING NUMBER OF EXERCISE PRICE
SHARES RANGE PER PER SHARE CONTRACTUAL LIFE OF SHARES PER SHARE
OUTSTANDING SHARE OUTSTANDING OUTSTANDING OPTIONS OUTSTANDING EXERCISABLE EXERCISABLE
- ----------------- ------------------ ---------------- ------------------- ------------- -----------------
1,106,181 $ .76-4.25 $ 2.29 6.42 Years 923,436 $ 2.13
903,525 4.38-10.88 7.59 7.68 Years 514,717 7.83
57,250 11.50-14.63 12.70 7.35 Years 32,750 12.74
--------- ------------ ------ ---------- --------- ------
2,066,956 $ .76-$14.63 $ 4.90 7.00 Years 1,470,903 $ 4.32
========= ============ ====== ========== ========= ======
The Company accounts for its stock-based compensation plans under APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 establishes a
fair-value based method of accounting for stock-based compensation plans.
A-31
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The Company has adopted the disclosure-only alternative under SFAS No. 123
for grants to employees, which requires disclosure of the pro forma effects
on earnings and earnings per share as if SFAS No. 123 had been adopted, as
well as certain other information. The Company has computed the pro forma
disclosures required under SFAS No. 123 for all employee stock options
granted in 1998, 1997 and 1996 using the Black-Scholes option pricing model
prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the years ended
December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---- ---- ----
Risk-free interest rates 4.80%-6.38% 4.65%-5.72% 5.71%-6.61%
Expected dividend yield -- -- --
Expected lives 7 years 7 years 3-5 years
Expected volatility 87% 66% 67%
Weighted average grant-date
fair value of options
granted during the period $ 2.90 $ 4.66 $ 6.38
The effect of applying SFAS No. 123 would be as follows for the years ended
December 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Net loss:
As reported $(19,052,693) $(3,679,440) $(2,670,975)
============ =========== ===========
Pro forma $(20,101,646) $(4,564,706) $(2,670,975)
============ =========== ===========
Basic and diluted net loss
per common share:
As reported $ (1.77) $ (.36) $ (.28)
============ =========== ===========
Pro forma $ (2.10) $ (.47) $ (.28)
============ =========== ===========
A-32
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(c) Warrants
The following table summarizes the Company's warrant activity :
WEIGHTED
AVERAGE EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
------ -----
Balance, January 1, 1997 253,031 $3.48
Exercised (64,779) 4.26
------- -----
Balance, December 31, 1997 188,252 3.21
Granted 28,489 2.15
Canceled -- --
Exercised -- --
------- -----
Balance, December 31, 1998 216,741 3.07
Granted 25,000 3.41
------- -----
Balance, December 31, 1999 241,741 $3.10
======= =====
Exercisable, December 31, 1999 241,741 $3.10
======= =====
On April 15, 1999, the Company negotiated a waiver of the default with the
holder of the subordinated note payable (see note 9(a)). In connection with
such waiver, the Company issued to the noteholder warrants to purchase 25,000
shares of common stock at $3.41 per share.
Subsequent to year-end in connection with the Company's pay-down of debt
discussed in note 9(c), the Company issued the noteholder warrants to
purchase 20,000 shares of the Company's common stock at $4.94 per share.
The Company determined the value of these warrants using the Black-Scholes
option pricing model.
(d) Employee Stock Purchase Plan
Effective October 1, 1997, the Company's shareholders approved an employee
stock purchase plan (the Stock Plan). The Stock Plan allows eligible
employees to purchase common stock of the Company through payroll deductions
at a price that is 85% of the lower of the closing price of the Company's
stock on the either the beginning or ending of the six-month offering period.
The Company has reserved 90,000 of its $.001 par value common stock for
issuance under this Stock Plan. The Company issued 22,461 shares of common
stock under the Stock Plan during the year ended December 31, 1999.
