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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant To Sections 13 or 15(d) of the Securities Exchange
Act Of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant To Sections 13 or 15(d) of the Securities
Exchange Act Of 1934
For the transition period from ____________ to ____________.
Commission File No. 0-21001
NITINOL MEDICAL TECHNOLOGIES, INC.
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(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 Sections 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 Common Stock held by nonaffiliates of
the registrant on March 6, 1998, was $58,552,278, based on the last reported
sale prices of the registrant's Common Stock on the Nasdaq National Market on
that date. Registrant had 9,823,186 shares of Common Stock outstanding as of
March 6, 1998.
Documents Incorporated By Reference
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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 with respect to the Annual Part III
Meeting of Stockholders to be held on
June 3, 1998
PART I
ITEM I. BUSINESS
OVERVIEW
Nitinol Medical Technologies, 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. These products offer alternative approaches to complex medical
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 (the Simon Nitinol Filter or "SNF") and septal repair devices (the
CardioSEAL Septal Occluder). The Company's strategy is to develop and
commercialize a broad range of advanced medical devices for minimally invasive
applications to address unmet medical needs. At this time, the Company's stents
have been commercially launched in Europe and in the United States for certain
indications, its vena cava filters are marketed in the United States and abroad,
and the CardioSEAL Septal Occluder is in clinical trials in the United States
and is sold commercially in Europe and other international markets.
The Company has established agreements with Boston Scientific and Bard Radiology
("Bard"), worldwide leaders in sales of minimally invasive medical devices, for
the distribution, sale and marketing of its stents and its Simon Nitinol Filter,
respectively. The Company intends to continue to market products with extensive
distribution requirements through collaborations with established market
leaders. For products with smaller and more easily accessible user groups (such
as the CardioSEAL Septal Occluder) NMT has developed and intends to continue to
develop direct marketing and distribution capabilities.
BACKGROUND
The Company was founded in July 1986 to develop and commercialize medical
devices using nitinol. In April 1990, the Company obtained clearance from the
Food and Drug Administration (the "FDA") to market its initial product, the
Simon Nitinol Filter, in the United States. The Company entered into an
exclusive distribution agreement with Bard for distribution of the SNF in the
United States and certain other countries in May 1992. The Company's primary
stent patent was issued in November 1994 and, during the same month, the Company
entered into an exclusive license agreement with Boston Scientific to further
develop, manufacture, market and distribute NMT's stents
worldwide. In November 1995, the Company expanded its relationship with Bard by
granting Bard International the right to distribute the SNF in most markets
outside the United States. In February 1996, the Company acquired the rights to
its CardioSEAL Septal Occluder to expand its product base and complement its
core technologies. In furtherance of the Company's strategy to develop and
commercialize a broad range of advanced medical technologies for minimally
invasive applications, in May 1997, the Company acquired a 23% ownership
interest in Image Technologies Corporation ("ITC"), a privately held company
that is developing a line of advanced imaging products for minimally invasive
surgery.
CORE TECHNOLOGIES
NMT has developed an expertise in precisely engineering nitinol and other
advanced materials, such as MP35N, for a variety of innovative medical device
applications. The Company has developed capabilities in advanced device
fabrication, materials characterization, manufacturing and process control and
sophisticated in vitro testing resulting in highly efficient and reliable
manufacturing processes.
Nitinol, a nickel-titanium alloy, has unique superelastic and thermal shape-
memory characteristics. The superelastic characteristics enable a nitinol-based
device to undergo severe deformation without permanent damage to either its
shape or strength. The thermal shape-memory characteristics of nitinol enable a
device which has been radically deformed to return to its intended shape in
response to a small change in temperature. The mechanical properties that can be
engineered into nitinol-based devices permit innovative product designs that
presently would be difficult or impossible to replicate with other materials.
The Company utilizes the thermal shape-memory characteristic of nitinol for
medical device applications. The Company has demonstrated its ability to
utilize this characteristic to provide for ease of access and delivery of
sophisticated medical devices that transform into their intended shape once
placed into the body. Nitinol is biocompatible and non-ferromagnetic, thereby
allowing the use of magnetic resonance imaging on patients with nitinol-based
device implants.
MP35N is an advanced metal alloy which is biocompatible and resistant to
corrosion and fatigue. The Company has combined the use of MP35N with knitted
polyester in developing the CardioSEAL Septal Occluder. Knitted polyester, a
biocompatible fabric that encourages tissue in-growth, has been extensively used
in the vasculature for many years.
2
PRODUCTS
Stents
Stents are small tubes that hold open arteries, veins and other passageways in
the body, such as the bile duct, that have closed or become obstructed as a
result of disease, trauma or aging. Stents are placed in the body using
catheter-based delivery systems in minimally invasive procedures. Once
deployed, they exert radial force against the walls of passageways to enable
such passageways to remain open and functional. A number of different stent
designs, materials and delivery systems, with varying characteristics are
currently available. The three most prevalent stent designs are slotted tubes
(a metal tube from which most of the material is removed, resulting in a
lattice-like structure), coiled stents (continuous coiled wire) and wire mesh
stents (knitted metal wire). Most stents are currently manufactured using
stainless steel or similar alloys and are deployed through the expansion of a
balloon on a catheter-based delivery system. After deployment, a second balloon
may be used to further expand the stent. Certain stents, including the
Company's, are self-expanding, thereby eliminating the need for a balloon on the
delivery catheter. The factors influencing the performance of a stent include
ease of deployment, radial strength, flexibility, stability and the ability to
achieve precise placement.
Stents have emerged as one of the fastest growing segments of the medical device
market and 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.
NMT's Hex-cell Stents. The Company has developed and patented a nitinol stent
which relies on a novel hexagonal cell (hex-cell) design. NMT's stents can be
customized into a variety of sizes, shapes, flexibilities and radial force
characteristics for use in treating specific indications. The Company utilizes
the thermal shape-memory characteristic of nitinol to provide for ease of access
and delivery of its stents which transform into their intended shape once placed
into the body.
Market Opportunity. From its infancy in 1990, the stent market has grown to
estimated worldwide sales in excess of $1 billion in 1997, with continued growth
expected. To date, most stents have been used for the treatment of
atherosclerotic plaque in the coronary arteries. The Company believes that the
increase in stent usage for other procedures and indications has been limited,
in part, by the characteristics of stents currently available. NMT believes that
its stents may offer certain advantages over currently available stents and, in
connection with its collaboration with Boston Scientific, is actively pursuing
the development of its stents in each of the market segments described below.
3
Peripheral Vascular. Existing stents for vascular disease include both balloon-
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expandable and self-expanding stents. While stent use is well established in
the larger vessels such as the iliac arteries, currently available stents have
limitations in their use in the smaller, more exposed vessels of the leg due to
difficulty of placement, insufficient radial strength and flexibility and a
higher risk of clot formation.
The Company believes that its stents may offer advantages over currently
available stents in flexibility, radial strength and placement. NMT's stents
have precisely engineered radial strength, cannot be permanently deformed after
deployment, and can be delivered using a small diameter catheter. Boston
Scientific has commercially launched the Company's stents for peripheral
vascular use in Europe and is currently conducting multi-center clinical trials
for this indication in the United States.
Carotid Arteries. While some stenting of the carotid arteries (located near the
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surface of the neck) is being done experimentally, the Company believes that the
characteristics of current stents limit their utility in the carotid arteries.
Balloon expandable stents require occluding blood flow to the brain during
deployment. In addition, balloon expandable stents can be permanently deformed
by compression or trauma to the stented vessel.
The Company believes its stents will not require occluding blood flow to the
brain during deployment and, unlike currently available balloon expandable
stents, cannot be permanently deformed after deployment, thereby preventing
accidental closure of the vessel. In addition, the Company believes that its
stents can be engineered to exert precise radial force to prevent movement, are
designed to conform well to the vessel shape, have minimal length change during
deployment for highly accurate placement, and can be delivered by a small
diameter catheter.
Biliary. Existing stents for tumor ingrowth of the bile duct primarily include
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plastic and self-expanding wire mesh stents. Plastic stents can become blocked
rather quickly because of their narrow diameter, and the wire mesh stents, due
to their mesh design, may not resist further tumor growth.
The Company believes that its stents may have advantages for this indication.
NMT's stents have a large expansion ratio for delivery of a large diameter stent
on a small diameter catheter and exert sustained radial force which may resist
recoil from continued tumor growth. Boston Scientific has commercially launched
the Company's stents for biliary use in Europe and in the United States.
Coronary Arteries. Existing stents for coronary disease include balloon-
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expandable or self-expanding wire mesh stents.
4
The Company believes that its stents may have advantages over other stents for
use in coronary arteries. NMT's stents are self-expanding to avoid balloon
occlusion of the vessel during placement, may not require post-deployment
ballooning, and exhibit minimal length change during deployment for highly
accurate placement.
Relationship with Boston Scientific. In November 1994, NMT licensed to Boston
Scientific, a worldwide leader in sales of minimally invasive medical devices,
exclusive worldwide rights to develop, manufacture, market and distribute the
Company's stent technology. Boston Scientific is the leader in the peripheral
angioplasty market, a leader in the vascular graft market and a leader in the
coronary angioplasty market. Under the terms of this agreement, Boston
Scientific funds, and has control over, product development, manufacturing
scale-up, clinical trials, marketing and distribution worldwide and has the sole
right to use the patents and technical information owned by NMT related to
stents. NMT receives a sales royalty, milestone payments, minimum license fees,
manufacturing cost reduction incentives and reimbursement of development costs.
Boston Scientific has assumed responsibility for conducting the necessary
preclinical and clinical studies, obtaining the regulatory approvals it deems
necessary, and manufacturing and marketing NMT's stents worldwide.
Boston Scientific is not prohibited from selling competing stents and has
established a broad-based stent program. In addition to its collaboration with
the Company, Boston Scientific has obtained exclusive worldwide rights to
Medinol, Ltd.'s (NIR) balloon expandable stent technology and has developed its
own Strecker knitted stent technology and Radius/TM/ self-expanding stent
technology. Boston Scientific launched Medinol's NIR/TM/ coronary stent in
Europe in March 1996. In May 1996, Boston Scientific acquired Mintec, Inc., a
privately held company, which develops stent graft technology and has announced
its intention to launch a device for the repair of AAAs in the near future.
The Company believes that its relationship with Boston Scientific, a market
leader which has made a significant commitment to developing stent technology,
will facilitate the development and commercialization of the Company's stents.
The Company and Boston Scientific are currently pursuing projects to develop the
Company's stents for a variety of applications. The markets ultimately targeted
for commercial sales will be determined by Boston Scientific pursuant to the
license agreement.
Current Status. European clinical trials for the NMT stent in peripheral
vessels have been completed by Boston Scientific. Boston Scientific began
marketing a line of the Company's peripheral vascular stents in Europe in
January 1997 and in the United States in June 1997 for biliary use under the
name Symphony and has begun clinical trials for peripheral vascular applications
in the U.S. In May 1997, the Symphony obtained a CE Mark, allowing for
marketing of the device throughout the European Union. Boston Scientific has
also initiated European trials of the NMT stent for peripheral vascular stent
grafts. Such trials are intended to demonstrate that a stent graft may provide
for a new minimally invasive alternative to bypass surgery using multiple NMT
stents joined with graft material and inserted in the vessel percutaneously.
5
Boston Scientific has completed a scale-up of its peripheral vascular stent
manufacturing capabilities in the United States to enable it to manufacture
NMT's stents in quantities to support initial commercialization in certain
markets. The Company and Boston Scientific continue to work collaboratively
towards the development of NMT's stents for additional indications and to
achieve manufacturing efficiencies.
Competition. Competition in the stent market is intense and is expected to
increase. Most of the stents sold today are balloon expandable and have been
designed primarily for coronary applications. However, the companies listed
below, as well as other companies, may be developing additional stents. Some of
the stents being developed may be more similar to the Company's stents than
those in the market today, although the Company does not know of any competitor
that is developing a stent substantially similar to its product.
Johnson & Johnson Interventional Systems Co., Medtronic, Inc., Cook Inc.,
Guidant Corporation/ACS, Boston Scientific/Medinol, and Arterial Vascular
Engineering, Inc., among others, currently sell stainless steel, balloon
expandable stents in the United States or internationally.
The following table lists the Company's major competitors who are currently
selling or, to the Company's knowledge, developing self-expanding stents in the
United States or internationally.
COMPANY MATERIAL DESIGN
-------------------------------- --------------- ------------
Pfizer, Inc./Schneider Stainless steel Wire mesh
Medtronic, Inc. Nitinol Coil
Boston Scientific (Strecker) Tantalum Wire mesh
Boston Scientific (Radius/TM/) Nitinol Slotted tube
Bard/Angiomed Nitinol Slotted tube
Vena Cava Filters
Vena cava filters are used for the prevention of pulmonary embolism (a blood
clot lodged in the vessels supplying blood to the lungs). These emboli (clots),
which often develop initially in the veins of the legs, can break loose and
travel up the vena cava, through the heart and into the blood vessels of the
lungs, causing acute respiratory and circulation problems. Vena cava filters
are intended to trap these clots before they can reach the lungs. Patients at
high risk for pulmonary embolism include post-operative orthopedic and
neurosurgery patients, cancer patients undergoing surgery and chemotherapy and
severe trauma victims. There are 600,000 incidents of pulmonary embolism
diagnosed in the United States each year with 125,000 to 150,000 deaths per
year. While usually treated initially with anticoagulant drugs, vena cava
filters may be used in cases where drug therapy has failed or is
contraindicated. Factors influencing
6
the performance of vena cava filters include coverage of the vena cava and the
pattern of the filtering method. Additionally, the variety of entry site options
and the size of the delivery system affect ease of deployment.
Simon Nitinol Filter. The Company has developed a nitinol vena cava filter
which possesses highly efficient clot filtering characteristics. The Company
has engineered both the superelastic and 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.
Market Opportunity. The worldwide sales for vena cava filters were estimated to
be $65-$70 million in 1996. The United States represents 75% of current
worldwide sales. NMT's vena cava filters currently rank second in worldwide
sales.
Current Status. The Company received FDA 510(k) clearance to market the SNF,
and commenced sales, in April 1990. All 510(k) notifications with respect to
subsequent modifications to the SNF have also been accepted by the FDA. In
November 1995, the Company introduced a simplified, straight line catheter-based
delivery system for its SNF. In November 1996, the Company received 510(k)
clearance for the implementation of the SNF through the subclavian vein in the
shoulder.
New Product Development. The Company is currently developing a removable vena
cava filter as discussed below.
Removable Vena Cava Filter. Currently available vena cava filters are permanent
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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, recent 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 high-risk patients for 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.
The Company is conducting early design and feasibility work on a removable vena
cava filter which can be placed into the body and later removed. Vena cava
filters which remained implanted for six weeks were successfully removed from
sheep in studies
7
conducted by the Company in April 1996. Following additional laboratory and
animal testing, the Company anticipates filing an IDE for a removable vena cava
filter during 1998 to enable the Company to conduct human clinical trials in the
United States.
Relationship with Bard. The Company entered into an exclusive distribution
agreement in May 1992 with Bard Radiology for distribution of the SNF in the
United States and certain other countries. Sales and market penetration for the
SNF have increased significantly as a result of this agreement. Beginning
November 30, 1995, Bard International was granted the exclusive right to
distribute the SNF in most markets outside the United States. In addition, in
December 1997 the Company secured approval for CE Marking, which, beginning in
July 1998, will be required for all medical devices marketed in the European
Union.
Each of the distribution agreements is for a five year term. Bard Radiology may
renew, at its option, its agreement thereafter for periods of five years. The
Company's agreement with Bard International renews automatically for successive
one year periods unless terminated by either party. Both distributors are
obligated to make annual minimum purchases and have agreed not to sell competing
vena cava filters during the term of the respective distribution agreements.
