<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 June 30, 1999
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number: 000-21001
NMT Medical, 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)
Nitinol Medical Technologies, Inc.
----------------------------------
(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 August 6,1999, there were 10,769,239 shares of Common Stock, $.001
par value per share, outstanding.
<PAGE>
NMT Medical, Inc.
INDEX
-----
Part I. Financial Information Page Number
--------------------- -----------
Item 1. Financial Statements.
Consolidated Balance Sheets at December 31, 1998
and June 30, 1999 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 26
Part II. Other Information
-----------------
Item 2. Changes in Securities and Use of Proceeds. 27
Item 3. Defaults Upon Senior Securities. 27
Item 4. Submission of Matters to a Vote of Security Holders. 27
Item 6. Exhibits and Reports on Form 8-K. 28
Signatures 29
<PAGE>
Part I -- Financial Information
- -------------------------------
Item 1. Financial Statements
--------------------
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
At At
June 30, December 31,
1999 1998
----------------------------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,693,185 $ 4,007,014
Marketable securities 3,867,051 5,113,537
Accounts receivable, net of allowances for doubtful accounts
of $756,000 and $946,000 as of June 30, 1999 and
December 31, 1998, respectively 10,481,393 11,785,861
Inventories 11,478,069 10,848,432
Prepaid expenses and other current assets 3,921,448 3,516,610
----------------------------
Total current assets 33,441,146 35,271,454
----------------------------
Property, plant and equipment, at cost:
Land and buildings 4,650,000 4,650,000
Laboratory and computer equipment 2,636,483 2,621,211
Office furniture and equipment 2,572,645 2,299,589
Leasehold improvements 4,071,156 4,429,235
Equipment under capital lease 1,167,982 1,144,982
----------------------------
15,098,266 15,145,017
Less- Accumulated depreciation and amortization 2,635,279 1,961,869
----------------------------
12,462,987 13,183,148
----------------------------
Long-term investments in marketable securities - 1,009,401
Notes receivable from Image Technologies Corporation 1,363,348 1,600,898
Goodwill and other intangible assets, net 13,147,091 13,478,010
Other assets 1,538,085 1,640,218
----------------------------
$61,952,658 $ 66,183,129
============================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 4,657,657 $ 6,619,190
Accrued expenses 5,048,319 5,219,500
Current portion of debt obligations 17,576,121 386,248
----------------------------
Total current liabilities 27,282,097 12,224,938
----------------------------
Long-term debt obligations, net of current portion 793,561 17,798,743
Deferred tax liability 1,929,408 1,990,808
Stockholders' equity
Preferred stock, $.001 par value-
Authorized-3,000,000 shares
Issued and outstanding-none - -
Common stock, $.001 par value-
Authorized-30,000,000 shares
Issued and outstanding-10,769,239 and 10,680,117 shares
at June 30, 1999 and December 31,1998, respectively 10,770 10,681
Addditional paid-in capital 41,184,487 40,999,277
Cumulative translation adjustment (867,000) 687,000
Accumulated deficit (8,380,665) (7,528,318)
----------------------------
Total stockholders' equity 31,947,592 34,168,640
----------------------------
$61,952,658 $ 66,183,129
============================
</TABLE>
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
3
<PAGE>
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 11,845,636 $ 2,916,637 $ 22,417,095 $ 5,525,522
License fees 418,693 457,500 868,938 1,227,252
--------------------------------- -------------------------------
12,264,329 3,374,137 23,286,033 6,752,774
--------------------------------- -------------------------------
Expenses:
Cost of product sales 5,058,058 1,094,459 9,364,019 2,114,138
Research and development 1,296,478 907,930 2,403,466 1,672,365
General and administrative 3,008,424 665,704 5,885,361 1,313,349
Selling and marketing 2,449,693 404,462 5,226,068 725,359
--------------------------------- -------------------------------
11,812,653 3,072,555 22,878,914 5,825,211
--------------------------------- -------------------------------
Income from operations 451,676 301,582 407,119 927,563
--------------------------------- -------------------------------
Equity in net loss of Image Technologies Corporation (165,421) (93,337) (299,550) (93,337)
Currency transaction gain (loss) 26,282 (36,908) 227,044 (69,464)
Interest expense (753,269) (14,828) (1,570,521) (30,555)
Interest income 165,554 392,771 350,161 791,376
--------------------------------- -------------------------------
(726,854) 247,698 (1,292,866) 598,020
--------------------------------- -------------------------------
Income (loss) before provision for
income taxes (275,178) 549,280 (885,747) 1,525,583
Provision (benefit) for income taxes 42,300 218,500 (33,400) 550,500
--------------------------------- -------------------------------
Net income (loss) $ (317,478) $ 330,780 $ (852,347) $ 975,083
================================= ===============================
Basic net income (loss) per common share $ (0.03) $ 0.03 $ (0.08) $ 0.10
================================= ===============================
Weighted average common shares outstanding 10,766,852 9,828,213 10,725,542 9,825,713
================================= ===============================
Diluted net income (loss) per common share $ (0.03) $ 0.03 $ (0.08) $ 0.09
================================= ===============================
Diluted weighted average common shares outstanding 10,766,852 10,845,316 10,725,542 10,904,221
================================= ===============================
The accompanying Notes are an integral part of these Consolidated Financial Statements.
