<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number: 0-21001
Nitinol Medical Technologies, Inc.
----------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4090463
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
27 Wormwood Street, Boston, Massachusetts 02210
- -----------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
617-737-0930
------------
(Registrant's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ___
---
As of November 11, 1998, there were 10,629,190 shares of Common Stock,
$.001 par value per share, outstanding.
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC.
INDEX
-----
Part I. Financial Information Page Number
--------------------- -----------
Item 1. Financial Statements.
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and 1997
and for the Nine Months Ended September 30, 1998
and 1997 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 25
Part II. Other Information
-----------------
Item 2. Changes in Securities and Use of Proceeds. 26
Item 5. Other Information. 26
Item 6. Exhibits and Reports on Form 8-K. 27
Signatures 28
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I Financial Information
- ------------------------------
Item 1. Financial Statements.
---------------------
(UNAUDITED)
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,123,366 $ 5,561,445
Marketable securities 5,846,313 20,822,405
Accounts receivable, net of allowances for doubtful
accounts of $811,000 and $125,000 as of
September 30, 1998 and December 31, 1997,
respectively 11,514,427 2,317,408
Inventories 8,554,062 1,071,265
Prepaid expenses and other current assets 3,498,201 1,110,271
------------ ------------
Total current assets 33,536,369 30,882,794
------------ ------------
Property and equipment, at cost:
Land and Buildings 13,056,000 -
Laboratory and computer equipment 3,614,672 1,091,380
Office furniture and equipment 1,297,809 143,640
Leasehold improvements 1,122,235 1,135,583
Equipment under capital lease 1,006,693 948,155
------------ ------------
20,097,409 3,318,758
Less--Accumulated depreciation and amortization 1,911,290 845,512
------------ ------------
18,186,119 2,473,246
------------ ------------
Investments in long-term marketable securities 1,516,269 1,478,058
Investment in affiliate 999,849 -
Goodwill and other intangible assets 8,080,686 -
Other assets 2,960,191 171,415
------------ ------------
$ 65,279,483 $ 35,005,513
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,359,927 $ 166,248
Accrued expenses 4,924,134 986,128
Current portion of capital lease obligation 178,500 168,736
Current portion of senior debt 184,000 -
Current portion of deferred tax liability 106,226 -
Deferred revenue - 300,000
------------ ------------
Total current liabilities 9,752,787 1,621,112
------------ ------------
Capital lease obligation, net of current portion 525,778 612,458
Senior debt, net of current portion 313,000
Subordinated debt, net of original issue discount 16,886,666 -
Deferrred tax liability 4,142,831 -
------------ ------------
Total long-term liabilities 21,868,275 612,458
------------ ------------
Stockholders' equity
Common stock, $.001 par value-
Authorized-30,000,000 shares
Issued and outstanding-10,622,245 and 9,823,186 shares
at September 30, 1998 and December 31,1997, respectively 10,623 9,824
Addditional paid-in capital 40,800,368 36,610,997
Cumulative translation adjustment 669,000 -
Accumulated deficit (7,821,570) (3,848,878)
------------ ------------
Total stockholders' equity 33,658,421 32,771,943
------------ ------------
$ 65,279,483 $ 35,005,513
============ ============
The accompanying Notes are an integral part of these Consolidated Financial Statements.
</TABLE>
3
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 11,920,173 $ 2,265,077 $ 17,445,695 $ 6,154,792
License fees 296,558 250,000 1,522,357 750,000
Product development - 8,216 1,453 58,610
-------------------------------- --------------------------------
12,216,731 2,523,293 18,969,505 6,963,402
-------------------------------- --------------------------------
Expenses:
Cost of product sales 5,024,891 917,213 7,139,029 2,802,896
Research and development 1,120,353 793,909 2,792,718 2,268,618
General and administrative 2,234,606 636,604 3,547,956 1,968,402
Selling and marketing 2,748,310 294,128 3,473,668 678,475
In-process research and development 4,710,000 - 4,710,000 2,449,072
Merger and integration 687,242 - 687,242 193,635
-------------------------------- --------------------------------
16,525,402 2,641,854 22,350,613 10,361,098
-------------------------------- --------------------------------
Loss from operations (4,308,671) (118,561) (3,381,108) (3,397,696)
-------------------------------- --------------------------------
Equity in loss of affiliate (154,614) - (247,951) -
Currency Transaction Loss (18,939) - (88,403) -
Interest expense (658,973) (10,979) (689,528) (30,726)
Interest income 155,109 394,624 946,485 1,201,103
-------------------------------- --------------------------------
(503,864) 383,645 256,957 1,170,377
-------------------------------- --------------------------------
Income (loss) before provision
for income taxes (4,986,088) 265,084 (3,460,505) (2,227,319)
Provision (benefit) for income taxes (38,313) 90,500 512,187 113,500
-------------------------------- --------------------------------
Net income (loss) $ (4,947,775) $ 174,584 $ (3,972,692) $ (2,340,819)
================================ ================================
Basic net income (loss) per common share $ (0.47) $ 0.02 $ (0.40) $ (0.25)
================================ ================================
Weighted average common shares outstanding 10,464,675 9,614,778 10,041,041 9,535,505
================================ ================================
Diluted net income (loss) per common share $ (0.47) $ 0.02 $ (0.40) $ (0.25)
================================ ================================
Diluted weighted average common and common
equivalent shares outstanding 10,464,675 11,151,490 10,041,041 9,535,505
================================ ================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,972,692) $ (2,340,819)
Adjustments to reconcile net loss to net cash
used in operating activities-
In-process research & development 4,710,000 -
