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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Mark One)
[X] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2000 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 March 26, 2001 was $7,902,806, based on the last reported sale
price of the registrant's Common Stock on the Nasdaq National Market on that
date. There were 10,954,463 shares of Common Stock outstanding as of March 26,
2001.
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 7, 2001
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 cardiovascular business unit provides the interventional cardiologist,
interventional radiologist and vascular surgeon with proprietary catheter-based
implant technologies that minimize the risk of embolic events. The
cardiovascular business unit also serves the pediatric interventional
cardiologist with a broad range of cardiac septal repair implants delivered with
nonsurgical catheter techniques. The Company's neurosciences business unit
serves the needs of neurosurgeons with a range of implantable and single-use
products, including cerebral spinal fluid shunts, external drainage products and
aneurysm clips. The Company's two business units are managed separately. See
Note 15 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(R) ("SNF"), in the
United States. The Company entered into an exclusive distribution agreement with
Bard Radiology, a division of C. R. Bard, Inc. ("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 the Company's nitinol-based
stents worldwide. In November 1995, the Company expanded its relationship with
Bard by granting Bard International, Inc. the right to distribute the SNF in
most markets outside the United States pursuant to an International Distribution
Agreement. The Company acquired the rights to the CardioSEAL(R) Septal Occluder
to expand its product base in February 1996 and since September 1999 has
received notifications from the FDA of the approval of the CardioSEAL(R) under
Humanitarian Device Exemption("HDE") 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 businesses of its neurosciences
business unit to companies controlled by Integra LifeSciences 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 included herein treat these
businesses as discontinued operations. See Note 3 of Notes to the Consolidated
Financial Statements. The Company is exploring strategic alternatives with
respect to the remaining neurosciences business unit.
PRODUCTS
Cardiovascular Business Unit
The Company's cardiovascular business unit markets the following devices:
. cardiac septal repair devices
. vena cava filters
. stents.
Cardiac Septal Repair Devices
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In February 1996, the Company acquired the exclusive rights to the
CardioSEAL(R) cardiac septal repair implant, which is used for the repair of
intracardiac shunts that result in abnormal blood flow through the chambers of
the heart. The most common defects occur in either the atrial ("ASD") or
ventricular ("VSD") septum which divides the left and right pumping chambers of
the heart. The CardioSEAL(R) cardiac septal repair implant is a catheter-
based, less costly alternative to open heart surgery.
Another common cardiac septal defect is the Patent Foramen Ovale ("PFO"), a
transient hole that 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 or open heart surgery. Both drug therapy and open heart
surgery may present significant risks to the embolic stroke patient with a PFO.
The Company's cardiac septal repair technology is
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a less invasive, less costly alternative to open heart surgery or drug treatment
for this patient population.
The Company acquired the rights to develop and commercialize its current
cardiac septal repair device in February 1996 from InnerVentions, Inc., a
licensee of the Children's Hospital of Boston. In connection with the
acquisition, the Company acquired all of the existing development,
manufacturing, testing equipment, patent licenses, know-how and documentation
necessary to manufacture cardiac septal repair devices.
In 1998, the Company introduced design enhancements to the CardioSEAL(R)
cardiac septal repair device, the STARFlex(TM) centering system. The design of
the STARFlex(TM) centering system allows the implant 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(TM) was awarded the CE Mark in September 1998 and
commercialization began internationally in October 1998. Two additional
STARFlex(TM) systems with the CE Mark were added to the product line to treat
large ASDs. Also, during 2000 the Company introduced the QuickLoad enhancement
to the entire CardioSEAL(R) family, providing a more ergonomic implant loading
system.
The Company estimates that the worldwide market potential for its cardiac
septal repair technology is approximately 500,000 procedures annually, with
current congenital heart defect procedures (ASD, VSD, etc.) counting for about
30,000 and the balance being the potential for the emerging PFO procedures.
The CardioSEAL(R) is sold commercially in Europe and other international
markets. In the United States, the FDA classifies septal repair devices as Class
III medical devices, which requires receipt of pre-market approval ("PMA") prior
to marketing. Clinical trials of the CardioSEAL(R) for ASD and PFO closure are
under way at a number of major hospitals and research centers in the United
States and Canada. The clinical data from these trials will then be used for the
submission of a PMA application with the FDA for the CardioSEAL(R).
The Company has established an international registry to support the
clinical use of the CardioSEAL(R) cardiac septal repair implant in patients
having PFO as the likely pathway of an embolic stroke or transient ischemic
attack. The 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(R) is a clinically viable
alternative to surgery, or to lifetime anticoagulant therapy, such as coumadin.
The Company has received notifications from the FDA of the approval of the
CardioSEAL(R) Septal Occluder under HDE regulations for three indications. Under
HDE 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 PMA. Boston Children's
Hospital worked with the Company to generate the clinical data necessary for the
approvals and on the approval application.
The first HDE approval was granted in September 1999 for use of the
CardioSEAL(R) for nonsurgically closing Fenestrated Fontans. Traditionally, 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 Company's cardiac septal repair technology offers a nonsurgical
alternative to these patients.
The second HDE approval, also granted in September 1999, was granted for use
of the CardioSEAL(R) for closing muscular ventricular septal defects ("VSD") in
patients with high surgical risk factors.
In February 2000, the Company received FDA approval under HDE 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(R) Septal Occluder is marketed by the Company's direct sales
force in the U.S. and Europe and through selected distributors worldwide. The
product was awarded an HCPC passthrough code in September 2000 and has a
favorable medical policy position from the national Blue Cross Blue Shield
Association.
Vena Cava Filters
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The Company's vena cava filter technology is used for the prevention of
pulmonary embolism (a blood clot lodged in the vessels supplying blood to the
lungs). The 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
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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. The Company estimates that
the current worldwide market potential for vena cava filters is 100,000
procedures annually. The Company has developed a nitinol vena cava filter which
possesses highly efficient clot filtering characteristics, the Simon Nitinol
Filter(R) ("SNF"). 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 were 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.
The Company entered into a 5-year exclusive distribution agreement in May
1992 with Bard Radiology, a division of Bard, for the SNF in the United States
and certain other countries. This 1992 distribution agreement was renewed by
Bard Radiology for a second 5-year period and contains further renewal options.
Beginning November 30, 1995, pursuant to an International Distribution
Agreement, Bard International, Inc., a subsidiary of Bard, was granted the
exclusive right to distribute the SNF in most markets outside the United States.
The Company's international distribution agreement renews automatically for
successive one year periods unless terminated by either party. Under each
distribution agreement, the distributors are obligated to make annual minimum
purchases and have agreed not to sell competing nitinol vena cava filters during
the term of the respective distribution agreements. Additionally, Bard
Radiology has agreed to this non-compete provision for an additional two years
after the termination of the 1992 distribution agreement. In addition, the
Company has granted each distributor a right of first offer for certain of the
Company's new devices pursuant to the terms of such agreements. During August
2000, the Company filed a demand for arbitration relating to certain provisions
of the U.S. distribution agreement. Please see Item 3 (Legal Proceedings) for
more information.
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,
removable vena cava nitinol filter device ("RNF"). This innovative new device is
the first implantable vena cava filter that can be removed with a simple
catheter removal procedure soon after implant or several weeks later. If
desired, the RNF 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. During 2000, under a
compassionate use clearance given to the Company and one hospital in Canada, 20
patients were successfully treated with RNF, with removals successfully achieved
in all patients within twelve weeks after implant. The Company continues to
gather information on product design aspects for potential incorporation in the
proposed product.
During August 2000, the Company filed a demand for arbitration relating to
certain provisions of the U.S. distribution agreement. Please see Item 3 (Legal
Proceedings) for more information.
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. The
Company'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.
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In November 1994, the Company licensed to Boston Scientific Corporation
("Boston Scientific"), a worldwide leader in sales of minimally invasive medical
devices, the exclusive worldwide rights to develop, manufacture, market and
distribute the Company's stent technology. Under the terms of this agreement,
Boston Scientific has the sole right to use the patents and technical
information owned by the Company 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. Pursuant to the
license agreement, the Company receives sales royalties, 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 the Company's stents in quantities to
support initial commercialization in certain markets.
Boston Scientific is responsible for applying for registrations and
regulatory approvals that it deems necessary for the Company'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.
Neurosciences Business Unit
The Company's neurosciences business unit 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 cerebral spinal fluid ("CSF").
. Titanium aneurysm clips for the management of intracranial aneurysms.
Shunts
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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
newborn 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(R) 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. The Company estimates that the worldwide market potential
for CSF shunts is approximately 85,000 procedures per year.
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 agreement, the neurosciences business unit 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 the Company, and the
Company has first right 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. CS Fluids is in the process of finalizing a protocol
for a larger clinical study expected to commence during 2001.
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 FDA
approved 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
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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.
Powered Surgical Tools
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The neurosciences business unit 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. In 1999, as a result of perceived product quality problems, the
neurosciences business unit ceased its distribution activities for these
products. In July 2000 Sodem Diffusion SA ("Sodem") filed a breach of contract
suit against NMT Neurosciences. This litigation was settled subsequent to year-
end (see Note 6 of Notes to Consolidated Financial Statements).
MARKETING AND SALES STRATEGY
The Company has entered into agreements with entities affiliated with Bard
for the worldwide distribution of the SNF. The Company markets its
CardioSEAL(R) cardiac septal repair products through the business unit's direct
sales force covering the United States, Canada and most of Europe. A few select
distributors are selling CardioSEAL(R) products in other strategically important
geographic markets.
The neurosciences business unit uses a combination of a direct sales force,
distributors and manufacturers' representatives worldwide. The North American
selling activity is managed through the business unit's United States operations
in Atlanta, Georgia. The Asian region is managed from the Company's Hong Kong
office. Sales for the rest of the world are managed through the business unit's
headquarters in Biot, France.
CUSTOMERS
Bard, through its division, Bard Radiology, and its subsidiary, Bard
International, accounted for 23%, 26% and 33% of product revenues for fiscal
2000, 1999 and 1998, respectively. The Company had one customer, Cordis Europa
N.V., whose revenues accounted for 12% and 10% of product revenues for fiscal
1999 and 1998, respectively.
MANUFACTURING
The Company manufactures the CardioSEAL(R) cardiac septal repair system 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. Under this agreement, Lake
Region acquired the right to manufacture a certain percentage of the Company's
worldwide requirements of the SNF component until June 30, 2001, which agreement
is expected to be extended until December 31, 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 manufactures its neurosurgical products 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. 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 following is a description of the companies that NMT believes to be its
principal competitors.
