NMT MEDICAL INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

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

(State or Other Jurisdiction of

Incorporation or Organization)

95-4090463

(I.R.S. Employer

Identification No.)

27 Wormwood Street, Boston, Massachusetts

(Address of Principal Executive Offices)

02210-1625

(Zip Code)

Registrant’s telephone number, including area code: (617) 737-0930

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 ¨

As of November 1, 2002 there were 11,688,001 shares of Common Stock, $.001 par value per share, outstanding.

INDEX

			Page Number
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	3

		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001	4

		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

	Item 4.	Controls and Procedures	18

Part II.	Other Information

	Item 1.	Legal Proceedings	19

	Item 6.	Exhibits and Reports on Form 8-K	20

Signatures			21
Certifications			21

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NMT MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	At September 30, 2002			At December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	20,332,402		$	7,837,496
Marketable securities		16,323,152			—
Receivable from sale of product line		—			18,500,000
Accounts receivable, net of reserves of $265,000 and $566,000, respectively		2,311,254			2,418,214
Inventories		1,140,189			1,415,769
Prepaid expenses and other current assets		898,910			594,515
Assets from discontinued operations		—			6,401,409

Total current assets		41,005,907			37,167,403

Property and equipment, at cost:
Laboratory and computer equipment		1,888,468			1,643,053
Leasehold improvements		1,134,545			1,134,545
Equipment under capital lease		1,188,902			1,188,902
Office furniture and equipment		468,763			376,093

		4,680,678			4,342,593
Less—Accumulated depreciation and amortization		3,646,340			3,252,797

		1,034,338			1,089,796

Other assets		115,997			176,609

	$	42,156,242		$	38,433,808

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,048,483		$	1,862,205
Accrued expenses		3,541,922			2,538,227
Deferred gain		45,131			3,419,200
Deferred income taxes		—			2,515,000
Current portion of debt obligations		61,921			126,198
Liabilities from discontinued operations		711,412			3,539,000

Total current liabilities		6,408,869			13,999,830

Long-term debt obligations, net of current portion		—			31,655

Commitments and Contingencies (Note 13)
Stockholders’ equity:
Common stock, $.001 par value
Authorized—30,000,000 shares
Issued and outstanding—11,665,555 and 11,178,826 shares, respectively		11,666			11,179
Additional paid-in capital		44,544,148			42,963,993
Unrealized gain on marketable securities		131,000			—
Cumulative translation adjustment		—			(1,591,595	)
Accumulated deficit		(8,939,441	)		(16,981,254	)

Total stockholders’ equity		35,747,373			24,402,323

	$	42,156,242		$	38,433,808

The accompanying Notes are an integral part of these Consolidated Financial Statements.

NMT MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2002			2001			2002			2001
Revenues:
Product sales	$	5,007,307		$	6,079,412		$	19,030,260		$	17,480,790
License fees and royalties		118,434			136,403			323,074			537,549

		5,125,741			6,215,815			19,353,334			18,018,339

Costs and Expenses:
Cost of product sales		1,417,601			1,970,393			5,263,541			6,006,816
Research and development		1,488,312			949,676			4,243,655			2,915,963
General and administrative		887,101			1,609,900			4,180,647			4,963,064
Selling and marketing		1,439,131			1,014,441			3,863,207			2,720,244
Settlement of litigation		—			—			372,713			—

		5,232,145			5,544,410			17,923,763			16,606,087

Gain on sale of product line		4,000,000			—			4,000,000			—

Income from operations		3,893,596			671,405			5,429,571			1,412,252
Other Income (Expense):
Foreign currency transaction gain (loss)		6,621			3,280			53,922			(15,619	)
Interest expense		(1,452	)		(164,100	)		(7,105	)		(636,106	)
Interest income		206,357			37,340			470,038			145,403

		211,526			(123,480	)		516,855			(506,322	)

Income before income taxes		4,105,122			547,925			5,946,426			905,930
Provision for income taxes		1,572,000			—			2,278,000			—

Net income from continuing operations		2,533,122			547,925			3,668,426			905,930

Income from discontinued operations		145,345			42,000			333,060			297,000
Gain on sale of discontinued operations, including income tax benefit of $4,022,000		4,040,327			—			4,040,327			—

Net income from discontinued operations		4,185,672			42,000			4,373,387			297,000

Net income	$	6,718,794		$	589,925		$	8,041,813		$	1,202,930

Basic net income per common share:
Continuing operations	$	0.22		$	0.05		$	0.32		$	0.08
Discontinued operations		0.36			—			0.38			0.03

Net income	$	0.58		$	0.05		$	0.70		$	0.11

Diluted net income per common share:
Continuing operations	$	0.21		$	0.05		$	0.30		$	0.08
Discontinued operations		0.34			—			0.36			0.03

Net income	$	0.55		$	0.05		$	0.66		$	0.11

Weighted average common shares outstanding:
Basic		11,619,621			11,005,940			11,490,292			10,980,971

Diluted		12,221,692			11,543,678			12,181,617			11,231,557

The accompanying Notes are an integral part of these Consolidated Financial Statements.