Depreciation and amortization 959,657 329,211
Equity in loss of affiliate 247,951 -
Acceleration of stock options 11,679 111,576
Changes in assets and liabilities-
Accounts receivable (8,663,892) (909,205)
Inventories 416,260 (331,130)
Prepaid expenses and other current assets (1,193,929) (338,949)
Accounts payable 6,078,947 (268,844)
Accrued expenses 274,004 99,985
Deferred revenue (300,000) -
----------------------------
Net cash used in operating activities (1,432,015) (3,648,175)
----------------------------
Cash flows from investing activities:
Maturities of marketable securities 14,920,848 4,954,164
Purchases of property and equipment (551,004) (213,827)
Increase in other assets (971,871) (63,003)
Increase in investment in affiliate (1,247,800) -
Acquisition of Elekta Neurosurgical Instruments, net of cash acquired (33,193,714) -
-----------------------------
Net cash provided by
(used in) investing activities (21,043,541) 4,677,334
-----------------------------
Cash flows from financing activities:
Payments of capital lease obligations (135,454) (86,003)
Proceeds from issuance of common stock 4,134,341 660,317
Issuance of common stock pursuant to employee stock purchase plan 44,151 -
Payments senior debt (17,592) -
Increase in subordinated debt, net 16,744,999 -
-----------------------------
Net cash provided by financing activities 20,770,445 574,314
-----------------------------
Effect of exchange rate changes on cash 267,032 -
Net increase (decrease) in cash and cash equivalents (1,438,079) 1,603,473
Cash and cash equivalents, beginning of period 5,561,445 4,082,486
-----------------------------
Cash and cash equivalents, end of period $ 4,123,366 $ 5,685,959
=============================
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest $ 689,528 $ 30,726
=============================
Taxes $ 528,324 $ 28,500
=============================
Supplemental disclosure of non-cash investing and financing transactions:
Equipment under capital lease obligation $ 58,538 $ 303,481
=============================
Write-off of abandonement of leasehold improvements $ - $ 111,472
=============================
Acquisition of Elekta Neurosurgical Instruments:
Fair value of assets acquired $ 32,691,000 $ -
Goodwill and intangible assets 10,081,714 -
In-process research and development 4,710,000 -
Liabilities assumed (12,096,000) -
Cash acquired (2,193,000) -
----------------------------
$ 33,193,714 $ -
============================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
Nitinol Medical Technologies, Inc. (the Company) designs, develops and
markets innovative medical devices that utilize advanced technologies and
are delivered by minimally invasive procedures. The Company's products are
designed to offer alternative approaches to existing complex treatments,
thereby reducing patient trauma, shortening procedure, hospitalization and
recovery times and lowering overall treatment costs. The Company's patented
medical devices include self-expanding stents, vena cava filters and septal
repair devices. Currently, 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 the United
States and is sold commercially in Europe and other international markets.
As a result of the Company's acquisition on July 8, 1998 of the
neurosurgical instruments business (ENI) of Elekta AB (PUBL), a Swedish
corporation, which the Company operates through its NMT Neurosciences
division (See Note 3), the Company provides a wide range of products
including cerebral spinal fluid shunts, the Selector Ultrasonic Aspirator,
Ruggles Surgical Instruments, the Spetzler Titanium Aneurysm Clip and
endoscopes and instrumentation for minimally invasive surgery. 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,
both foreign and domestic.
2. Interim Financial Statements
The accompanying Consolidated Financial Statements as of September 30, 1998
and for the three and nine month periods ended September 30, 1997 and 1998
are unaudited. In management's opinion, these unaudited Consolidated
Financial Statements have been prepared on the same basis as the audited
Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K for the period ending December 31, 1997, as filed with the
Securities and Exchange Commission on March 17, 1998, and include all
adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the results for such interim periods. The results of
operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results expected for the fiscal year ending
December 31, 1998.
6
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Acquisition of Elekta Neurosurgical Instruments
On July 8, 1998 the Company acquired Elekta Neurosurgical Instruments
(ENI), the neurosurgical instruments business of Elekta AB (PUBL), a
Swedish corporation, for approximately $35.4 million, which includes
acquisition costs of approximately $2.4 million. The acquisition has been
accounted for as a purchase in accordance with the requirements of
Accounting Principles Board Opinion No. 16, Business Combinations, and
accordingly ENI's results of operations are included in those of the
Company beginning on the date of the acquisition in the accompanying
financial statements. The transaction was financed with $15.4 million of
the Company's cash and $20 million of subordinated debt borrowed from an
affiliate of a significant stockholder of the Company. The subordinated
debt, which is secured by substantially all of the assets of the Company,
is due September 30, 2003 with quarterly interest payable at 10.101% per
annum and contains certain restrictive covenants as defined by the
agreement. A total of 675,000 shares of the Company's $.001 par value
common stock was issued to the significant stockholder and its affiliate in
connection with this transaction. The shares are accompanied by certain
demand and "piggy-back" registration rights and are restricted for resale
for up to one year. The Company paid the stockholder a debt placement fee
of $600,000 in connection with this transaction. A significant portion of
the purchase price was identified as intangible assets in an independent
appraisal, using proven valuation procedures and techniques. These
intangible assets included $4.7 million for acquired in-process research
and development for projects that did not have future alternative uses.