Three companies, AGA Medical Corp., W. L. Gore and Pediatric Cardiology
Custom Medical Devices, have developed devices that compete with CardioSEAL(R)
and are being sold in Europe and other international markets. AGA and W. L.
Gore are also conducting clinical trials in the United States.
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Competitors in vena cava filter products include Boston Scientific
Corporation, Johnson & Johnson, Cook and B. Braun.
Current competitors in the vascular stent market are Johnson & Johnson,
Guidant and Medtronic.
The two principal competitors in the CSF shunt market are Medtronic and
Johnson & Johnson. 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 neurosciences
business unit, including the Selector(R) Ultrasonic Aspirator and cryosurgery
businesses, its leased facility in Andover, England, and the Ruggles(TM)
Surgical Instruments business to companies controlled by Integra LifeSciences
Holdings Corporation for $12 million in cash. The ultrasonic aspirator, which
was sold under the Selector(R) trademark, utilized 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 allowed the direct attachment of the microsurgical handpiece. The
Ruggles(TM) Surgical Instruments were 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 neurosurgeon typically an additional trademark on the products. The
cryosurgical products were marketed under the Spembly tradename and included
both liquid nitrogen and gas expansion technologies, which have applications in
ophthalmic, general, gynecological, urological and cardiac surgery. The
Company's Consolidated Financial Statements included herein reflect these
businesses as discontinued operations.
INVESTMENT IN IMAGE TECHNOLOGIES CORPORATION
In November 2000 the Company sold its ownership interest in Image Technologies
Corporation, including shares of preferred stock of ITC, secured convertible
notes and a warrant to purchase shares of ITC common stock, to Argo Capital
Partners L.P. for $350,000 in cash and assumption of the Company's position as
guarantor of certain ITC liabilities. See Note 4 of Notes to Consolidated
Financial Statements. 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.
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, former Vice President of Finance and Administration and Chief
Financial Officer of the Company, was its Chief Financial Officer until December
15, 1999. ITC was located in leased space immediately adjacent to the Company's
facilities until June 2000 at which time the lease was assumed by the Company.
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 more than 40 issued
United States patents, and corresponding foreign patents, relating to its
neurosurgical instruments products, stents, the SNF, the RNF, the cardiac septal
repair devices, nitinol radiopaque markers and other cardiovascular devices.
These patents expire at various dates ranging from 2003 to 2018. 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, SNF and RNF.
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 2016. The patents related to
permanent and removable vena cava filters expire from 2016 to 2018, its
anastomosis devices expire in 2016 and the patent for its radiopaque markers
expires in 2014. In addition, the Company is the exclusive licensee under
certain patents, expiring from 2012 to 2016, relating to the CardoSEAL(R) 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 cardiac septal repair devices, 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", "Occluder for Repair of Cardiac and
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Vascular Defects" and "Self-Centering Umbrella-Type Septal Closure Device" and
the respective corresponding foreign patents, patent applications and associated
know-how. The license agreement, as amended, provides for royalty payments of 7
1/2% based on commercial net sales of the Company's CardioSEAL(R) Septal
Occluder. In addition, once cumulative net sales reach increments of $25 million
there are additional one-time royalty payments due of $250,000, at which times
the royalty rate increases sequentially by 1%, to a maximum of 10 1/2%.
Royalties continue until either the end of the term of the patents (ranging from
2012 to 2016) or termination of the agreement. 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
knowhow. 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, subject to certain annual minimums, based
on net sales of nitinol septal repair devices which are covered by the patent
until the end of the term of the patent in 2011.
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 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. The employment
agreement ended as of December 31, 2000.
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
7
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(k)
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 Good Manufacturing Practice ("GMP") inspection. In addition, the
FDC Act 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 HDE 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 HDE
regulations, medical devices that provide safe treatment and a reasonable
assurance of effectiveness may be made available to small numbers of patients
(less than 4,000 patients in the U.S. per year) on more limited clinical
experience than that required for a PMA. In addition, under HDE 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(R) products 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
8
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 and for the CardioSEAL(R) Septal Occluders
used in HDE procedures. 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 on a claims made basis, with a maximum $2 million aggregate per
policy year, and an umbrella policy of $10 million.
EMPLOYEES
As of December 31, 2000, the Company employed 191 full-time employees and 30
part-time employees. The Company believes it maintains good relations with its
employees.
9
ITEM 2. PROPERTIES
The Company currently leases an approximately 35,000 square foot
manufacturing, laboratory and administrative facility in Boston, Massachusetts,
including approximately 8,000 square feet previously occupied by ITC until June
2000. 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 Duluth, Georgia to house the United States operations, sales and
marketing activities of the Neurosciences business unit.
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
The Company is a party to the following legal proceedings that could have a
material adverse impact on the Company's results of operations or liquidity if
there were an adverse outcome. Although the Company intends to pursue its
rights in each of these matters vigorously, it cannot predict the ultimate
outcomes.
In December 1998, the Company filed a patent infringement suit in the United
States District Court for the District of Massachusetts (the "Court") against
AGA Medical Corp. ("AGA"), claiming that AGA's Amplatzer aperture occlusion
devices infringe U.S. Patent No. 5,108,420, which is licensed exclusively to the
Company. The Company is seeking an injunction to prevent further infringement 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. There is
pending before the Court a motion by AGA for summary judgment. The case is
currently in 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. 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 Elekta's breach of the same contract.
As currently pleaded, Elekta's claim seeks approximately $2 million in damages
and NMT's counterclaim seeks approximately $2 million in damages. On January
17-19, 2001, the arbitrator conducted a hearing on preliminary legal issues. On
March 15, 2001, the Arbitrator issued a partial award which for the most part
clarified certain legal issues without deciding the merits of either Elekta's
claims or the Company's counterclaims. The Arbitrator did dismiss an
approximate $314,000 portion of NMT's counter claim, but indicated, however,
that $289,000 of that portion may still be recoverable by NMT in litigation
outside the Arbitration process as "ordinary trade debts". The hearing on the
merits of Elekta's claims and the Company's counterclaims has not been
scheduled.
On July 17, 2000, Sodem Diffusion SA ("Sodem") filed a claim with the
Tribunal de Premiere Instance in Geneva, Switzerland, alleging that NMT
NeuroSciences Implants (France), a wholly owned subsidiary of the Company ("NMT
France"), breached its obligations under an exclusive distribution agreement,
dated as of November 10, 1998, pursuant to which NMT France is acting as the
exclusive worldwide distributor of Sodem's products. Sodem sought approximately
US$18 million in damages in addition to costs and fees of their attorneys. NMT
France filed a counterclaim for approximately US$30 million plus costs. On
February 23, 2001, Sodem and NMT France entered into a settlement agreement
whereby the parties agreed to withdraw their respective claims. Pursuant to the
settlement agreement, NMT France paid a settlement fee of US$500,000 and agreed
to return the remaining inventory in the Company's possession.
On August 11, 2000, the Company filed a demand for arbitration before the
American Arbitration Association in Boston, Massachusetts to obtain a
determination that Bard does not have distribution rights to the Company's
Recovery Filter(TM) under the 1992 U.S. distribution agreement between the
Company and Bard Radiology, a division of Bard, and that the Company may sell
the Recovery Filter(TM) technology to a third party without violating the
agreement. Bard has filed a counterclaim seeking a contrary declaration and an
indeterminate amount of damages. Hearings are scheduled to begin on April 30,
2001.
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 2000.
10
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The executive officers of the Company and their ages as of March 26, 2001 are
as follows:
NAME AGE POSITION
- ---- --- --------
John E. Ahern 56 President, Chief Executive Officer and Chairman of the Board of Directors
Richard E. Davis 43 Vice President and Chief Financial Officer
JOHN E. AHERN has served as President, Chief Executive Officer and Chairman
of the Company since September 2000. Most recently, Mr. Ahern was Vice
President, Emerging Technology Investment Group at C.R. Bard, Inc., where he was
responsible for identifying, investing in and managing early-stage medical
technologies and companies. In his 13 years with Bard, Mr. Ahern also held the
senior marketing and strategic planning positions in three of Bard's
cardiovascular divisions. Mr. Ahern's medical device industry experience also
includes Vice President of Worldwide Sales and Marketing at IntraSonix, Area
Manager for the Middle East and North Africa at Abbott Laboratories and various
sales and marketing positions at Becton Dickinson.
RICHARD E. DAVIS has served as Vice President and Chief Financial Officer
since February 2001. From August 2000 to February 2001 Mr. Davis served as
Interim Chief Financial Officer of the Company through his employment with the
consulting firm of Argus Management Corporation. From July 1998 to July 2000,
Mr. Davis was Vice President and Chief Financial Officer of Q-Peak, Inc., a
marketer and manufacturer of solid state laser systems. Prior to that, Mr. Davis
was employed for ten years by TJX Companies, Inc. in various senior financial
management positions where he was responsible for business and strategic
planning, cash flow and expense management and accounting and operational
controls.
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 89 stockholders of record of the
Company's Common Stock on March 26, 2001, representing approximately 1,825
shareholder accounts. The following table lists for the periods indicated the
high and low closing prices for the Company's Common Stock.
Period High Low
------ ----- ------
1999
----
First quarter......... 5 5/8 3 1/4
Second quarter........ 4 1/2 2 3/8
Third quarter......... 7 1/2 2 3/4
Fourth quarter........ 3 1/8 1 3/4
2000
----
First quarter......... 6 2 7/8
Second quarter........ 4 3/4 2 11/16
Third quarter......... 4 2 1/16
Fourth quarter........ 2 1/4 13/16
During the years ended December 31, 1999 and 2000, 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, 2004. 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.