Bard Radiology has also agreed not to compete for an additional two years after
its distribution agreement with the Company has terminated. In addition, the
Company has granted Bard Radiology a right of first offer for any of NMT's new
devices (including the removeable vena cava filter) which may be marketed to
interventional radiologists and for which NMT desires to enter into an exclusive
distributorship within the United States.
Manufacturing. The Company has contracted with Lake Region Manufacturing for
the production of the filter component of the SNF. The Company's agreement with
Lake Region grants Lake Region the right to manufacture a certain percentage of
the Company's worldwide requirements of the current filter until June 30, 2001.
The Company is obligated to order a minimum quantity of the current filters and
pay Lake Region a fixed price per unit. Lake Region has agreed not to
manufacture filters for a third party for a period of two years after the
termination of the agreement. Final assembly of the vena cava filter system is
conducted by the Company.
Competition. Boston Scientific, among others, currently competes with the
Company in sales of vena cava filters. Boston Scientific introduced the
Greenfield Filter to the market in the mid-1970's and is still the predominant
leader with more than half of current unit sales of vena cava filters in the
United States. Since the introduction of the Simon Nitinol Filter in 1990, NMT
has achieved the second highest level of sales in the United States due
primarily to its distribution agreement with Bard Radiology and the introduction
of a new simplified delivery system. Other competitors in this market include
Cook, Inc. and B. Braun.
8
Septal Repair Devices
In February 1996, to expand its product base and complement its core
technologies, the Company acquired the exclusive rights to its CardioSEAL Septal
Occluder, which is designed for the repair of intracardiac shunts commonly known
as "holes in the heart." Intracardiac shunts are common medical problems,
occurring primarily in children, that result in abnormal blood flow through the
chambers of the heart. The most common defects occur in either the atrial
("ASD") or ventricular ("VSD") septum which divide the left and right pumping
chambers of the heart. Patients with these defects may suffer from poorly
oxygenated blood and require increased cardiac effort to adequately supply blood
to the body. This may lead to congestive heart failure and pulmonary
hypertension, resulting in severe incapacity or even death. The current
treatment is open-heart surgery. Open-heart surgery involves opening a
patient's chest, cutting through the sternum, connecting the patient to a
heart/lung machine and opening the heart to surgically repair the hole. Such a
procedure is costly and generally requires up to a week of hospitalization and
an extensive recovery period. The CardioSEAL Septal Occluder is designed to be
a minimally invasive, less costly alternative to open heart surgery.
Another common septal defect is the Patent Foramen Ovale ("PFO"), a transient
hole which may open under straining efforts (coughing, defecating, etc.). PFO
has been implicated as a possible cause of embolic strokes, in which small blood
clots escape through the PFO and travel to the brain. Current treatment for
patients who have experienced embolic strokes is lifelong anticoagulation
therapy, which may result in significant side effects and/or patient
noncompliance with the treatment regimen. Recently, some institutions have begun
advocating open heart surgery to close PFOs to prevent additional strokes. The
Company believes that its septal repair device using a minimally-invasive
delivery system may address the needs of the PFO market.
CardioSEAL Septal Occluder. The CardioSEAL Septal Occluder is a catheter-
delivered cardiac implant designed to close septal defects. The device consists
of eight wire spring arms covered with two pieces of knitted polyester fabric
which form two opposed disk-like occluders each having an umbrella shape. The
framework is made of MP35N, a material chosen because of its superior
characteristics as an implant material (biocompatibility and corrosion and
fatigue resistance). Knitted polyester was chosen because of its extensive use
in the cardiovascular system and its ability to promote normal tissue in-growth.
At the center of the occluders is an inter-connection point which allows the
product to be placed within the septal defect so that one umbrella is opened on
each side of the defect. The product is designed to be manufactured in five
diameter sizes ranging from 17mm to 40mm.
The CardioSEAL Septal Occluder is delivered to the site of the defect through a
puncture of the femoral vein in the leg. The device is loaded into a delivery
catheter and moved toward the defect site. At the defect site, the CardioSEAL
Septal Occluder is deployed
9
through the defect and the first umbrella is opened. The delivery system is then
retracted through the hole so that the first umbrella comes into contact with
the septal wall. The delivery system is then retracted further allowing the
second umbrella to open and seal the defect from both sides. Once the position
of the CardioSEAL Septal Occluder is confirmed, the physician detaches the
delivery system and removes it from the patient. To date, the CardioSEAL implant
procedures have taken approximately one hour to complete, with patients
returning home to normal activity just one to two days later.
An earlier version of the septal repair device, named the Clamshell, was
developed by Bard in collaboration with Children's Hospital of Boston. Between
1989 and 1991 Bard sponsored clinical trials of the Clamshell in over 700
patients with a variety of cardiac conditions. In 1991, Bard discovered
fractures of the stainless steel framework in certain of the devices implanted
during such clinical trials and, following such discovery, suspended its
clinical trials. However, Bard subsequently submitted, and the FDA approved, a
revised IDE to permit the continued use of the Clamshell for patients with
limited therapeutic alternatives and at high risk for surgical repair of their
condition. The Company is not aware of any significant adverse clinical
consequences resulting from the observed fractures. Extensive engineering
redesign and testing, including the use of MP35N for the framework, resulted in
significant improvements in both the fatigue and corrosion resistance of the
device. In 1995, Bard donated the technology and associated assets to
Children's Hospital of Boston which subsequently licensed the technology to
InnerVentions. The Company acquired the rights to develop and commercialize the
current septal repair device in February 1996. In connection with the
acquisition, the Company acquired all of the existing development, manufacturing
and testing equipment, patent licenses, know-how and documentation necessary to
manufacture septal repair devices which had been originally developed by Bard.
Market Opportunity. The Company believes the CardioSEAL Septal Occluder may be
suitable for approximately 55,000 patient implants annually for congenital heart
defects and approximately 145,000 adult patients annually with PFOs. Such
estimates are based on industry reports of the total numbers of patients
diagnosed with such conditions and the Company's own analysis of the portions of
such populations for whom its device may be suitable.
Current Status. The CardioSEAL is sold commercially in Europe and other
international markets. In the U.S., Children's Hospital of Boston is currently
conducting clinical trials of the redesigned Clamshell device manufactured by
Bard prior to the acquisition by the Company under an IDE granted by the FDA in
the second quarter of 1996 to allow for use of the devices in patients with a
variety of cardiac conditions and at high risk for surgery. The devices being
tested by Children's Hospital of Boston were not included in the assets acquired
by the Company. NMT began supplying Children's Hospital of Boston with
CardioSEAL Septal Occluders in December 1996. The CardioSEAL Septal
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Occluder is manufactured by the Company based on the same design specifications
as the redesigned Clamshell devices being tested by Children's Hospital of
Boston.
In the United States, the FDA classifies the septal repair device as a Class III
medical device, which requires receipt of pre-market approval prior to
marketing. In August 1996, NMT received approval of its IDE from the FDA to
conduct a multi-center pivotal clinical trial of the CardioSEAL in the United
States for ASDs, and implants of the device have been underway since October
1996. Participants include Children's Hospital in Boston, Yale New Haven
Children's Hospital, Miami Children's Hospital, Texas Children's Hospital in
Houston, Cleveland Clinic, Children's Hospital of Philadelphia, the Medical
Center at the University of California San Francisco, Primary Children's Medical
Center/University of Utah in Salt Lake City, Presbyterian Hospital in
Albuquerque, Denver Children's Hospital, Children's Heart Clinic in Minneapolis,
University of Oregon Health Sciences Center in Portland, Loyola University
Medical Center in Maywood, Illinois, University of California-San Diego, and
Good Samaritan Hospital in Loma Linda, California. Additionally, one Canadian
center is currently implanting the CardioSEAL under a clinical investigational
protocol. The Company filed an IDE with the FDA in February 1998 to pursue
clinical studies for the PFO indication in the United States, and expects to
begin PFO trials in Canada in 1998.
New Product Development. The Company is currently evaluating design
enhancements to the CardioSEAL Septal Occluder as well as alternative designs
for the device.
Marketing and Sales Strategy. The Company has developed its own sales force,
and is marketing the CardioSEAL Septal Occluder directly in Europe and to
selected distributors worldwide. There are approximately 150 to 200 pediatric
interventional cardiologists in the United States who could potentially implant
the device. These specialists practice at an estimated 75 to 100 institutions
that provide advanced cardiac care to children. It is estimated that a similar
number of centers would be targeted internationally. Therefore, the Company
believes that the size and scope of the target audience is manageable with a
small, specialized sales and marketing team. The Company's marketing strategy
requires a specific physician training program prior to selling products into
any center.
Manufacturing. The Company currently leases an approximately 27,000 square foot
manufacturing, laboratory and administrative facility in Boston, Massachusetts
where it manufactures its CardioSEAL Septal Occluder. The facility includes a
Class 10,000 clean room. The Company has received ISO 9000 certification, which
is based on adherence to established standards in the areas of quality assurance
and manufacturing process control, and has also received permission to affix the
prescribed "CE" mark to its products. The European Union has promulgated rules
which provide that, beginning in July 1998, medical products may not be marketed
and sold commercially in the countries of the European Economic Area unless they
receive a CE mark.
11
Competition. The Company believes that four companies, AGA Medical, Microvena
Corporation, Dr. Osypka GmbH, and Pediatric Cardiology Custom Medical Devices
have developed competitive devices which are being sold in Europe and other
international markets, and that AGA and Microvena are also conducting clinical
trials in the United States.
Imaging Products
In May 1997, the Company acquired a 23 percent ownership interest in Image
Technologies Corporation. ITC, a privately held company, is developing a line of
advanced imaging products for minimally invasive surgery which require less
equipment, are easier to use, reduce procedure time and personnel requirements,
improve operating room efficiency and reduce overall treatment costs. In
addition, the Company extended to ITC a $2.0 million senior credit line, which
is convertible into preferred stock of ITC representing up to an additional 20
percent ownership interest in ITC. The Company was also granted an option, which
is exercisable at any time until May 30, 1999, to purchase the remaining 57
percent of ITC for $24.5 million. The option may be extended for an additional
six months under certain conditions.
Thomas M. Tully, President and Chief Executive Officer of the Company, is the
Chairman and Chief Executive Officer of ITC and Theodore I. Pincus, Executive
Vice President of the Company, is its Chief Financial Officer. ITC is located
in leased space immediately adjacent to the Company's facilities.
The principal products under development by ITC are:
(i) TroView/TM/, a compact, computerized image viewing system allowing
for easy, surgeon controlled enhancement of endoscopic images, including
the recording and remote transmission of both still and full motion video.
(ii) TroCam/TM/, an advanced endoscopic camera system for use with the
TroView. The TroCam, unlike currently available systems, places the camera
and lighting directly into the surgical field, allowing the surgeon to
personally control the field of view by pivoting the camera and zooming in
or out on the surgical field using a simple fingertip remote control
device. The camera system is protected during surgery by a sterile,
optically clear, disposable molded plastic cover that eliminates the need
to re-sterilize the camera after each use.
(iii) EndoCam/TM/, an endocoupler/camera system that allows rigid or
flexible endoscopes from other manufacturers to be used in conjunction with
the TroView. The coupler is a sterile, single use device eliminating the
need to re-sterilize the camera after each use.
12
(iv) Operative TroCam/TM/, an endoscopic surgical system for use with the
TroView that allows the camera system and surgical instruments to be
inserted into the body through a single puncture site.
(v) GynaCam/TM/, a disposable device for use of the camera and TroView
system for examination of the cervix.
The Company's investment will allow it to work with ITC to further develop ITC's
line of innovative products, and, if development is successful, to build a new
minimally invasive device franchise for 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 nine issued United States
patents, and corresponding foreign patents, relating to its stents, the SNF, the
septal repair device and nitinol radiopaque markers. 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 stents, methods of manufacturing its stents, methods and devices for
inserting its stents, its SNF and devices for inserting its SNF. The expiration
dates of the Company's patents relating to its stents range from 2012 to 2013.
The patent for its vena cava filters expires in 2001 and the patent for its
radiopaque markers expires in 2014. In addition, the Company is the exclusive
licensee under certain patents relating to the CardioSEAL Septal Occluder and
methods for repairing cardiac and vascular defects. The Company also holds
licenses to certain technology used in the SNF and in nitinol septal repair
devices.
The Company also relies on trade secrets and technical know-how in the
development and manufacture of its devices, which it seeks to protect, in part,
through confidentiality agreements with its employees, consultants and other
parties. The Company has seven trademarks, two of which are registered in the
United States Patent and Trademark Office.
LICENSED TECHNOLOGY; ROYALTY OBLIGATIONS
In connection with its septal repair device, the Company has obtained an
exclusive worldwide license from Children's Medical Center Corporation under
United States patents entitled "Occluder and Method for Repair of Cardiac and
Vascular Defects" and "Occluder for Repair of Cardiac and Vascular Defects" and
the respective corresponding foreign patents, patent applications and associated
know-how. The license agreement provides for royalty payments of five percent
based on net sales of the Company's CardioSEAL Septal Occluder until the end of
the term of the patents or termination of the agreement. The patents expire in
September 2012 and June 2012, respectively. Pursuant to the license agreement,
the Company is required to achieve certain milestones
13
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 United States patent entitled
"System for the Percutaneous Transluminal Front-End Loading Delivery and
Retrieval of a Prosthetic Occluder" and its corresponding foreign patents and
associated know-how. The sublicense is exclusive in the field of the repair of
atrial septal defects and nonexclusive in certain other fields. The Company has
also obtained an exclusive worldwide license from Lloyd A. Marks, M.D. under the
United States patent entitled "Aperture Occlusion Device." The license agreement
with Dr. Marks provides for royalty payments based on net sales of nitinol
septal repair devices which are covered by the patent until the end of term of
the patent in 2011. Certain minimum royalty payments must be paid regardless of
net sales.
In connection with the Simon Nitinol Filter, the Company entered into a
Technology Purchase Agreement dated April 14, 1987 with Morris Simon, M.D., the
Company's 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 U.S. 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 their respective employment agreements, the Company has agreed to
pay royalties of one to five percent to Messrs. Kleshinski and Harry based on
sales or licenses of products where either Mr. Kleshinski or Dr. Harry, as the
case may be, was the sole or joint inventor.
AGREEMENTS WITH BOSTON SCIENTIFIC AND BARD
Boston Scientific
In November 1994, NMT entered into an agreement with Boston Scientific,
pertaining to its stent technology. Under the terms of the agreement, NMT
granted to Boston Scientific exclusive worldwide rights to develop, manufacture,
market and distribute products incorporating NMT's stent technology. Boston
Scientific has the right to market and advertise products based on the Company's
stent technology exclusively under its own name and the Company has no right to
any trademarks or tradenames developed by Boston Scientific. Boston Scientific
has exclusive control over, and is responsible for, funding product development,
manufacturing scale-up, clinical trials, marketing and
14
distribution worldwide. Boston Scientific is not prohibited from developing or
selling competing stents.
Boston Scientific is obligated to pay NMT a percentage of revenue from the sale
of products using NMT's stent technology. If the fees payable are less than
certain minimum levels, Boston Scientific must pay the difference or NMT can
elect to make the license non-exclusive. Boston Scientific is also obligated to
make payments upon the occurrence of certain developmental events and the
achievement of certain manufacturing cost reductions, and to reimburse certain
development costs. The term of the agreement is for the longer of 20 years from
market launch or the date on which the last NMT patent relating to stents
expires. Boston Scientific also has the perpetual non-exclusive and royalty-
free right to manufacture, use and sell all products as to which it has
previously paid licensing fees and on products for which all applicable patents
have expired or have been held invalid. Such additional rights granted to
Boston Scientific survive termination of the agreement.
Bard
The Company has entered into strategic distribution agreements with Bard
Radiology (as amended, the "Bard Radiology Agreement") and Bard International
(the "Bard International Agreement") to distribute the SNF in the United States
and certain other countries.