This allocation represents the estimated fair market value based on risk-
adjusted cash flows related to the in-process research and development
projects. At the date of acquisition the development of these projects had
not yet reached technological feasibility and the in-process research and
development had no alternative future uses. Accordingly, these costs were
written off in the quarter ended September 30, 1998. The remaining premium
of approximately $16.1 million was allocated to the following identifiable
assets and goodwill and will be amortized over periods of 7 to 40 years:
Amortization
Amount Period
------------ ------------
Land and Buildings $10,150,000 40 Years
Leashold Improvements 1,170,000 40 Years
Goodwill 8,904,000 7-20 Years
Deferred tax liability (4,096,000) 40 Years
-----------
$16,128,000
===========
7
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Acquisition of Elekta Neurosurgical Instruments--(continued)
The total consideration allocated to the fair market value of assets and
liabilities acquired on the purchase date is as follows, net of cash
acquired of approximately $2.2 million:
<TABLE>
<S> <C>
Accounts receivable $ 5,815,000
Inventories 7,160,000
Prepaid expenses and other current assets 2,047,000
Property and equipment 15,476,000
Goodwill 8,911,714
Other assets 1,170,000
In-process research and development 4,710,000
Accounts payable (7,058,000)
Accrued expenses (155,000)
Senior debt (523,000)
Deferred tax liability (4,360,000)
------------
$33,193,714
============
</TABLE>
Additionally, as a result of this acquisition, the Company reorganized its
operations and recorded $687,000 in merger and integration expenses for the
three and nine month periods ended September 30, 1998, respectively.
Unaudited pro forma condensed statements for the nine month periods ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Revenues $35,789,000 $29,115,000
============ ============
Net Loss $(6,843,000) $(9,331,000)
============ ============
Diluted weighted average
shares outstanding 10,716,041 10,210,505
============ ============
Diluted loss per share $ (.64) $ (.91)
============ ============
</TABLE>
4. Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
8
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Cash and Cash Equivalents and Investments in Marketable Securities
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified its marketable securities and long-term investments
as held-to-maturity.
Held-to-maturity securities represent those securities which the Company
has the intent and ability to hold to maturity and are reported at
amortized cost. The Company considers all investments with maturities of 90
days or less from the date of purchase to be cash equivalents. Investments
with maturities greater than one year from the balance sheet date are
considered to be long-term investments.
Cash and cash equivalents, which are carried at cost and approximate market
value, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Cash $4,111,464 $1,626,074
Cash equivalents--
Money market 11,902 971,176
Commercial paper -- 2,964,195
---------- ----------
$4,123,366 $5,561,445
========== ==========
</TABLE>
Marketable securities, with a weighted average maturity of approximately
seven months and three months at September 30, 1998 and December 31, 1997,
respectively, are carried at cost and approximate market value and consist
of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Held-to-maturity--
Eurodollar bonds $4,828,305 $10,619,598
Medium-term notes 511,724 665,998
Corporate debt securities 506,284 2,388,681
Commercial paper -- 5,985,895
Zero coupon bonds -- 1,162,233
---------- -----------
$5,846,313 $20,822,405
========== ===========
</TABLE>
9
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Cash and Cash Equivalents and Investments in Marketable Securities--
(continued)
Long-term investments, with a weighted average maturity of approximately 17
months and 15 1/2 months at September 30, 1998 and December 31, 1997,
respectively, are carried at cost and approximate market value and consist
of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Held-to-maturity--
Medium-term notes $1,011,208 $ 502,468
Eurodollar bonds 505,061 --
Corporate debt securities -- 975,590
---------- ----------
$1,516,269 $1,478,058
========== ==========
</TABLE>
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
and in other assets in the accompanying balance sheets:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Short-term interest receivable $143,142 $476,559
Long-term interest receivable 19,624 5,676
-------- --------
$162,766 $482,235
======== ========
</TABLE>
6. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Components $3,716,526 $ 625,381
Finished Goods 4,837,536 445,884
---------- ----------
$8,554,062 $1,071,265
========== ==========
</TABLE>
Finished goods consist of materials, labor and manufacturing overhead.
10
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. 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:
Asset Classification Estimated Useful Life
-------------------- ---------------------
Buildings 40 Years
Laboratory and computer
equipment 3-7 Years
Office furniture and equipment 5-10 Years
Leasehold improvements Life of Lease
Equipment under capital leases Life of Lease
8. 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 (loss) per share and applies to entities with publicly
held common stock or potential common stock. Calculations of basic and
diluted net income (loss) per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) available to
common stockholders $(4,947,775) $ 174,584 $(3,972,692) $(2,340,819)
=========== =========== =========== ===========
Weighted average common shares
outstanding 10,464,675 9,614,778 10,041,041 9,535,505
Potential common stock pursuant to
stock options -- 1,536,712 -- --
----------- ----------- ----------- -----------
Diluted weighted average common and
common equivalent shares
outstanding 10,464,675 11,151,490 10,041,041 9,535,505
=========== =========== =========== ===========
Basic income (loss) per share $ (.47) $ .02 $ (.41) $ (.25)
=========== =========== =========== ===========
Diluted income (loss) per share $ (.47) $ .02 $ (.41) $ (.25)
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Investment in Affiliate
In connection with the Company's acquisition of a 23% ownership interest in
Image Technologies Corporation (ITC), the Company extended to ITC a credit
line of up to $2.0 million of senior debt that bears interest at 10% per
annum. During the second quarter of 1998, ITC began to make borrowings
against this line in order to fund its operations and as of September 30,
1998 owes the Company $1,247,800 plus accrued interest. The Company has not
recorded interest income on the note receivable from ITC because interest
is not due until May 29, 1999 and payment will be waived if the Company
exercises its option to convert its senior debt into additional equity. The
note is convertible at the rate of one percent of ownership per $100,000
borrowed. This option expires May 29, 1999. The Company believes that if it
does not exercise this option the amount due from ITC will be collectible
from ITC's future cash flows or from independent financing. In the quarter
ended September 30, 1998, the Company recorded $155,000 as its equity in
the loss of ITC. The carrying value of the note receivable from ITC has
been reduced by the amount of the loss recorded by the Company.