A-33
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) TECHNOLOGY PURCHASE AGREEMENT
Pursuant to a technology purchase agreement (TPA), the Company purchased from
a stockholder/founder the proprietary rights to the primary patent for the
SNF and related technology. Under the terms of the TPA, the Company made an
initial payment of $15,000 and agreed to pay royalties based upon various
rates of cumulative net sales, as defined, with minimum royalties payable of
$15,000 per year. Royalties are payable over the life of the primary patent
and commenced after FDA approval. The Company has granted the
stockholder/founder a security interest in substantially all proprietary
rights acquired by the Company. In the event of unsecured defaults, as set
forth in the TPA, the Company has agreed to immediately pay the
stockholder/founder damages of $100,000.
(13) RELATED PARTY TRANSACTIONS
Three stockholders of the Company and related entities provided management
consulting services to the Company during the year ended December 31, 1997
amounting to $196,000. During the years ended December 31, 1999 and 1998,
only one shareholder provided consulting services to the Company, at a rate
of $100,000 per annum. Additionally, during the year ended December 31,
1999, an affiliate of a stockholder provided consulting services to the
Company amounting to approximately $103,000.
In September 1998, a former employee of the Company entered into a secured
promissory note agreement with the Company under which the former employee
borrowed $167,100, which accrues interest at 10 % per annum, and was due the
earlier of September 30, 1999 or the tenth business day on which the closing
price of the Company's stock is greater than $8.00 per share for any
consecutive three-day period. As of December 31, 1999, the amount owed under
this note agreement is approximately $131,000. The note agreement was
extended under similar terms to September 30, 2000 and was paid in full
subsequent to year-end.
On September 1, 1998, a former employee of the Company borrowed $25,000 from
the Company. The loan accrues interest at 10.101% per annum and is
collateralized. The loan was due on January 15, 2000 but was subsequently
extended to March 31, 2000 under similar terms.
A-34
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) ACCRUED EXPENSES
Accrued expenses consist of the following:
AT DECEMBER 31,
---------------------
1999 1998
---- ----
Payroll and payroll related $1,607,773 $1,518,859
Taxes 635,530 954,860
Other accrued expenses 2,386,063 1,741,781
---------- ----------
$4,629,366 $4,215,500
========== ==========
A-35
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Revenues by country for the years ended December 31, 1999, 1998 and 1997 are
as follows:
Destination 1999 1998 1997
- ----------- ---- ---- ----
United States $18,251,000 $13,835,000 $ 8,201,848
The Netherlands 4,565,000 2,870,000 93,600
Germany 2,986,000 1,872,000 440,480
Other 9,277,368 6,476,713 1,389,780
----------- ----------- -----------
$35,079,368 $25,053,713 $10,125,708
=========== =========== ===========
Long-lived assets by country as of December 31, 1999 and 1998 are as follows:
Destination 1999 1998
- ----------- ---- ----
France $ 8,282,000 $ 7,937,000
United States 5,201,635 4,690,750
Other 57,000 49,500
----------- -----------
$13,540,635 $12,677,250
=========== ===========
(16) SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision, or decision making
group, in deciding how to allocate resources and in assessing performance.
A-36
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) SEGMENT REPORTING--(CONTINUED)
The Company's chief operating decision making group is the Chief Executive
Officer, members of Senior Management, and the Board of Directors. The
operating segments are managed separately because each represents specific
types of medical devices for specific markets (i.e. the core technologies
segment includes minimally-invasive medical devices that were the primary
products of the Company prior to the acquisition of ENI, while the
neurosurgical segment includes primarily neurosurgical medical devices that
were the primary products of ENI).