In April 2000, the Company issued a warrant to purchase 20,000 shares of
Common Stock at an exercise price of $4.94 per share, to a noteholder of the
Company. The warrants may be exercised at any time and from time to time until
April 3, 2005. 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 years ended December 31, 2000 and 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
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,
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA: In thousands, except per share data
Revenues:
Product Sales $ 4,557 $ 8,565 $ 23,024 $ 32,949 $ 35,662
License fees and royalties 2,375 1,500 2,029 2,130 811
Product development 92 61 1 - -
----------- ----------- ----------- ----------- -----------
7,024 10,126 25,054 35,079 36,473
Costs and Expenses:
Cost of product sales 2,387 3,765 10,819 15,215 15,019
Research and development 2,662 2,974 3,640 4,462 4,951
General and administrative 2,284 2,873 5,043 9,050 9,535
Selling and marketing 311 1,010 4,391 8,428 8,786
Impairment of long-lived assets - - - 6,801 7,054
Settlement of litigation - - - - 673
In-process research and development 1,111 2,449 4,710 - -
Merger and integration charge - - 687 - -
Write-down of note receivable from Image
Technologies Corporation - - - 1,364 -
Restructuring charge - 194 - - -
----------- ----------- ----------- ----------- -----------
Total costs and expenses 8,755 13,265 29,290 45,320 46,018
----------- ----------- ----------- ----------- -----------
Loss from operations (1,731) (3,139) (4,236) (10,241) (9,545)
Equity in loss of Image Technologies Corporation - - (437) (489) -
Gain on sale of investment in Image Technologies Corporation - - - - 440
Currency transaction gain (loss) - (15) (88) 105 191
Interest expense (42) (46) (1,461) (2,814) (1,237)
Interest income 610 1,592 1,168 479 211
----------- ----------- ----------- ----------- -----------
Total other income (expense) 568 1,531 (818) (2,719) (395)
----------- ----------- ----------- ----------- -----------
Loss before income taxes (1,163) (1,608) (5,054) (12,960) (9,940)
Extraordinary loss on early extinguishment of debt - - - (2,618) -
Provision for income taxes - 230 745 180 -
----------- ----------- ----------- ----------- -----------
Net loss from continuing operations (1,163) (1,838) (5,799) (15,758) (9,940)
Net gain (loss) from discontinued operations - 2,120 (3,295) 345
----------- ----------- ----------- ----------- -----------
Net loss $ (1,163) $ (1,838) $ (3,679) $ (19,053) $ (9,595)
=========== =========== =========== =========== ===========
Basic and diluted income (loss) per share:
Continuing operations $ (0.17) $ (0.19) $ (0.57) $ (1.47) $ (0.91)
Discontinued operations - - 0.21 (0.31) 0.03
----------- ----------- ----------- ----------- -----------
Net loss $ (0.17) $ (0.19) $ (0.36) $ (1.77) $ (0.88)
=========== =========== =========== =========== ===========
Weighted average common shares outstanding 6,749 9,596 10,193 10,751 10,909
=========== =========== =========== =========== ===========
AT DECEMBER 31,
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
In thousands
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,082 $ 5,561 $ 4,007 $ 3,533 $ 6,761
Short-term investments 25,273 20,822 5,114 - -
Working capital 30,301 29,262 17,343 8,765 6,420
Total assets 34,930 35,006 63,715 38,747 19,091
Long-term obligations 416 612 18,903 14,853 4,422
Stockholders' Equity 33,320 32,772 34,169 14,161 4,326
The following table presents our unaudited statement of operations data for each
quarter in the two years ended December 31, 2000. The information for each of
these quarters is unaudited, but has been prepared on the same basis as the
audited financial statements appearing elsewhere in this document. In our
opinion, all necessary adjustments, consisting only of normal recurring
adjustments, have been made to present fairly the unaudited quarterly results
when read in conjunction with our audited financial statements and the notes
thereto appearing elsewhere in this document. Please see the discussion on
discontinued operations in Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations). These operating results are not
necessarily indicative of the results of operations that may be expected for any
future period.
THREE MONTHS ENDED
------------------------------------------------------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
1999 1999 1999 1999 2000 2000 2000 2000
--------- --------- --------- --------- --------- --------- ---------- ---------
STATEMENT OF OPERATIONS DATA: In thousands, except per share data
(unaudited)
Revenues:
Product Sales $ 7,316 $ 8,792 $ 8,884 $ 7,957 $ 9,756 $ 9,000 $ 8,992 $ 7,914
License fees and royalties 450 418 425 837 249 193 203 166
--------- --------- --------- --------- --------- --------- ---------- ---------
7,766 9,210 9,309 8,794 10,005 9,193 9,195 8,080
Costs and Expenses:
Cost of product sales 2,898 4,112 3,607 4,598 4,029 3,612 4,263 3,114
Research and development 960 1,137 1,200 1,165 1,275 1,372 1,334 970
General and administrative 2,188 2,039 2,246 2,577 2,398 2,135 3,497 1,505
Selling and marketing 2,104 1,554 2,122 2,648 2,018 2,483 2,367 1,918
Impairment of long-lived assets - - - 6,801 - 7,054 - -
Settlement of litigation - - - - - - - 673
Write-down of note receivable from
Image Technologies Corporation - - 1,364 - - - - -
--------- --------- --------- --------- --------- --------- ---------- ---------
8,150 8,842 10,539 17,789 9,720 16,656 11,461 8,180
--------- --------- --------- --------- --------- --------- ---------- ---------
Income (loss) from operations (384) 368 (1,230) (8,995) 285 (7,463) (2,266) (100)
Equity in loss of Image Technologies
Corporation (134) (165) (189) - - - - -
Gain on sale of investment in Image
Technologies Corporation - - - - - - - 440
Currency transaction gain (loss) 201 26 (221) 98 133 118 189 (249)
Interest expense (733) (682) (622) (777) (360) (480) (199) (199)
Interest income 168 165 116 30 10 57 69 75
--------- --------- --------- --------- --------- --------- ---------- ---------
(498) (656) (916) (649) (217) (305) 59 67
--------- --------- --------- --------- --------- --------- ---------- ---------
Income (loss) before income taxes (882) (288) (2,146) (9,644) 68 (7,768) (2,207) (33)
Extraordinary loss on early
extinguishment of debt - - (2,618) - - - - -
Provision (benefit) for income taxes (180) 96 (24) 288 - - - -
--------- --------- --------- --------- --------- --------- ---------- ---------
Net income (loss) from continuing
operations (702) (384) (4,740) (9,932) 68 (7,768) (2,207) (33)
Net gain (loss) from discontinued
operations 167 66 70 (3,598) - (933) - 1,278
--------- --------- --------- --------- --------- --------- ---------- ---------
Net income (loss) $ (535) $ (318) $ (4,670) $(13,530) $ 68 $ (8,701) $ (2,207) $ 1,245
========= ========= ========= ========= ========= ========= ========== =========
Basic and diluted income (loss) per share:
Continuing operations $ (0.07) $ (0.04) $ (0.44) $ (0.92) $ 0.01 $ (0.71) $ (0.20) $ -
Discontinued operations 0.02 0.01 0.01 (0.33) - (0.09) - 0.12
--------- --------- --------- --------- --------- --------- ---------- ---------
Net income (loss) $ (0.05) $ (0.03) $ (0.43) $ (1.25) $ 0.01 $ (0.80) $ (0.20) $ 0.11
========= ========= ========= ========= ========= ========= ========== =========
Weighted average common shares outstanding 10,684 10,767 10,769 10,783 10,822 10,919 10,939 10,954
========= ========= ========= ========= ========= ========= ========== =========
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 on the
design, development and commercialization of medical technologies which are
delivered by minimally invasive procedures. Products and products under
development include cardiac 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) for approximately $33 million
in cash and operated the business as the Company's neurosciences business unit.
In April 2000, following a decision by the Company's board of directors to
discontinue the U.K. operations of its neurosciences business unit, 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 in the year ended
December 31, 1999. The Company has recorded a gain on the sale of the U.K.
operations of $345,000 in the year ended December 31, 2000, representing a
revision of estimates made concerning the costs associated with the sale. The
net loss of $3.2 million was comprised of proceeds of $12 million, estimated
transaction and other costs of $3.8 million and net assets sold of $11.4
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 is exploring strategic alternatives with respect to the remaining
businesses which comprise the neurosciences business unit.
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 Radiology 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.
13
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 any stent
development costs incurred by the Company. The Company receives 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.
In February 1996, the Company acquired, through the issuance of Common Stock,
the rights to develop and commercialize its cardiac septal repair devices. The
Company commenced sales of the CardioSEAL(R) 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(R) product under HDE 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(R) 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. Mr. Kleshinski's employment agreement
terminated as of December 31, 2000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues for the year ended December 31, 2000 increased 4% to $36.5
million from $35.1 million for the year ended December 31, 1999. Product sales
increased 8% to $35.7 million compared to $32.9 million. An approximately $4.3
million increase in CardioSEAL(R) Septal Occluder product sales was partially
offset by an approximately $1.5 million decrease in product sales from the
neurosciences business unit.
License fees and royalties for the year ended December 31, 2000 decreased 62%
to $811,000 from $2.1 million for the year ended December 31, 1999. These
revenues relate primarily to the exclusive distribution of the Company's stent
technology by Boston Scientific Corporation and included $671,000 and $1.5
million of royalties and $140,000 and $300,000 of cost-sharing payments for the
years ended December 31, 2000 and 1999, respectively. The $829,000 decrease in
royalty payments is attributable to the elimination of quarterly guaranteed
minimums of $375,000 as of December 31, 1999. Additionally, for the year ended
December 31, 1999 the Company's neurosciences business unit received patent
license payments of approximately $400,000.
Cost of Product Sales. Cost of product sales decreased by $200,000 to $15.0
million for the year ended December 31, 2000 from $15.2 million for the year
ended December 31, 1999. Cost of product sales, as a percent of product sales,
decreased to 42.1% for the year ended December 31, 2000 as compared to 46.2 %
for the year ended December 31, 1999. The decrease in cost of product sales as a
percent of product sales in 2000 is primarily attributable to a shifting sales
mix in favor of the Company's CardioSEAL(R) Septal Occluders which have a lower
product cost as a percent of sales than the Company's other product lines.
Research and Development. Research and development expense increased by
$500,000 or 11% to $5.0 million for the year ended December 31, 2000 from $4.5
million for the year ended December 31, 1999. The increase is primarily
attributable to contract management, clinical monitoring, data management and
biostatisical analysis in support of the FDA approval process for various
medical use applications of the CardioSEAL(R) and StarFlex(TM) products.
General and Administrative. General and administrative expenses increased by
5.5% to $9.5 million for the year ended December 31, 2000 from $9.1 million for
the year ended December 31, 1999. The increase is primarily attributable to a
significant increase in legal fees associated with ongoing litigation and
general corporate matters.