The Bard Radiology Agreement, signed in May 1992 and amended in February 1993
and October 1995, grants Bard Radiology the exclusive right to distribute the
Simon Nitinol Filter, and any changes, improvements or modifications thereto, in
the United States and certain other countries for a five year term renewable by
Bard Radiology for additional five year terms thereafter. The Company also
granted Bard Radiology a right of first offer to obtain exclusive distribution
rights in the United States for any new devices developed by the Company that
may be marketed to interventional radiologists and for which NMT desires to
enter into an exclusive distributorship within the United States. The Company
sells the SNF to Bard Radiology at determined prices and Bard Radiology is
required to purchase certain minimums to maintain its exclusivity. Bard
Radiology has further agreed not to compete with the Company in the vena cava
filter market during the term of the agreement and for two years after
termination. The Company has agreed not to make or sell any competing device as
long as Bard maintains its exclusivity under the agreement.
The Bard International Agreement, signed in November 1995, grants Bard
International the exclusive right to distribute the Simon Nitinol Filter, and
any changes, improvements or modifications thereto, worldwide (excluding the
United States and certain other countries) for a five year term which is
automatically renewed for successive one year periods unless terminated by
either party. The Company sells the SNF to Bard International at determined
prices and Bard International is required to make certain
15
minimum purchases which, if not met, could result in termination of the
agreement by the Company. Bard International has further agreed not to compete
with the Company in the vena cava filter market during the term of the Bard
International Agreement.
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 institutional review board
("IRB") established pursuant to FDA regulations. If one or more IRBs determine
that a clinical trial involves
16
a "nonsignificant risk" device, the sponsor of the study is not required to
obtain FDA approval of an IDE application before beginning the study. However,
prior IRB approval of the study is required and the study must be conducted in
compliance with the applicable FDA regulations, including, but not limited to,
FDA regulations regarding the protection of human subjects.
Generally, before a new device can be introduced into the market in the United
States, the manufacturer or distributor must obtain FDA clearance of a pre-
market notification ("510(k) notification") submission or approval of a PMA
application. If a medical device manufacturer or distributor can establish that
a device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device for which the FDA has not called for PMAs, the
manufacturer or distributor may seek clearance from the FDA to market the device
by filing a 510(k) notification. The 510(k) notification may need to be
supported by appropriate data establishing the claim of substantial equivalence
to the satisfaction of the FDA. The FDA's recently enacted Modernization Act
proposes alternative approaches to facilitate the process.
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.
Certain Class III devices that were on the market before May 28, 1976
("preamendments Class III devices"), and devices that are determined to be
substantially equivalent to them, can be brought to market through the 510(k)
process until the FDA, by regulation, calls for PMA applications for the
devices. Generally, the FDA will not grant 510(k) clearance for such devices
unless the facilities at which they are manufactured successfully undergo an FDA
pre-approval GMP inspection. In addition, the FDC Act 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
17
Class III devices are required to submit to the FDA as set forth in two FDA
orders published in August 1995.
The Company's first product, the SNF, underwent significant clinical
investigation under an IDE and received 510(k) clearance in 1990. Subsequent
improvements and modifications to the SNF have also received 510(k) clearance
from the FDA. The 510(k) clearances for the SNF were based on substantial
equivalence of the device to other cardiovascular intravascular filters, which
are preamendments Class III devices. On July 22, 1996, the Company submitted
safety and effectiveness data to the FDA in accordance with one of the August
1995 FDA orders addressing the classification of preamendments Class III
devices. The FDA will use this data, along with data furnished by manufacturers
of similar devices, in determining the final classification of the SNF.
Boston Scientific is responsible for applying for registrations and regulatory
approvals it deems necessary for NMT's stents. It is believed that each of the
vascular indications for the stent (coronary arteries, carotid arteries,
peripheral vascular, AAA and peripheral vascular stent grafts) will require
separate PMA applications prior to commercialization in the United States.
Boston Scientific has completed clinical trials in Europe of NMT's stents for
peripheral vascular applications and has initiated clinical trials for
peripheral vascular stent graft applications.
The CardioSEAL will also be subject to the PMA process in the United States.
NMT submitted an application for an IDE to the FDA in May 1996 which was
subsequently approved and the Company began a multi-center, pivotal clinical
trial in the United States for ASDs in October 1996. The Company submitted a
second IDE in February 1998 to study the CardioSEAL for PFO indications.
The Company is currently manufacturing the CardioSEAL. The Company's
manufacturing facilities are required to be registered with the FDA and are
subject to the GMP regulations. FDA approval will be required before the
Company may begin commercial distribution in the United States of medical
devices from its own manufacturing facilities.
The advertising of most FDA-regulated products is subject to both FDA and
Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.
Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements.
18
The current regulatory environment in Europe for medical devices differs
significantly from that in the United States. There is currently no universally
accepted definition of a medical device in Europe and there is no common
approach to medical device regulation among the various countries. 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 is
expected to undergo 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, beginning in July 1998, 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
and CardioSEAL have received approval for CE Marking.
19
THIRD PARTY REIMBURSEMENT
Health care providers in the United States, such as hospitals and physicians,
that purchase medical devices such as stents, generally rely on third party
payers, principally Medicare, Medicaid and private health insurance plans, to
reimburse all or part of the costs and fees associated with the Company's
devices. Major third party payers reimburse inpatient medical treatment,
including all operating costs and all furnished items or services, including
devices such as the Company's, at a prospectively fixed rate based on the
diagnosis-related group ("DRG") that covers such treatment as established by the
federal Health Care Financing Administration. For interventional procedures,
the fixed rate of reimbursement is based on the procedure or procedures
performed and is unrelated to the specific devices used in that procedure. The
amount of profit relating to the procedure may be reduced by the use of the
Company's devices. If a procedure is not covered by a DRG, certain third party
payers may deny reimbursement. Alternatively, a DRG may be assigned that does
not reflect the costs associated with the use of the Company's devices,
resulting in underreimbursement. If, for any reason, the Company's products
were not to be reimbursed by third party payers, the Company's ability to sell
its products may be materially adversely affected. Mounting concerns about
rising health care costs may cause more restrictive coverage and reimbursement
policies to be implemented in the future. Several states and the federal
government are investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control directly the
price health care providers and drug and device manufacturers may charge for
their services and products. The Company believes that domestic health care
providers currently are reimbursed for the cost of purchasing the Company's SNF.
In the international market, reimbursement by private third party medical
insurance providers, including governmental insurers and providers, varies from
country to country. In certain countries, the Company's ability to achieve
significant market penetration may depend upon the availability of third party
governmental reimbursement. The Company's independent distributors, and the
health care providers to whom such distributors sell, obtain any necessary
reimbursement approvals.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. The
Company has not experienced any product liability claims to date. The Company
maintains product liability insurance with coverage limits of $10 million per
occurrence and an annual aggregate maximum of $10 million.
EMPLOYEES
As of December 31, 1997, NMT employed 49 full-time employees and 1 part-time
employee. Further staff will be added as required by the demands of the
manufacturing
20
scale-up for the septal repair device and other development programs. No
employees are covered by collective bargaining agreements, and the Company
believes it maintains good relations with its employees.
ITEM 2. PROPERTIES
The Company currently leases an approximately 27,000 square foot manufacturing,
laboratory and administrative facility in Boston, Massachusetts.
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 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 1997.
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The executive officers of the Company and their ages as of March 6, 1998
are as follows:
NAME AGE POSITION
- ---------------------- --- ---------------------------------
Thomas M. Tully 52 President, Chief Executive
Officer and Director
David A. Chazanovitz 47 President, Septal Repair Division
Theodore I. Pincus 55 Executive Vice President and
Chief Financial Officer
21
THOMAS M. TULLY has served as President, Chief Executive Officer and Director of
NMT since January 1996. From June 1995 to January 1996 Mr. Tully served as a
consultant to the Company. From May 1994 to April 1995, Mr. Tully served as
President of the Institute of Molecular Biology, a biotechnology company focused
on tissue repair and regeneration and from August 1991 to March 1994, Mr. Tully
served as President of Organogenesis, Inc., a biotechnology company focused on
the commercialization of medical device applications of tissue engineering.
Prior to that Mr. Tully served for three years as the President of the Schneider
division of Pfizer, Inc., which concentrates on interventional radiology and
cardiology, spent nine years in various executive positions in consumer products
and medical devices at Johnson & Johnson, Inc. and was founding President of
Johnson & Johnson Interventional Systems, an interventional medicine company.
DAVID A. CHAZANOVITZ has served as President of NMT's Septal Repair Division
since January 1996. Prior to joining the Company, Mr. Chazanovitz served as
President and Chief Executive Officer of InnerVentions from April 1995 until
January 1996. Mr. Chazanovitz was employed by Bard from 1979 to 1995 in various
positions including President of the USCI Angiography Division, Bard
Electrophysiology Division and Bard Ventures Division where he was a founder.
During his last two and one-half years at Bard Mr. Chazanovitz had overall
responsibility for the septal defect repair program.
THEODORE I. PINCUS has served as Chief Financial Officer of the Company, as a
part-time employee since June 1995 and became an Executive Vice President and a
full-time employee in May 1996. From September 1993 to April 1996 he served as
Chief Financial Officer of Immunotherapy, Inc., a privately-held
biopharmaceutical company, and from May 1990 to May 1996 he was President of the
Pincus Group, a management consulting firm. From August 1992 to March 1995 he
also served as the Chief Financial Officer of Biofield Corp., then a privately-
held medical device company. Mr. Pincus is a Certified Public Accountant and
from 1985 to 1989 he was a partner at Ernst & Young, an accounting firm.
22
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 has been traded on the Nasdaq National Market under
the symbol NMTI since September 27, 1996. Prior to September 27, 1996, the
Company's Common Stock was not publicly traded. There were approximately 80
shareholders of record of the Company's Common Stock on March 3, 1998. The
following table lists the high and low bid prices for the third quarter (for the
period from September 27, 1996 through September 30, 1996) and fourth quarter of
1996 and for each quarter of 1997.
Period High Low
- ---------------- ------ ------
1996
- ----------------
Third quarter 12 1/4 11
Fourth quarter 12 1/2 10
1997
- ----------------
First quarter 12 1/2 7 3/4
Second quarter 15 1/8 8
Third quarter 17 1/4 12 1/2
Fourth quarter 16 1/2 7 7/8
During the fiscal year ended December 31, 1997, the Company granted options to
purchase 17,500 shares of Common Stock at a weighted average exercise price of
$9.74 to employees and one director and 19,000 shares of Common Stock at a
weighted average exercise price of $13.78 per share to employees pursuant to
the Company's 1996 Stock Option Plan. None of such options has been exercised.
The Company believes that the transactions described in this paragraph are
exempt from the registration requirements of the Securities Act of 1933, as
amended, by reason of Section 4(2) thereof. No underwriters were engaged in
connection with these grants.
23
(b) Uses of Proceeds from Registered Securities
There has been no change to the information previously provided by the Company
on its Quarterly Report on Form 10-Q for the period ended September 30, 1997, as
amended, relating to securities sold by the Company pursuant to its Registration
Statement on Form S-1 (Registration No. 333-06463), which was declared effective
on September 27, 1996.
Dividend Policy
The Company did not declare or pay any cash dividends on shares of its Common
Stock during the fiscal years ended December 31, 1996 and December 31, 1997 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements and the Notes thereto and the other financial
information appearing elsewhere in this Annual Report on Form 10-K.
24
Year Ended December 31,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
In thousands, except per share data
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales $ 2,003 $ 1,837 $ 2,716 $ 4,557 $ 8,565
License fees -- 773 625 2,375 1,500
Product development -- 38 492 92 61
------- ------- ------- ------- -------
2,003 2,647 3,833 7,024 10,126
Expenses:
Cost of product sales 655 812 1,264 2,387 3,765
Research and development 272 555 871 2,662 2,974
General and administrative 468 770 871 2,284 2,888
Selling and marketing 285 182 169 311 1,010
In-process research and development(1) -- -- -- 1,111 2,449
Restructuring charge (2) 194
------- ------- ------- ------- -------
1,680 2,319 3,175 8,755 13,280
------- ------- ------- ------- -------
Income(loss) from operations 323 328 658 (1,731) (3,154)
Interest income (expense), net (62) (39) (29) 568 1,546
Income(loss) before provision for income ------- ------- ------- ------- -------
taxes 261 289 628 (1,163) (1,608)
Provision for income taxes(3) -- -- 44 -- 230
------- ------- ------- ------- -------
Net income(loss) $ 261 $ 289 $ 584 $(1,163) $(1,837)
======= ======= ======= ======= =======
Cash dividends declared per common share (4) $ -- $ .13 $ .03 $ -- $ --
======= ======= ======= ======= =======
Basic income (loss) per share $ .07 $ .08 $ .16 $ (.21) $ (.19)
======= ======= ======= ======= =======
Weighted average common shares outstanding 3,588 3,622 3,764 6,749 9,596
======= ======= ======= ======= =======
Diluted income (loss) per share $ .07 $ .08 $ .15 $ (.21) $ (.19)
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding (5) 3,676 3,854 3,983 6,749 9,596
======= ======= ======= ======= =======
At December 31,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
In thousands
BALANCE SHEET DATA:
Cash and cash equivalents $ 644 $ 715 $ 533 $ 4,082 $ 5,561
Short-term investments -- -- -- 25,274 20,822
Working capital (deficit) 512 68 (1,277) 30,301 29,262
Total assets 1,152 1,253 1,661 34,930 35,006
Long-term obligations 1,957 1,690 -- 416 612
Stockholders' equity (deficit) (1,190) (1,331) (844) 33,320 32,772
25
- ----------------------
(1) Relates to a write-off of in-process research and development incurred in
connection with the Company's acquisition of the septal repair device
technology in 1996 and ITC in 1997. See Notes to the Consolidated Financial
Statements.
(2) Relates to reorganization of the Company's vena cava filter operations in
the second quarter of 1997. See Notes to the Consolidated Financial
Statements.
(3) In the periods prior to October 19, 1995 the Company elected to be taxed as
an "S" corporation for income tax purposes. Accordingly, there was no
provision for income taxes in these periods. See Notes to the Consolidated
Financial Statements.
(4) Computed based on the actual number of common shares outstanding at the
time the dividend was declared. In the periods prior to October 19, 1995,
the Company elected to be taxed as an "S" corporation for income tax
purposes.
(5) Computed on the basis described in Notes to the Consolidated Financial
Statements.
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 includes forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. All such forward-looking statements involve known and unknown
risks, uncertainties or other factors which may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those set forth below 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. The products developed or under development
include self-expanding stents, vena cava filters and septal repair devices.
The Company's initial product, a vena cava filter system, was given FDA
clearance in 1990. This product is distributed in the United States and certain
other countries by Bard and in other markets outside the United States by Bard
International. Both distributors are obligated to make annual minimum purchases.
The filter component of the current vena cava filter system is manufactured by
Lake Region Manufacturing Inc. ("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.
26
In November 1994, the Company entered into an agreement with Boston Scientific
pursuant to which Boston Scientific obtained exclusive worldwide rights to
develop, manufacture, market and distribute the Company's stent technology and
products which incorporate such technology. Under this license agreement, Boston
Scientific is responsible for performing clinical trials for stents under
development and for reimbursing the Company for stent development costs incurred
by the Company. These reimbursements are classified as product development
revenues in the Consolidated Statement of Operations. The Company also receives
license fees, including milestone payments, royalties based upon product sales
and certain manufacturing cost reduction incentives from Boston Scientific under
the license agreement, which are included in the Company's revenues in the
periods discussed below. Most of its costs associated with its stents are
included in research and development expenses.
In February 1996, the Company acquired, through the issuance of common stock,
the rights to develop and commercialize its septal repair device. The Company
commenced sales of the CardioSEAL Septal Occluder at the end of September 1996
in connection with clinical trials of the device, and the device has been sold
commercially in Europe and other international markets since July 1997. The
Company manufactures this device at its own facility.