NMT MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	2002			2001
Cash flows from operating activities:
Net income	$	8,041,813		$	1,202,930
Net income from discontinued operations		(4,373,387	)		(297,000	)

Net income from continuing operations		3,668,426			905,930
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization		427,738			461,308
Noncash interest expense relating to original issue discount		—			255,517
Decrease in accounts receivable reserves		(72,500	)		—
Stock-based compensation		(131,172	)		62,667
Tax benefit from exercise of stock options		655,000			—
Changes in assets and liabilities—
Accounts receivable		179,460			(969,210	)
Receivable from sale of product line		18,500,000			—
Inventories		275,580			586,151
Prepaid expenses and other current assets		(304,395	)		(194,378	)
Accounts payable		186,278			29,571
Accrued expenses		1,003,696			105,145
Deferred gain		(3,374,069	)		—

Net cash provided by continuing operations		21,014,042			1,242,701

Net cash provided by discontinued operations		2,204,193			618,252

Cash flows from investing activities:
Purchases of property, plant and equipment		(338,085	)		(122,318	)
Decrease in other assets		50,674			5,000
Proceeds from sale of discontinued operations, net of cash sold		4,833,000			—
Purchases of marketable securities		(16,192,152	)		—

Net cash used in investing activities		(11,646,563	)		(117,318	)

Cash flows from financing activities:
Proceeds from exercise of common stock options and warrants		852,945			90,370
Proceeds from issuance of common stock pursuant to employee stock purchase plan		203,870			71,526
Payments of capital lease obligations		(95,932	)		(193,852	)
Payments of subordinated debt		—			(1,000,000	)

Net cash provided by (used in) financing activities		960,883			(1,031,956	)

Effect of exchange rate changes on cash		(37,649	)		20,974

Net increase in cash and cash equivalents		12,494,906			732,653
Cash and cash equivalents, beginning of period		7,837,496			4,415,144

Cash and cash equivalents, end of period	$	20,332,402		$	5,147,797

Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest	$	7,105		$	266,955

Income Taxes	$	159,304		$	—

The accompanying Notes are an integral part of these Consolidated Financial Statements.

NMT MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Operations

NMT Medical, Inc. (the “Company” or “NMT”) designs, develops and markets proprietary implant technologies that allow interventional cardiologists to treat cardiac sources of stroke through minimally invasive, catheter-based 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. These products also serve the pediatric interventional cardiologist with a broad range of cardiac septal repair implants delivered with nonsurgical catheter techniques.

On November 5, 2001, the Company sold the vena cava filter product line of its cardiovascular business unit to C.R. Bard, Inc. (“Bard”) for $27 million in up front cash payments plus up to $7 million tied to certain performance and delivery milestones. Pursuant to the asset purchase agreement with Bard, the Company continued to manufacture the filter products for Bard through June 30, 2002, and, upon final transfer of manufacturing to Bard, received an additional $4 million on September 30, 2002. In addition, the Company will receive ongoing royalty payments thereafter from Bard on its manufacture and sales of the vena cava filter products (see Note 5) and will continue to pay certain royalties to the original inventor (see Note 13).

On July 31, 2002, the Company sold its neurosciences business unit, which served the needs of neurosurgeons with a range of implantable and single-use products, including cerebral spinal fluid shunts and external drainage products, to a wholly-owned subsidiary of Integra LifeSciences Holding Corporation (“Integra”), for $5.4 million in cash (see Note 6). In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the accompanying consolidated financial statements of the Company have been restated to reflect the financial results of the neurosciences business unit as discontinued operations for all periods presented.

The accompanying consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior-period amounts have been reclassified to conform to the current period’s presentation.

2. Interim Financial Statements

The accompanying consolidated financial statements at September 30, 2002, and for the three and nine month periods ended September 30, 2002 and 2001, are unaudited. In management’s opinion, these unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2001, and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for such interim periods pursuant to the rules and regulations of the Securities and Exchange Commission. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2001. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results expected for the year ending December 31, 2002.

3. Cash, Cash Equivalents and Marketable Securities

The Company considers all investments with maturities of 90 days or less from the date of purchase to be cash equivalents and all investments with original maturity dates greater than 90 days to be marketable securities.

Cash and cash equivalents, which are carried at cost and approximate market value, consist of cash, certificates of deposit and money market accounts. At September 30, 2002, an aggregate of approximately $1.2 million of certificates of deposit were restricted to collateralize bank guarantees issued in favor of the French tax authorities in connection with the Company’s appeal of a tax assessment (see Note 13).

In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company has classified its marketable securities as available-for-sale. Available-for-sale securities represent those securities that do not meet the classification of held-to-maturity and are not actively traded. In accordance with SFAS No. 115, these

NMT MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

3. Cash, Cash Equivalents and Marketable Securities (continued)

securities are reported at fair market value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’ equity.

Marketable securities at September 30, 2002 consist of various U.S. Government Agency debt instruments with maturities ranging from 12-24 months. There were $131,000 of unrealized gains recorded at September 30, 2002. Accrued interest receivable of approximately $189,000 is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet at September 30, 2002.

4. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

	September 30, 2002		December 31, 2001
Components	$	298,227	$	643,802
Finished goods		841,962		771,967

	$	1,140,189	$	1,415,769

Finished goods consist of materials, labor and manufacturing overhead.

5. Sale of Vena Cava Filter Product Line

On November 5, 2001, the Company sold the assets comprising its vena cava filter product line to Bard pursuant to an asset purchase agreement. In exchange for these assets, the Company received $8.5 million at closing and $18.5 million in January 2002, and the right to receive up to an additional $7 million tied to certain performance and delivery milestones, which amounts, if any, are to be recorded as additional gain on sale of product line in the periods in which these performance and delivery milestones are completed by the Company and/or Bard, as appropriate. The Company continued to manufacture the products for Bard through June 30, 2002 pursuant to the agreement and completed the transfer of manufacturing responsibilities to Bard in the third quarter of 2002, resulting in receipt of a $4 million payment from Bard on September 30, 2002, which has been recorded as gain on sale of product line in the quarter ended September 30, 2002. Under the manufacturing transition agreement, the Company agreed to sell vena cava filter products to Bard at a discounted price and the Company recorded the estimated aggregate discount as part of the deferred gain that was amortized to revenue over the production and sales period. During the quarter ended September 30, 2002, the Company incurred approximately $157,000 of costs associated with the vena cava filter manufacturing and ongoing royalties payable to the original inventor based upon Bard’s sales of the products, which amounts have been classified as cost of sales. Total vena cava filter product sales were approximately $5.2 million for the nine months ended September 30, 2002. Remaining in deferred gain at September 30, 2002 are estimated costs associated with certain arbitration proceedings directly attributable to the sale of the vena cava filter product line (see Note 13).