Selling and Marketing. Selling and marketing expenses increased by 4.3% to
$8.8 million for the year ended December 31, 2000 from $8.4 million for the year
ended December 31, 1999. This increase is primarily attributable to the
development of a direct sales force for the CardioSEAL(R) products in the United
States and Europe.
14
Impairment of Long-lived Assets. The neurosciences business unit has
continued to incur operating losses for the year ended December 31, 2000, which
has caused management and the Board of Directors of the Company to periodically
consider various strategic alternatives for that unit. In the second quarter,
based upon these considerations, an undiscounted cash flow analysis and other
considerations, the Company recorded a $7.1 million impairment charge to reduce
the carrying value of the long-lived assets of the neurosciences business unit
to their estimated fair value. The long-lived assets consist primarily of a
building and other fixed assets located in the Company's Biot, France facility.
The current year impairment charge follows a $6.8 million impairment charge for
the year ended December 31, 1999 for goodwill recorded upon the acquisition of
neurosciences business unit in July 1998.
Settlement of Litigation. For the year ended December 31, 2000, the Company
recorded a charge of $673,000 associated with the settlement, after year-end, of
litigation between Sodem Diffusion SA ("Sodem") and NMT NeuroSciences Implants
(France) SA ("NMT France"), a wholly owned subsidiary of the Company (see Note 6
of the Notes to Consolidated Financial Statements).
Gain on Sale of Investment in Image Technologies Corporation. During the year
ended December 31, 2000, the Company sold its investment in Image Technologies
Corporation for $350,000 cash proceeds plus assumption of the Company's position
as guarantor of certain ITC liabilities (see Notes 4 and 9(c) of the Notes to
Consolidated Financial Statements).
Interest Expense. Interest expense for the year ended December 31, 2000
decreased by 56% to $1.2 million from $2.8 million for the year ended December
31, 1999. The decrease is attributable to the repayment of $6 million of the
Company's subordinated note in September 1999 and the repayments of $7.3 million
and $500,000 of the senior secured debt and the subordinated note, respectively,
on April 5, 2000 in connection with the sale of the U.K operations of the
Company's neurosciences business unit (see Note 9(a) and 9(b) of the Notes to
Consolidated Financial Statements).
Interest Income. Interest income for the year ended December 31, 2000
decreased by 56% to $211,000 from $480,000 for the year ended December 31, 1999.
This decrease is primarily attributable to the use of $6 million of cash to
repay a portion of the subordinated note in September 1999.
Gain (Loss) on Sale of Discontinued Operations. Net gain from discontinued
operations was $345,000 for the year ended December 31, 2000 compared to a net
loss of $3.3 million for the year ended December 31, 1999. The net loss in 1999
represented a $3.5 million loss on the sale of the U.K. operations of the
Company's neurosciences business unit, partially offset by $200,000 of income
from the discontinued operations. The gain from discontinued operations in 2000
represents a revision of estimates made concerning the costs associated with the
sale of the U.K. operations (see Note 3(a) of Notes to Consolidated Financial
Statements).
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 neurosciences business unit 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 HDE 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 neurosciences business unit
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(R)
15
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 neurosciences business unit 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 HDE
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 neurosciences business unit 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
neurosciences business unit for the full year ended December 31, 1999 as
compared to the partial year for the year ended December 31, 1998.
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 neurosciences
business unit 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 HDE 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 analysis 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 of approximately $1.4 million
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 neurosciences business unit on April
5, 2000 (see Note 3(a) of the Notes to Consolidated Financial Statements), the
Company recorded at December 31, 1999 a $6.8 million impairment charge for
goodwill recorded upon the acquisition of the neurosciences business unit in
July 1998. This impairment charge was determined based upon the Company's
analysis of estimated cash flows of its neurosciences business unit and the
carrying value of all of the long-lived assets of neurosciences business unit
which were not sold in April 2000. The Company's assessment of the value of the
assets of neurosciences business unit 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.
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 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
neurosciences business unit.
16
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), 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 the Company's neuroscience. business unit 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 neurosciences business
unit, 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and marketable securities of $6.8
million at December 31, 2000 as compared to $3.5 million as of December 31,
1999. During year ended December 31, 2000, the Company's operations provided
cash of approximately $2.1 million which consisted of approximately $9.9 million
of cash used by operations prior to approximately $8.8 million of noncash
charges and $3.2 million net decrease 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. 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 remaining $2 million of the senior
secured debt facility was available to be drawn down by the Company for working
capital purposes, as needed. The facility had 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. In April 2000, the
Company used the proceeds from the sale of the U.K. operations and certain other
assets of the neurosciences business unit (see Note 3(a) of the Notes to
Consolidated Financial Statements) to reduce the subordinated note payable by
$500,000 and to repay the entire senior secured debt balance of $7.3 million. In
September 2000, the working capital portion of the senior secured debt facility
was terminated by the bank. At December 31, 2000, the outstanding balance of the
subordinated note, net of original issue discount of approximately $551,000, was
approximately $4.9 million. At December 31, 2000, the Company was in compliance
with newly amended subordinated debt covenants relating to maintenance of
tangible net equity. In addition, the subordinated debt covenants relating to
maintenance of certain ratios, tangible net equity and income were amended for
2001. The $1.0 million current portion of the subordinated debt balance consists
of (a) $200,000 due January 2001 from the proceeds obtained in connection with
the sale of the Company's investment in ITC (see Note 4 of the Notes to
Consolidated Financial Statements); and (b) $800,000 due April 2001 in
connection with the amended debt covenants agreement.
Purchases of property and equipment for use in the Company's manufacturing,
research and development and general and administrative activities, exclusive of
the assumption of equipment under lease and capital lease obligations of
approximately
17
$90,000 from ITC, amounted to $395,000 for the year ended December 31, 2000. In
September 2000, the Company entered into a new equipment financing agreement for
up to a maximum of $250,000 of purchases based upon a 3-year term. As of
December 31, 2000 approximately $100,000 of purchases were in the process of
being financed under this arrangement, leaving approximately $150,000 available
to finance future equipment purchases.
The Company is party to various contractual arrangements including royalty
arrangements and employment and consulting agreements with current employees and
consultants. Minimum guaranteed royalty payments for 2001 are approximately
$300,000.
The Company also has committed to purchase certain minimum quantities of the
vena cava filter component from a supplier through June 2001, which agreement is
expected to be extended through December 2001. See Note 10 of Notes to the
Consolidated 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.
The Company believes that existing cash and cash expected to be generated from
operations will be sufficient to meet its working capital, financing and capital
expenditure requirements through at least 2001.
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, 2000, the impact of the euro conversion has not had a
material impact on the operations of the Company.
18
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 Whitney & Co., one of our significant stockholders. As of
December 31, 1999 and through the first nine months of 2000, we were not in
compliance with certain of the debt covenants and obtained necessary waivers of
default from the lender. As of December 31, 2000 the subordinated debt
covenants have been modified and the Company is in compliance as of that date.
In connection with the revised covenants the Company has agreed to a further
subordinated note repayment of $800,000 in April 2001. 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, the
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 MAY FACE CHALLENGES MAINTAINING OUR NASDAQ NATIONAL MARKET LISTING.
On January 26, 2001, we received a delisting notification from the Nasdaq
National Market for failure to maintain net tangible assets of at least $4
million. We appealed this determination and, on March 22, 2001, we appeared
before a hearing panel of the Nasdaq National Market and presented evidence of
our ability to meet the Nasdaq National Market maintenance requirements.
Although we believe that we will continue to meet the requirements for inclusion
on the Nasdaq National Market, we cannot assure you that the panel will find in
our favor. If the panel decides to delist us, we will be removed immediately
from the Nasdaq National Market without prior notification. If we are delisted,
we will have constrained access to capital markets and you may find it more
difficult to buy and sell our securities.
WE MAY FACE CHALLENGES IN REFOCUSING OUR BUSINESS STRATEGY.
In connection with the commercialization of our CardioSEAL(R) product, and the
recent sale of a portion of our neurosciences business unit, we have had to
refocus our business strategy. This refocusing has placed significant demands on
a new senior management team 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 MAY 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(R) 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
19
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.
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 each of 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
each of Bard Radiology and Bard International has 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 the
companies will continue in their current form. In August 2000, the Company filed
a demand for arbitration relating to the 1992 distribution agreement with Bard
Radiology. 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 cardiac septal repair devices are marketed
through our direct sales force and distributors. Because we have marketed our
initial products (such as stents and vena cava filters) through third parties,
we have limited experience marketing our products directly. In order to market
directly the CardioSEAL(R) Septal Occluder and any related products, we will
have to continue 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.
20
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 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.
Our issued U.S. patents, and corresponding foreign patents, expire at various
dates ranging from 2002 to 2018. When each of our patents expires, competitors
may develop and sell products based on the same or similar technologies as those
covered by the expired patent.
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.
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 uninsured or underinsured
liabilities could have a material adverse effect on our business, financial
condition, and results of operations.
21
INTENSE INDUSTRY COMPETITION FOR QUALIFIED EMPLOYEES COULD AFFECT 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 our business.
ITEM 7A. QUANTITATIVE 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. Although
the Company has decreased its international operations following the sale of the
UK operations of its Neurosciences division and consistently reduced its foreign
currency exposure, it remains an international concern. Accordingly, 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.
The Company's most significant foreign currency exposures relate to its
manufacturing activities and assets in France. The Company translates the
accounts of its foreign subsidiaries in accordance with SFAS No. 52, Foreign
Currency Translation. In translating these foreign currency accounts 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 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.
22
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 2001 Annual Meeting of
Stockholders to be held on June 7, 2001 (the "2001 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 2001
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 2001 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 2001 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 2001 Proxy Statement under the
caption "Certain Transactions," which section is incorporated herein by this
reference.
23
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. and Subsidiaries:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
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, 2000.
24
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/ John E. Ahern
-----------------
John E. Ahern
President and Chief Executive Officer
Dated: March 30, 2001
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
President, Chief Executive Officer March 30, 2001
/s/ John E. Ahern and Chairman of the Board (Principal
- -------------------------------------- Executive Officer)
John E. Ahern
Vice President and March 30, 2001
/s/ Richard E. Davis Chief Financial Officer (Principal
- -------------------------------------- Financial and Accounting Officer)
Richard E. Davis
/s/ Robert G. Brown Director March 30, 2001
- --------------------------------------
Robert G. Brown
Director March 30, 2001
/s/ Cheryl Clarkson
- --------------------------------------
Cheryl Clarkson
/s/ R. John Fletcher Director March 30, 2001
- --------------------------------------
R. John Fletcher
/s/ C. Leonard Gordon Director March 30, 2001
- --------------------------------------
C. Leonard Gordon, Esq.
/s/ James E. Lock Director March 30, 2001
- --------------------------------------
James E. Lock, M.D.