In 1996, the Company significantly increased the scope of its operations,
including the addition of a new Chief Executive Officer, an Executive Vice
President and Chief Financial Officer and a President of the Septal Repair
Division, which was formed in February 1996. In addition, in April 1996, the
Company entered into a lease for a new manufacturing, laboratory and
administrative space which increased the Company's annual facility lease
payments by approximately $400,000. The Company took full occupancy of the
facility in September 1996.
The Company has agreed to make certain royalty payments to Children's Medical
Center Corporation based on net sales of the CardioSEAL Septal Occluder. The
Company has also agreed to pay certain royalties to Morris Simon, M.D., the
Company's Scientific Director and co-founder and a current Director of the
Company, 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 agreements with Mr. Kleshinski and Dr. Harry,
respectively, the Company has agreed to pay certain royalties based on sales or
licenses of products where either Mr. Kleshinski or Dr. Harry, as the case may
be, was the sole or joint inventor.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the year ended December 31, 1997 increased to $10.1
million from $7.0 million for the year ended December 31, 1996 (a 44% increase).
Product sales increased to $8.6 million for the year ended December 31, 1997
from $4.6 million for the year ended December 31, 1996 (an 87% increase). The
increase in product sales was primarily due to increased unit sales of vena cava
filters, a 3% increase in the price of
27
vena cava filters, the commencement of sales of the CardioSEAL Septal Occluder
in connection with clinical trials at the end of September 1996, and the
commencement of commercial sales of the CardioSEAL Septal Occluder in June 1997
in certain European and other international markets. The Company recorded $1.5
million in license fees from Boston Scientific related to its stent technology
in the year ended December 31, 1997, consisting of $300,000 of milestone
payments and $1,200,000 of royalty payments. Product development revenues from
Boston Scientific (which consist of reimbursement of certain costs incurred by
the Company) decreased to $61,000 for the year ended December 31, 1997 from
$92,000 for the year ended December 31, 1996 (a 34% decrease), as a result of a
reduction of stent development costs incurred by the Company on behalf of Boston
Scientific in the year ended December 31, 1997 compared to the year ended
December 31, 1996.
Cost of Product Sales. Cost of product sales increased to $3.8 million for the
year ended December 31, 1997 from $2.4 million for the year ended December 31,
1996 (a 58% increase). The cost of product sales in 1997 includes sales of vena
cava filters and CardioSEAL Septal Occluders in connection with clinical trials
and foreign commercial sales. The cost of product sales for the year ended
December 31, 1996 was primarily related to sales of vena cava filers as sales
of the CardioSEAL Septal Occluder in connection with clinical trials commenced
at the end of September 1996. Cost of product sales, as a percent of product
sales, decreased to 44% for the year ended December 31, 1997 from 52% for the
year ended December 31, 1996. This decrease is primarily attributable to sales
of the CardioSEAL Septal Occluder, which has a lower cost of product sales as a
percent of sales than the vena cava filter, as well as a decrease in the cost
of the vena cava filter due to the reorganization of the Company's filter
operations in the second quarter of 1997. See Note 4 of the accompanying Notes
to Consolidated Financial Statements.
Research and Development. Research and development expense increased to $3.0
million for the year ended December 31, 1997 from $2.7 million for the year
ended December 31, 1996 (an 11% increase). The increase reflects an increase in
regulatory and clinical trial expenses for the CardioSEAL Septal Occluder
incurred in connection with clinical trials which commenced in September 1996,
as well as increase activity in the Company's development programs for vena cava
filters and other products under development. Increased expenses resulted
primarily from increases in personnel and related costs, engineering expenses
and facilities related costs. The Company received reimbursement from Boston
Scientific for $61,000 and $92,000 of these expenses in the years ended December
31, 1997 and 1996, respectively, which amounts are included in revenues.
General and Administrative. General and administrative expenses increased to
$2.9 million for the year ended December 31, 1997 from $2.3 million for the year
ended December 31, 1996 (a 26% increase). The increase consisted primarily of
increases in personnel and related costs, legal and professional fees,
facilities costs, insurance costs, investors relations costs and computer
systems costs resulting from the Company's expanded scope of operations in 1997.
28
Selling and Marketing. Selling and marketing expenses increased to $1.0 million
for the year ended December 31, 1997 from $311,000 for the year ended December
31, 1996 (a 222% increase). The increase related primarily to marketing
activities related to the CardioSEAL Septal Occluder in connection with the
commencement of commercial sales of the CardioSEAL Septal Occluder in Europe and
other international markets in June 1997.
In-Process Research and Development. For the year ended December 31, 1997, the
Company recorded a charge of $2.4 million for in-process research and
development related to the Company's investment in Image Technologies
Corporation on May 29, 1997. See Note 3(b) of the accompanying Notes to
Consolidated Financial Statements.
Interest Income, Net. Interest income, net was $1.5 million for the year ended
December 31, 1997 as compared to $569,000 for the year ended December 31, 1996
(a 164% increase). This increase was primarily due to the closing of the
Company's initial public offering of 3,150,000 shares of common stock (including
150,000 shares sold upon exercise of the underwriters' over-allotment option) in
October 1996 resulting in net proceeds to the Company of $31.2 million.
Income Taxes. The Company had a provision for income taxes of $229,500 for the
year ended December 31, 1997 which reflects the non-deductibility of the in-
process research and development and a portion of the restructuring charge
recorded during 1997, and the utilization of carry-forward net operating losses
from prior years. There was no provision for income taxes for the year ended
December 31, 1996 as the Company incurred an operating loss.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues for the year ended December 31, 1996 increased to $7.0
million from $3.8 million for the year ended December 31, 1995 (an 84%
increase). Product sales increased to $4.6 million for the year ended December
31, 1996 from $2.7 million for the year ended December 31, 1995 (a 70%
increase). The increase in product sales was primarily due to increased unit
sales of vena cava filters, which in turn, was primarily due to the introduction
of the straight-line delivery system in November 1995, and the commencement of
sales of the CardioSEAL Septal Occluder in connection with clinical trials at
the end of September 1996. The Company recorded $2.4 million in license fees
from Boston Scientific related to its stent technology in the year ended
December 31, 1996, consisting of $1,625,000 milestone payments and $750,000
minimum royalty payments. Product development revenues from Boston Scientific
(which consist of reimbursement of certain costs incurred by the Company)
decreased to $92,000 for the year ended December 31, 1996 from $492,000 for the
year ended December 31, 1995 (an 81% decrease), due to the completion of the
Company's transfer of its stent technology to Boston Scientific in November 1995
which has resulted in a reduction of stent development costs incurred by the
Company on behalf of Boston Scientific.
Cost of Product Sales. Cost of product sales increased to $2.4 million for the
year ended December 31, 1996 from $1.3 million for the year ended December 31,
1995 (an 85%
29
increase). The cost of product sales in 1995 was entirely related to vena cava
filters. The costs of product sales in 1996 includes vena cava filters and
CardioSEAL Septal Occluders and the increase reflects the increase in vena cava
filters sold in the year ended December 31, 1996 and the commencement of sales
of the CardioSEAL Septal Occluder in connection with clinical trials at the end
of September 1996. Cost of products sales, as a percent of product sales,
increased to 52% for the year ended December 31, 1996 from 48% for the year
ended December 31, 1995. This increase reflects the impact of the introduction
of the vena cava filter straight-line delivery system which has a higher unit
manufacturing cost as a percent of the selling price, and start-up manufacturing
costs related to the commencement of sales of the CardioSEAL Septal Occluder in
connection with clinical trials at the end of September 1996.
Research and Development. Research and development expense increased to $2.7
million for the year ended December 31, 1996 from $871,000 for the year ended
December 31, 1995 (a 210% increase). The increase reflects increased activity
in the Company's development programs for vena cava filters, the CardioSEAL
Septal Occluder and other products under development. Increased expenses
resulted primarily from increases in personnel and related costs, engineering
expenses and facilities related costs. The Company received reimbursement from
Boston Scientific for $92,000 and $492,000 of these expenses in the year ended
December 31, 1996 and 1995 respectively, which amounts are included in revenues.
General and Administrative. General and administrative expenses increased to
$2.3 million for the year ended December 31, 1996 from $871,000 for the year
ended December 31, 1995 (a 164% increase). The increase consisted primarily of
increases in personnel and related costs, legal and professional fees and
consulting expenses. These increases resulted from the Company's expanded scope
of operations.
Selling and Marketing. Selling and marketing expenses decreased to $311,000 for
the year ended December 31, 1996 from $169,000 for the year ended December 31,
1995 (an 84% increase). The increase related primarily to the introduction of
the vena cava filter straight-line delivery system and to pre-marketing
activities related to the CardioSEAL Septal Occluder. Selling and marketing
expenses for the year ended December 31, 1995 were entirely related to vena cava
filters.
In-Process Research and Development. For the year ended December 31, 1996, the
Company recorded a charge of $1.1 million for in-process research and
development related to the CardioSEAL Septal Occluder which was acquired in
February 1996. See Note 3(a) of Notes to Consolidated Financial Statements.
Interest Income (Expense), Net. Interest expense, net was $569,000 for the year
ended December 31, 1996 as compared to interest expense, net amounting to
$29,000 for the year ended December 31, 1995. This increased net interest
income was primarily due to the receipt in February 1996 of $7.5 million in net
proceeds from the sale of Convertible Preferred Stock and the closing of the
Company's initial public offering of 3,150,000 shares of common stock (including
150,000 shares sold upon exercise of the underwriters' over-allotment option) in
October 1996 resulting in net proceeds of $31.2
30
million. Interest expense in 1996 consisted primarily of interest on
subordinated debt to stockholders, which was fully repaid in April 1996, and
interest on capital lease obligations. Interest expense in 1995 consisted
primarily of interest on subordinated debt to stockholders.
Income Taxes. The Company had no income tax provision for the year ended
December 31, 1996 as it incurred an operating loss. Prior to October in 1995,
the Company elected to be taxed as an "S" Corporation for federal and state
income tax purposes and, accordingly, the financial statements for the year
ended December 31, 1995 do not include a provision for income taxes for the
period from January 1, 1995 to October 19, 1995. The provision for income taxes
relates to the period from October 19, 1995 to December 31, 1995 and consists of
certain state income taxes. The Company has not recorded a pro forma tax
provision as there would have been sufficient net operating loss carryforwards
to offset income in 1995. See Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 1997, the Company used cash of approximately $2.9
million, of which $2.4 million was used to acquire a 23% ownership interest in
Image Technologies Corporation (see Note 3(b) of the accompanying Notes to
Consolidated Financial Statements) and $500,000 was used for working capital
purposes primarily related to sales of the CardioSEAL Septal Occluder in
connection with clinical trials and commercial sales in Europe and other
international markets and for increased vena cava filter sales. In the year
ended December 31, 1996, the Company's operations utilized cash of $1.7 million
which was used primarily to fund operating losses and for working capital. Cash
flow from operations was used to fund increases in accounts receivable of $1.5
million and $459,000 in the years ended December 31, 1997 and 1996,
respectively. Such increases reflect the increases in product sales and the
timing of such product sales.
During the year ended December 31, 1997, the Company received proceeds of
$815,000 from the exercise of Common Stock options. In October 1996, the
Company completed an initial public offering of 3,150,000 shares of Common Stock
for net proceeds of approximately 31,197,000, net of underwriting discounts and
expenses. In February 1996, the Company received approximately $7.5 million in
net proceeds from the sale of 3,787,104 shares of Convertible Preferred Stock,
which funds were used in part to accelerate its facilities and infrastructure
expansion. In the year ended December 31, 1996, the Company made a $100,000
distribution to its stockholders. In 1996, the Company made its last payment on
a $1.5 million loan received in 1992 from Bard. Payments during 1996 and 1995
amounted to $781,000 and $477,000, respectively. In addition, during the years
ended December 31, 1996 and 1995, the Company repaid subordinated debt to its
stockholders amounting to $309,000 and $2,500, respectively. The Company had no
such outstanding debt during the year ended December 31, 1997.
Purchases and capitalized leases of property and equipment for use in its
research and development, manufacturing and general and administrative
activities amounted to $672,000 and $2.2 million during the years ended December
31, 1997 and 1996,
31
respectively. In May 1996, the Company entered into a lease for a new
manufacturing research and administrative facility which increased its annual
facility lease payments by approximately $400,000 beginning in the third quarter
of 1996. In connection therewith, the Company incurred costs for leasehold
improvements of approximately $1 million, net of the landlord's contribution. In
June 1996, the Company entered into a $1.5 million equipment lease line of
credit agreement without covenants. Upon expiration of this agreement in June
1997, the Company entered into a new agreement with similar terms that provides
the Company and its affiliate, ITC, the option to borrow up to $1 million
through March 31, 1998. As of December 31, 1997, the Company borrowed $572,000
and $376,000 under the $1.5 million and $1.0 million agreement, respectively,
including $221,000 borrowed under the $1.0 million agreement by ITC. The Company
has guaranteed the outstanding capital leases of ITC. See Note 8 of the
accompanying Notes to Consolidated Financial Statements.
The Company is party to various other substantial contractual arrangements
including salaries and fees for current employees and consultants which are
likely to increase as additional agreements are entered into and additional
personnel are retained. The Company has also committed to purchase certain
minimum quantities of components from a supplier through June 2001. See Note 8
of Notes to 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 has reviewed its internal computer systems and their capability of
recognizing the year 2000 and years thereafter. The Company expects that any
costs related to ensuring such systems to be year 2000 compliant will not be
material to the financial condition or results of operations of the Company.
The Company believes that its existing resources and cash flow from current
operations will be sufficient to fund its current level of operations and
planned new product development, including increased working capital
requirements and capital expenditures, for the foreseeable future. The Company
expects to expend substantial resources to complete development of the Company's
products, seek regulatory clearances or approvals, build its marketing, sales
and manufacturing organizations and conduct further research and development.
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 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 preclinical and 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 terms of any collaborative, licensing and other arrangements
that the Company may establish.
32
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.
Limited Commercialization; Uncertainties of Product Development and Market
Acceptance. The Company currently markets three products, the Simon Nitinol
Filter, which is marketed worldwide, a line of the Company's peripheral vascular
stents under the name Symphony, which is marketed by Boston Scientific in Europe
and the United States, and the CardioSEAL Septal Occluder. The Company's stents
and CardioSEAL Septal Occluder may require substantial further investment in
research, product development, preclinical and clinical testing and governmental
regulatory approvals prior to being marketed and sold in the United States.
There can be no assurance that the Company's current products, or any other
products developed by the Company will achieve or continue to have market
acceptance. Certain of the medical indications that can be treated by the
Company's devices can also be treated by surgery, drugs or other medical
devices. Many alternative treatments currently are widely accepted in the
medical community and have a long history of use. There can be no assurance
that the Company's devices and procedures will be able to replace such
established treatments or that physicians or the medical community in general
will accept and utilize the Company's devices or any other medical products that
may be developed by the Company.
Dependence Upon Collaborators. The Company has entered into distribution
agreements with Bard Radiology and Bard International granting them exclusive
distribution rights to the Company's SNF, and a license agreement with Boston
Scientific granting Boston Scientific exclusive worldwide rights to develop,
manufacture, market and distribute the Company's stent technology and products
which incorporate such technology. Although Bard Radiology and Bard
International have agreed not to sell competing filters, Boston Scientific is
not prohibited from selling other stents and, in fact, manufactures and licenses
from others a variety of stents that may compete with the Company's stents.
Boston Scientific may choose to emphasize such other stents in its developmental
and marketing efforts. There can be no assurance that these arrangements will
be renewed or that the Company's existing relationships with Bard Radiology,
Bard International or Boston Scientific will continue in their current form.
The Company's business could be materially adversely affected if its
arrangements with Bard Radiology, Bard International or Boston Scientific prove
unsuccessful or if such companies terminate their arrangements with the Company,
negotiate lower prices, sell additional competing products, whether manufactured
by themselves or others, or otherwise alter the nature of their relationships
with the Company.