The Company's operating segments include the core technologies product line
and the neurosurgical product line. Revenues for the core technologies
product line are derived from sales of the Simon Nitinol Filter (SNF) and the
CardioSEAL Septal Occluder, as well as from licensing revenues from the
Company's self-expanding stents. Revenues for the neurosurgical product line
are derived from sales of cerebral spinal fluid shunts, the Spetzler Titanium
Aneurysm Clip and endoscopes and instrumentation for minimally invasive
surgery.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on stand-alone operating segment net income. Revenues are
attributed to geographic areas based on where the customer is located. The
Company operated in only one operating segment, core technologies products,
during the year ended December 31, 1997. Segment information is presented as
follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
Segment Revenues:
Core technologies products $ 15,058,368 $13,989,713 $10,125,728
Neurosurgical products 20,021,000 11,064,000 --
------------ ----------- -----------
Total $ 35,079,368 $25,053,713 $10,125,728
============ =========== ===========
Segment Interest Income:
Core technologies products $ 479,617 $ 1,168,056 $ 1,591,922
Neurosurgical products -- -- --
------------ ----------- -----------
Total $ 479,617 $ 1,168,056 $ 1,591,922
============ =========== ===========
Segment Interest Expense:
Core technologies products $ 2,426,211 $ 1,324,346 $ 46,152
Neurosurgical products 388,000 137,000 --
------------ ----------- -----------
Total $ 2,814,211 $ 1,461,346 $ 46,152
============ =========== ===========
Segment Income Tax Provision:
Core technologies products $ -- $ 744,538 $ 229,500
Neurosurgical products 180,000 -- --
------------ ----------- -----------
Total $ 180,000 $ 744,538 $ 229,500
============ =========== ===========
Segment Depreciation and Amortization:
Core technologies products $ 1,071,395 $ 892,088 $ 461,141
Neurosurgical products 966,000 499,000 --
------------ ----------- -----------
Total $ 2,067,395 $ 1,391,088 $ 461,141
============ =========== ===========
Segment Equity in Net Loss of Investees:
Core technologies products $ (488,529) $ (437,145) $ --
Neurosurgical products -- -- --
------------ ----------- -----------
Total $ (488,529) $ (437,145) $ --
============ =========== ===========
A-37
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
Segment Signficant Noncash Items:
Core technologies products $ 8,165,369 $ 5,397,242 $ 2,642,707
Neurosurgical products -- -- --
------------ ----------- -----------
Total $ 8,165,369 $ 5,397,242 $ 2,642,707
============ =========== ===========
Segment Income (Loss):
Core technologies products $(14,455,968) $(5,378,440) $(1,837,991)
Neurosurgical products (1,302,000) (421,000) --
------------ ----------- -----------
Total net loss $(15,757,968) $(5,799,440) $(1,837,991)
============ =========== ===========
Segment balance sheet information is as follows as of December 31, 1999 and
1998:
1999 1998
---- ----
Segment Long-Lived Tangible Assets:
Core technologies products $ 3,963,402 $ 3,682,017
Neurosurgical products 9,577,233 8,995,233
----------- -----------
Total $13,540,635 $12,677,250
=========== ===========
(17) VALUATION OF QUALIFYING ACCOUNTS
The following table sets forth the activity in the Company's allowance for
doubtful accounts and sales returns:
BALANCE AT PROVISION FOR UNCOLLECTIBLE
YEARS ENDED BEGINNING OF BAD DEBT AND AMOUNTS OTHER BALANCE AT END
DECEMBER 31, PERIOD RETURNS WRITTEN OFF ADDITIONS OF PERIOD
------------ ------ ------- ----------- --------- ---------
1997 17,000 108,000 -- -- 125,000
1998 125,000 596,000 (5,000) 155,000* 871,000
1999 871,000 185,000 (143,000) -- 913,000
* represents additions arising from the acquisition of ENI, net of reserves
reclassified to net assets from discontinued operations.
A-38
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Purchase Agreement, dated as of May, 1998, between the company and
Elekta AB (PUBL), as amended by Amendment No. 1 dated as of July 8,
1998. (4)
2.2 Purchase Agreement by and among the Company, NMT NeuroSciences (US),
Inc., NMT NeuroSciences Holdings (UK) Ltd., NMT NeuroSciences (UK)
Ltd., Spembly Medical Ltd., Spembly Cryosurgery Ltd., Swedemed AB,
Integra Neurosciences Holdings (UK) Ltd., and Integra Selector
Corporation, dated as of March 20, 2000.