/s/ Francis J. Martin Director March 30, 2001
- --------------------------------------
Francis J. Martin
/s/ Morris Simon Director March 30, 2001
- --------------------------------------
Morris Simon, M.D.
25
Appendix
--------
NMT MEDICAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. A-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. A-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999, and 1998......................................... A-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999, and 1998......................................... A-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999, and 1998...................................................... 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, 2000 and 1999
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 2, 2001
A-2
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) and Subsidiaries
Consolidated Balance Sheets
At December 31,
2000 1999
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 6,761,144 $ 3,533,475
Accounts receivable, net of reserves of $1,079,000 and
$913,000 in 2000 and 1999, respectively 5,446,647 7,900,099
Inventories 3,440,254 4,634,348
Prepaid expenses and other current assets 1,115,070 2,429,016
------------ ------------
Total current assets 16,763,115 18,496,938
------------ ------------
Property and equipment, at cost:
Land and buildings 4,650,000 4,650,000
Laboratory and computer equipment 3,555,212 3,284,294
Leasehold improvements 3,129,897 3,268,897
Equipment under capital lease 2,480,512 2,258,982
Office furniture and equipment 1,103,662 1,062,228
------------ ------------
14,919,283 14,524,401
Less- Accumulated depreciation and amortization 13,052,460 3,506,354
------------ ------------
1,866,823 11,018,047
------------ ------------
Other assets 461,474 839,733
Net assets from discontinued operations -- 8,392,448
------------ ------------
$ 19,091,412 $ 38,747,166
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,533,194 $ 4,100,081
Accrued expenses 5,228,846 4,629,366
Current portion of debt obligations 1,581,459 1,002,877
------------ ------------
Total current liabilities 10,343,499 9,732,324
------------ ------------
Long-term debt obligations, net of current portion 4,421,522 13,570,355
Deferred tax liability -- 1,283,008
Commitments and Contingencies (Notes 10 and 17)
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--10,954,463 and 10,783,278
shares in 2000 and 1999, respectively 10,955 10,784
Additional paid-in capital 42,031,096 41,439,959
Cumulative translation adjustment (1,539,595) (708,253)
Accumulated deficit (36,176,065) (26,581,011)
------------ ------------
Total Stockholders' Equity 4,326,391 14,161,479
------------ ------------
$ 19,091,412 $ 38,747,166
============ ============
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,
2000 1999 1998
------------ ------------ ------------
Revenues:
Product sales $ 35,662,466 $ 32,948,829 $ 23,024,740
License fees and royalties 810,539 2,130,539 2,028,973
------------ ------------ ------------
36,473,005 35,079,368 25,053,713
------------ ------------ ------------
Costs and Expenses:
Cost of product sales 15,018,482 15,215,081 10,819,003
Research and development 4,951,154 4,462,359 3,639,728
General and administrative 9,534,577 9,050,244 5,043,872
Selling and marketing 8,786,264 8,427,357 4,390,739
Impairment of long-lived assets 7,054,106 6,801,000 --
Settlement of litigation 673,000 -- --
Acquired in-process research and development -- -- 4,710,000
Merger and integration charge -- -- 687,242
Write-down of note receivable from Image
Technologies Corporation -- 1,364,369 --
------------ ------------ ------------
Total costs and expenses 46,017,583 45,320,410 29,290,584
------------ ------------ ------------
Loss from operations (9,544,578) (10,241,042) (4,236,871)
Other Income (Expense):
Equity in net loss of Image Technologies Corporation -- (488,529) (437,145)
Gain on sale of investment in Image Technologies Corporation 439,781 -- --
Currency transaction gain (loss) 190,997 104,625 (87,596)
Interest expense (1,237,556) (2,814,211) (1,461,346)
Interest income 211,098 479,617 1,168,056
------------ ------------ ------------
Total other expense, net (395,680) (2,718,498) (818,031)
------------ ------------ ------------
Loss before income taxes (9,940,258) (12,959,540) (5,054,902)
Extraordinary loss on early extinguishment of debt -- (2,618,428) --
Provision for income taxes -- 180,000 744,538
------------ ------------ ------------
Net loss from continuing operations (9,940,258) (15,757,968) (5,799,440)
Discontinued operations:
Net income from discontinued operations, net of income
taxes of $0, $265,000 and $142,000 during the years
ended December 31, 2000, 1999 and 1998, respectively -- 236,827 2,120,000
Gain (loss) on sale of discontinued operations 345,204 (3,531,552) --
------------ ------------ ------------
Net gain (loss) from discontinued operations 345,204 (3,294,725) 2,120,000
------------ ------------ ------------
Net loss $ (9,595,054) $(19,052,693) $ (3,679,440)
============ ============ ============
Basic and diluted net (loss) income per common share:
Continuing operations $ (0.91) $ (1.47) $ (0.57)
Discontinued operations 0.03 (0.31) 0.21
------------ ------------ ------------
Net loss $ (0.88) $ (1.77) $ (0.36)
============ ============ ============
Basic and diluted weighted average common shares outstanding 10,908,945 10,751,070 10,192,663
============ ============ ============
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 of $0.001 Number of $0.001 Paid-in Accumulated
Shares Par Value Shares Par Value Capital Deficit
------------------------ -------------------------- -------------- --------------
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)
Common stock issued under the employee
stock purchase plan - - 29,276 29 63,769 -
Exercise of common stock options and
warrants - - 141,909 142 527,368 -
Cumulative translation adjustment - - - - - -
Net loss - - - - - (9,595,054)
----------------------- ------------------------- -------------- --------------
Total comprehensive loss
Balance, December 31, 2000 - $ - 10,954,463 $10,955 $42,031,096 $(36,176,065)
======================= ========================= ============== ==============
Cumulative Total
Translation Stockholders' Comprehensive
Adjustment Equity Loss
---------------- -------------- -----------------
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 original 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
nonemployee stock options - 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 $(20,947,946)
===================
Balance, December 31, 1999 (708,253) 14,161,479 $ -
Common stock issued under the employee
stock purchase plan - 63,798 -
Exercise of common stock options and
warrants - 527,510 -
Cumulative translation adjustment (831,342) (831,342) (831,342)
Net loss - (9,595,054) (9,595,054)
-------------- ---------------- -------------------
Total comprehensive loss $(10,426,396)
===================
Balance, December 31, 2000 $(1,539,595) $ 4,326,391
============== ================
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 Flow
For the Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (9,595,054) $(19,052,693) $ (3,679,440)
Net (gain) loss from discontinued operations (345,204) 3,294,725 (2,120,000)
------------ ------------ ------------
Net loss from continuing operations (9,940,258) (15,757,968) (5,799,440)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities --
Impairment of long-lived asset 7,054,106 6,801,000 --
Depreciation and amortization 1,157,020 2,067,395 1,391,088
Noncash interest expense relating to original issue discount 473,405 531,264 215,490
Increase in accounts receivable reserves 145,239 42,000 596,000
Acquired in-process research and development -- -- 4,710,000
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
Noncash tax provision -- 180,000 674,000
Noncash interest expense relating to early extinguishment of debt -- 2,358,970 --
Write-down of note receivable from Image Technologies Corporation -- 1,364,369 --
Deferred tax benefit -- (74,800) (1,019,692)
Changes in assets and liabilities--
Accounts receivable 1,770,385 2,078,314 (2,582,685)
Inventories 1,052,358 579,357 2,745,588
Prepaid expenses and other current assets 709,802 794,478 700,406
Accounts payable (331,047) (1,821,804) (1,046,530)
Accrued expenses 25,650 (109,147) 2,714,238
Deferred revenue -- -- (300,000)
------------ ------------ ------------
Net cash provided by (used in) continuing operations 2,116,660 (203,443) 3,447,287
------------ ------------ ------------
Net cash (used in) provided by discontinued operations (2,327,617) 1,589,828 (4,654,000)
------------ ------------ ------------
Cash flows from investing activities:
Maturities of marketable securities and long-term investments -- 6,122,938 16,167,143
Purchases of property, plant and equipment (394,880) (518,000) (193,432)
Decrease (increase) in other assets 283,349 (497,213) (636,238)
Increase in investment in Image Technologies Corporation -- -- (2,038,043)
Cash paid for acquisition of Elekta Neurosurgical Instruments, net
of cash acquired -- -- (32,721,076)
Proceeds from sale of discontinued operations 11,632,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 11,520,469 5,107,725 (19,421,646)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 527,510 107,059 303,225
Proceeds from issuance of common stock pursuant to employee stock
purchase plan 63,798 59,126 69,233
(Payments of ) proceeds from subordinated note payable (500,000) (14,000,000) 20,000,000
(Payments of) proceeds from financing arrangements (428,000) 428,000 --
(Payments of) proceeds from senior secured notes payable, net (7,279,134) 7,279,134 --
Cash paid for deferred financing costs -- -- (852,849)
Payments of bank debt -- -- (523,000)
Payments of capital lease obligations (489,640) (252,816) (190,519)
------------ ------------ ------------
Net cash (used in) provided by financing activities (8,105,466) (6,379,497) 18,806,090
------------ ------------ ------------
Effect of exchange rate changes on cash 23,623 (588,152) 267,838
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,227,669 (473,539) (1,554,431)
Cash and cash equivalents, beginning of period 3,533,475 4,007,014 5,561,445
------------ ------------ ------------
Cash and cash equivalents, end of period $ 6,761,144 $ 3,533,475 $ 4,007,014
============ ============ ============
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 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 patented medical devices
include self-expanding stents, vena cava filters and cardiac septal repair
devices. 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
neuroscience business unit, the Company develops, manufactures, markets
and sells specialty devices for neurosurgery, including cerebral spinal
fluid shunts on the Spetzler(TM) Titanium Aneurysm Clip. On April 5, 2000,
the Company sold the U.K. operations of its neurosciences business unit,
including the Selector(R) Ultrasonic Aspirator, Ruggles(TM) surgical
instruments and cryosurgery product lines and certain assets and
liabilities for approximately $12.0 million in cash (see Note 3(a)).