The Company will receive ongoing royalty payments from Bard on its manufacture and sales of the vena cava filter products and will continue to pay certain royalties to the original inventor (see Note 13). In addition, the Company has the right to receive up to an additional $3 million tied to the receipt by Bard of FDA approval to market certain additional vena cava filter products.

6. Sale of Neurosciences Business Unit

On July 31, 2002, the Company sold all of the outstanding stock of the companies comprising its neurosciences business unit to a wholly-owned subsidiary of Integra for $5.4 million in cash, resulting in a pre-tax gain from discontinued operations of approximately $18,000. Although the disposition of the neurosciences business unit resulted in an insignificant gain for financial reporting purposes, on a tax basis, the disposition resulted in a significant capital loss. Accordingly, the Company recorded a tax benefit of approximately $4.0 million attributable to utilization of capital losses on the sale during the quarter ended September 30, 2002.

Revenues for the neurosciences business unit were approximately $1.2 million for the month of July 2002 and $8.6 million for the nine months ended September 30, 2002, and approximately $3.6 million and $12.0 million for the three and nine months ended September 30, 2001, respectively.

NMT MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

6. Sale of Neurosciences Business Unit (continued)

The determination of the pre-tax gain on the sale of the neurosciences business unit is summarized as follows:


Cash proceeds				$	5,400,000

Net assets sold:
Current assets	$	5,590,704
Property, plant and equipment, net		87,741
Other assets		300,000
Current liabilities		(2,870,754	)
Long-term debt obligation		(12,000	)

Net assets sold	$	3,095,691			3,095,691

Write-off of cumulative translation adjustment					1,320,595
Transaction costs and related accruals					965,387

					5,381,673

Pre-tax gain				$	18,327

7. Settlement of Litigation

Effective April 4, 2002, the Company settled the outstanding arbitration with Elekta AB (publ), resulting in a net payment by the Company of approximately $388,000. The charge to operations of approximately $373,000 for the nine months ended September 30, 2002, included the settlement amount plus legal costs, reduced by the elimination of net accounts payable balances due Elekta.

8. Income Taxes

In accordance with SFAS No. 109, the Company has provided for taxes on income from continuing operations based upon its anticipated effective income tax rate. The Company anticipates an effective income tax rate of 38% of income from continuing operations, which is approximately equal to the combined federal and state income tax rates.

The tax benefit of approximately $4.0 million recorded in connection with the Company’s sale of its neurosciences business unit is expected to substantially offset the current year tax provision on income from continuing operations and the deferred tax liability previously established in connection with the 2001 sale of the Company’s vena cava filter product line to Bard (see Note 6).

9. Net Income Per Common and Common Equivalent Share

Basic and diluted net income per share are presented in conformity with SFAS No. 128, Earnings per Share, for all periods presented. In accordance with SFAS No. 128, basic net income per share was determined by dividing net income available for common shareholders by the weighted average common shares outstanding during the period. Diluted net income per share was determined by dividing net income available for common shareholders by the weighted average common shares outstanding, including potential common shares from exercise of stock options and warrants using the treasury stock method, if dilutive. Options and warrants to purchase a total of 736,049 and 604,799 common shares for the three and nine month periods ended September 30, 2002, respectively, and 225,483 and 472,483 common shares for the three and nine month periods ended September 30, 2001, respectively, have been excluded from the computation of diluted weighted average shares outstanding as they were not dilutive.

A reconciliation of the number of shares used in the calculation of basic and diluted net income per share is as follows:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2002	2001	2002	2001
Weighted average common shares outstanding	11,619,621	11,005,940	11,490,292	10,980,971
Dilutive effect of assumed exercise of stock options and warrants	602,071	537,738	691,325	250,586

Weighted average common shares outstanding assuming exercise of stock options and warrants	12,221,692	11,543,678	12,181,617	11,231,557

NMT MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

10. Stock Option Repricing

On March 1, 2001, the Company’s Board of Directors authorized an offer for employees to exchange certain options outstanding under the Company’s current stock option plans. Under this exchange offer, certain employees elected to have a total of 324,771 existing options cancelled in exchange for 133,108 new options. The new options have an exercise price of $2.19 per share, which was the fair market value of the common stock as of the date of grant. These options are subject to variable plan accounting as defined in FASB Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation. In addition, the Company granted 87,150 additional options that are subject to variable accounting under FIN 44. The Company is following the provisions of FIN 44 and revalues to market the repriced options through the date of exercise, cancellation or expiration, at each reporting date. Compensation (benefit) expense related to the repriced options was approximately ($149,000) and ($131,000) for the three and nine month periods ended September 30, 2002, respectively, and approximately $33,000 for the three and nine month periods ended September 30, 2001.

11. Foreign Currency

The accounts of the Company’s foreign subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, the accounts of these subsidiaries, all of which are associated with the neurosciences business unit, 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 (see Note 12). The cumulative foreign currency loss amounted to approximately $1.6 million as of December 31, 2001. The cumulative translation adjustment loss balance of approximately $1.3 million at July 31, 2002 was written off as part of the accounting for the sale of the neurosciences business unit in the quarter ended September 30, 2002 (see Note 6).

Additionally, the Company had foreign currency exchange transaction gains (losses) of approximately $7,000 and $54,000 for the three and nine month periods ended September 30, 2002, respectively, and $3,000 and ($16,000) for the three and nine month periods ended September 30, 2001, respectively. Foreign currency transaction gains and losses result from differences in exchange rates between the functional currency and the currency in which a transaction is denominated and are included in the consolidated statement of operations in the period in which the exchange rate changes.

As a result of the sale of the neurosciences business unit, the Company believes that its remaining foreign subsidiaries will use the U.S. dollar as the functional currency. Accordingly, foreign currency translation gains and losses will be reported as a component of income.