2.3 Asset Purchase Agreement by and among NMT NeuroSciences (US), Inc.,
the Company and Integra Selector Corporation, dated as of March 20,
2000.
3.1 Second Amended and Restated Certificate of Incorporation. (5)
3.2 Certificate of Amendment to the Company's Second Amended and Restated
Certificate of Incorporation, as filed with the office of the
Secretary of State of the State of Delaware on June 3, 1999. (9)
3.3 Amended and Restated By-laws. (1)
4.1 Form of Common Stock Certificate.
4.2 Rights Agreement, dated as of June 7, 1999, between NMT Medical, Inc.
and American Stock Transfer & Trust Company, as Rights Agent, which
includes as Exhibit A, the form of Certificate of Designation, as
Exhibit B the form of Rights Certificate, and as Exhibit C, the
Summary of Rights to Purchase Preferred Stock. (8)
10.1 Stock Purchase Agreement by and among the Company, Whitney Equity
Partners, L.P., Boston Scientific Corporation, David J. Morrison,
Corporate Decisions, Inc., dated as of February 16, 1996. (1)
10.2 Registration Rights Agreement by and among the Company, Whitney
Equity Partners, L.P., Boston Scientific Corporation, David J.
Morrison, Corporate Decisions, Inc., dated as of February 16, 1996.
(1)
10.3 Agreement and Plan of Merger by and among the Company, NMT Heart,
Inc., InnerVentions, Inc. and Fletcher Spaght, Inc., dated as of
January 25, 1996. (1)
10.4 Stock Purchase Warrant by and between the Company and Fletcher
Spaght, Inc., dated as of July 1, 1998. (11)
10.5 Stock Purchase Warrant by and between the Company and David A.
Chazanovitz, dated as of July 1, 1998. (11)
10.6 Registration Rights Agreement by and between the Company and Fletcher
Spaght, Inc., dated as of February 14, 1996. (1)
10.6.1 Amendment No. 1, dated July 1, 1998 to the Registration Rights
Agreement by and between the Company and Fletcher Spaght, Inc., dated
as of February 14, 1996. (11)
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.7 Distribution Agreement by and between the Company and the Bard
Radiology division of C.R. Bard, Inc., dated May 19, 1992, as amended
on February 1, 1993, and October 1, 1995. (1)(2)
10.8 International Distribution Agreement by and between the Company and
Bard International, Inc., dated as of November 30, 1995. (1)(2)
10.9 License and Development Agreement by and between the Company and
Boston Scientific Corporation, dated as of November 22, 1994. (1)(2)
10.10 Manufacturing Agreement by and between the Company and Lake Region
Manufacturing Company, Inc., dated February 15, 1996. (1)(2)
10.11 Technology Purchase Agreement by and between the Company and Morris
Simon, M.D., dated as of April 14, 1987. (1)(2)
10.12 Asset and Technology Donation and Transfer Agreement by and between
C.R. Bard, Inc. and Children's Medical Center Corporation dated as of
May 12, 1995. (1)
10.13 Stock Transfer Agreement by and between Children's Medical Center
Corporation and InnerVentions, Inc., dated as of June 19, 1995. (1)
10.14 License Agreement by and between Children's Medical Center
Corporation and InnerVentions, Inc., dated June 19, 1995. (1)(2)
10.15 Sublicense Agreement by and between Children's Medical Center
Corporation and InnerVentions, Inc., dated June 19, 1995. (1)
10.16 Assignment Agreement by and between the Company and The Beth Israel
Hospital Association, dated June 30, 1994. (1)
10.17 License Agreement by and between the Company and Lloyd A. Marks,
dated as of April 15, 1996. (1)(2)
10.18 Share Purchase Warrant by and between the Company and Lloyd A. Marks,
dated April 15, 1996. (1)
10.19 Employment Agreement by and between the Company and Thomas M. Tully
dated January 1, 1999. (7) (**)
10.20 Registration Rights Agreement by and between the Company and Thomas
M. Tully, dated as of February 13, 1996. (1)
10.21 Employment Agreement by and between the Company and David
Chazanovitz, dated February 13, 1996, as amended as of June 15, 1996.