</TABLE>
4
<PAGE>
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (852,347) 975,083
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Equity in net loss of Image Technologies Corporation 299,550 93,337
Depreciation and amortization 1,178,825 267,806
Noncash tax provision 403,000 -
Noncash interest expense 361,520 -
Increase (decrease) in accounts receivables reserves (189,760) 80,000
Changes in assets and liabilities- -
Accounts receivable 1,204,338 (1,061,973)
Inventories (988,561) (244,908)
Prepaid expenses and other current assets (604,685) 322,712
Accounts payable (1,674,810) 613,814
Accrued expenses (95,178) (322,283)
Deferred revenue - (300,000)
------------------------------
Net cash provided by (used in) operating activities (958,108) 423,588
------------------------------
Cash flows from investing activities:
Maturities of marketable securities 2,268,870 13,208,377
Purchases of property, plant and equipment (672,854) (83,870)
Increase in investment in Image Technologies Corporation, net (62,000) (487,506)
Increase in other assets (331,384) (447,800)
------------------------------
Net cash provided by investing activities 1,202,632 12,189,201
------------------------------
Cash flows from financing activities:
Payments of capital lease obligations (105,808) (88,162)
Proceeds from issuance of common stock 135,299 44,150
Payments of senior debt (88,000) -
------------------------------
Net cash used in financing activities (58,509) (44,012)
------------------------------
Effect of exchange rate changes on cash (499,844) -
------------------------------
Net increase (decrease) in cash and cash equivalents (313,829) 12,568,777
Cash and cash equivalents, beginning of period 4,007,014 5,561,445
------------------------------
Cash and cash equivalents, end of period $ 3,693,185 $18,130,222
==============================
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest $ 1,141,373 $ 30,555
==============================
Taxes $ 98,148 $ 517,324
==============================
Noncash investing and financing activities:
Issuance of warrants in connection with debt waiver $ 50,000 $ -
==============================
The accompanying Notes are an integral part of these Consolidated Financial Statements.
</TABLE>
5
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) (the
Company) designs, develops and markets innovative medical devices that
utilize advanced technologies and are delivered by minimally invasive
procedures. The Company's products are designed to offer alternative
approaches to existing complex treatments, thereby reducing patient trauma,
shortening procedure, hospitalization and recovery times and lowering
overall treatment costs. The Company's patented medical devices include
self-expanding stents, vena cava filters and septal repair devices (the
CardioSeal Septal Occluder). The Company's stents have been commercially
launched in Europe and in the United States (U.S.) for certain indications,
its vena cava filters are marketed in the U.S. and abroad and the CardioSEAL
Septal Occluder is in the clinical trials stage in the U.S. 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, the Company develops,
manufactures, markets, and sells specialty implants and instruments for
neurosurgery 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.
As of June 30, 1999, the Company was not in compliance with certain of the
debt covenants contained in the subordinated note agreement, as amended, and
has not obtained a waiver of default from the subordinated noteholder, which
is an affiliate of one of the Company's principal stockholders. As a result,
the Company has classified this subordinated note payable as a current
liability on the accompanying balance sheets as of June 30, 1999. The
Company is currently seeking to refinance this debt. Upon refinancing of
this subordinated note payable, the Company anticipates that it will record
a non-cash extraordinary loss on the early extinguishment of this
subordinated note payable equal to the difference between the face value of
the note and its carrying value. As of June 30, 1999, the discount from face
value is approximately $2.8 million. There can be no assurance that the
Company will be able to refinance this debt on acceptable terms. See Note 4.