12. Comprehensive Income

The only components of comprehensive income reported by the Company are net income, foreign currency translation adjustments and unrealized gains and losses from available-for-sale marketable securities.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2002		2001		2002		2001
Net income	$	6,718,794	$	589,925	$	8,041,813	$	1,202,930
Foreign currency translation adjustments		19,000		114,948		271,000		(34,052	)
Unrealized gain on marketable securities		131,000		—		131,000		—

Comprehensive income	$	6,868,794	$	704,873	$	8,443,813	$	1,168,878

13. Commitments and Contingencies

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.

NMT MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

13. Commitments and Contingencies (continued)

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. On April 25, 2001, the Court granted the Company’s motion to stay all proceedings in this matter pending reexamination of the patent by the United States Patent and Trademark Office.

On or about September 24, 2001, the three French subsidiaries of the Company’s former neurosciences business unit, NMT Neurosciences Instruments SARL, NMT Neurosciences Holdings SA and NMT Neurosciences Implants SA, each received a Notification of Reassessment Following Verification of the Accounts (Notification de redressements suite à une vérification de comptabilité) from the French Direction de Controle Fiscal, Sud-est (Nice) (“Reassessment”). The French authorities are seeking from the above-named entities in excess of FF 11 million (approximately $1.5 million, assuming an exchange rate of FF 7.21 = USD 1.00) in back taxes, interest and penalties. In order to continue to appeal the Reassessment, the Company has provided the French authorities with a bank guaranty on behalf of each of the three former subsidiaries totaling approximately $1.2 million. In connection with the Company’s sale of the neurosciences business unit in July 2002 (see Note 6), the Company agreed to specifically indemnify the buyer against any liability in connection with these tax claims. Pursuant to the terms of a settlement agreement with Elekta AB, completed in early 2002 (see Note 7), a portion of any resulting tax claim may be recoverable from Elekta.

On September 11, 2001, the Company filed with Dr. Morris Simon and Beth Israel Deaconess Medical Center (“Beth Israel”) a demand for arbitration before a former judge of the Massachusetts Superior Court, in Boston, Massachusetts, seeking resolution of certain disputes over royalties payable on sales of certain existing and future products under the Technology Purchase Agreement, dated as of April 14, 1987 (“TPA”), between Dr. Simon and the Company. On September 28, 2001, Dr. Simon filed a response to the demand for arbitration, which identified one additional dispute for resolution. On October 19, 2001, the Company and Beth Israel settled their disputes by execution of a general release agreement which became effective on November 5, 2001. Dr. Simon resigned as a Director of the Company on January 22, 2002. On January 31, 2002, the parties met and attempted to mediate the matter. However, these efforts at mediation were not successful. A hearing on the merits of the disputes between the Company and Dr. Simon began during the week of June 24, 2002 and ended on September 26, 2002. On October 3 and 4, 2002, the parties submitted post-trial briefs. On October 23, 2002, the arbitrator issued an award ruling that the Company does not owe Dr. Simon past royalties with respect to the Company’s sales of its former Simon Nitinol Filter product; the Company is not in breach of the TPA between it and Dr. Simon; and the Company will be required to make royalty payments to Dr. Simon in accordance with the terms of the TPA in connection with future sales, if any, of its former “Removable Filter” product by Bard. A decision by the arbitrator on the issue of whether either party is entitled to reimbursement of all or a portion of its legal fees from the other is expected in the next several weeks.

On June 1, 2002, the Company received a Demand for Arbitration from Bio-Tech Engineering, Inc., Kevin Maughan and Ferenc Schmidt. The Demand claims that the Company is in breach of a contract dated July 1, 1998 due to a failure and refusal to perform its duties under the contract to manufacture and market surgical clips and mini-clips pursuant to a license and technology agreement dated May 10, 1994, which the Company assumed by agreement dated July 1, 1998 from Elekta Instruments, Inc. The parties have sent notice of their respective preference for an arbitrator to the American Arbitration Association (“AAA”). The Company expects the AAA to select an arbitrator shortly. Thereafter, the parties will proceed with discovery. At this early stage in the case, the Company is unable to express an opinion as to the likely outcome of this matter.

Other than as described above, the Company has no material pending legal proceedings.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q, other than the historical financial information, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievement of the Company to be materially different from any future results, performance, or achievement expressed or implied by such forward-looking statements. Factors that might cause such a difference include those described below under “Certain Factors That May Affect Future Results”.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are particularly important to the portrayal and understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, the Company’s management uses its judgment in making certain assumptions and estimates. Our critical accounting policies include:

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Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, as amended by Staff Accounting Bulletins 101A and 101B. These bulletins require that four basic criteria must be satisfied before revenue can be recognized:

1. Persuasive evidence of an arrangement between the Company and a third party exists;

2. Title to the product has transferred to the customer and the Company has no significant post-delivery obligations;

3. The sales price for the product is fixed or determinable; and

4. Collection of the sales price is probable.

Our management uses its judgment concerning the satisfaction of these criteria, particularly No. 4 relating to the collectability of the receivables relating to such sales. Should changes and conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any period could be adversely affected. The Company recognizes license fees and royalties as they are earned in accordance with relevant contractual provisions. Note 5 of Notes to Consolidated Financial Statements provides additional information relating to our accounting for vena cava filter product revenues under our transitional manufacturing agreement with Bard.

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Inventories

The Company states its inventories at the lower of cost (first-in, first-out) or market. The Company records reserves for slow moving and obsolete inventories based on its historical experience and current product demand. The Company evaluates the adequacy of these reserves quarterly.