10. Lease Finance Facility Agreement
The Company has outstanding borrowings of $351,000 under an expired 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. Upon expiration of this agreement in June 1997, the Company
entered into a $1.0 million lease finance facility agreement with the same
bank under similar terms. Borrowings of $376,000 and $250,000 have been
made under this agreement by the Company and its affiliate, ITC,
respectively, of which $298,000 and $191,000 was outstanding as of
September 30, 1998, respectively. On April 1, 1998, the Company entered
into a new agreement with this bank that provides the Company and ITC with
similar terms and the option to borrow up to $750,000 through March 31,
2003. Borrowings of $59,000 and $20,000 have been made under this new
agreement by the Company and ITC, respectively, of which $56,000 and
$18,000 was outstanding as of September 30, 1998, respectively. Leases
under these agreements are payable in equal monthly installments over a
period of 36-60 months and expire through August 2003. The Company
guarantees the outstanding leases of ITC under these agreements.
12
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. Accrued Expenses
Accrued expenses consist of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Payroll and payroll related $1,704,267 $252,425
Merger and integration expenses 420,609 --
Income taxes payable 787,000 (8,000)
Royalties 140,777 116,012
Leasehold improvements -- 48,553
Other accrued expenses 1,871,481 577,138
---------- --------
$4,924,134 $986,128
========== ========
</TABLE>
12. SFAS No. 52, Foreign Currency Translation
The accounts of ENI are translated in accordance with SFAS No. 52, Foreign
Currency Translation. Accordingly, assets and liabilities of ENI's foreign
subsidiaries are translated from their local currency, which is the
functional currency, into U.S. dollars, the reporting currency, using the
exchange rate at the balance sheet date. Income and expense accounts are
translated using an average rate of exchange during the period. Cumulative
foreign currency translation gains or losses are reflected as a component
of consolidated stockholders' equity and amounted to a gain of $669,000 for
the three and nine months ended September 30, 1998. There were no foreign
currency translation gains or losses for the three and nine month periods
ended September 30, 1997.
Additionally, the Company had foreign currency exchange transaction losses
of approximately $19,000 and $88,000 for the three and nine month periods
ended September 30, 1998, respectively. Foreign currency transaction gains
and losses result from differences in exchange rates between the functional
currency and the currency in which a transaction is denominated and are
included in the consolidated statement of operations in the period in which
the exchange rate changes. There were no foreign currency exchange
transaction gains or losses for the three and nine month periods ended
September 30, 1997.
13. New Accounting Standards
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. The adoption of this standard did not have a material effect on
the Company's financial statements, as the only elements of comprehensive
income related to the Company are foreign currency translation adjustments
which are presented separately on the balance sheet as required. If
presented on the statement of operations for the three month and nine month
periods ended September 30, 1998, comprehensive income would be $669,000
more than reported income. There were no differences in net income (loss)
and comprehensive net income (loss) for the three and nine month periods
ended September 30, 1997.
13
<PAGE>
NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. New Accounting Standards--(continued)
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. The Company
will adopt SFAS No. 131 for the year ended December 31, 1998. Unless
impracticable, companies would be required to disclose similar prior period
information upon adoption.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
This Quarterly Report on Form 10-Q, other than the historical financial
information, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements involve known and unknown risks, uncertainties or other factors which
may cause actual results, performance or achievement by the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements. Factors that might
cause such a difference include uncertainties of product development and market
acceptance, government regulation and uncertainty of product approvals,
uncertainties associated with intellectual property rights and litigation, the
impact of healthcare reform programs and competitive products and pricing, risks
associated with technology and product development and commercialization,
potential product liability, management of growth, dependence on significant
corporate relationships and other risks detailed under the heading "Management's
Discussion and Analysis of Financial Conditions and Results of Operations
Certain Factors That May Affect Future Results" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 17, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues. Revenues for the three months ended September 30, 1998 increased to
$12.2 million from $2.5 million for the three months ended September 30, 1997.
Product sales increased to $11.9 million for the three months ended September
30, 1998 from $2.3 million for the three months ended September 30, 1997. The
increase is primarily attributable to the Company's acquisition of Elekta
Neurosurgical Instruments (ENI), the neurosurgical intstruments business of
Elekta AB (PUBL), a Swedish corporation, on July 8, 1998 and accordingly ENI's
results of operations, including product revenues of $9.0 million for the period
since acquisition on July 8, 1998, are included in those of the Company from
that date. Additionally, the Company had increased unit sales of vena cava
filters and CardioSEAL Septal Occluders in the quarter ended September 30, 1998
as compared to the quarter ended September 30, 1997. License fees for the three
months ended September 30, 1998 and September 30, 1997 remained relatively
consistent at $297,000 and $250,000, respectively.
15
<PAGE>
Cost of Product Sales. Cost of product sales increased to $5.0 million for the
three months ended September 30, 1998 from $917,000 for the three months ended
September 30, 1997 primarily due to the Company's acquisition of ENI on July 8,
1998 and accordingly ENI's cost of product sales of $3.9 million are included
with those of the Company since the acquisition date. The Company also had
increases in unit sales of the vena cava filter and the CardioSEAL Septal
Occluder. Cost of product sales, as a percent of product sales, increased to 42%
for the three months ended September 30, 1998 from 40% for the three months
ended September 30, 1997 due to the inclusion of cost of sales of ENI's products
which have a higher cost of product sales as a percent of sales than do the vena
cava filter and the CardioSEAL Septal Occluder.
Research and Development. Research and development expenses increased to $1.1
million for the three months ended September 30, 1998 from $794,000 for the
three months ended September 30, 1997. The increase is partly attributable to
the Company's acquisition of ENI on July 8, 1998 and accordingly, ENI's research
and development expenses are included with those of the Company since the
acquisition date. Additionally, the increase in research and development
expenses also reflects increased regulatory and clinical trial expenses relating
to clinical trials of the CardioSEAL Septal Occluder that commenced in September
1996, as well as for clinical trials related to the closure of patent foramen
ovales (PFO), and increased 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 and engineering
expenses.