Intense Competition; Rapid Technological Change. The medical device industry is
characterized by rapidly evolving technology and intense competition. Other
companies in the medical device industry are currently marketing products that
compete with the Company's devices and may be developing, or could in the future
develop, additional products that are competitive with the Company's. Many of
the Company's competitors have substantially greater capital resources, greater
research and development, manufacturing and marketing resources and experience
and greater name recognition
33
than the Company. In addition, new surgical procedures and medications could be
developed that replace or reduce the importance of current or future procedures
that use the Company's products.
Limited Manufacturing History; Dependence on Third Party Manufacturers. The
Company currently uses third parties to manufacture components of the SNF system
and to distribute the SNF. Final assembly of the vena cava filter system and
manufacturing of the CardioSEAL are done by the Company in its own facility.
Pursuant to an exclusive license agreement with Boston Scientific, Boston
Scientific manufactures and distributes the Company's stents. The Company
intends to continue to use third parties to manufacture and distribute such
products and certain other products which the Company may seek to develop. If
the Company should encounter delays or difficulties with third party
manufacturers in producing, packaging or distributing its proposed products,
market introduction and subsequent sales of such products would be adversely
affected and the Company may have to seek alternative sources of supply. No
assurance can be made that the Company will be able to enter into alternative
supply arrangements at commercially acceptable rates, if at all. If the Company
is unable to obtain or retain third party manufacturers on commercially
acceptable terms, it may not be able to commercialize medical products as
planned.
The Company's manufacturing facility is subject to Good Manufacturing Practice
("GMP") regulations, ISO 9000 and other regulatory requirements, is subject to
risks regarding delays or difficulties encountered in manufacturing any such
medical products and may require a substantial additional investment of capital.
Limited Marketing and Sales Experience. Although the Company has limited
internal marketing and sales resources and personnel, and currently relies
primarily on third parties to market and sell its products, the Company plans to
market the CardioSEAL Septal Occluder directly, if and when it receives the
required regulatory approvals. In order to market the CardioSEAL Septal
Occluder and any other products that it may develop, the Company will have to
develop a marketing and sales organization with technical expertise and
distribution capabilities.
Dependence on Patents and Proprietary Technology. The Company's success will
depend, in part, on its ability to obtain patents, maintain trade secret
protection and operate without infringing on the proprietary rights of third
parties. No assurance can be given 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 the
Company, any of the Company's 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 the Company. Furthermore, there can be no
assurances that others have not or will not develop similar products, duplicate
any of the Company's products or design around any patents issued or that may be
issued in the future to the Company or its licensors. In addition, whether or
not patents are issued to the Company or its licensors, others may hold or
receive patents which contain claims having a scope that covers products
developed by the Company. The Company could incur substantial costs in
defending any patent infringement suits or in asserting
34
any patent rights, including those granted by third parties. In addition, the
Company 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.
Government Regulation; Product Approvals Uncertain. 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 manufactured or distributed by the
Company are subject to continuing regulation by the FDA. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or clearances for its products on a timely basis or at all, and delays in
receipt of, or failure to receive, such approvals or clearances, the loss of
previously received approvals or clearances, limitations on intended use imposed
as a condition of such approvals or clearances, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
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 the Company's business, financial condition and
results of operations.
Uncertain Availability of Third Party Reimbursement. In the United States,
suppliers of health care products and services are greatly affected by Medicare,
Medicaid and other government insurance programs, as well as by private
insurance reimbursement programs. Third party payers may affect the pricing or
relative attractiveness of the Company's products by regulating the maximum
amount of reimbursement provided for by such payers to the physicians and
clinics using the Company's devices, or any other products that the Company may
develop, or by taking the position that such reimbursement is not available at
all. 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 the implemented in the
future. In the international market, reimbursement by private third party
medical insurance providers, and 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.
Uncertainties of Successful Redesign of the Septal Repair Device. Between 1989
and 1991 Bard sponsored trials of an earlier version of the septal repair
device, known as the Clamshell. In 1991, Bard discovered fractures of the
stainless steel framework in certain
35
of the devices implanted during such clinical trials and, following such
discovery, suspended its clinical trials worldwide except for patients at high
risk for surgery. It was determined that the fractures were caused by metal
fatigue resulting from higher than anticipated forces acting on the Clamshell.
Redesign efforts were initiated, resulting in the design of the current version
of the septal repair device. Although the CardioSEAL Septal Occluder has
undergone in vitro testing, there can be no assurance that such testing
accurately simulates the actual forces in the human body or that similar
fractures will not occur with the CardioSEAL Septal Occluder. If such fractures
occur with adverse clinical consequences, the Company's efforts to commercialize
the CardioSEAL Septal Occluder may be significantly delayed and the Company may
be required to invest significant resources in further designing and engineering
the device or to discontinue its development efforts.
Product Liability Risks; Insurance. The testing, marketing and sale of
implantable devices and materials entail an inherent risk that product liability
claims will be asserted against the Company or its third party distributors in
the event that the use of the Company's devices is alleged to have adverse
effects on a patient. A product liability claim or a product recall could have
a material adverse effect on the Company's business, financial condition and
results of operations. Certain of the Company's devices are designed to be used
in life-threatening situations where there is a high risk of serious injury or
death. Although the Company currently maintains limited product liability
insurance coverage, there can be no assurance that in the future the Company
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, there can be no assurance that
the Company 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
the Company's business, financial condition, and results of operations.
Uncertain Future Capital Requirements. The Company may require additional funds
for its research and product development programs, preclinical and clinical
testing, operating expenses, regulatory processes and manufacturing and
marketing programs. 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 preclinical and 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 new collaborative, licensing and other
arrangements that the Company may establish. There can be no assurance that
additional financing will be available when needed or, if available, will be
available on acceptable or affordable terms. Insufficient funds may prevent the
Company from implementing its business strategy or may require the Company to
delay, scale back or eliminate certain of its research and product development
programs or to license to third parties rights to commercialize products or
technologies that the Company would otherwise seek to develop itself. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
36
Dependence on Qualified Personnel. There is intense competition for qualified
personnel in the medical device field, and there can be no assurance that the
Company will be able to continue to attract and retain qualified personnel
necessary for the development of its business. 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 the Company's anticipated growth and expansion into areas and
activities requiring additional expertise such as marketing. The failure to
attract and retain such personnel could adversely affect the Company's business.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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.
37
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 Annual Meeting of Stockholders to
be held on June 3, 1998 (the "1998 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 1998 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 1998 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 1998 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 1998 Proxy Statement under the
caption "Certain Transactions," which section is incorporated herein by this
reference.
38
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 Nitinol Medical Technologies, Inc.:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flow for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Financial Statements of Image Technologies Corporation:
Report of Independent Public Accountants
Balance Sheet
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flow
Notes to 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
they are 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(i) 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, 1997.
39
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.
NITINOL MEDICAL TECHNOLOGIES, INC.
By: /s/ Thomas M. Tully,
-------------------------------------
Thomas M. Tully,
President and Chief Executive Officer
Dated: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Thomas M. Tully President and Chief Executive March 16, 1998
- ------------------------------- Officer and Director (Principal
Thomas M. Tully Executive Officer)
/s/ Theodore I. Pincus Executive Vice President, Secretary March 16, 1998
- ------------------------------- and Chief Financial Officer (Principal
Theodore I. Pincus Financial and Accounting Officer)
/s/ C. Leonard Gordon Director March 16, 1998
- -------------------------------
C. Leonard Gordon
/s/ Morris Simon, M.D. Director March 16, 1998
- -------------------------------
Morris Simon, M.D.
/s/ Michael C. Brooks Director March 16, 1998
- -------------------------------
Michael C. Brooks
/s/ Robert A. Van Tassel Director March 16, 1998
- -------------------------------
Robert A. Van Tassel
/s/ R. John Fletcher Director March 16, 1998
- -------------------------------
R. John Fletcher
/s/ Jeffrey R. Jay, M.D. Director March 16, 1998
- -------------------------------
Jeffrey R. Jay, M.D.
40
Appendix A
----------
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NITINOL MEDICAL TECHNOLOGIES AND SUBSIDIARIES:
Report of Independent Public Accountants A-2
Consolidated Balance Sheets as of December 31, 1997 and 1996................... A-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1996, and 1995............................................................ A-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1997, 1996, and 1995......................................... A-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996, and 1995............................................................ A-6
Notes to Consolidated Financial Statements..................................... A-7 - A-26
IMAGE TECHNOLOGIES CORPORATION:
Report of Independent Public Accountants A-27
Balance Sheets as of December 31, 1997......................................... A-28
Statements of Operations for the Year Ended December 31, 1997 and From
Inception (November 17, 1995) to December 31, 1997 ...................... A-29
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1997, 1996, and 1995......................................... A-30
Statements of Cash Flows for the Year Ended December 31, 1997, and From
Inception (November 17, 1995) to December 31, 1997........................ A-31
Notes to Financial Statements.................................................. A-32 - A-40
A-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nitinol Medical Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Nitinol
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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 Nitinol Medical
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with general accepted
accounting principles.
Boston, Massachusetts
February 9, 1998
A-2
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
Assets 1997 1996
-------------------- --------------------
Current assets:
Cash and cash equivalents $ 5,561,445 $ 4,082,486
Marketable securities 20,822,405 25,273,555
Accounts receivable, net of allowances for doubtful accounts
of $125,000 and $17,000 in 1997 and 1996, respectively 2,317,408 782,230
Inventories 1,071,265 745,977
Prepaid expenses and other current assets 1,110,271 610,017
----------- -----------
Total current assets 30,882,794 31,494,265
----------- -----------
Property and equipment, at cost:
Leasehold improvements 1,135,583 1,191,498
Laboratory and computer equipment 1,091,380 925,166
Equipment under capital lease 948,155 548,063
Office furniture and equipment 143,640 93,031
----------- -----------
3,318,758 2,757,758
Less--Accumulated depreciation and amortization 845,512 504,909
----------- -----------
2,473,246 2,252,849
----------- -----------
Long-term investments in marketable securities 1,478,058 1,083,763
----------- -----------
Other assets 171,415 98,627
----------- -----------
$35,005,513 $34,929,504
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 166,248 $ 420,424
Accrued expenses 986,128 678,164
Current portion of capital lease obligation 168,736 94,954
Deferred revenue 300,000 --
----------- -----------
Total current liabilities 1,621,112 1,193,542
----------- -----------
Capital lease obligation, net of current portion 612,458 415,591
----------- -----------
Commitments and contingencies (Note 8)
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--9,823,186 and 9,435,922
shares at December 31, 1997 and 1996, respectively 9,824 9,437
Additional paid-in capital 36,610,997 35,321,821
Accumulated deficit (3,848,878) (2,010,887)
----------- -----------
Total stockholders' equity 32,771,943 33,320,371
----------- -----------
$35,005,513 $34,929,504
=========== ===========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
A-3
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Revenues:
Product sales $ 8,564,810 $ 4,556,861 $2,716,022
License fees 1,500,000 2,375,000 625,000
Product development 60,898 91,662 491,857
----------- ----------- ----------
10,125,708 7,023,523 3,832,879
----------- ----------- ----------
Expenses:
Cost of product sales 3,765,235 2,386,896 1,263,951
Research and development 2,973,755 2,661,849 870,588
General and administrative 2,888,149 2,284,184 871,469
Selling and marketing 1,010,123 310,988 169,308
Acquired in-process research and development 2,449,071 1,111,134 --
Restructuring charge 193,636 -- --
----------- ----------- ----------
13,279,969 8,755,051 3,175,316
----------- ----------- ----------
Income (loss) from operations (3,154,261) (1,731,528) 657,563
----------- ----------- ----------
Interest expense (46,152) (42,179) (37,629)
Interest income 1,591,922 610,830 8,328
----------- ----------- ----------
1,545,770 568,651 (29,301)
----------- ----------- ----------
Income (loss) before provision for
income taxes (1,608,491) (1,162,877) 628,262
Provision for income taxes 229,500 -- 44,000
----------- ----------- ----------
Net income (loss) $(1,837,991) $(1,162,877) $ 584,262
=========== =========== ==========
Basic income (loss) per common share $(.19) $(.21) $.16
=========== =========== ==========
Weighted average common shares outstanding 9,595,969 6,748,810 3,763,587
=========== =========== ==========
Diluted income (loss) per common share $(.19) $(.21) $.15
=========== =========== ==========
Diluted weighted average common shares
outstanding 9,595,969 6,748,810 3,983,247
=========== =========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
A-4
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible
Preferred Stock Common Stock
------------------------------ --------------------
Number $ .001 Number $.001
of Shares Par Value of Shares Par Value
--------------- ------------ --------- ------
Balance, January 1, 1995 -- $ -- 3,758,322 $3,759
Exercise of common stock
options -- -- 15,790 16
Distributions to stockholders
($.03 per share) -- -- -- --
Reclassification of S Corpora-
tion losses to the extent of
additional paid-in capital -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- ----------
Balance, December 31, 1995 -- -- 3,774,112 3,775
Issuance of convertible
preferred stock, net of
issuance costs of
approximately $989,000 3,787,104 3,787 -- --
Common stock issued in
connection with the
purchase of technology
and other assets -- -- 514,651 515
Exercise of common stock
options -- -- 3,947 4
Warrant grant in exchange
for license -- -- -- --
Accretion of convertible
preferred stock dividends -- -- -- --
Proceeds from initial public
offering, net of offering costs
of approximately -- -- 3,150,000 3,150
$ 1,028,000
Conversion of convertible
preferred stock into common stock (3,787,104) (3,787) 1,993,212 1,993
Net loss -- -- -- --
----------- ----------- ----------- ----------
Balance, December 31, 1996 -- -- 9,435,922 9,437
Exercise of common stock
options -- -- 322,485 322
Exercise of warrants -- -- 64,779 65
Acceleration of vesting of
common stock options -- -- -- --
Tax benefit related to exercise
of common stock options -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ----------
Balance, December 31, 1997 -- $ -- 9,823,186 $9,824
=========== ============ =========== ==========
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity/(Deficit)
------------ ------------ ---------------
Balance, January 1, 1995 $ 263,247 $(1,598,503) $(1,331,497)
Exercise of common stock options 2,984 -- 3,000
Distributions to stockholders
($.03 per share) -- (100,000) (100,000)
Reclassification of S Corpora-
tion losses to the extent of
additional paid-in capital (266,231) 266,231 --
Net income -- 584,262 584,262
----------- ----------- -----------
Balance, December 31, 1995 -- (848,010) (844,235)
Issuance of convertible
preferred stock, net of
issuance costs of
approximately $989,000 3,257,211 -- 3,260,998
Common stock issued in
connection with the
purchase of technology
and other assets 1,104,442 -- 1,104,957
Exercise of common stock
options 8,471 -- 8,475
Warrant grant in exchange
for license 11,200 -- 11,200
Accretion of convertible
preferred stock dividends (255,000) -- (255,000)
Proceeds from initial public
offering, net of offering costs of
approximately $ 1,028,000 31,193,703 -- 31,196,853
Conversion of convertible
preferred stock into common
stock 1,794 -- --
Net loss -- (1,162,877) (1,162,877)
----------- ----------- -----------
Balance, December 31, 1996 35,321,821 (2,010,887) 33,320,371
Exercise of common stock
options 535,706 -- 536,028
Exercise of warrants 275,894 -- 275,959
Compensation relating to
acceleration of vesting of
common stock options 111,576 -- 111,576
Tax benefit related to exercise
of common stock options 366,000 -- 366,000
Net loss -- (1,837,991) (1,837,991)
----------- ----------- -----------
Balance, December 31, 1997 $36,610,997 $(3,848,878) $32,771,943
=========== =========== ===========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
A-5
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
------------ ------------- ----------
Cash flows from operating activities:
Net income (loss) $(1,837,991) $ (1,162,877) $ 584,262
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities--
Expense recorded on acceleration of stock options 111,576 -- --
Depreciation and amortization 461,141 226,968 88,895
Write off of leasehold improvements -- 75,000 --
Common stock issued for in-process research and development -- 806,174 --
Warrant grant in exchange for license -- 11,200 --
Changes in assets and liabilities--
Accounts receivable (1,535,178) (459,013) (238,421)
Inventories (325,288) (537,916) (56,947)
Prepaid expenses and other current assets (500,254) (209,048) (152,512)
Accounts payable (254,176) (78,392) 379,347
Accrued expenses 673,966 462,181 (79,523)
Deferred revenue 300,000 (600,000) --
---------- ---------- ----------
Net cash provided by (used in) operating activities (2,906,204) (1,465,723) 525,101
---------- ---------- ----------
Cash flows from investing activities:
Maturities (purchases) of marketable securities and long-term investments 4,056,855 (26,611,915) --
Purchases of property and equipment (272,380) (1,317,250) (201,121)
Increase in other assets (81,855) (39,495) (29,513)
----------- ------------ ---------
Net cash provided by (used in) investing activities 3,702,620 (27,968,660) (230,634)
----------- ------------ ---------
Cash flows from financing activities:
Proceeds from initial public offering, net -- 31,196,853 --
Redemption of preferred stock including dividends -- (4,505,000) --
Payments of subordinated debt -- (309,356) (2,500)
Payments of loan from distributor -- (780,830) (477,120)
Proceeds from issuance of convertible preferred stock, net -- 7,510,998 --
Proceeds from issuance of common stock 811,986 8,475 3,000
Distributions to stockholders -- (100,000) --
Payments of capital lease obligations (129,443) (37,518) --
----------- ------------ ---------
Net cash provided by (used in) financing activities 682,543 32,983,622 (476,620)
----------- ------------ ---------
Net increase (decrease) in cash and cash equivalents 1,478,959 3,549,239 (182,153)
Cash and cash equivalents, beginning of period 4,082,486 533,247 715,400
----------- ------------ ---------
Cash and cash equivalents, end of period $ 5,561,445 $ 4,082,486 $ 533,247
=========== ============ =========
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest $ 46,152 $ 27,288 $ 39,814
=========== ============ =========
Income Taxes $ 32,000 $ 186,500 $ 2,135
=========== ============ =========
Supplemental disclosure of non-cash financing and investing transactions:
Equipment acquired under capital lease obligations $ 400,091 $ 548,063 $ --
=========== ============ =========
Abandonment of leasehold improvements $ 111,472 $ -- $ --
=========== ============ =========
Conversion of preferred stock into common stock $ -- $ 3,787 $ --
=========== ============ =========
Common stock issued for property and equipment $ -- $ 298,783 $ --
=========== ============ =========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
A-6
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Nitinol Medical Technologies, Inc. (NMT or the Company) designs, develops
and markets innovative medical devices that utilize advanced technologies
and are delivered by minimally invasive procedures. The Company's products
are designed to offer alternative approaches to existing complex
treatments, thereby reducing patient trauma, shortening procedure,
hospitalization and recovery times, and lowering overall treatment costs.