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Legal Contingencies

We are currently involved in certain legal proceedings. In connection with these legal proceedings, which we discuss in Note 13 of Notes to Consolidated Financial Statements, management periodically reviews estimates of potential costs to be incurred by the Company in connection with the adjudication or settlement, if any, of these proceedings. These estimates are developed in consultation with outside counsel and are based on an analysis of potential litigation outcomes and settlement strategies. In accordance with FASB Statement No. 5, Accounting for Contingencies, loss contingencies are accrued if, in the opinion of management, an adverse outcome is probable and such outcome can be reasonably estimated. We do not believe that these proceedings will have a material adverse effect on our financial position; however, it is possible that future results for any particular quarter or annual period may be materially affected by changes in our assumptions or the effectiveness of our strategies relating to these proceedings.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2001

Revenues. CardioSEAL^® and STARFlex^® cardiac septal repair implant sales for the three months ended September 30, 2002 increased by approximately $1.0 million, or 25.8%, to approximately $5.0 million from approximately $4.0 million for the three months ended September 30, 2001. The Company believes that the increase resulted from the growing awareness within the medical community that closing a patent foramen ovale (“PFO”) in certain subsets of stroke patients offers an alternative to ongoing drug therapy. The Company had no vena cava filter product sales for the three months ended September 30, 2002, as a result of the completion of the transitional manufacturing agreement with Bard during the quarter ended June 30, 2002, as compared to approximately $2.1 million of vena cava filter product sales for the three months ended September 30, 2001. In the aggregate, product sales for the three months ended September 30, 2002 decreased 17.6% to approximately $5.0 million compared to $6.1 million for the three months ended September 30, 2001. Including license fees and royalties, total revenue for the three months ended September 30, 2002 decreased by approximately 17.5%, or $1.1 million, to approximately $5.1 million compared to approximately $6.2 million for the three months ended September 30, 2001.

Cost of Product Sales. CardioSEAL^® and STARFlex^® cardiac septal repair implant cost of product sales increased 23.7% to approximately $1.2 million for the three months ended September 30, 2002 from approximately $937,000 for the three months ended September 30, 2001. Cost of CardioSEAL^® and STARFlex^® product sales, as a percentage of product sales, decreased marginally to 23.3% for the three months ended September 30, 2002 as compared to 23.7% for the three months ended September 30, 2001. Vena cava filter cost of product sales, as a percentage of sales, was approximately 47.7% for the three months ended September 30, 2001. During the three months ended September 30, 2002, the Company incurred approximately $157,000 of costs associated with the vena cava filter manufacturing and ongoing royalties to the original inventor based upon Bard’s sales of the products that have been classified as cost of sales. In the aggregate, cost of product sales as a percentage of product sales was 28.3% and 32.4% for the three months ended September 30, 2002 and 2001, respectively. The current period decrease is primarily attributable to the higher cost of sales as a percentage of sales for the vena cava filter products in 2001.

Research and Development. Research and development expenses increased by 56.7% or $538,000 to approximately $1.5 million for the three months ended September 30, 2002 from approximately $950,000 for the three months ended September 30, 2001. The increase is primarily attributable to a combination of increased headcount and contract product development for ongoing research and development programs related to CardioSEAL^® and STARFlex^® enhancements and accessories, next generation PFO closure platforms, research into the use of novel materials and related patent legal costs. The Company intends to continue its investments in these areas.

General and Administrative. General and administrative expenses decreased by 44.9%, or $723,000 to approximately $900,000 for the three months ended September 30, 2002 from approximately $1.6 million for the three months ended September 30, 2001. This decrease is primarily attributable to reduced legal costs related to ongoing litigation and arbitration proceedings and reduced compensation expense related to stock option repricing (see Note 10 of Notes to Consolidated Financial Statements).

Selling and Marketing. Selling and marketing expenses increased by 41.9% or $425,000 to approximately $1.4 million for the three months ended September 30, 2002 from approximately $1.0 million for the three months ended September 30, 2001. This increase is primarily attributable to increased headcount and related personnel costs and marketing programs in support of CardioSEAL^® and STARFlex^® product lines in the U.S. and Europe. At September 30, 2002 and 2001, there were a total of 16 and nine worldwide direct sales reps, respectively.

Gain on Sale of Product Line. The Company recorded an additional $4.0 million gain on sale of product line for the three months ended September 30, 2002. This gain, representing a portion of the contingent consideration associated with the November 2001 sale of the Company’s vena cava filter product line to Bard, was realized upon the transfer of all vena cava filter manufacturing responsibilities to Bard, resulting in the receipt by the Company of a $4 million payment from Bard on September 30, 2002 (see Note 5 of Notes to Consolidated Financial Statements).

Interest Expense. Interest expense for the three months ended September 30, 2002 was $1,000 compared to $164,000 for the three months ended September 30, 2001. The decrease is directly attributable to the Company’s payment in full of the $5.3 million remaining balance of its subordinated debt in April and November of 2001.

Interest Income. Interest income for the three months ended September 30, 2002 was approximately $206,000 compared to $37,000 for the three months ended September 30, 2001. This increase was primarily attributable to an increase in average interest bearing cash and marketable securities balances of approximately $23 million during the

three months ended September 30, 2002, resulting primarily from the sale of the vena cava filter product line to Bard and the sale of the neurosciences business unit to Integra.

Income Tax Provision. The Company’s income tax provision for the three months ended September 30, 2002 of approximately $1.6 million, or approximately 38.0% of income before income taxes, is approximately equal to the estimated combined statutory federal and state tax rate of 40%. There was no income tax provision for the three months ended September 30, 2001 as a result of the utilization of net operating loss carryforwards.

Net Income from Discontinued Operations. Net income from the discontinued neurosciences business unit was approximately $145,000 for the three months ended September 30, 2002 as compared to net income of $42,000 for the three months ended September 30, 2001. This increase is primarily attributable to decreased general and administrative expenses and decreased foreign currency transaction losses for the period through July 31, 2002, the effective date of the sale of the neurosciences business unit.