The results of these discontinued operations and the loss incurred upon
the sale of the operations have been included as separate line items in
the statement of operations in the accompanying financial statements for
the years ended December 31, 2000, 1999 and 1998.
Certain prior-period amounts have been reclassified to conform to the
current period's presentation.
(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.
(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
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.
Cash and cash equivalents, which are carried at cost and approximate market,
consist of cash and money market accounts.
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)
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
AT DECEMBER 31,
2000 1999
---------- ----------
Components $1,723,209 $2,379,474
Finished goods 1,717,045 2,254,874
---------- ----------
$3,440,254 $4,634,348
========== ==========
Finished goods consist of materials, labor and manufacturing overhead.
(e) Financial Instruments
Statement of Financial Accounting Standards 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, accounts receivable and
debt obligations. The estimated fair value of these financial instruments
approximates their carrying value at December 31, 2000 and 1999,
respectively. The estimated fair values have been determined through
information obtained from market sources and management estimates. 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 and Significant Customers
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 the
potential for credit risk consist primarily of trade accounts receivable 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 $470,000 and $748,000 as of December 31, 2000 and
1999, respectively. This distributor accounted for 23%, 26% and 33% of
product revenues for fiscal 2000, 1999 and 1998, respectively. The Company
also had one customer whose revenues accounted for 12% and 10% of product
revenues for fiscal 1999 and 1998, respectively. At December 31, 2000
approximately 31% of gross accounts receivable represent accounts denominated
in foreign currencies that are translated at year-end exchange rates. For
the years ended December 31, 2000, 1999 and 1998, foreign sales accounted for
38%, 48% and 45% of total revenues, respectively.
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)
(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.
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 $6.8 million impairment charge for goodwill
recorded upon the acquisition of the neurosciences business unit in July
1998. This impairment charge was determined based upon the Company's analysis
of estimated cash flows of the neurosciences business unit and the carrying
value of all of the long-lived assets of the neurosciences business unit
which were sold in April 2000. The Company's assessment of the future value
of the assets of the neurosciences business unit was corroborated by
independent outside parties.
During the year ended December 31, 2000, the Company recorded a $7.1 million
impairment charge to reduce the carrying value of the long-lived assets of
the neuroscience business unit (exclusive of its U.K. operations sold in
April 2000) to their estimated fair value. The long-lived assets that are
impaired consist primarily of a building and other fixed assets located in
the Company's Biot, France facility. The Company's estimates of fair value
for such assets was based upon discounted cash flows and was corroborated by
outside parties. This asset impairment charge does not include losses which
may occur upon a decision to sell or liquidate the neuroscience business
unit, including exit costs, transaction costs and additional losses on the
sale or disposition of the assets.
(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 transfer of title to the customer,
provided that there is persuasive evidence of an arrangement and the
collection of the sales price is probable. Products sold to the Company's
distributors are not subject to a right of return for unsold product. License
fees and royalties are recognized as earned.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. This bulletin
summarizes certain views of the Staff on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The Company believes that its current revenue recognition policy
complies with SAB No. 101.
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)
(j) Net Loss per Common and Potential Common Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings per Share, for all periods presented. In accordance with
SFAS No. 128, basic and diluted net loss per share was determined by dividing
net loss available for common shareholders by the weighted average common
shares outstanding during the period. Basic and diluted net loss per share
are the same because all outstanding common stock options and warrants have
been excluded, as they are antidilutive. Options and warrants to purchase a
total of 2,401,949, 2,308,697 and 2,150,014 common shares have been excluded
from the computation of diluted weighted average shares outstanding for the
years ended December 31, 2000, 1999 and 1998, respectively.
(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. The net change in
cumulative foreign currency gain (loss) amounted to ($831,000), ($1,395,000)
and $687,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. Additionally, the Company had foreign currency exchange
transaction gains of approximately $191,000 and $105,000 for the years ended
December 31, 2000 and 1999, respectively, and a foreign currency exchange
transaction loss of $88,000 for the year ended December 31, 1998. 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.
(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 $831,000 and $1,395,000 for the years ended December 31, 2000 and 1999 and
decreased the net loss by $687,000 for the year ended December 31, 1998.
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)
(m) Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25. The interpretation
clarifies the application of Accounting Principles Board (APB) Opinion No.
25, Accounting For Stock Issued to Employees in specified events, as defined.
The interpretation is effective July 1, 2000, but covers certain events
occurring during the period after December 15, 1998, but before the effective
date. The adoption of this pronouncement did not have a significant impact on
the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. The
Company currently does not engage in trading market risk sensitive
instruments or purchasing hedging instruments or "other than trading"
instruments that are likely to expose them to market risk, whether interest
rate, foreign currency exchange, commodity price or equity price risk. The
Company may do so in the future to the extent that operations expand
domestically and abroad. The Company will adopt SFAS No. 133, as required by
SFAS No. 137, in fiscal year 2001. The adoption of SFAS No. 133 is not
expected to have a material impact on the Company's 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 modified
accounting and reporting disclosure standards for pension and other
postretirement benefit plans. As part of the acquisition of Elekta
Neurosurgical Instruments ("ENI"), 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)).
In October 1996, the Company adopted a qualified defined contribution plan.
Under the Company's 401(k) Plan, 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, 2000, 1999 and 1998.
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)
(o) Supplemental Cash Flow Information and 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,
2000 1999 1998
-------- ---------- ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest $741,425 $1,983,001 $ 1,371,912
======== ========== ============
Income Taxes $ 50,000 $ 121,148 $ 728,324
======== ========== ============
Supplemental disclosure of noncash financing and investing transactions:
Equipment acquired under capital lease obligations $ 89,847 $1,100,000 $ 195,827
======== ========== ============
Noncash tax benefit relating to exercise of stock options $ --- $ -- $ 90,000
======== ========== ============
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) NEUROSCIENCES BUSINESS UNIT
(a) Sale of U.K. Operations of Neurosciences Business Unit
On April 5, 2000, the Company sold the U.K. operations of its neuroscience
business unit including the Selector(R) Ultrasonic Aspirator, Ruggles(TM)
Surgical Instruments and cryosurgery businesses and certain assets and
liabilities for $12.0 million in cash. The Company recorded an estimated $3.5
million loss on the anticipated sale in the year ended December 31, 1999. The
Company has recorded a gain on the sale of the U.K. operations of
approximately $345,000 in the year ended December 31, 2000, representing a
revision of estimates made concerning the costs associated with the sale. The
total net loss of $3.2 million was comprised of net proceeds of approximately
$12.0 million less estimated transaction and other costs of $3.8 million, and
net assets sold of $11.4 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 net assets sold consisted of the following:
Current assets $ 6,807,000
Property and equipment, net 1,203,000
Goodwill and other intangible assets, net 5,495,000
-----------
Total assets 13,505,000
Current liabilities (2,089,000)
-----------
$11,416,000
===========
A-12
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(3) NEUROSCIENCES BUSINESS UNIT - (CONTINUED)
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 year ended December 31, 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 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 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.
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.
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:
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-13
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(3) NEUROSCIENCES BUSINESS UNIT - (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 finder's
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.
For the years ended December 31, 2000 and 1999, impairment charges of $7.1
million and $6.8 million were recorded against tangible assets and goodwill,
respectively, related to the above acquisition (see Note 2(g)).
(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 bore interest at
10% per annum, payable monthly beginning March 31, 2001. This $2 million
senior note was secured by substantially all of the assets of ITC. The
principal amount of the note was 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 would have been forgiven. If not converted, the note
was 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 accrued interest at 10% per annum and
was generally subject to the same terms as the $2 million credit line
agreement, except that it was 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
owed 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 not 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
A-14
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(4) INVESTMENT IN IMAGE TECHNOLOGIES CORPORATION - (CONTINUED)
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.
At November 30, 2000, the Company sold its investment in ITC for $350,000 plus
assumption of NMT's position as guarantor of certain ITC liabilities. The
Company recorded a gain on this sale of $439,781 (see Note 9(c)).
(5) 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.
(6) SETTLEMENT OF LITIGATION
On July 17, 2000 Sodem Diffusion SA ("Sodem") filed a claim with the Tribunal
de Premiere Instance in Geneva, Switzerland, alleging that NMT NeuroSciences
Implants ("NMT France"), a wholly owned subsidiary of the Company, breached
its obligations under an exclusive distribution agreement, dated as of
November 10, 1998, pursuant to which NMT France was acting as the exclusive
worldwide distributor of Sodem's products. Sodem sought approximately $18
million in damages in addition to costs and fees of their attorneys. NMT
France filed a counterclaim for approximately $30 million plus costs. On
February 23, 2001 NMT France and Sodem settled the litigation, resulting in a
charge of $673,000 in the accompanying statement of operations for the year
ended December 31, 2000, consisting of a $500,000 settlement fee paid to
Sodem plus legal fees and associated costs.
(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.
A-15
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(7) INCOME TAXES - (CONTINUED)
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations for the years ended December 31, 2000, 1999 and 1998
consists of the following:
At December 31,
2000 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
======== ========= ==========
The Company has federal and state net operating loss carryforwards of
approximately $3.0 million to reduce to reduce federal and state taxable
income in future periods, if any, and approximately $699,000 of tax credit
carryforwards, 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 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 2020.
As of December 31, 2000, the Company has available foreign net operating loss
carryforwards of approximately $2.2 million. 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. The Company recorded the tax effect of utilizing
these loss carryforwards in the amounts of $180,000 and $674,000 as a
reduction in the carrying value of the goodwill during the years ended
December 31, 1999 and 1998, respectively.
The provision for income taxes in the year ended December 31, 1999 represents
the taxes on income generated in France by the neuroscience business unit.
The Company generated a net operating loss for federal and state income tax
purposes in the United States in the years ended December 31, 2000 and 1999.
The provision for income taxes in 1998 is calculated on the income before
provision for taxes without taking into account the write-off of acquired in-
process research and development ($4,710,000), the equity in the loss of ITC
($437,145) and goodwill amortization ($140,000).
A-16
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(7) INCOME TAXES - (CONTINUED)
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) at December 31, 2000 and 1999 are as follows:
AT DECEMBER 31,
2000 1999
----------- -----------
Net operating loss carryforwards $ 1,202,000 $ 1,646,000
Tax credit carryforwards 699,000 190,000
Timing differences, including reserves
accruals, and write-offs 3,006,000 5,867,000
----------- -----------
4,907,000 7,703,000
Less - Valuation allowance (4,907,000) (7,703,000)
----------- -----------
Net deferred tax asset -- --
Deferred tax liability related to
the acquisition of ENI -- (1,283,000)
----------- -----------
Net deferred tax asset (liability) $ -- $(1,283,000)
=========== ===========
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.