The Company's patented medical devices include self-expanding stents, vena
cava filters and septal repair devices (the CardioSEAL Septal Occluder).
At this time, the Company's stents have been commercially launched in
Europe and in the United States for certain indications, its vena cava
filters are marketed in the United States and abroad, and the CardioSEAL
Septal Occluder is in the clinical trials stage in U.S. and is sold
commercially in Europe and other international markets. The Company is
subject to a number of risks similar to those of other companies in this
stage of development, including uncertainties regarding the development of
commercially viable products, competition from alternative procedures and
larger companies, dependence on key personnel and government regulation.
(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 accrual-based 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
A-7
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities, and Long-Term
Investments
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified certain of its marketable securities and long-term
investments as held-to-maturity and certain of its marketable securities as
available-for-sale. Held-to-maturity securities represent those securities
for which the Company has the intent and ability to hold to maturity and
are reported at amortized cost. Available-for-sale securities represent
those securities that do not meet the classification of held-to-maturity,
are not actively traded and are reported at fair market value with
unrealized gains and losses included in stockholders' equity. The Company
considers all investments with maturities of 90 days or less from the date
of purchase to be cash equivalents.
Cash and cash equivalents, which are carried at cost and approximate
market value, consist of the following:
AT DECEMBER 31,
1997 1996
---- ----
Cash $1,626,074 $ 816,124
Cash equivalents--
Commercial paper 2,964,195 2,994,829
Money market 971,176 271,533
---------- ----------
$5,561,445 $4,082,486
========== ==========
A-8
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities, and Long-Term
Investments--(continued)
Marketable securities, with a weighted average maturity of approximately 6
months and 4 1/2 months at December 31, 1997 and 1996, respectively,
consist of the following:
AT DECEMBER 31,
1997 1996
---- ----
Held-to-maturity--
Eurodollar bonds $10,619,598 $11,084,453
Commercial paper 5,985,895 10,958,453
Corporate debt securities 2,388,681 329,363
Zero coupon bonds 1,162,233 --
Medium term notes 665,998 501,596
----------- -----------
20,822,405 22,873,555
Available-for-sale--
Taxable auction securities -- 2,400,000
----------- -----------
$20,822,405 $25,273,555
=========== ===========
Long-term investments, with a weighted average maturity of approximately
15 and 1/2 months and 15 months at December 31, 1997 and 1996,
respectively, are carried at cost and approximate market value and
consist of the following:
AT DECEMBER 31,
1997 1996
---- ----
Held-to-maturity--
Corporate debt securities $ 975,590 $ --
Medium-term notes 502,468 --
Eurodollar bonds -- 1,083,763
---------- ----------
$1,478,058 $1,083,763
========== ==========
A-9
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities, and Long-Term
Investments--(continued)
In addition, the following amounts of interest receivable generated from
the Company's cash and cash equivalents, marketable securities, and long-
term investments are included in prepaid expenses and other current assets
in the accompanying balance sheets:
AT DECEMBER 31,
1997 1996
---- ----
Short-term interest receivable $476,559 $237,643
Long-term interest receivable 5,676 16,953
-------- --------
$482,235 $254,596
======== ========
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
AT DECEMBER 31,
1997 1996
---- ----
Components $ 625,381 $307,778
Finished goods 445,884 438,199
---------- --------
$1,071,265 $745,977
========== ========
Finished goods consist of materials, labor and manufacturing overhead.
(e) Financial Instruments
The estimated fair values of the Company's financial instruments, which
include cash and cash equivalents, marketable securities, long-term
investments, accounts receivable and capital lease obligations approximate
their reported amounts.
A-10
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet and
credit risk concentrations. Financial instruments that subject the Company
to credit risk consist primarily of trade accounts receivable. The Company
utilizes primarily one distributor for the sales of its filter products.
This distributor had amounts due to the Company of approximately $923,000
and $408,000 as of December 31, 1997 and 1996, respectively. This
distributor accounted for 65%, 89% and 95% of product revenues for fiscal
1997, 1996 and 1995, respectively for the year ended December 31, 1997,
foreign sales accounted for 22% of total revenues.
(g) 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 and equipment over the following estimated useful lives:
Estimated
Asset Classification Useful Life
-------------------- -----------
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
(h) Revenue Recognition
The Company records product sales upon shipment to the customer. Products
sold to the Company's distributors are not subject to a right of return for
unsold product. License fees and product development revenue are recognized
as earned.
A-11
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(i) Net Income (Loss) per Common and Common Equivalent Share
In 1997, the Company adopted SFAS No. 128, Earnings per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The Company has applied the
provisions of SFAS No. 128 retroactively to all periods presented. In
accordance with SAB No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the periods
prior to the Company's initial public offering. The dilutive effect of
potential common shares in 1995 was determined using the treasury stock
method in accordance with SFAS No. 128. Diluted weighted average shares for
1997 and 1996 excludes the potential common shares from stock options, as
their effect would be antidilutive. Calculations of basic and diluted net
income (loss) per share are as follows:
DECEMBER 31,
1997 1996 1995
----------------- ---------------- -----------------
Net income (loss) $(1,837,991) $(1,162,877) $ 584,262
Accretion of convertible preferred
stock dividends -- 255,000 --
----------- ----------- ----------
Net income (loss) available to common
stockholders $(1,837,991) $(1,417,877) $ 584,262
=========== =========== ==========
Weighted average common shares
outstanding 9,595,969 6,748,810 3,763,587
Potential common stock pursuant to stock
options -- -- 219,660
----------- ----------- ----------
Diluted weighted average shares 9,595,969 6,748,810 3,983,247
=========== =========== ==========
Basic earnings (loss) per share $ (.19) $ (.21) $ .16
=========== =========== ==========
Diluted earnings (loss) per share $ (.19) $ (.21) $ .15
=========== =========== ==========
(j) Postretirement Benefits
The Company has no material obligations for postretirement benefits.
A-12
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) PURCHASE OF TECHNOLOGY AND OTHER ASSETS
(a) InnerVentions
In February 1996, the Company issued 514,651 shares of its common stock and
warrants to purchase 111,818 shares of common stock at $2.15 per share for
the purchase of certain technology and related fixed assets. The Company
valued the common stock issued in this transaction at $2.15 per share, which
represented the fair value as determined by its Board of Directors and
supported by an appraisal. The Company is required to pay certain future
royalties, as defined in the agreement. The acquired technology relates to
the CardioSEAL Septal Occluder for which the Company is conducting human
clinical trials. At the time of the acquisition, it was determined that the
commercial feasibility of the purchased technology was uncertain, and
accordingly, the Company charged the amount of the purchase price allocated
to the technology to operations as in-process research and development. The
amount allocated to laboratory and computer equipment represents the
estimated fair value at the date of acquisition of the acquired laboratory
and computer equipment that have alternative future uses. The aggregate
purchase price and acquisition costs incurred of $1,409,917 were allocated
as follows:
Laboratory and computer equipment $ 298,783
In-process research and development 1,111,134
----------
$1,409,917
==========
(b) Image Technologies Corporation
On May 29, 1997 the Company entered into an agreement to invest $2.3 million
in Image Technologies Corporation (ITC) in exchange for 345,722 shares of
ITC's $.01 par value redeemable convertible preferred stock, representing a
23% ownership interest in ITC. Under the terms of this agreement, the
Company has also extended ITC a credit line of up to $2 million of senior
debt, exchangeable for convertible preferred stock at the option of the
Company and equivalent to up to an additional 20% ownership of ITC. ITC may
draw against this line of credit based upon meeting its approved business
plan. The Company, however, has the right to advance all of the line and
exchange it for convertible preferred stock at its option. The Company also
has a 24 month option to purchase the remaining 57% of ITC for $24.5
million, of which up to $7.84 million may be payable in cash. The option may
be extended for an additional six months under certain conditions. The
Company guarantees the operating and capital leases of ITC (see Note 8(c)).
A-13
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) PURCHASE OF TECHNOLOGY AND OTHER ASSETS--(CONTINUED)
(b) Image Technologies Corporation--(continued)
ITC uses certain facilities, management, administrative, and other services
of NMT. Under this agreement ITC is to pay NMT $216,000 per annum for two
years. During the year ended December 31, 1997, ITC's management service
fees amounted to $126,000.
ITC is a development stage company which is focusing its efforts on
developing certain technologies and has generated no revenues to date. Due
to the uncertainty regarding the realization of the investment, the Company
charged the amount of the purchase price and related acquisition costs to
operations as in-process research and development in the period of the
investment in the accompanying statements of operations.
(4) RESTRUCTURING CHARGE
During 1997, the Company reorganized its vena cava filter operations and
brought the assembly of its straight-line vena cava filters in-house. In
connection with this restructuring, the Company reduced staff and incurred
other non-recurring costs. The $194,000 restructuring charge in the
accompanying statements of operations includes a non-cash charge of
$112,000 for the accelerated vesting of certain stock options, cash
severance and benefits of $62,000 and $20,000 for the transfer of assembly
technology. Other start-up costs related to the in-house assembly of the
straight-line vena cava filter, including the training of manufacturing
personnel and associated materials and overhead, are included in cost of
goods sold in the accompanying statements of operations.
A-14
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) INCOME TAXES
The Company uses the liability method to account for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes.
Prior to October 19, 1995, the Company elected to be taxed as an S
corporation for federal and state income tax purposes. Accordingly, the
accompanying consolidated financial statements do not include a provision
for the first 10 1/2 months of 1995. The provision for income taxes in the
accompanying consolidated statement of operations for the period from
October 19, 1995 to December 31, 1995 consists of the following:
Federal $ --
State 44,000
-------
$44,000
=======
The accompanying 1995 consolidated statement of operations does not contain
a pro forma income tax adjustment for periods prior to the termination of
the S corporation election. If the election to be treated as an S
corporation was not made, the Company would have been subject to federal and
state corporate income taxes. However, the Company would have had sufficient
net operating loss carryforwards to offset income in 1995. There is no
provision for income taxes for the year ended December 31, 1996 as the
Company incurred an operating loss during that year. The provision for
income taxes in the accompanying consolidated statement of operations for
the year ended December 31, 1997 consists of the following:
Federal - current $ 366,000
State - current 21,000
---------
387,000
Federal - deferred $(134,000)
State - deferred (23,500)
---------
(157,500)
---------
$ 229,500
=========
The Company has recorded the tax benefit of $366,000 associated with certain
incentive stock option and non-qualified stock option exercises as a
reduction in its current tax liability and as a component of additional paid
in capital.
A-15
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) INCOME TAXES--(CONTINUED)
As of December 31, 1997, the Company has net operating losses and credit
carryforwards of approximately $81,000 and $515,000, respectively. The
carryforwards expire through 2011 and are subject to possible adjustment
by federal and state tax authorities.
The approximate income tax effect of each temporary difference
constituting the deferred tax asset, which is included in prepaid
expenses and other current assets in the accompanying consolidated
balance sheets, is as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Deferred tax assets:
Tax credit carryforwards $ 515,000 $ 231,000
Net operating loss carryforwards 32,000 158,000
Deferred revenue 120,000 --
Reserves and nondeductible accruals 62,000 16,000
--------- ---------
729,000 405,000
Deferred tax liabilities:
Depreciation (24,000) (21,000)
--------- ---------
705,000 384,000
Valuation allowance (547,500) (384,000)
--------- ---------
Net deferred tax asset $ 157,500 $ --
========= =========
The Company has provided a valuation allowance for a portion of its gross
deferred tax asset due to the uncertainty in its ability to fully utilize
this asset. In 1997, the Company received a refund of $143,000 that was
recorded as refundable income taxes as of December 31, 1996.
(6) LOAN FROM DISTRIBUTOR
The Company has an exclusive distribution agreement with an unrelated third
party to provide for the sale and distribution of the Simon Nitinol Filter
(SNF). In connection with this agreement, the Company received a loan of
$1,500,000 from the distributor in 1992. The agreement called for the
repayment of this loan by the Company through certain minimum purchases of
the SNF by the distributor, as defined in the agreement. This loan was paid
in full as of December 1996.
A-16
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEFERRED REVENUE
On November 22, 1994, the Company licensed exclusive, worldwide rights,
including the right to sublicense to others, to develop, produce and market
its stent technology to an unrelated third party (the Licensee). In
connection with the signing of the license agreement, the Company received
$500,000 in consideration for the license granted and an additional
$500,000 upon issuance of the United States patent for a specific stent.
The Company was required to refund varying amounts of such payments based
on the occurrence of certain events, as defined in the license agreement.
The Company deferred recognition as revenue of amounts that were subject to
refund until the expiration of the refund period. The final refund period
expired in November 1996. Under this agreement the Company earned
$1,200,000 and $750,000 in license revenues during the years ended December
31, 1997 and 1996, respectively. All licensing revenues for 1995 were
milestone revenues as discussed below.
During 1997, 1996 and 1995, the Company received $300,000, $1,625,000 and
$625,000, respectively, in additional nonrefundable license fees upon the
achievement of certain milestones, as defined in the license agreement.
These amounts are included in license fees in the accompanying consolidated
statements of operations. On December 31, 1997, the Company received a
payment of $300,000 from the Licensee that pertains to a milestone achieved
by the Company in 1998. This amount is included in deferred revenue in the
accompanying balance sheet as of December 31, 1997 and will be recognized
as revenue in 1998.