Gain on Sale of Discontinued Operations. The Company recorded a pre-tax gain of approximately $18,000 on the sale of the stock of the subsidiaries which comprised its neurosciences business unit, effective July 31, 2002 (see Note 6 of Notes to Consolidated Financial Statements). The approximate $4.0 million tax benefit recorded in connection with the utilization of capital losses on the sale transaction substantially offset all of the Company’s current and deferred tax liabilities.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001

Revenues. CardioSEAL^® and STARFlex^® cardiac septal repair implant sales for the nine months ended September 30, 2002 increased by approximately $3.2 million, or 30.3%, to approximately $13.8 million from approximately $10.6 million for the nine months ended September 30, 2001. The Company believes that the increase resulted from the growing awareness within the medical community that closing a PFO in certain subsets of stroke patients offers an alternative to ongoing drug therapy. Vena cava filter product sales, which concluded during the second quarter under the Company’s transitional manufacturing agreement with Bard, decreased for the nine months ended September 30, 2002 by approximately $1.7 million, or 24.9%, to approximately $5.2 million from approximately $6.9 million for the nine months ended September 30, 2001. In the aggregate, product sales for the nine months ended September 30, 2002 increased by approximately 8.9%, or $1.5 million, to approximately $19.0 million compared to approximately $17.5 million for the nine months ended September 30, 2001. Including license fees and royalties, total revenues for the nine months ended September 30, 2002 increased by approximately 7.4%, or $1.3 million, to approximately $19.4 million compared to approximately $18.0 million for the nine months ended September 30, 2001.

Cost of Product Sales. CardioSEAL^® and STARFlex^® cardiac septal repair implant cost of product sales increased 23.0% to approximately $3.2 million for the nine months ended September 30, 2002 from approximately $2.6 million for the nine months ended September 30, 2001. Cost of CardioSEAL^® and STARFlex^® product sales, as a percentage of product sales, decreased to 23.1% for the nine months ended September 30, 2002 as compared to 24.5% for the nine months ended September 30, 2001. Vena cava filter cost of product sales as a percentage of sales was approximately 37.4% and 49.5% for the nine months ended September 30, 2002 and 2001, respectively. This decrease was primarily attributable to reduced royalty expense associated with the repurchase of certain royalty rights in connection with the sale of the vena cava filter product line to Bard and prototype manufacturing costs incurred in 2001 related to the removable filter. In the aggregate, cost of product sales as a percentage of product sales was 27.7% and 34.4% for the nine months ended September 30, 2002 and 2001, respectively.

Research and Development. Research and development expenses increased by 45.5% or $1.3 million to approximately $4.2 million for the nine months ended September 30, 2002 from approximately $2.9 million for the nine months ended September 30, 2001. The increase is primarily attributable to a combination of increased headcount and contract product development for ongoing research and development programs related to CardioSEAL^® and STARFlex^® enhancements and accessories, next generation PFO closure platforms, research into the use of novel materials and related patent legal costs. The Company intends to continue its investments in these areas.

General and Administrative. General and administrative expenses decreased by 15.8% or $782,000 to approximately $4.2 million for the nine months ended September 30, 2002 from approximately $5.0 million for the nine months ended September 30, 2001. The decrease is primarily attributable to reduced legal costs related to ongoing litigation and arbitration proceedings and reduced compensation expense related to stock option repricing (see Note 10 of Notes to Consolidated Financial Statements).

Selling and Marketing. Selling and marketing expenses increased by 42.0% or $1.2 million to approximately $3.9 million for the nine months ended September 30, 2002 from approximately $2.7 million for the nine months ended September 30, 2001. This increase was largely attributable to increased headcount and related personnel costs and

marketing programs in support of CardioSEAL^® and STARFlex^® product lines in the U.S. and Europe. At September 30, 2002 and 2001, there were a total of 16 and nine worldwide direct sales reps, respectively.

Settlement of Litigation. During the three months ended March 31, 2002, the Company recorded a charge of $373,000 associated with the settlement, effective as of April 4, 2002, of the arbitration proceedings with Elekta AB related to the Company’s 1998 acquisition of its neurosciences business unit. This charge consisted of a settlement amount of approximately $388,000 plus legal costs, reduced by the elimination of net accounts payable balances to Elekta AB (see Note 7 of Notes to Consolidated Financial Statements).

Gain on Sale of Product Line. The Company recorded an additional $4.0 million gain on sale of product line for the nine months ended September 30, 2002. This gain, representing a portion of the contingent consideration associated with the November 2001 sale of the Company’s vena cava filter product line to Bard, was realized upon the transfer of all manufacturing responsibilities to Bard, resulting in the receipt by the Company of a $4 million payment from Bard on September 30, 2002 (see Note 5 of Notes to Consolidated Financial Statements).

Interest Expense. Interest expense for the nine months ended September 30, 2002 was approximately $7,000 compared to $636,000 for the nine months ended September 30, 2001. The decrease is directly attributable to the Company’s payment in full of the $5.3 million remaining balance of its subordinated debt in April and November of 2001.

Interest Income. Interest income for the nine months ended September 30, 2002 was approximately $470,000 compared to approximately $145,000 for the nine months ended September 30, 2001. This increase was primarily attributable to an increase in average interest bearing cash and marketable securities balances of approximately $21 million during the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001, resulting primarily from the sale of the vena cava filter product line to Bard and the sale of the neurosciences business unit to Integra, partially offset by a reduction in money market interest rates.

Income Tax Provision. The Company’s income tax provision for the nine months ended September 30, 2002 of approximately $2.3 million, or approximately 38.0% of income before income taxes, is approximately equal to the estimated combined statutory federal and state tax rate of 40%. There was no income tax provision for the nine months ended September 30, 2001 as a result of the utilization of net operating loss carryforwards.

Net Income from Discontinued Operations. Net income from the discontinued neurosciences business unit was $333,000 for the nine months ended September 30, 2002 as compared to net income of $297,000 for the nine months ended September 30, 2001. This change is primarily attributable to decreased neurosciences product sales and increased foreign currency translation losses related to the strengthening of the Euro against the U.S. dollar, offset by reduced general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash, cash equivalents and marketable securities of approximately $36.6 million at September 30, 2002, as compared to $7.8 million at December 31, 2001. During the nine months ended September 30, 2002, the Company’s continuing operations provided cash of approximately $21.0 million, which consisted of $18.5 million of additional cash proceeds from the 2001 sale of the vena cava filter product line, approximately $3.7 million of net income and approximately $900,000 of net non-cash charges, offset by an approximate $2.1 million net decrease in other working capital items.