(8) LICENSE FEES AND ROYALTIES
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 approximately $811,000,
$1,779,000 and $1,729,000 in royalty revenues during the years ended
December 31, 2000, 1999 and 1998, respectively.
(9) DEBT OBLIGATIONS
The Company has the following debt outstanding as of December 31, 2000 and
1999:
2000 1999
---------- -----------
Subordinated note payable $4,948,783 $ 5,232,412
Senior secured notes payable -- 7,279,134
Capital lease obligations 1,054,198 1,633,686
Line of credit facility -- 428,000
---------- -----------
6,002,981 14,573,232
Less--Current portion 1,581,459 1,002,877
---------- -----------
$4,421,522 $13,570,355
========== ===========
A-17
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(9) DEBT OBLIGATIONS - (CONTINUED)
(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, 2000 is being amortized to interest
expense over 33 months. The Company recorded approximately $216,000 and
$531,000 of interest expense relating to the amortization of original issue
discount for the years ended December 31, 2000 and 1999, respectively. As of
December 31, 2000, the Company was in compliance with newly amended debt
covenants of the subordinated note payable. At December 31, 2000 the $1
million current portion of the subordinated debt consists of (a) $200,000 due
January 2001 from the proceeds obtained in connection with the sale of the
Company's investment in ITC (see Note 4); and (b) $800,000 due April 2001.
(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 was
available to be drawn down by the Company for working capital purposes, as
needed. The facility had 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 had
outstanding borrowings of $7.3 million under this facility. In April 2000,
the Company paid down this note in its entirety from the proceeds obtained in
connection with the sale of part of its neurosciences business unit (see Note
3(a)). The bank terminated the availability of this facility in September
2000.
(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 leased 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 approximately $88,000 was outstanding as of
December 31, 2000.
A-18
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(9) DEBT OBLIGATIONS - (CONTINUED)
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 were made under this agreement by the
Company, of which approximately $144,000 was outstanding as of December 31,
2000.
On April 1, 1998, the Company entered into a new agreement with this bank
that provided the Company with similar terms and the option to borrow up to
$750,000 through March 31, 1999. Borrowings of $169,000 have been made under
this new agreement by the Company, of which approximately $106,000 was
outstanding as of December 31, 2000, respectively. Leases under these
agreements are payable in equal monthly installments over a period of 60
months and expire through May 2004.
In June 2000, certain ITC capital lease obligations and related equipment
were transferred to the Company. These leases had outstanding borrowings of
approximately $73,000 at December 31, 2000.
The Company had been the guarantor of other outstanding lease obligations of
ITC under the above-referenced bank agreements. Effective November 30, 2000,
this guarantee has been assumed by a third party in connection with the
Company's sale of its investment in ITC (see note 4).
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 $33,000 is outstanding under this agreement as of December 31,
2000.
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 $610,000 of borrowings is outstanding as of
December 31, 2000.
A-19
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(9) DEBT OBLIGATIONS - (CONTINUED)
(d) Lines of Credit
In June 1999, the Company entered into lease 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 and were paid in full during the first
quarter of 2000.
In September 2000, the Company entered into an equipment lease financing
facility providing for borrowings of up to $250,000. Leases under this
agreement are payable in equal monthly installments over 36 months. There
were no borrowings under this agreement as of December 31, 2000.
Approximately $100,000 of equipment purchases at December 31, 2000 will be
financed under this facility.
(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
----------- ------
2001 $ 1,649,901
2002 466,807
2003 4,544,299
2004 1,854
-----------
6,662,861
Less--Unamortized original issue discount (551,217)
Less--Amount representing interest (108,663)
-----------
6,002,981
Less--Current portion (1,581,459)
-----------
$ 4,421,522
===========
(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 annual unit quantities through June
2001. As of December 31, 2000, the minimum remaining purchase commitment is
approximately $100,000. The agreement is expected to be extended for an
additional six months ending December 2001. 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.
A-20
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(10) COMMITMENTS - (CONTINUED)
(b) Operating Leases
The Company has entered into operating leases for office and laboratory space
and motor vehicle leases, including the ITC office lease assumed by the
Company in June 2000. 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.
Future minimum rental payments due under operating lease agreements as of
December 31, 2000 are approximately as follows:
YEAR ENDING AMOUNT
----------- ------
2001 $ 865,000
2002 779,000
2003 658,000
2004 558,000
2005 551,000
Thereafter 321,000
----------
$3,732,000
==========
Rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to
approximately $797,000, $602,000 and $524,000, respectively.
(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 and a
stockholder/founder based on sales or licenses of products where they were
the sole or joint inventor. Future minimum commitments under these agreements
are approximately $30,000 per year.
In addition to the aforementioned, during the year ended December 31, 1998,
the Company entered into an agreement to pay minimum royalties of $87,500 per
quarter through September 2001 to two individuals for a product for which
these individuals own the rights. Any excess of the minimum royalties paid
over the royalties earned are creditable against future sales until
expiration of the associated patents. At December 31, 2000, approximately
$174,000 and $200,000 of minimum royalties in excess of royalties earned were
classified as prepaid expenses and other assets, respectively, on the
accompanying balance sheet.
Additionally, these individuals are entitled to $50,000 per quarter for their
product development and marketing consulting efforts through the quarter
ended June 30, 2000. The Company recorded $175,000, $200,000 and $100,000 for
such services during the years ended December 31, 2000, 1999 and 1998,
respectively.
Royalty expense under royalty agreements was $1,648,000, $838,000 and
$640,000 for the years December 31, 2000, 1999 and 1998, respectively.
A-21
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(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, 2000, 1,061,279 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, 2000, the
Company has granted 308,368 options under the 1994 Plan. As of December 31,
2000, 30,890 shares are subject to outstanding options at exercise prices of
$2.15-$8.93 per share. At December 31, 2000, pursuant to the terms of the
1994 Plan, no further options may be granted under the 1994 Plan.
1996 Stock Option Plan. The Company's 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, 2000, 394,400 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. At December 31, 2000, 205,600 shares
are available for future grants under the 1996 Plan.
The 1996 Director's Stock Plan. The Company's 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.
A-22
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(11) STOCK OPTIONS AND WARRANTS - (CONTINUED)
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, 2000, 92,500 shares are
subject to outstanding options at an exercise price of $2.38-$13.13 per
share, of which 68,889 shares are exercisable. At December 31, 2000, 57,500
shares are available for future grant under the 1996 Directors' Stock Plan.
1998 Stock Incentive Plan. The Company's 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, 2000, 660,800 shares are subject to
outstanding options at exercise prices of $1.88-$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. As of December 31, 2000, 37,170 shares are available for
future grants under the 1998 Plan.
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, 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
--------- --------
Granted 639,565 2.97
Cancelled (424,404) 5.35
Exercised (42,249) 2.44
--------- --------
Balance, December 31, 2000 2,239,868 $ 4.30
========= ========
Exercisable, December 31, 2000 1,466,284 $ 4.44
========= ========
Exercisable, December 31, 1999 1,470,903 $ 4.32
========= ========
Exercisable, December 31, 1998 1,286,891 $ 3.67
========= ========
A-23
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(11) STOCK OPTIONS AND WARRANTS - (CONTINUED)
The following detail pertains to outstanding options of the Company at
December 31, 2000:
WEIGHTED WEIGHTED AVERAGE WEIGHTED
EXERCISE PRICE AVERAGE REMAINING AVERAGE
NUMBER OF RANGE PER EXERCISE PRICE CONTRACTUAL LIFE NUMBER OF EXERCISE PRICE
SHARES SHARE PER SHARE OF SHARES PER SHARE
OUTSTANDING OUTSTANDING OUTSTANDING OPTIONS OUTSTANDING EXERCISABLE EXERCISABLE
----------- ----------- ----------- ------------------- ----------- -----------
65,786 $ .76-1.14 $ 0.99 3.23 Years 65,786 $ 0.99
1,215,753 1.88-2.75 2.26 6.68 Years 790,045 2.16
102,597 2.88-4.25 3.31 8.31 Years 40,912 3.29
235,050 4.38-6.50 4.64 8.44 Years 72,085 4.70
362,682 6.63-9.88 7.28 6.16 Years 300,955 7.22
258,000 10.00-14.63 10.70 6.21 Years 196,501 10.63
--------- ------------ ------ ------------- --------- ------
2,239,868 $ .76-14.63 $ 4.30 6.70 Years 1,466,284 $ 4.44
========= ============ ====== ============= ========= ======
The Company accounts for its stock-based compensation plans under APB Opinion
No. 25. SFAS No. 123 establishes a fair-value based method of accounting for
stock-based compensation plans.
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, 2000, 1999 and 1998 are as follows:
2000 1999 1998
----------- ----------- -----------
Risk-free interest rates 5.78%-6.72% 4.80%-6.38% 4.65%-5.72%
Expected dividend yield -- -- --
Expected lives 7 years 7 years 7 years
Expected volatility 52% 87% 66%
Weighted average grant-date fair value of options
granted during the period $ 1.76 $ 2.90 $ 4.66
The effect of applying SFAS No. 123 would be as follows for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
------------ ------------ -----------
Net loss:
As reported $ (9,595,054) $(19,052,693) $(3,679,440)
============ ============ ===========
Pro forma $(10,173,512) $(20,101,646) $(4,564,706)
============ ============ ===========
Basic and diluted net loss per common share:
As reported $ (.88) $ (1.77) $ (.36)
============ ============ ===========
Pro forma $ (.93) $ (2.10) $ (.47)
============ ============ ===========
A-24
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, 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
Granted 20,000 4.94
Exercised (99,660) 4.26
------- -----
Balance, December 31, 2000 162,081 $2.62
======= =====
Exercisable, December 31, 2000 162,081 $2.62
======= =====
Pursuant to Emerging Issues Task Force (EITF) Issue 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock, the Company believes that equity classification is
appropriate for all outstanding warrants.
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.
On April 3, 2000, in connection with the Company's pay down of debt discussed
in Note 9(b), 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
pricing model and charged such values to interest expense for the year ended
December 31, 1999.