General and Administrative. General and administrative expenses for the three
months ended September 30, 1998 increased to $2.2 million from $637,000 for the
three months ended September 30, 1997. The increase is primarily attributable to
the inclusion of ENI's general and administrative expenses of $1.5 million since
the date of acquisition on July 8, 1998 and increases in personnel and related
costs, legal and professional fees and consulting expenses due to the Company's
expanded scope of operations.
Selling and Marketing. Selling and marketing expenses increased to $2.7 million
for the three months ended September 30, 1998 from $294,000 for the three months
ended September 30, 1997. The increase is primarily attributable to the
inclusion of ENI's selling and marketing expenses of $2.1 million since the date
of acquisition on July 8, 1998 and to increases in marketing activities related
to both the CardioSEAL Septal Occluder in connection with clinical trials and
from the commencement of commercial sales of the CardioSEAL Septal Occluder in
June 1997 in European and other international markets.
16
<PAGE>
In-Process Research and Development. For the three months ended September 30,
1998, the Company recorded $4.7 million of in-process research and development
expenses related to the Company's acquisition of ENI on July 8, 1998. See Note 3
of the accompanying Notes to Consolidated Financial Statements as of September
30, 1998. On the date of acquisition, ENI's in-process research and development
value was comprised of five primary research and development programs that were
expected to reach completion between late 1998 and 2000. At the acquisition
date, continuing research and development commitments to complete the projects
were expected to be approximately $2.0 million through 2000 ($680,000, $888,000,
and $383,000 in 1998, 1999, and 2000, respectively). These estimates are subject
to change, given the uncertainties of the development process, and no assurance
can be given that deviations from these estimates will not occur.
Merger and Integration Expense. As a result of the acquisition of ENI on July 8,
1998, the Company reorganized certain of its operations. In connection with
this reorganization, the Company recorded merger and integration expenses of
$687,000 in the quarter ended September 30,1998.
Equity in Loss of Affiliate. During the three months ended September 30, 1998,
the Company recorded $155,000 as its equity in the loss of Image Technologies
Corporation (ITC). The carrying value of the note receivable from ITC has been
reduced by the amount of the loss recorded by the Company. See Note 9 of Notes
to Consolidated Financial Statements in the accompanying financial statements as
of September 30, 1998.
Interest Expense. Interest expense was $659,000 for the three months ended
September 30, 1998 as compared to $11,000 for the three months ended September
30, 1997. The increase was primarily the result of the Company's issuance of $20
million of subordinated debt to finance its acquisition of ENI. The subordinated
debt bears interest at a rate of 10.101% per annum. As a result, the Company is
amortizing prepaid interest and original issue discount related to this
acquisition which amounted to $466,000 and $179,000, respectively, in the
statements of operations for the three and nine month periods ended September
30, 1998.
Interest Income. Interest income was $155,000 for the three months ended
September 30, 1998 as compared to $395,000 for the three months ended September
30, 1997 (a 61% decrease). The decrease was due to the Company's lower cash
balances as a result of its financing the acquisition of ENI with cash of $15.4
million on July 8, 1998.
Provision (Benefit) for Income Taxes. The Company had a benefit for income
taxes of $38,000 for the three months ended September 30, 1998, based on an
estimated effective tax rate of 40% and the nondeductibility of the $4.7 million
acquired in-process research and development write-off and other
acquisition-related items. For the three months ended September 30, 1997, the
Company had a provision for income taxes of $90,500 based on an income before
provision for income taxes of $265,000 for the period and an effective tax rate
of 34%, which reflects the impact of lower state taxation on the Company's
investment income.
17
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues for the nine months ended September 30, 1998 increased to
$19.0 million from $7.0 million for the nine months ended September 30, 1997.
Product seles increased to $17.4 million for the nine months ended September 30,
1998 from $6.2 million for the nine months ended September 30, 1997. The
increase is primarily attributable to the Company's acquisition of ENI on July
8, 1998 and accordingly ENI's results of operations, including product revenues
of $9.0 million, are included in those of the Company since that date.
Additionally, the Company had increased unit sales of vena cava filters and
CardioSEAL Septal Occluders during the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 due to the commencement of
commercial sales of the CardioSEAL Septal Occluder in June 1997 in certain
European and other international markets and general increased demand for the
vena cava filter. License fees for the nine months ended September 30, 1998
increased to $1.5 million from $750,000 during the nine months ended September
30, 1997. Specifically, the Company recorded $1,125,000 in minimum quarterly
license fees, $300,000 in milestone payments and $79,000 in cost reduction
incentives from Boston Scientific. Revenues for the nine months ended September
30, 1997 included three quarterly minimum royalty payments of $250,000 each.
Cost of Product Sales. Cost of product sales increased to $7.1 million for the
nine months ended September 30, 1998 from $2.8 million for the nine months ended
September 30, 1997, primarily due to the Company's acquisition of ENI on July 8,
1998 and accordingly $3.9 million of ENI's cost of product sales are included
with those of the Company since the acquisition date. Cost of product sales also
increased due to increases in unit sales of the vena cava filter and the
CardioSEAL Septal Occluder attributable to increased demand for the vena cava
filter and commencement of commercial sales of the CardioSEAL Septal Occluder in
June 1997 in certain European and other international markets. Cost of product
sales, as a percent of product sales, decreased to 41% for the nine months ended
September 30, 1998 from 45% for the nine months ended September 30, 1997. This
decrease is due primarily to the Company's reorganization of its vena cava
filter operations during the second quarter of 1997, which has resulted in lower
per unit manufacturing costs for the vena cava filter, as well as to increased
sales of the CardioSEAL Septal Occluder which has a lower cost of product sales
as a percent of sales than does the vena cava filter, partially offset by the
inclusion of ENI's products which have a higher cost of product sales as a
percent of sales than do the vena cava filter and CardioSEAL Septal Occluder.