At September 30, 2002, approximately $1.2 million of certificates of deposit were restricted to collateralize bank guarantees issued in favor of the French tax authorities in connection with the Company’s appeal of a tax assessment (see Note 13 of Notes to Consolidated Financial Statements).

During the nine months ended September 30, 2002, the Company has not engaged in:

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material off-balance sheet activities, including the use of structured finance or special purpose entities;

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trading activities in non-exchange traded contracts; or

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transactions with persons or entities that benefit from their non-independent relationship with the Company.

Debt obligations at September 30, 2002 consist of capital lease liabilities of approximately $62,000 due in monthly installments through September 2003.

Purchases of property and equipment for use in the Company’s manufacturing, research and development and general and administrative activities amounted to approximately $338,000 for the nine months ended September 30, 2002.

The Company is party to various contractual arrangements, including royalty arrangements and employment and consulting agreements with current employees and consultants. There are no minimum guaranteed royalty payments for the balance of 2002. 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 others require termination or severance payments as part of any early termination.

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 the end of 2003.

Euro Conversion

The Company has conducted a substantial portion of its business with the member countries of the European Union and, accordingly, its existing systems have been generally capable of accommodating multiple currencies, including the Euro. The Company’s former neurosciences business unit, headquartered in France, converted its accounting systems to the Euro prior to December 31, 2001. As of September 30, 2002, the impact of the Euro conversion has not had a material impact on the operations of the Company. The sale of the neurosciences business unit in July 2002 (see Note 6 of Notes to Consolidated Financial Statements) will significantly reduce the effect of the Euro on the operations of the Company.

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 Quarterly Report on Form 10-Q and presented elsewhere by management from time to time.

WE MAY FACE CHALLENGES IN EXECUTING OUR FOCUSED BUSINESS STRATEGY.

In connection with the commercialization of our CardioSEAL^® and STARFlex^® products, and the recent sale of our neurosciences business unit and our vena cava filter product line, we have focused our business growth strategy to concentrate on the manufacturing, marketing and selling of our CardioSEAL^® and STARFlex^® cardiac septal repair implant devices. Our future sales growth and financial results are highly dependent upon the growth of sales of this product line. CardioSEAL^® and STARFlex^® product sales may not grow as quickly as we expect for various reasons, including, but not limited to, costs and delays in receiving further FDA approvals, difficulties in recruiting additional experienced sales and marketing personnel and increased competition. This focus has placed significant demands on a relatively new senior management team and other resources. Our future success will depend on our ability to manage and implement our focused business strategy effectively, including by:

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improving our sales and marketing capabilities;

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continuing to train, motivate and manage our employees; and

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developing and improving our operational, financial and other internal systems.

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, we may be required to conduct further research, product development, preclinical and clinical testing and obtain additional governmental regulatory approvals. We cannot be certain that our current products, or products currently under development, will achieve or continue to have market acceptance. Certain of the medical indications that can be treated by our devices can also be treated by surgery, drugs or other medical devices. Currently, the medical community widely accepts many alternative treatments, and these other treatments have a long history of use. We cannot be certain that our devices and procedures

will be able to replace such established treatments or that either physicians or the medical community, in general, will accept and utilize our devices or any other medical products that we may develop. In addition, our future success depends, in part, on our ability to develop additional products. Even if we determine that a product candidate has medical benefits, the cost of commercializing that product candidate may be too high to justify development. In addition, competitors may develop products that are more effective, cost less or are ready for commercial introduction before our products. If we are unable to develop additional, commercially viable products, our future prospects will be limited.

AS A RESULT OF GOVERNMENT REGULATIONS, THE UNCERTAINTY OF OBTAINING REGULATORY APPROVALS MAY RESULT IN 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 Company intends to seek additional regulatory approvals for certain of its current and future products. These regulatory approval processes are 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:

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delays in receipt of, or failure to receive, regulatory approvals or clearances;

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the loss of previously received approvals or clearances;

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limitations on the intended use of a device imposed as a condition of regulatory approvals or clearances; or

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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.

INTENSE INDUSTRY COMPETITION FOR QUALIFIED SENIOR EXECUTIVES AND 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.

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:

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any pending patent applications or any future patent application will result in issued patents;

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the scope of any patent protection will exclude competitors or provide competitive advantages to us;

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any of our patents will be held valid if subsequently challenged; or

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others will not claim rights in or ownership of the patents and other proprietary rights held by us.

Furthermore, we cannot be certain that others have not or will not develop similar products, duplicate any of our products or design around any patents issued or that may be issued in the future to us or to our licensors. Whether or not patents are issued to us or to our licensors, others may hold or receive patents which contain claims having a scope that covers products developed by us. We could incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by 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 2012 to 2017. 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.

OUR LIMITED MANUFACTURING HISTORY AND THE POSSIBILITY OF NON-COMPLIANCE WITH MANUFACTURING REGULATIONS RAISE UNCERTAINTIES WITH RESPECT TO OUR ABILITY TO COMMERCIALIZE FUTURE PRODUCTS.

We have a limited history in manufacturing our CardioSEAL^® and STARFlex^® cardiac septal repair implant devices, and we may face difficulties as the commercialization of our products and the medical device industry changes. Increases in our manufacturing costs, or significant delays in our manufacturing process, could have a material adverse effect on our business, financial condition and results of operations.

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 cardiac septal repair implant devices are marketed primarily through our direct sales force. Because we had 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^® and STARFlex^® cardiac septal repair implant devices, 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 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.

AN ADVERSE OUTCOME IN ANY LITIGATION WE ARE CURRENTLY INVOLVED IN COULD AFFECT OUR FINANCIAL CONDITION.