2. Interim Financial Statements
The accompanying Consolidated Financial Statements as of June 30, 1999 and
for the three and six month periods then ended 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 year
ended December 31, 1998, as filed with the Securities and Exchange
Commission on on April 15, 1999, and include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
results for such interim periods.
6
<PAGE>
NMT MEDICAL, INC. (FOMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Interim Financial Statements--(continued)
The results of operations for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results expected for the fiscal
year ending December 31, 1999.
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, and financed this transaction with $13 million of the Company's
cash, plus acquisition costs of $3.1 million, and $20 million of
subordinated debt borrowed from an affiliate of a significant stockholder of
the Company.
The following table presents selected unaudited financial information of
the Company and the neurosurgical division of Elekta AB, assuming the
companies combined on January 1, 1998. The unaudited pro forma results are
not necessarily indicative of either the actual results that would have
occurred had the acquisition been consummated on January 1, 1998, or of
future results:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
---- ----
(Actual) (Pro forma)
<S> <C> <C>
Net revenues $12,264,329 $11,784,000
=========== ===========
Net loss $ (317,478) $(1,068,000)
=========== ===========
Basic and diluted weighted
average shares outstanding 10,766,852 10,503,213
=========== ===========
Basic and diluted net loss per share $ (.03) $ (.10)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
-------- ---------
(Actual) (Pro forma)
<S> <C> <C>
Net revenues $23,286,033 $23,572,000
=========== ===========
Net loss $ (852,347) $(1,827,000)
=========== ===========
Basic and diluted weighted
average shares outstanding 10,725,542 10,500,713
=========== ===========
Basic and diluted net loss per share $ (.08) $ (.17)
=========== ===========
</TABLE>
7
<PAGE>
NMT MEDICAL, INC. (FOMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. Subordinated Note Payable
The Company financed a significant portion of the acquisition of ENI (see
Note 3) with $20 million of subordinated debt borrowed from an affiliate of
a significant stockholder of the Company. The subordinated debt, 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. As of June 30, 1999, the
Company was not in compliance with certain of the covenants contained in the
subordinated note, as amended, and has not obtained a waiver of default from
the subordinated noteholder. As a result, the Company has classified this
subordinated note payable as a current liability on the accompanying balance
sheet as of June 30, 1999. The Company is currently seeking to refinance
this debt. Upon refinancing of this subordinated note payable, the Company
anticipates that it will record a non-cash extraordinary loss on the early
extinguishment of this subordinated note payable equal to the difference
between the face value of the note and its carrying value. As of June 30,
1999, the discount from face value is approximately $2.8 million. There can
be no assurance that the Company will be able to refinance this debt on
acceptable terms.
5. Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
6. Cash and Cash Equivalents, Marketable Securities, and Long-Term Investments
in Marketable Securities
The Company considers all investments with maturities of 90 days or less
from the date of purchase to be cash equivalents and all investments with
original maturity dates greater than 90 days to be marketable securities.
Marketable securities are classified as current or long term based on their
remaining maturity as of the balance sheet date.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified certain of its marketable securities as held-to-
maturity and available-for-sale and its long-term investments in marketable
securities as held-to-maturity. Held-to-maturity securities represent those
securities for which the Company has the intent and ability to hold to
maturity and are reported at amortized cost.
8
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Cash and Cash Equivalents, Marketable Securities, and Long-Term Investments
in Marketable Securities--(continued)
Available-for-sale securities represent those securities that do not meet
the classification of held-to-maturity, are not actively traded and are
reported at fair market value with unrealized gains and losses included in
stockholders' equity. There were no unrealized gains or losses for the three
and six month periods ended June 30, 1999 or 1998.