18
<PAGE>
Research and Development. Research and development expenses increased to $2.8
million for the nine months ended September 30, 1998 from $2.3 million for the
nine months ended September 30, 1997 (a 22% increase). The increase is
primarily attributable to the Company's acquisition of ENI on July 8, 1998 and
accordingly ENI's research and development expenses are included with those of
the Company since the acquisition date. Additionally, the increase reflects
increased regulatory and clinical trial expenses relating to clinical trials of
the CardioSEAL Septal Occluder that commenced in September 1996, as well as for
clinical trials related to the closure of patent foramen ovales (PFO) and
increased 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 and engineering expenses.
General and Administrative. General and administrative expenses increased to
$3.5 million for the nine months ended September 30, 1998 from $2.0 million for
the nine months ended September 30, 1997. The increase is primarily attributable
to the inclusion of ENI's general and administrative expenses of $1.5 million
since the date of acquisition on July 8, 1998.
Selling and Marketing. Selling and marketing expenses increased to $3.5 million
for the nine months ended September 30, 1998 from $678,000 for the nine months
ended September 30, 1997. The increase is primarily attributable to the
inclusion of ENI's selling and marketing expenses of $2.1 million since the date
of acquisition on July 8, 1998 and from increases in marketing activities
related to both the CardioSEAL Septal Occluder in connection with clinical
trials and from the commencement of commercial sales of the CardioSEAL Septal
Occluder in June 1997 in European and other international markets.
In-Process Research and Development. For the nine months ended September 30,
1998, the Company recorded $4.7 million of in-process research and development
expenses related to the Company's acquisition of ENI on July 8, 1998. See Note
3 of the accompanying Notes to Consolidated Financial Statements as of September
30, 1998. On the date of acquisition, ENI's in-process research and development
value was comprised of five primary research and development programs that were
expected to reach completion between late 1998 and 2000. At the acquisition date
continuing research and development commitments to complete the projects were
expected to be approximately $2.0 million through 2000 ($680,000, $888,000, and
$383,000 in 1998, 1999, and 2000, respectively). These estimates are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. For the nine
months ended September 30, 1997, the Company recorded $2.4 million of in-process
19
<PAGE>
research and development expenses related to the Company's investment in ITC on
May 29, 1997. See Note 3 of Notes to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on March 17, 1998.
Merger and Integration Expense. As a result of the acquisition of ENI on July
8, 1998, the Company reorganized certain of its operations. In connection with
this reorganization, the Company recorded merger and integration expenses of
$687,000 during the nine months ended September 30, 1998.
Restructuring Charge. During the six months ended June 30, 1997, the Company
reorganized its vena cava filter operations and brought the assembly of its
straight-line vena cava filters in-house. In connection with this
reorganization, the Company recorded a restructuring charge of $194,000 in the
nine months ended September 30, 1997. See Note 4 of the Notes to Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 as filed with the Securities and Exchange Commission on
March 17, 1998.
Equity in Loss of Affiliate. During the nine months ended September 30, 1998,
the Company recorded $248,000 as its equity in the loss of ITC. The carrying
value of the note receivable from ITC has been reduced by the amount of the loss
recorded by the Company. See Note 9 of Notes to Consolidated Financial
Statements in the accompanying financial statements as of September 30, 1998.
Interest Expense. Interest expense was $690,000 for the nine months ended
September 30, 1998 as compared to $31,000 for the nine months ended September
30, 1997. The increase was primarily the result of the Company's acquisition of
ENI on July 8, 1998, pursuant to which the Company incurred $20 million of debt
on which it owes interest at 10.101% per annum. As a result, the Company is
amortizing prepaid interest and original issue discount related to this
acquisition which amounted to $466,000 and $179,000, respectively, in the
statements of operations for the three and nine month periods ended September
30, 1998.
Interest Income. Interest income was $947,000 for the three months ended
September 30, 1998 as compared to $1.2 million for the three months ended
September 30, 1997 (a 27% decrease). The decrease was due to the Company's lower
cash balances as a result of its financing the acquisition of ENI with cash of
$15.4 million on July 8, 1998.
Provision (Benefit) for Income Taxes. The Company had a provision for income
taxes of $257,000 for the nine months ended September 30, 1998 based on an
operating income before the write-off of in-process research and development
expenses and other items related to the acquisition of ENI on July 8, 1998 and
an estimated effective tax rate of 40%. For the nine months ended September 30,
1997 the Company had a provision for income taxes of $113,500, which reflects
the non-deductibility of the in-process research and development expenses and a
portion of the $194,000 restructuring charge recorded in the period then ended.
See Notes 3(b) and 4 of the Notes to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on March 17, 1998.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 1998, the Company's operations used cash
of approximately $1.4 million which was primarily the result of the Company's
acquisition of ENI on July 8, 1998 for approximately $35.4 million, including
approximately $2.4 million of acquisition costs. The acquisition has been
accounted for as a purchase in accordance with the requirements of Accounting
Principles Board Opinion No. 16, Business Combinations, and accordingly ENI's
results of operations are included in those of the Company beginning on the date
of the acquisition. The transaction was financed with $15.4 million of the
Company's cash and $20 million of subordinated debt borrowed from an affiliate
of a significant stockholder of the Company. The subordinated debt, which is
secured by all of the assets of the Company, is due September 30, 2003 with
quarterly interest payable at 10.101% per annum and contains restrictive
covenants. The Company anticipates repaying the subordinated debt from its cash
flows, including the operations of ENI, or from debt or equity financing. A
total of 675,000 shares of the Company's $.001 par value common stock was issued
to the significant stockholder and its affiliate in connection with this
transaction. The shares are accompanied by certain demand and "piggy-back"
registration rights and are restricted for resale for up to one year. The
Company paid the stockholder a debt placement fee of $600,000 in connection with
this transaction. A significant portion of the purchase price was identified as
intangible assets in an independent appraisal, using proven valuation procedures
and techniques. These intangible assets included $4.7 million for acquired in-
process research and development for projects that did not have future
alternative uses. This allocation represents the estimated fair market value
based on risk-adjusted cash flows related to the in-process research and
development projects. At the date of acquisition the development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative future uses. Accordingly, these
costs were written off in the quarter ended September 30, 1998. The remaining
premium of approximately $10.7 million was allocated to identifiable assets and
goodwill and will be amortized over periods of 7 to 40 years. Additionally, as a
result of this acquisition, the Company reorganized its operations and recorded
$687,000 in merger and integration expenses for the three and nine month periods
ended September 30, 1998, respectively. During the nine months ended September
30, 1997, the Company's operations utilized cash of approximately $3.6 million,
of which $2.4 million was used to acquire the 23% interest in ITC. An additional
$1.2 million was used for working capital primarily related to sales of the
CardioSEAL Septal Occluder in connection with clinical trials and commercial
sales in certain European and other international markets and for increased vena
cava filter sales.