(1)(**)
10.21.1 Amendment to Employment Agreement by and between the Company and
David Chazanovitz, dated July 9, 1996. (1)(**)
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.22 Employment Agreement by and between the Company and David Chazanovitz
dated July 1, 1998. (7) (**)
10.23 Employment Agreement by and between the Company and Stephen J.
Kleshinski, dated July 22, 1993, as supplemented by agreement dated
as of June 1, 1994. (**)
10.24 Form of Registration Rights Agreement between the Company and certain
of its existing stockholders, dated as of February 14, 1996. (1)
10.25 Agreement of Lease by and between the Company and the Trustees of
Wormwood Realty, dated as of May 8, 1996. (1)
10.26 Company 1994 Stock Option Plan. (1)(**)
10.27 Company 1996 Stock Option Plan. (1)(**)
10.28 Amendment No. 1 to 1996 Stock Option Plan. (5)(**)
10.29 Company 1996 Stock Option Plan for Non-Employee Directors. (1)(**)
10.30 Company 1998 Stock Incentive Plan (5)(**)
10.31 Subordinated Note and Common Stock Purchase Agreement by and among
the Company, Whitney Subordinated Debt Fund, L.P. and, for certain
purposes, J.H. Whitney & Co., dated as of July 8, 1998. (4)
10.32 Guarantee and Collateral Agreement made by the Company and certain of
its Subsidiaries in favor of J.H. Whitney & Co., as Agent, dated as
of July 8, 1998. (4)
10.33 Amendment No. 1 dated April 14, 1999 to Subordinated Note and Common
Stock Purchase Agreement of July 8, 1998 by and among the Company,
Whitney Subordinated Debt Fund, L.P., and, for certain purposes, J.H.
Whitney & Co. (7)
10.34 Waiver No. 1 dated April 14, 1999 by and among the Company and
Whitney Subordinated Debt Fund, L.P. (7)
10.35 Registration Rights Agreement among the Company, Whitney Subordinated
Debt Fund, L.P. and J.H. Whitney & Co., dated as of July 8, 1998. (4)
10.36 Consulting Agreement between the Company and Morris Simon, M.D.,
dated February 27, 1998. (6)
10.37 Assignment Agreement between the Company and Morris Simon, M.D.,
dated February 27, 1998. (6)
10.38 Stock Option Agreement evidencing grant by the Company to Morris
Simon, M.D., dated February 27, 1998. (6)
10.39 Non-plan Stock Option Agreement evidencing grant by the Company to
Morris Simon, M.D., dated February 27, 1998. (6)
10.40 Registration Rights Agreement entered into by and among the Company
and Morris Simon, M.D., dated February 27, 1998. (6)
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.41 Registration Rights Agreement dated as of March 30, 1999 by and among
the Company and the individuals listed on Schedule A thereto. (7)
10.42 Amendment dated May 12, 1999 to Waiver No. 1 dated April 14, 1999 by
and among the Company and Whitney Subordinated Debt Fund, L.P. (7)
10.43 Amendment No. 2 dated November 9, 1998 to Purchase Agreement between
the Company and Elekta AB (Publ.) of May 8, 1998. (7)
10.44 Amendment No. 1 dated as of March 30, 1999 to Registration Rights
Agreement among the Company, Whitney Equity Partners, Boston
Scientific Corporation, David J. Morrison and Corporate Decisions,
Inc. of February 16, 1996. (7)
10.45 Amendment No. 1 dated as of March 30, 1999 to Registration Rights
Agreement among the Company, Whitney Subordinated Debt Fund, L.P. and
J.H. Whitney & Co. of July 8, 1998. (7)
10.46 Common Stock Purchase Warrant No. WSDF-4. (9)
10.47 Credit Agreement, dated as of September 13, 1999, among NMT Medical,
Inc., NMT Heart, Inc., NMT Investments Corp., NMT NeuroSciences
(International), Inc., NMT NeuroSciences (US), Inc., NMT
NeuroSciences (IP), Inc. and NMT NeuroSciences Innovasive Systems,