Under a product development program with the Licensee, the Company received
reimbursement of costs incurred related to the activities of product
development, registration and transfer of technology to the Licensee. For
the years ended December 31, 1997, 1996 and 1995, the Company received
$61,000, $92,000, and $492,000, respectively, of reimbursements for
development program costs. These reimbursed amounts are included in
revenues in the accompanying consolidated statements of operations.
A-17
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) COMMITMENTS, CONTINGENCIES AND CAPITAL LEASE ARRANGEMENTS
(a) Manufacturing Agreement
The Company contracts with an unrelated third party for the manufacture of
certain components. Under the amended agreement dated February 15, 1996, the
Company is required to purchase minimum unit quantities through June 2001.
The aggregate minimum purchases under the agreement are approximately
$2,600,000. In addition, in the event of an order cancellation or product
conversion, the Company has agreed to purchase all in-process materials and
all special materials purchased by the manufacturer for use in the
production of these components, limited to purchase orders through 180 days
after cancellation.
(b) Operating Leases
The Company has entered into operating leases for office and laboratory
space. 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, 1997 are approximately as follows:
Year Ending Amount
----------- ------
1998 $ 478,000
1999 472,000
2000 468,000
2001 503,000
2002 551,000
Thereafter 1,973,000
----------
$4,445,000
==========
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted
to approximately $482,000, $303,000, and $103,000, respectively. In
addition, the Company is a guarantor of the lease of office space for ITC
(see Note 3(b)).
A-18
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) COMMITMENTS, CONTINGENCIES AND CAPITAL LEASE ARRANGEMENTS--(CONTINUED)
(c) Capital Leases
In June 1996, the Company entered into a $1.5 million lease finance facility
agreement with a bank under which the Company leases equipment at an
interest rate that is 200 basis points above the bank's cost of funds.
Leases under this agreement are payable in equal monthly installments over a
period of 36-60 months and expire through December 2002. Borrowings of
$572,000 were made under this agreement, of which $433,000 was outstanding
as of December 31, 1997.
Upon expiration of this agreement in June 1997, the Company entered into a
new agreement with the bank that provides 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 (see Note 3(b)). Borrowings of $376,000 and
$221,000 were made under this new agreement by the Company and ITC,
respectively, of which $348,000 and $202,000 were outstanding as of December
31, 1997. The Company has guaranteed the outstanding capital leases of ITC.
Future minimum lease payments under the capital lease obligations of the
Company as of December 31, 1997 are approximately as follows:
Year Ending Amount
----------- ------
1998 $236,408
1999 236,408
2000 222,526
2001 167,161
2002 58,375
--------
Total minimum lease payments 920,878
Less--Amount representing interest 139,684
--------
781,194
Less--Current portion 168,736
--------
$612,458
========
A-19
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) COMMITMENTS, CONTINGENCIES AND CAPITAL LEASE ARRANGEMENTS--(CONTINUED)
(d) Royalties
The Company has entered into various agreements that require payment of
royalties based on specified percentages of future sales, as defined (see
Notes 3 and 12). In addition, the Company has agreed to pay royalties to
certain employees based on sales or licenses of products where they were the
sole or joint inventor. Future minimum commitments under these agreements
are approximately $15,000 per year. Royalty expense under royalty agreements
was $278,000, $157,000 and $64,000 for the years December 31, 1997, 1996
and 1995, respectively.
(9) COMMON STOCK
(a) Authorized Common Stock
On July 9, 1996, the Company increased the number of authorized shares of
common stock from 10,000,000 to 30,000,000.
(b) Stock Split
On July 9, 1996, the Company effected a 1-for-1.9 reverse stock split of its
common stock. Accordingly, all share and per share amounts of common stock
have been retroactively restated for all periods presented to reflect the
reverse stock split.
(c) Initial Public Offering
On October 2, 1996, the Company completed an initial public offering (the
"Offering") of 3,000,000 shares of the Company's common stock at $11.00 per
share for net proceeds of approximately $29,662,000, net of underwriting
discounts and related expenses. Upon completion of the Offering, all
outstanding shares of the Company's convertible preferred stock, par value
$.001 per share, automatically converted into 1,993,212 and 3,787 shares of
the Company's common stock and redeemable preferred stock, par value $.001
per share, respectively. A portion of the proceeds from the Offering was
used to redeem the redeemable preferred stock for $4,505,000, which included
dividends of $255,000. Pursuant to an over-allotment option, on October 30,
1996, the underwriters of the Offering purchased an additional 150,000
shares of the Company's common stock at $11.00 per share, resulting in
additional net proceeds to the Company of approximately $1,535,000.
A-20
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) PREFERRED STOCK
In February 1996, the Board of Directors authorized 3,800,000 shares of
convertible preferred stock and 38,000 shares of redeemable preferred
stock. The Company then sold 3,787,104 shares of preferred stock at $2.24
per share, resulting in net proceeds to the Company of approximately
$7,500,000. On July 9, 1996, the Company authorized 3,000,000 shares of
undesignated preferred stock. As a result of the Offering discussed in Note
9(c), the Company's convertible preferred stock was converted into common
stock and redeemable preferred stock, and the redeemable preferred stock,
including dividends, was redeemed for $4,505,000.
(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 five to ten years from date of issuance or 90 days
after termination of service as an officer, director, employee and/or
consultant. Subsequent to December 31, 1997, the Company issued 25,000 such
options at an exercise price of $10.50 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, 1997
the Company has granted 308,368 options under this plan and does not intend
to grant any additional options under this plan.
A-21
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) Stock Options and Warrants--(CONTINUED)
(b) Stock Option Plans--(continued)
1996 Stock Option Plan. The Nitinol Medical Technologies, Inc. 1996 Stock
Option Plan (the 1996 Plan) was approved by the Company's stockholders in
July 1996. The 1996 Plan provides for the grant of options to acquire a
maximum of 600,000 shares of common stock. As of December 31, 1997, 316,276
shares are subject to outstanding options at an exercise price of $8.25-
$14.63 per share. The Board of Directors has appointed a Stock Option
Committee of the Board as the Plan Administrator. The 1996 Plan permits the
granting of incentive stock options or nonstatutory stock options at the
discretion of the Plan Administrator. Subject to the terms of the 1996
Plan, the Plan Administrator determines the terms and conditions of options
granted under the 1996 Plan. At December 31, 1997, 283,724 shares are
available for future grants under the 1996 Plan. Subsequent to December 31,
1997, the Company granted options to purchase 125,100 shares of common
stock at $7.38-10.50 per share.
The 1996 Directors Stock Plan. The Nitinol Medical Technologies, Inc. 1996
stock option plan for non-employee 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
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(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, 1997, 50,000 shares are
subject to outstanding options at an exercise price of $9.88-$14.00 per
share, of which 13,333 shares are exerciseable. Subsequent to December 31,
1997, the Company granted options to purchase 10,000 shares of common stock
at $7.38 per share.
The following table summarizes all stock option activity under all of the
Company's stock option plans, including grants outside of the 1996 and 1994
Plans:
WEIGHTED
AVERAGE EXERCISE
NUMBER OF PRICE PER
Shares Share
--------- ---------
Balance, January 1, 1995 392,104 $ 1.05
Granted 539,459 2.15
Exercised (15,790) .19
--------- ---------
Balance, December 31, 1995 915,773 1.70
Granted 1,060,431 5.17
Exercised (3,947) 2.15
--------- ---------
Balance, December 31, 1996 1,972,257 3.56
Granted 141,500 12.04
Canceled (44,411) 9.72
Exercised (322,485) 1.68
--------- ---------
Balance, December 31, 1997 1,746,861 $ 4.44
========= ======
Exercisable, December 31, 1997 1,037,188 $ 2.99
========= ======
Weighted average remaining
contractual life of options
oustanding 7.62 years
A-23
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The following detail pertains to outstanding options of the Company at
December 31, 1997:
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE PRICE NUMBER OF EXERCISE PRICE
SHARES RANGE PER PER SHARE SHARES PER SHARE
OUTSTANDING SHARE OUTSTANDING OUTSTANDING EXERCISABLE EXERCISABLE
- ----------- ----------------- --------------- ------------ -------------------
1,170,818 $ .76-3.19 $ 1.99 878,669 $ 1.91
493,293 6.95-10.88 8.77 178,144 8.21
82,750 11.50-14.63 13.23 375 11.50
--------- ------------ ------ --------- ------
1,746,861 $ .76-$14.63 $ 4.44 1,037,188 $ 2.99
========= ============ ====== ========= ======
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995,
the Financial Accounting Standards Board issued SFAS No. 123, Accounting for
Stock-Based Compensation, which is effective for fiscal years beginning
after December 15, 1995. 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, 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 1997, 1996 and 1995 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, 1997, 1996 and 1995 are as follows:
DECEMBER 31, December 31, December 31,
1997 1996 1995
------------- --------------- ----------------
Risk-free interest rates 5.71%-6.61% 5.14%-6.39% 5.39%-5.77%
Expected dividend yield -- -- --
Expected lives 3-5 years 3-5 years 3 years
Expected volatility 67% 48% 48%
Weighted average grant-date fair value of options
granted during the period $ 6.38 $ 1.68 $ .82
Weighted average exercise price $ 12.15 $ 4.15 $ 2.15
A-24
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The effect of applying SFAS No. 123 would be as follows:
DECEMBER 31, December 31, December 31,
1997 1996 1995
-------------- -------------- --------------
Pro forma net income (loss) $(2,670,975) $(1,578,296) $564,110
=========== =========== ========
Pro forma basic net income (loss) per share $ (.28) $ (.23) $ .15
=========== =========== ========
Pro forma diluted net income (loss) per share $ (.28) $ (.23) $ .14
=========== =========== ========
(c) Warrants
In connection with the technology purchase discussed in Note 3(a), the
Company issued warrants to purchase 111,818 shares of common stock at $2.15
per share. The warrants are fully exercisable and expire ten years from the
date of grant.
In February 1996, the Company issued warrants to purchase 164,439 shares of
common stock at $4.26 per share to placement agents in connection with a
private placement of the Company's convertible preferred stock. In April
1997, 64,779 of these warrants were exercised.
In April 1996, the Company issued a warrant to purchase 5,263 shares of
common stock at $.02 per share in connection with a patent license
agreement. The warrant is fully exercisable and expires ten years from the
date of grant.
(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.
A-25
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) TECHNOLOGY PURCHASE AGREEMENT
Pursuant to a technology purchase agreement (TPA), the Company purchased
from a stockholder/founder the proprietary rights to the primary patent for
the SNF and related technology. Under the terms of the TPA, the Company
made an initial payment of $15,000 and agreed to pay royalties based upon
various rates of cumulative net sales, as defined, with minimum royalties
payable of $15,000 per year. Royalties are payable over the life of the
primary patent and commenced after FDA approval. The Company has granted
the stockholder/founder a security interest in substantially all
proprietary rights acquired by the Company. In the event of unsecured
defaults, as set forth in the TPA, the Company has agreed to immediately
pay the stockholder/founder damages of $100,000.
(13) RELATED PARTY TRANSACTIONS
Three stockholders of the Company and related entities provide management
consulting services to the Company. Total payments made during the years
ended December 31, 1997, 1996 and 1995 in connection with such services
were approximately $196,000, $256,000 and $242,000, respectively. Beginning
January 1, 1998 only one shareholder provides consulting services to the
Company, at a rate of $100,000 per annum.
(14) ACCRUED EXPENSES:
Accrued expenses consist of the following:
At December 31,
1997 1996
---- ----
Payroll and payroll related $252,425 $231,211
Leasehold improvements 48,553 108,553
Royalties 116,012 75,520
Other accrued expenses 569,138 262,880
-------- --------
Total accrued expenses $986,128 $678,164
======== ========
A-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Image Technologies Corporation:
We have audited the accompanying balance sheet of Image Technologies Corporation
(a Delaware corporation in the development stage) as of December 31, 1997, and
the related statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended, and for the period from inception (November 17,
1995) to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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 Image Technologies Corporation
as of December 31, 1997, and the results of its operations and cash flows for
the year then ended and for the period from inception (November 17, 1995) to
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
Boston, Massachusetts
February 9, 1998
A-27
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEET
AT DECEMBER 31,
1997
---------------
ASSETS
Current assets:
Cash and cash equivalents $ 840,652
Prepaid expenses and other current assets 43,114
-----------
Total current assets 883,766
-----------
Property and equipment, at cost:
Equipment under capital lease 221,138
Laboratory and computer equipment 40,295
Leasehold improvements 36,987
Office furniture and equipment 31,550
-----------
329,970
Less--Accumulated depreciation and amortization 24,016
-----------
305,954
-----------
Other assets 34,667
-----------
$ 1,224,387
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 36,141
Accrued expenses 55,567
Current portion of capital lease obligation 48,818
-----------
Total current liabilities 140,526
-----------
Capital lease obligation, net of current portion 153,211
-----------
Commitments and contingencies (Note 5)
Series A Redeemable Convertible Preferred stock, $.01 par value--
Authorized--1,000,000 shares
Issued and outstanding--345,722 shares
(liquidation preference of $2,300,000) 2,300,000
Stockholders' equity (deficit):
Common stock, $.01 par value--
Authorized--5,000,000 shares
Issued and outstanding--1,139,680 shares 11,397
Additional paid-in capital 541,603
Accumulated deficit (1,922,350)
-----------
Total stockholders' deficit (1,369,350)
-----------
$ 1,224,387
===========
The accompanying Notes are an integral part of these Financial Statements.
A-28
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FROM INCEPTION
FOR THE YEAR (NOVEMBER 17, 1995)
ENDED DECEMBER 31, TO DECEMBER 31,
1997 1997
------------------- ----------------
Expenses:
Research and development $ 327,569 $ 689,482
General and administrative 831,725 1,111,451
----------- -----------
Loss from operations (1,159,294) (1,800,933)
----------- -----------
Interest expense (7,366) (22,066)
Interest income 38,120 38,120
----------- -----------
30,754 16,054
----------- -----------
Net Loss $(1,128,540) $(1,784,879)
=========== ===========
Basic loss per common share $(.99)
===========
Weighted average common and common 1,136,315
equivalent shares outstanding ===========
The accompanying Notes are an integral part of these Financial Statements.
A-29
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
------------------------- Total
Number $.01 Paid-in Accumulated Stockholders'
of Shares Par Value Capital Deficit Equity/(Deficit)
--------- ------- ------------- ------------------ ---------------
Initial issuance of common
stock 825,908 $ 8,259 $ 46,741 $ -- $ 55,000
Net loss -- -- -- (248,582) (248,582)
--------- ------- --------- ------------- -----------
Balance, December 31, 1995 825,908 8,259 46,741 (248,582) (193,582)
(unaudited)
Issuance of common
stock 285,204 2,852 487,148 -- 490,000
Net loss -- -- -- (407,757) (407,757)
--------- ------- --------- ------------- -----------
Balance, December 31, 1996 1,111,112 11,111 533,889 (656,339) (111,339)
(unaudited)
Issuance of common
stock 73,662 737 499,263 -- 500,000
Redemption of common
stock (45,094) (451) (299,549) -- (300,000)
Accretion of redeemable
convertible stock
discount -- -- -- (137,471) (137,471)
Distribution to common
shareholders -- -- (192,000) -- (192,000)
Net loss -- -- -- (1,128,540) (1,128,540)
--------- ------- --------- ------------- -----------
Balance, December 31, 1997 1,139,680 $11,397 $ 541,603 ($ 1,922,350) $(1,369,350)
========= ======= ========= ============= ===========
The accompanying Notes are an integral part of these Financial Statements.