(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 29,276 and 22,461 shares
of common stock under the Stock Plan during the years ended December 31, 2000
and 1999, respectively.
A-25
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(12) RELATED PARTY TRANSACTIONS
During the years ended December 31, 2000, 1999 and 1998, 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 plus 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 was approximately $131,000. The note agreement was extended under
similar terms to September 30, 2000 and was paid in full as of March 31,
2000.
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 June 30, 2000 under similar terms. Subsequent to year-end
approximately $11,000 of this loan has been repaid.
(13) ACCRUED EXPENSES
Accrued expenses consist of the following:
AT DECEMBER 31,
2000 1999
---------- ----------
Payroll and payroll related $1,765,165 $1,607,773
Taxes 446,944 635,530
Legal settlement 628,000 --
Other accrued expenses 2,388,737 2,386,063
---------- ----------
$5,228,846 $4,629,366
========== ==========
(14) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Revenues by country for the years ended December 31, 2000, 1999 and 1998 are
as follows:
2000 1999 1998
----------- ----------- -----------
Destination
-----------
United States $22,600,000 $18,251,000 $13,835,000
The Netherlands 2,855,000 4,565,000 2,870,000
Germany 2,344,000 2,986,000 1,872,000
France 1,218,000 1,888,000 947,000
Other 7,456,005 7,389,368 5,529,713
----------- ----------- -----------
$36,473,005 $35,079,368 $25,053,713
=========== =========== ===========
A-26
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(14) FINANCIAL INFORMATION BY GEOGRAPHIC AREA - (CONTINUED)
Long-lived assets by country as of December 31, 2000 and 1999 are as follows:
2000 1999
----------- -----------
Destination
-----------
France $ 8,968,999 $ 9,265,766
United States 5,867,621 5,201,635
Other 82,663 57,000
----------- -----------
$14,919,283 $14,524,401
=========== ===========
(15) 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.
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 cardiovascular
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 cardiovascular business unit and
the neuroscience business unit. Revenues for the cardiovascular business unit
are derived from sales of the Simon Nitinol Filter(R) (SNF) and the
CardioSEAL(R) Septal Occluder, as well as from licensing revenues from the
Company's self-expanding stents. Revenues for the neuroscience business unit
are derived from sales of cerebral spinal fluid shunts and Spetzler(TM)
Titanium Aneurysm Clips.
A-27
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(15) SEGMENT REPORTING - (CONTINUED)
The accounting policies of the business 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. Segment information is presented as follows:
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
----------- ----------- -----------
Segment Revenues:
Cardiovascular products $18,596,005 $15,058,368 $13,989,713
Neurosurgical products 17,877,000 20,021,000 11,064,000
----------- ----------- -----------
Total revenues $36,473,005 $35,079,368 $25,053,713
=========== =========== ===========
Segment Interest Income:
Cardiovascular products $ 211,098 $ 479,617 $ 1,168,056
Neurosurgical products -- -- --
----------- ----------- -----------
Total $ 211,098 $ 479,617 $ 1,168,056
=========== =========== ===========
Segment Interest Expense:
Cardiovascular products $ 1,168,556 $ 2,426,211 $ 1,324,346
Neurosurgical products 69,000 388,000 137,000
----------- ----------- -----------
Total $ 1,237,556 $ 2,814,211 $ 1,461,346
=========== =========== ===========
Segment Income Tax Provision:
Cardiovascular products $ -- $ -- $ 744,538
Neurosurgical products -- 180,000 --
----------- ----------- -----------
Total $ -- $ 180,000 $ 744,538
=========== =========== ===========
Segment Depreciation and Amortization:
Cardiovascular products $ 637,944 $ 1,071,395 $ 892,088
Neurosurgical products 519,076 966,000 499,000
----------- ----------- -----------
Total $ 1,157,020 $ 2,067,395 $ 1,391,088
=========== =========== ===========
Segment Equity in Net Loss of Investees:
Cardiovascular products $ -- $ (488,529) $ (437,145)
Neurosurgical products -- -- --
----------- ----------- -----------
Total $ -- $ (488,529) $ (437,145)
=========== =========== ===========
Segment Significant Noncash Items:
Cardiovascular products $ -- $ 1,364,369 $ 5,397,242
Neurosurgical products 7,054,106 6,801,000 --
----------- ------------ -----------
Total $ 7,054,106 $ 8,165,369 $ 5,397,242
=========== ============ ===========
Segment Income (Loss):
Cardiovascular products $ (941,331) $ (7,654,968) $(5,378,440)
Neurosurgical products (8,998,927) (8,103,000) (421,000)
----------- ------------ -----------
Total net loss $(9,940,258) $(15,757,968) $(5,799,440)
=========== ============ ===========
A-28
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(15) SEGMENT REPORTING - (CONTINUED)
Segment balance sheet information is as follows as of December 31, 2000 and
1999:
2000 1999
----------- -----------
Segment Long-Lived Tangible Assets:
Cardiovascular products $ 4,550,284 $ 3,963,402
Neurosurgical products 10,368,999 10,560,999
----------- -----------
Total $14,919,283 $14,524,401
=========== ===========
(16) VALUATION OF QUALIFYING ACCOUNTS
The following table sets forth the activity in the Company's allowance for
doubtful accounts and sales returns:
BALANCE AT UNCOLLECTIBLE
YEARS ENDED BEGINNING PROVISION FOR AMOUNTS BALANCE AT END OF
DECEMBER 31, OF PERIOD BAD DEBT AND RETURNS WRITTEN OFF OTHER ADDITIONS PERIOD
------------ --------- -------------------- ----------- --------------- ------
1998 $ 125,000 $ 596,000 $ (5,000) $ 155,000* $ 871,000
1999 871,000 185,000 (143,000) -- 913,000
2000 913,000 228,000 (62,000) -- 1,079,000
*Represents additions arising from the acquisition of ENI, net of reserves
reclassified to net assets from discontinued operations.
(17) LEGAL PROCEEDINGS
The Company is a party to the following legal proceedings that could have a
material adverse impact on the Company's results of operations or liquidity if
there were an adverse outcome. Although the Company intends to pursue its
rights in each of these matters vigorously, it cannot predict the ultimate
outcomes.
In December 1998, the Company filed a patent infringement suit in the United
States District Court for the District of Massachusetts (the "Court") against
AGA Medical Corp. ("AGA"), claiming that AGA's Amplatzer aperture occlusion
devices infringe U.S. Patent No. 5,108,420, which is licensed exclusively to the
Company. The Company is seeking an injunction to prevent further infringement 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. There is
pending before the Court a motion by AGA for summary judgment. The case is
currently in 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. 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 Elekta's breach of the same contract.
As currently pleaded, Elekta's claim seeks approximately $2 million in damages
and NMT's counterclaim seeks approximately $2 million in damages. On January
17-19, 2001, the arbitrator conducted a hearing on preliminary legal issues. On
March 15, 2001, the Arbitrator issued a partial award which for the most part
clarified certain legal issues without deciding the merits of either Elekta's
claims or the Company's counterclaims. The Arbitrator did dismiss an
approximate $314,000 portion of NMT's counter claim, but indicated, however,
that $289,000 of that portion may still be recoverable by NMT in litigation
outside the Arbitration process as "ordinary trade debts". The hearing on the
merits of Elekta's claims and the Company's counterclaims has not been
scheduled.
A-29
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(17) LEGAL PROCEEDINGS (CONTINUED)
On August 11, 2000, the Company filed a demand for arbitration before the
American Arbitration Association in Boston, Massachusetts to obtain a
determination that Bard does not have distribution rights to the Company's
Recovery Filter(TM) under the 1992 U.S. distribution agreement between the
Company and Bard Radiology, a division of Bard, and that the Company may sell
the Recovery Filter(TM) technology to a third party without violating the
agreement. Bard has filed a counterclaim seeking a contrary declaration and an
indeterminate amount of damages. Hearings are scheduled to begin on April 30,
2001.
Other than as described above, the Company has no material pending legal
proceedings.
A-30
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. (12)
2.3 Asset Purchase Agreement by and among NMT NeuroSciences (US), Inc.,
the Company and Integra Selector Corporation, dated as of March 20,
2000. (12)
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. (12)
4.2 Rights Agreement, dated as of June 7, 1999, between the Company 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. (**) (12)
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 the Company 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 the
Company, 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 the Company 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 the
Company 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. (12)
10.58 Common Stock Purchase Warrant No. BBH-1. (12)
10.59 Amendment No. 3 to Subordinated Note and Common Stock Purchase
Agreement, dated as of April 5, 2000, by and among NMT Medical,
Inc., Whitney Subordinated Debt Fund, L.P. and, for certain
purposes, J.H. Whitney & Co. (13)
10.60 First Amendment to Credit Agreement, dated as of April 5, 2000, 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 the Borrowers and Brown Brothers
Harriman & Co. as the Lender. (14)
10.61 Severance and Settlement Agreement and Release, dated as of April
8, 2000, by and between NMT Medical, Inc. and Thomas M. Tully.
(13) (**)
10.62 Employment Agreement by and between the Company and John E. Ahern,
dated as of September 21, 2000. (15) (**)
10.63 Waiver and Amendment No. 4, made as of November 13, 2000, by and
between the Company and Whitney Subordinated Debt Fund, L.P. (15)
10.64 Employment Agreement by and between the Company and Richard E.
Davis, dated as of February 14, 2000.(**)
10.65 Settlement Agreement, dated as of February 14, 2001, by and
between the Company and C. Leonard Gordon.(**)
10.66 License Agreement, dated as of October 2000, by and between the
Company and Children's Medical Center Corporation.
10.67 Termination Agreement, dated as of March 29, 2001, by and among
the Company, NMT Heart, Inc., NMT Investments Corp., NMT
NeuroSciences (International), Inc., NMT NeuroSciences (US), Inc.,
NMT NeuroSciences (IP), Inc., and NMT NeuroSciences Innovasive
Systems, Inc. and Brown Brothers Harriman & Co.
10.68 Termination Agreement, dated as of March 29, 2001, by and among
NMT NeuroSciences Implants (France) SA, NMT NeuroSciences
Instruments (France) SARL and Brown Brothers Harriman & Co.
10.69 Amendment No. 5, dated as of December 31, 2000, by and between the
Company and Whitney Subordinated Debt Fund, L.P.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
- -----------------
(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 31, 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.
(12) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
(13) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000.
(14) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.
(15) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000.
(**) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.