Inc., as Borrowers, and Brown Brothers Harriman & Co., as Lender (10)
10.48 $5 Million Promissory Note, dated as of September 13, 1999, issued by
NMT Medical, Inc., NMT Heart, Inc., NMT Investments Corp., NMT
NeuroSciences (International), Inc., NMT NeuroSciences (US), Inc.,
NMT NeuroSciences (IP), Inc. and NMT Neurosciences Innovasive
Systems, Inc. in favor of Brown Brothers Harriman & Co. (10)
10.49 Guarantee, dated as of September 13, 1999, made by NMT Medical, Inc.,
NMT Heart, Inc., NMT Investments Corp., NMT NeuroSciences
(International), Inc., NMT NeuroSciences (US), Inc., NMT
NeuroSciences (IP), Inc. and NMT NeuroSciences Innovasive Systems,
Inc. in favor of Brown Brothers Harriman & Co. (10)
10.50 Security Agreement, dated as of September 13, 1999, between NMT
Medical, Inc., NMT Heart, Inc., NMT Investments Corp., NMT
NeuroSciences (International), Inc., NMT NeuroSciences (US), Inc.,
NMT NeuroSciences (IP), Inc. and NMT NeuroSciences Innovasive
Systems, Inc., as Debtors, and Brown Brothers Harriman & Co., as
Lender. (10)
10.51 Collateral Patent Assignment, dated as of September 13, 1999, made by
NMT Medical, Inc. in favor of Brown Brothers Harriman & Co. (10)
10.52 Pledge Agreement, dated as of September 13, 1999, between NMT
Medical, Inc., NMT Heart, Inc., NMT Investments Corp., NMT
NeuroSciences (International), Inc., NMT NeuroSciences (US), Inc.,
NMT NeuroSciences (IP), Inc. and NMT NeuroSciences Innovasive
Systems, Inc., as Pledgors, and Brown Brothers Harriman & Co., as
Lender. (10)
10.53 Amendment No. 2 to Subordinated Note and Common Stock Purchase
Agreement, dated as of September 13, 1999, by and among NMT Medical,
Inc., Whitney Subordinated Debt Fund, L.P. and, for certain purposes,
J.H. Whitney & Co. (10)
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.54 $6 Million Subordinated Promissory Note, dated as of July 8, 1998,
issued by NMT Medical, Inc. in favor of Whitney Subordinated Debt
Fund, L.P. (10)
10.55 Letter Agreement of Waiver of Compliance with Certain Covenants under
Credit Agreements, dated as of November 15, 1999, by and among NMT
Medical, Inc., NMT Heart, Inc., NMT Investments Corp., NMT
NeuroSciences (International), Inc., NMT NeuroSciences (US), Inc.,
NMT NeuroSciences (IP), Inc. and NMT Neurosciences Innovasive
Systems, Inc., as Borrowers, and Brown Brothers Harriman & Co., as
Lender. (10)
10.56 Waiver No. 2, made as of November 12, 1999, by and between NMT
Medical, Inc. and Whitney Subordinated Debt Fund, L.P. (10)
10.57 Waiver and Consent Agreement by and among Brown Brothers Harriman &
Co., J.H. Whitney & Co., Whitney Subordinated Debt Fund, L.P. and the
Borrowers named therein, dated as of March 20, 2000.
10.58 Common Stock Purchase Warrant No. BBH-1.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule.
(1) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-06463).
(2) Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(3) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(4) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K, dated July 8, 1998.
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to Exhibits to the Registrant's Amended Quarterly
Report on Form 10-Q/A for the quarter ended April 31, 1998.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 30, 1999.
(8) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K, dated June 7, 1999.
(9) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.
(10) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999.
(11) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
(**) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.