Cash and cash equivalents, which are carried at cost and approximate market
value, consist of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash $3,693,185 $3,995,112
Cash equivalents--
Money market -- 11,902
---------- ----------
$3,693,185 $4,007,014
========== ==========
</TABLE>
Marketable securities, with a weighted average maturity of approximately 4
months and 7 1/2 months at June 30, 1999 and December 31, 1998, respectively,
are carried at cost which approximates market value and consist of the
following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Held-to-maturity--
Eurodollar bonds $2,361,167 $3,310,627
Medium-term notes 1,505,884 500,847
Corporate debt securities -- 502,063
---------- ----------
3,867,051 4,313,537
Available-for-sale--
Taxable auction securities -- 800,000
---------- ----------
$3,867,051 $5,113,537
========== ==========
</TABLE>
There were no realized gains or losses on the sale of available-for-sale
securities during the three and six month periods ended June 30, 1999 and
1998.
9
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Cash and Cash Equivalents, Marketable Securities, and Long-Term Investments
in Marketable Securities--(continued)
Long-term investments, with a weighted average maturity of approximately
15 months at December 31, 1998, are carried at cost which approximates
market. As of December 31, 1998, the amount of long-term investments was
$1,009,401 and consisted of medium-term notes. The Company held no long-term
investments as of June 30, 1999.
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 at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Short-term interest receivable $168,658 $117,687
Long-term interest receivable -- 12,985
-------- --------
$168,658 $130,672
======== ========
</TABLE>
7. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- -----------
<S> <C> <C>
Components $ 3,667,146 $ 3,117,848
Finished Goods 7,810,923 7,730,584
----------- -----------
$11,478,069 $10,848,432
=========== ===========
</TABLE>
8. Net Income (Loss) per Common and Common Equivalent Share
The Company applies SFAS No. 128, Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common
stock. In accordance with Staff Accounting Bulletin (SAB) No. 98, the
Company has determined that there were no nominal issuances of common stock
or potential common stock in the periods prior to the Company's initial
public offering.
10
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Net Income (Loss) per Common and Common Equivalent Share--(continued)
Diluted loss per share is the same as basic loss per share for the three and
six month periods ended June 30, 1999 as the effects of the Company's
potential common stock (367,742 shares and 511,291 shares for the three and
six month periods ended June 30, 1999, respectively) are antidilutive.
Calculations of basic and diluted net income (loss) per share are as
follows:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) available to
common stockholders $ (317,478) $ 330,780 $ (852,347) $ 975,083
=========== =========== =========== ===========
Weighted average common shares
outstanding 10,766,852 9,828,213 10,725,542 9,825,713
Potential common stock pursuant to
stock options and warrants -- 1,017,103 -- 1,078,508
----------- ----------- ----------- -----------
Diluted weighted average common
shares outstanding 10,766,852 10,845,316 10,725,542 10,904,221
=========== =========== =========== ===========
Basic net income (loss) per share $ (.03) $ .03 $ (.08) $ .10
=========== =========== =========== ===========
Diluted net income (loss) per share $ (.03) $ .03 $ (.08) $ .09
=========== =========== =========== ===========
</TABLE>
9. Foreign Currency
The accounts of the Company's subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation. Accordingly, the accounts of the
Company's foreign subsidiaries are translated from their local currency,
which is the functional currency, into U.S. dollars, the reporting currency,
using the exchange rate at the balance sheet date.
Income and expense accounts are translated using an average rate of exchange
during the period. Cumulative foreign currency translation gains or losses
are reflected as a component of consolidated stockholders' equity and
amounted to a loss of $542,000 and $867,000 for the three and six month
periods ended June 30, 1999. There were no foreign currency translation
gains or losses for the three and six month periods ended June 30, 1998.
Additionally, the Company had a foreign currency exchange transaction gain
of approximately $26,000 and a foreign currency exchange transaction loss of
$37,000 for the three month period ended June 30, 1999 and 1998,
respectively. For the six months ended June 30, 1999, the Company had a
foreign currency transaction gain of approximately $227,000 and a foreign
currency transaction loss of $69,000 for the six months ended June 30, 1998.
11
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Foreign Currency--(continued)
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.
10. Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive
Income which establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The adoption of this standard did not
have a material effect on the Company's financial statements, as the only
element of comprehensive income related to the Company is the foreign
currency translation adjustment which is presented separately on the balance
sheet as required. If presented on the statement of operations for the three
and six month periods ended June 30, 1999, comprehensive net loss would have
increased the reported net loss by $542,000 and $1,554,000, respectively.