A-30
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE FROM INCEPTION
YEAR ENDED (NOVEMBER 17, 1995)
DECEMBER 31, TO DECEMBER 31,
1997 1997
------------- -------------------
Cash flows from operating activities:
Net loss $(1,128,540) $(1,784,879)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization 25,226 25,226
Changes in assets and liabilities--
Prepaid expenses and other current assets (43,114) (43,114)
Accounts payable 24,991 36,141
Accrued expenses 55,567 55,567
----------- -----------
Net cash used in operating activities (1,065,870) (1,711,059)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (103,502) (108,832)
Increase in other assets (28,540) (35,877)
----------- -----------
Net cash used in investing activities (132,042) (144,709)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of redeemable convertible
preferred stock 2,162,529 2,162,529
Proceeds from issuance of common stock 500,000 1,045,000
Redemption of common stock (300,000) (300,000)
Distribution to shareholders (192,000) (192,000)
Payment of debt obligation, net of borrowings (113,300) --
Payments of capital lease obligations (19,109) (19,109)
----------- -----------
Net cash provided by financing activities 2,038,120 2,696,420
----------- -----------
Net increase in cash and cash equivalents 840,208 840,652
Cash and cash equivalents, beginning of period 444 --
----------- -----------
Cash and cash equivalents, end of period $ 840,652 $ 840,652
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest $ 7,366 $ 22,066
=========== ===========
Taxes $ -- $ --
=========== ===========
Supplemental disclosure of non-cash investing and financing
transactions:
Equipment acquired under capital lease obligations $ 221,138 $ 221,138
=========== ===========
The accompanying Notes are an integral part of these Financial Statements.
A-31
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) OPERATIONS
Image Technologies Corporation (ITC), a Delaware corporation in the
development stage, was originally incorporated in Texas on November 17,
1995(see Note 7(a)). ITC is in the development stage and was organized for
the design and development of advanced endoscopic 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. The Company is
spending primarily all of its efforts developing such products at December
31, 1997.
ITC's product development efforts are subject to the risks inherent in the
development of products based on innovative technologies. These risks
include the possibilities that ITC's products under development will be
found to be ineffective or unsafe, or will otherwise fail to receive
necessary regulatory approvals; that the products, if safe and effective,
will be difficult to manufacture on a large scale or be uneconomical to
market; that the proprietary rights of third parties will interfere with
ITC's product development; or that third parties will market superior or
equivalent products which achieve greater market acceptance.
The accompanying financial statements have been prepared assuming that ITC
will continue as a going concern. ITC is in the development stage and has
incurred operating losses since inception. Given the uncertainty regarding
ITC's ability to raise the capital necessary to fund operations, there is
substantial doubt about ITC's ability to continue as a going concern (see
Note 3).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Management Estimates
The preparation of accrual-based 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
A-32
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(b) Cash and Cash Equivalents
ITC considers all investments with an original maturity of 90 days or less
to be cash equivalents. Cash and cash equivalents of ITC consist of money
market accounts.
(c) Financial Instruments
The estimated fair values of ITC's financial instruments, which include
cash and cash equivalents and capital lease obligations approximate their
reported amounts.
(d) Depreciation and Amortization
ITC provides for depreciation and amortization by charges to operations
using the straight-line method, which allocates the cost of property and
equipment over the following estimated useful lives:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Equipment under capital lease Life of Lease
Laboratory and computer equipment 5-7 Years
Leasehold improvements Life of Lease
Office furniture and equipment 5-10 Years
(e) Net Loss per Common and Common Equivalent Share
ITC computed net loss per common share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Under
the provisions of SFAS No. 128, basic loss per common and common equivalent
share is based on the weighted-average number of shares of common stock
outstanding during the respective periods. Diluted loss per share has not
been presented as the inclusion of convertible preferred stock and stock
options would be antidilutive.
A-33
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INVESTMENT BY NITINOL MEDICAL TECHNOLOGIES, INC.
On May 29, 1997, ITC entered into an agreement with Nitinol Medical
Technologies, Inc. (NMT) whereby NMT invested $2.3 million in ITC in
exchange for 345,722 shares of ITC's $.01 par value Series A convertible
preferred stock (Series A Preferred Stock), representing a 23% ownership
interest in ITC. In conjunction with this agreement with NMT, ITC issued
and subsequently redeemed 45,094 shares of $.01 par value common stock for
$300,000, made distributions to shareholders for $192,000, and paid
issuance costs of approximately $137,000.
Under the terms of this agreement, NMT has extended ITC a credit line of up
to $2 million of senior debt, convertible to convertible preferred stock at
the option of NMT and equivalent to up to an additional 20% ownership of
ITC. ITC may draw against this line of credit based upon meeting its
approved business plan. NMT, however, has the right to advance all of the
line and convert to convertible preferred stock at its option (see Note
6(a)). NMT also has a 24 month option to purchase the remaining 57% of ITC
for $24.5 million of which up to $7.84 million may be payable in cash. The
option may be extended for an additional six months under certain
conditions.
(4) INCOME TAXES
ITC provides for income taxes in accordance with the liability method under
the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS No.
109, deferred tax assets or liabilities are computed based on the
differences between the financial statement and income tax bases of assets
and liabilities using the enacted marginal rate. No income taxes were
provided for the year ended December 31, 1997 as a result of ITC incurring
an operating loss for such year. ITC has net operating loss carryforwards
of $1.4 million. The carryforwards expire through 2012 and are subject to
possible adjustments by tax authorities. ITC has recorded a full valuation
allowance against its deferred tax asset of $560,000. The principal
components of the deferred tax asset are the net operating loss
carryforwards.
A-34
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) COMMITMENTS, CONTINGENCIES AND CAPITAL LEASE COMMITMENTS
(a) Operating Leases
In May 1997, ITC entered into an operating lease for office and laboratory
space. This lease expires through 2002. The lease requires payment of all
related operating expenses of the building, including real estate taxes and
utilities in excess of base year amounts. The lease is guaranteed by NMT
(see Note 3).
Future minimum rental payments due under operating lease agreements as of
December 31, 1997 are approximately as follows:
Year Ending Amount
----------- ------
1998 $195,000
1999 169,000
2000 169,000
2001 169,000
2002 127,000
--------
$829,000
========
Rent expense for the year ended December 31, 1997 was approximately $66,000.
(b) Capital Leases
As part of NMT's investment in ITC (see Note 3), ITC has entered into a
joint NMT/ITC $1.0 million lease finance facility agreement with a bank
under which ITC leases equipment at an interest rate that is 200 basis
points above the bank's cost of funds. Leases under this agreement are
payable in equal monthly installments over a period of 36-60 months and
expire through September 2002. Borrowings of $221,000 were made under this
agreement of which $202,000 was outstanding as of December 31, 1997. The
agreement expires on March 31, 1998 and outstanding leases under this
agreement are guaranteed by NMT.
A-35
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) COMMITMENTS, CONTINGENCIES AND CAPITAL LEASE COMMITMENTS--(CONTINUED)
(b) Capital Leases--(continued)
Future minimum lease payments under the capital lease obligation of ITC as
of December 31, 1997 are approximately as follows:
Year Ending Amount
----------- ------
1998 $ 64,383
1999 64,383
2000 52,584
2001 34,042
2002 22,695
--------
Total minimum lease payments 238,087
Less--Amount representing interest 36,058
--------
202,029
Less--Current portion 48,818
--------
$153,211
========
(c) Management Services Agreement
As part of ITC's agreement with NMT dated May 29, 1997, (see Note 3) ITC
uses certain facilities, management, administrative, and other services of
NMT. Under this agreement ITC is to pay NMT $216,000 per annum for two
years. During the year ended December 31, 1997, ITC's management service
fees amounted to $126,000.
(d) Other Agreements
ITC has employment agreements with certain key employees which in addition
to setting forth the terms of employment, also provide for severance
payments of up to one year's salary and fringe benefits, depending on the
termination circumstances, and prohibit the employees from conducting
business that is in direct competition with ITC for one year following
termination.
A-36
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
ITC has authorized 1,000,000 shares of $.01 par value Series A redeemable
convertible preferred stock of which 345,722 shares are outstanding as of
December 31, 1997. Series A redeemable convertible preferred stock is
convertible, at any time at the option of the holder, into shares of the
Company's $.01 par value common stock at a rate of one common share for each
redeemable convertible preferred share, subject to certain adjustments.
Prior to the expiration of NMT's option to purchase the remaining 57% of ITC
(see Note 3), any dividends declared on Series A redeemable convertible
preferred stock accrue at 8% per annum and are non-cumulative. As of
December 31, 1997, no such dividends have been declared. Commencing on the
expiration date of NMT's option, such dividends shall accrue and shall be
cumulative whether or not declared. In addition, in the event NMT does not
exercise its aforementioned option, the Series A preferred stockholders have
the right to require redemption of their shares at any time commencing on
the earlier of (1) the closing of any debt or equity financing resulting in
at least $8 million of gross proceeds to ITC, or (2) the merger or
consolidation of ITC into or with another corporation or the sale of
substantially all of the assets of ITC, or (3) May 29, 2003. The right to
redemption terminates upon the closing of a public offering, as defined
below.
The Series A redeemable convertible preferred stock automatically converts
to common stock upon the closing of a public offering providing ITC with
gross proceeds of at least $15 million and initial public offering price of
at least $15.00 per share. The right of the holders of Series A redeemable
convertible preferred stock to redeem their shares terminates upon the
commencement of such offering.
Upon liquidation of ITC, the Series A preferred stockholders are entitled,
before any distribution is made to the common stockholders, to be paid the
greater of $6.65 per share plus accrued dividends or such amount per share
as would have been payable had each share been converted into common stock.
The Series A preferred stockholders vote, together with the common
stockholders, as a single class based on the number of shares of common
stock into which the Series A preferred shares convert. The Series A
preferred stockholders are entitled, as a separate class, to elect the
minimum number of directors that constitute at least 40% of the total number
of directors of ITC, with the common stockholders, as a separate class,
electing the remainder.
A-37
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) STOCKHOLDERS' EQUITY
(a) Common Stock
On May 27, 1997, ITC reincorporated in Delaware and merged its previous
Texas corporation into the Delaware corporation. ITC has 5,000,000 shares of
authorized common stock, $.01 par value, of which 1,139,680 shares are
issued and outstanding and 200,000 shares are reserved for issuance under
ITC's 1997 Stock Option Plan as of December 31, 1997.
(b) Stock Option Plan
On May 29, 1997, the Board of Directors and stockholders approved the 1997
Stock Option Plan (the 1997 Plan), which authorizes ITC to issue options to
purchase up to 200,000 shares of common stock. ITC 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. The options under the 1997 Plan vest in equal installments of 25%
per year over four years and expire ten years from the date of grant with no
options vesting or becoming exercisable at any time while NMT's option to
purchase the remaining 57% of ITC (see Note 3) remains outstanding. Upon the
expiration or exercise of NMT's option to purchase ITC, the options granted
under the 1997 Plan will be vested from the date of grant.
During the year ended December 31, 1997, ITC granted options to purchase
93,500 shares of common stock at an exercise price of $6.65 per share.
Subsequent to December 31, 1997, ITC issued an additional 6,000 options at
$6.65 per share.
ITC accounts for its stock-based compensation plans under APB Opinion No.
25, Accounting for Stock Issued to Employees. In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which is effective for fiscal years beginning after December
15, 1995. SFAS No. 123 establishes a fair-value based method of accounting
for stock-based compensation plans. ITC has adopted the disclosure-only
alternative under SFAS No. 123, 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.
A-38
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) STOCKHOLDERS' EQUITY
(b) Stock Option Plan--(continued)
ITC has computed the pro forma disclosures required under SFAS No. 123 for
all employee stock options granted in 1997 using the Black-Scholes option
pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the year ended
December 31, 1997 are as follows:
DECEMBER 31,
1997
---------------
Risk-free interest rates 6.29%
Expected dividend yield --
Expected lives 7 years
Expected volatility --
Weighted average grant-date fair value of options
granted during the period $2.37
Weighted average exercise price $6.65
Weighted average remaining contractual life of options
outstanding 9 years
The effect of applying SFAS No. 123 would be as follows:
DECEMBER 31,
1997
--------------
Pro forma net loss $(1,145,362)
===========
Pro forma net loss per share $ (1.01)
===========
The aggregate fair value of options granted in 1997 was approximately
$221,500.
(c) Warrants
In connection with the investment by NMT (see Note 3), ITC issued warrants
to a financial advisor to purchase 17,737 shares of common stock at $6.65
per share. The warrants are fully exercisable and expire on May 28, 2002.
A-39
IMAGE TECHNOLOGIES CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 1997:
Amount
------
Accrued bonuses $11,000
Accrued legal 8,686
Accrued other 35,881
-------
$55,567
=======
A-40
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ------------- ----------------------
3.1 Amended and Restated Certificate of Incorporation. (1)
3.1.1 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation. (1)
3.2 Amended and Restated By-laws. (1)
4.1 Form of Common Stock Certificate. (1)
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 February 14, 1996. (1)
10.5 Pledge Agreement by and between the Company and Fletcher Spaght,
Inc., dated February 14, 1996. (1)
10.6 Registration Rights Agreement by and between the Company and Fletcher
Spaght, Inc., dated as of February 14, 1996. (1)
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 Registration Rights Agreement by and between the Company and Lloyd
A. Marks, dated as of April 15, 1996. (1)
10.20 Employment Agreement by and between the Company and Thomas M.
Tully, dated February 13, 1996. (1)(**)
10.21 Registration Rights Agreement by and between the Company and Thomas
M. Tully, dated as of February 13, 1996. (1)
10.22 Employment Agreement by and between the Company and David
Chazanovitz, dated February 13, 1996, as amended as of June 15, 1996.
(1)(**)
10.22.1 Amendment to Employment Agreement by and between the Company
and David Chazanovitz, dated July 9, 1996. (1)(**)
10.23 Employment Agreement by and between the Company and Jason Harry,
dated as of July 1, 1994. (1)(2)(**)
10.24 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. (1)(2)(**)
10.25 Employment Agreement by and between the Company and Theodore I.
Pincus, dated as of May 17, 1996. (1)(**)
10.26 Form of Registration Rights Agreement between the Company and certain
of its existing stockholders, dated as of February 14, 1996. (1)
10.27 Agreement of Lease by and between the Company and the Trustees of
Wormwood Realty, dated as of May 8, 1996. (1)
10.28 Company 1994 Stock Option Plan. (1)(**)
10.29 Company 1996 Stock Option Plan. (1)(**)
10.30 Company 1996 Stock Option Plan for Non-Employee Directors. (1)(**)
10.31 Registration Rights Agreement between the Company and Junewicz &
Co., Inc. dated as of February 16, 1996. (1)
10.32 Registration Rights Agreement between the Company and Furman Selz,
LLC, dated as of February 16, 1996. (1)
10.33 Stockholders' Option Agreement, dated May 29, 1997, by and among the
Company, Image Technologies Corporation and the holders of common
stock and warrants to purchase shares of common stock of Image
Technologies Corporation listed on Schedule A thereto. (3)
10.34 Loan and Security Agreement, dated May 29, 1997, by and between the
Company and Image Technologies Corporation. (3)
10.35 Amendment No. 1, dated August 4, 1997, to the Loan and Security
Agreement, dated May 29, 1997, by and between the Company and Image
Technologies Corporation. (3)
10.36 Amendment No. 1, dated May 29, 1997, to the Pledge Agreement by and
between the Company and Fletcher Spaght, Inc., dated as of February 14,
1996.
11.1 Computation of Earnings per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Anderson LLP
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for the Fiscal Quarter Ended
September 30, 1996.
27.3 Restated Financial Data Schedule for the Fiscal Year Ended
December 31, 1996.
27.4 Restated Financial Data Schedule for the Fiscal Quarter Ended
March 31, 1997.
27.5 Restated Financial Data Schedule for the Fiscal Quarter Ended
June 30, 1997.
27.6 Restated Financial Data Schedule for the Fiscal Quarter Ended
September 30, 1997.
27.7 Restated Financial Data Schedule for the Fiscal Year Ended
December 31, 1995 and the six months ended June 30, 1996.
________________________
(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.
(**) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.