21
<PAGE>
Purchases and capitalized leases of property and equipment for use in its
research and development and general and administrative activities amounted to
$551,000 for the nine months ended September 30, 1998. In June 1997, the
Company entered into an agreement with a bank for a $1.0 million equipment lease
line of credit agreement without covenants. Borrowings of $376,000 and $250,000
have been made under this agreement by the Company and ITC, respectively, of
which $298,000 and $191,000 was outstanding as of September 30, 1998. On April
1, 1998, the Company entered into a new agreement with the bank that provides
the Company and ITC with similar terms and the option to borrow up to $750,000
through March 31, 2003. Borrowings of $59,000 and $20,000 have been made under
this agreement by the Company and ITC, respectively, of which $56,000 and
$18,000 was outstanding as of September 30, 1998, respectively. The Company
also has outstanding borrowings of $351,000 under an expired lease finance
facility agreement with the same bank.
In connection with the Company's acquisition of a 23% ownership interest in ITC,
the Company extended to ITC a credit line of up to $2.0 million of senior debt
that bears interest at 10% per annum. During the second quarter of 1998, ITC
began to make borrowings against this line in order to fund its operations and
as of September 30, 1998 owes the Company $1,247,800. The Company has not
recorded interest income on the note receivable from ITC because interest is not
due until May 29, 1999 and payment will be waived if the Company exercises its
option to convert its senior debt into additional equity. The note is
convertible at the rate of one percent of ownership per $100,000 borrowed. This
option expires May 29, 1999. The Company believes that if it does not exercise
this option the amount due from ITC will be collectible from ITC's future cash
flows or from independent financing. In the three and nine months ended
September 30, 1998, the Company recorded $155,000 and $248,000, respectively as
its equity in the loss of ITC. The carrying value of the note receivable from
ITC has been reduced by the amount of the loss recorded by the Company.
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 also has committed to purchase certain
minimum quantities of the vena cava filter from a supplier through June 2001.
See Note 9 to the Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on March 17, 1998. 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 believes that its existing resources and cash flow from current
operations will be sufficient to fund its current level of operations and
planned
22
<PAGE>
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 its products, to seek
regulatory clearances or approvals, to build its marketing, sales and
manufacturing organizations and to 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 additional debt financing, if available, may involve
restrictive covenants. The Company's capital requirements will depend on
numerous factors, including the sales of its products, the progress of its
research and development programs, the progress of clinical testing, the time
and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any collaborative, licensing and other similar
arrangements that the Company may establish.
Year 2000 Readiness
Prior to the Company's acquisition of ENI on July 8, 1998, the Company had
reviewed its internal computer systems and their capabilities of recognizing the
year 2000 and years thereafter. At that time, the Company was Year 2000
compliant.
In addition, prior to the acquisition of ENI by the Company, management of ENI
had determined that its financial and operational systems needed modification or
replacement not only to be year 2000 compliant, but also to (a) improve
functionality, (b) assure continued Euro currency compliance, (c) provide more
meaningful information and (d) integrate the various companies within ENI onto a
world-class Enterprise Reporting System (ERP). ENI management had developed a
comprehensive plan for implementing the new system, including selecting the
system and related providers of implementation assistance, but the decision to
proceed was postponed until the closing of the acquisition.
After the closing of the acquisition, the Company authorized the plan described
above in August 1998, and committed to the implementation of a new ERP system
for its NMT Neurosciences Division. See Notes 1 and 3 of Notes to Consolidated
Financial Statements as of September 30, 1998. The new systems are expected to
be operational by the end of the third quarter of 1999 at a total project cost
of $2.0 million, of which approximately $1.3 million will be for computer
hardware and other capital expenditures. The Company anticipates financing the
above capital component and expects to fund the remainder from operating cash
flows.
23
<PAGE>
While the Company currently does not have a contingency plan in the event a
particular system is not Year 2000 compliant, such a plan will be developed if
it becomes clear that the Company is not going to achieve its scheduled
compliance objectives. Since the Company is completely replacing the systems at
its Neurosciences Division with a commercially available and tested ERP product,
it is believed that the project will proceed more efficiently than it would have
had the Company chosen to modify its existing systems.
Since the Company interfaces with its major customers and suppliers via
telephone and fax, the Company does not anticipate to incur significant losses
in the event that either the Company or its customers and suppliers is not Year
2000 compliant.
The costs of the project and the date on which the Company believes it will
complete the implementation of its ERP system are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.
Euro Currency
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the Euro. The participating countries have agreed to
adopt the Euro as their common legal currency on that date.