We are currently involved in the litigation of several disputes as described in Item 1 of Part II (Legal Proceedings). An adverse outcome in any one of these disputes could result in substantial monetary damages and, therefore, negatively impact our financial condition or results of operations.

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.

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.

THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK COULD LIMIT INVESTORS’ ABILITY TO INFLUENCE CORPORATE ACTIONS.

The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change in control of the Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the Company and might affect the market price of our common stock. Whitney & Co. and related entities own approximately 21.5% of our outstanding common stock. As a result, this stockholder is able to influence the outcome of matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2002 and December 31, 2001, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107 or Item 305 of Regulation S-K. The Company’s investments are primarily short-term money market accounts and U.S. Government Agency debt instruments that are carried on the Company’s books at fair value, which approximates cost. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments.

The Company is subject to market risk in the form of foreign currency risk. Although the Company has decreased the extent of its international operations following the sale of its neurosciences business unit in July 2002 (see Note 6 of Notes to Consolidated Financial Statements), the Company will continue to denominate certain sales and incur certain costs in non-U.S. currencies. 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 have related to the manufacturing activities and assets of its former neurosciences business unit in France. The Company translated 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 were translated at the rate of exchange in effect at the end of each reporting period, while stockholders’ equity was translated at historical rates. Revenue and expense accounts were translated using the weighted average exchange rate in effect during the relevant periods. The Company recorded the effects of changes in balance sheet items (i.e., cumulative foreign currency translation gains and losses) as a component of consolidated stockholders’ equity, the balance of which at July 31, 2002 was written off in connection with the accounting for the sale of the Company’s neurosciences business unit (see Note 6 of Notes to Consolidated Financial Statements).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and are operating in an effective manner.

Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On or about September 24, 2001, the three French subsidiaries of the Company’s former neurosciences business unit, NMT Neurosciences Instruments SARL, NMT Neurosciences Holdings SA and NMT Neurosciences Implants SA, each received a Notification of Reassessment Following Verification of the Accounts (Notification de redressements suite à une vérification de comptabilité) from the French Direction de Controle Fiscal, Sud-est (Nice) (“Reassessment”). The French authorities are seeking from the above-named entities in excess of FF 11 million (approximately $1.5 million, assuming an exchange rate of FF 7.21 = USD 1.00) in back taxes, interest and penalties. In order to continue to appeal the Reassessment, the Company has agreed to provide the French authorities with a bank guaranty on behalf of each of the three former subsidiaries totaling approximately $1.2 million. In connection with the Company’s sale of the neurosciences business unit in July 2002 (see Note 6 of Notes to Consolidated Financial Statements), the Company agreed to specifically indemnify the buyer against any liability in connection with these tax claims. Pursuant to the terms of a settlement agreement with Elekta AB, completed in early 2002 (see Note 7 of Notes to Consolidated Financial Statements), a portion of any resulting tax claim may be recoverable from Elekta.

On September 11, 2001, the Company filed with Dr. Morris Simon and Beth Israel Deaconess Medical Center (“Beth Israel”) a demand for arbitration before a former judge of the Massachusetts Superior Court, in Boston, Massachusetts, seeking resolution of certain disputes over royalties payable on sales of certain existing and future products under the Technology Purchase Agreement, dated as of April 14, 1987 (“TPA”), between Dr. Simon and the Company. On September 28, 2001, Dr. Simon filed a response to the demand for arbitration, which identified one additional dispute for resolution. On October 19, 2001, the Company and Beth Israel settled their disputes by execution of a general release agreement which became effective on November 5, 2001. Dr. Simon resigned as a Director of the Company on January 22, 2002. On January 31, 2002, the parties met and attempted to mediate the matter. However, these efforts at mediation were not successful. A hearing on the merits of the disputes between the Company and Dr. Simon began during the week of June 24, 2002 and ended on September 26, 2002. On October 3 and 4, 2002 the parties submitted post-trial briefs. On October 23, 2002, the arbitrator issued an award ruling that the Company does not owe Dr. Simon past royalties with respect to the Company’s sales of its former Simon Nitinol Filter product; the Company is not in breach of the TPA between it and Dr. Simon; and the Company will be required to make royalty payments to Dr. Simon in accordance with the terms of the TPA in connection future sales, if any, of its former “Removable Filter” product by Bard. A decision by the arbitrator on the issue of whether either party is entitled to reimbursement of all or a portion of its legal fees from the other is expected in the next several weeks.

Other than as described above, the Company has no material pending legal proceedings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

On July 1, 2002, the Company filed a Current Report on Form 8-K to report that on June 28, 2002, the Company’s Board of Directors, through its Audit Committee, had decided to no longer engage Arthur Andersen LLP as the Company’s independent public accountants and to engage Ernst & Young LLP instead.

On August 14, 2002, the Company filed a Current Report on Form 8-K to report that, effective July 31, 2002, the Company completed the sale of its neurosciences business unit to Integra LifeSciences Corporation.

On October 28, 2002, the Company filed a Current Report on Form 8-K to report that the Company had received notification of an award issued in connection with the Company’s outstanding arbitration with Dr. Morris Simon, a former director of the Company.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NMT MEDICAL, INC.

Date: November 5, 2002

By: /s/ JOHN E. AHERN

John E. Ahern

President and Chief Executive Officer

Date: November 5, 2002

By: /s/ RICHARD E. DAVIS

Richard E. Davis

Vice President and Chief Financial Officer

CERTIFICATIONS

I, John E. Ahern, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NMT Medical, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 5, 2002				/s/ JOHN E. AHERN
				John E. Ahern President and Chief Executive Officer (principal executive officer)

CERTIFICATIONS

I, Richard E. Davis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NMT Medical, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 5, 2002				/s/ RICHARD E. DAVIS
				Richard E. Davis Vice President and Chief Financial Officer (principal financial officer)

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