The Company, including its Neurosciences Division, conducts a substantial
portion of its business within the member countries of the European Union, and
accordingly its existing systems are generally capable of accommodating multiple
currencies, including the Euro. The new ERP system described above will also
assure continued Euro currency compliance.
The Company has formed a task force and has begun to assess the potential impact
to the Company that may result from the Euro conversion. In addition to tax and
accounting considerations, the Company is assessing the potential impact from
the Euro conversion in a number of areas, including the following: (1) the
competitive impact of cross-border price transparency, which may make it more
difficult for businesses to charge different prices for the same products on a
country-by-country basis; (2) the impact on currency exchange costs and currency
exchange rate risk; and (3) the impact on existing contracts.
24
<PAGE>
At this early stage of its assessment, the Company cannot yet predict the
anticipated impact of the Euro conversion on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
Not Applicable.
25
<PAGE>
Part II -- Other Information
- ----------------------------
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
(c) Recent Sales of Unregistered Securities. The Company issued the
---------------------------------------
following unregistered securities during the quarterly period ended September
30, 1998:
(i) stock options under the 1998 Stock Incentive Plan to purchase an
aggregate of 108,250 shares of common stock at a weighted average
exercise price of $5.26 per share;
(ii) in connection with the financing of the Company's acquisition of
the neurosurgical instruments business of Electa AB (PUBL), a
Swedish corporation ("Elekta"), an aggregate of 675,000 shares of
common stock to J.H. Whitney & Co., a significant stockholder of
the Company, and one of its affiliates.
The securities were offered and issued in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.
(d) Uses of Proceeds from Registered Securities. During the quarterly
-------------------------------------------
period ended September 30, 1998, the Company used $15.4 million of the offering
proceeds from the sale of securities by the Company pursuant to its Registration
Statement on Form S-1 (Registration No. 333-06463), which was declared effective
on September 27, 1996, to acquire the neurosurgical instruments business of
Elekta. In connection with the financing of the acquisition, the Company used
$600,000 of this amount to pay J.H. Whitney & Co., a 10% stockholder of the
Company, a debt placement fee. The balance of the offering proceeds are invested
in short-term investment grade interest bearing instruments.
Item 5. Other Information.
-----------------
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
inclusion in the Company's proxy materials for its 1999 Annual Meeting of
Stockholders must be received by the Secretary of the Company at the principal
offices of the Company no later than December 24, 1998.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and
14a-8 under the Exchange Act, written notice of shareholder proposals submitted
outside the process of Rule 14a-8 for consideration at the 1999 Annual Meeting
of Stockholders must be received by the Company on or before March 9, 1999, in
order to be considered timely for purposes of Rule 14a-4. The persons designated
in the Company's proxy statement will be granted discretionary authority with
respect to any shareholder proposals of which the Company does not receive
timely notice.
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Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
--------
27.1 Financial Data Schedule
(b) Reports on Form 8-K. On July 23, 1998, the Company filed a Current
Report on Form 8-K dated July 8, 1998, reporting the completion of its
acquisition of the neurosurgical instruments business of Elekta. The Current
Report was amended by Amendment No. 1, filed on September 21, 1998. The
following financial statements were filed with Amendment No. 1:
(i) Financial Statements of Business Acquired -- Elekta Neurosurgical
Instruments, including:
(a) Report of Independent Public Accountants;
(b) Combined Balance Sheets as of April 30, 1998 and 1997;
(c) Combined Statements of Operations and Parent Company Equity
for the Years Ended April 30, 1998, 1997 and 1996;
(d) Combined Statements of Cash Flows for the Years Ended
April 30, 1998, 1997 and 1996;
(e) Notes to Combined Financial Statements; and
(ii) Pro Forma Financial Information -- Nitinol Medical Technologies,
Inc. and subsidiaries, including:
(a) Overview;
(b) Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended December 31, 1997;
(c) Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended December 31, 1997;
(d) Unaudited Pro Forma Condensed Combined Statement of
Operations for the Six Months ended June 30, 1998;
(e) Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations for the Six Months ended June 30, 1998;
(f) Unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1998;
(g) Notes to Unaudited Pro Forma Condensed Combined Balance
Sheet as of June 30, 1998.
On September 29, 1998, the Company filed a Current Report on Form 8-K dated
September 23, 1998, announcing the issuance of a press release on September 23,
1998 regarding the naming of William J. Knight as Vice President of Finance and
Administration and Chief Financial Officer of the Company. No financial
statements were filed with this Current Report.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NITINOL MEDICAL TECHNOLOGIES, INC.
Date: November 13, 1998 By: /s/ Thomas M. Tully
-------------------------------------
Thomas M. Tully
President and Chief Executive Officer
Date: November 13, 1998 By: /s/ William J. Knight
-----------------------------------
William J. Knight
Vice President of Finance and Administration
and Chief Financial Officer
28
<PAGE>
EXHIBIT INDEX
Exhibits
- --------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND FOR THE THREE AND
NINE MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,123,366
<SECURITIES> 5,846,313
<RECEIVABLES> 12,325,427
<ALLOWANCES> 811,000
<INVENTORY> 8,554,062
<CURRENT-ASSETS> 33,536,369
<PP&E> 20,097,409
<DEPRECIATION> 1,911,290
<TOTAL-ASSETS> 65,279,483
<CURRENT-LIABILITIES> 9,752,787
<BONDS> 0
0
0
<COMMON> 10,623
<OTHER-SE> 33,647,798
<TOTAL-LIABILITY-AND-EQUITY> 65,279,483
<SALES> 17,445,695
<TOTAL-REVENUES> 18,969,505
<CGS> 7,139,029
<TOTAL-COSTS> 15,211,584
<OTHER-EXPENSES> 336,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,957
<INCOME-PRETAX> (3,460,505)
<INCOME-TAX> 512,187
<INCOME-CONTINUING> (3,972,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,972,692)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