There were no differences in net income and comprehensive net income for the
three and six month periods ended June 30, 1998.
11. Investment in 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, subject to an annual interest
rate of 10%, 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. As of June 30, 1999, ITC has
borrowed $2 million under this agreement and owes the Company accrued
interest of approximately $169,000. On December 30, 1998 and February 3,
1999, the Company entered into a revolving credit note agreement with ITC
for an additional $50,000 and $100,000, respectively, under which ITC
borrowed $38,043 and $100,000.
12
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. Investment in Image Technologies Corporation--(continued)
These notes accrue interest at 10% per annum, are subject to the same terms
as the $2 million credit line agreement, and are payable in full at the
option of the Company. In connection with the issuance of the $100,000 note,
ITC granted a warrant to the Company to purchase 10,030 shares of ITC Series
A preferred stock at $9.97 per share. On March 30, 1999, ITC entered into a
finance agreement with a third party whereby the third party purchased
120,361 shares of ITC's common stock at $9.97 per share. The Company was
issued an additional 39,151 shares of ITC Series A preferred stock in
conjunction with this financing in order to maintain its 23% ownership
interest in ITC. A portion of the proceeds from this financing was used to
repay certain bridge financing, including approximately $38,000 borrowed
from the Company in December 1998. The agreement provided for the issuance
of additional shares of common stock to the third party and the Company if
ITC does not reach certain milestones as set forth in the agreement. As a
result, on June 30, 1999, both the third party and the Company received
894,110 shares and 267,072 shares of ITC common stock and Series A preferred
stock, respectively. On August 6, 1999, ITC signed a letter of intent for a
senior secured convertible note agreement with this same third party for
$1.5 million. The Company also has the 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 expired on May 29, 1999 and was extended to November 30,
1999 in accordance with the terms of the Company's agreement with ITC.
13
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Refundable and deferred income taxes $1,316,297 $ 753,749
Value added tax receivable 306,074 156,593
Interest 448,453 754,850
Equipment deposit 154,070 543,327
Advances to suppliers -- 247,000
Commissions 106,000 193,000
Insurance 175,965 178,804
Royalties 266,000 --
Maintenance 119,000 --
Promotional materials 195,000 --
Other prepaid expenses 834,589 689,287
---------- ----------
$3,921,448 $3,516,610
========== ==========
</TABLE>
13. Accrued Expenses
Accrued expenses consist of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Payroll and payroll related $1,577,951 $1,803,859
Severance and relocation costs 145,000 --
Income taxes 966,225 275,600
Sales taxes 229,000 753,000
Professional fees 159,841 566,776
Inventory 715,818 493,059
Royalties 371,038 265,331
Interest 169,000 106,000
Insurance 97,818 103,081
Other accrued expenses 616,628 852,794
---------- ----------
$5,048,319 $5,219,500
========== ==========
</TABLE>
14
<PAGE>
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. Segment Reporting
The Company applies the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 established
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services
and geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision, or decision making
group, in deciding how to allocate resources and in assessing performance.
The Company's chief operating decision making group is the Chief Executive
Officer, members of Senior Management, and the Board of Directors. The
operating segments are managed separately because each represents specific
types of medical devices for specific markets (i.e. the core technologies
segment includes minimally-invasive medical devices that were the primary
products of the Company prior to the acquisition of ENI while the
neurosurgical segment includes primarily neurosurgical medical devices that
were the primary products of ENI).
The Company's operating segments include the core technologies product line
and the neurosurgical product line. Revenues for the core technologies
product line are derived from sales of the Simon Nitinol Filter (SNF) and
the CardioSEAL Septal Occluder, as well as from licensing revenues from the
Company's self-expanding stents. Revenues for the neurosurgical product line
are derived from sales of cerebral spinal fluid shunts, the Selector
Ultrasonic Aspirator, Ruggles Surgical Instruments, the Spetzler Titanium
Aneurysm Clip and endoscopes and instrumentation for minimally invasive
surgery.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on stand-alone operating segment net income. Revenues are
attributed to geographic areas based on where the customer is located. The
Company operated in only one operating segment, core technologies products,
during the three and six month periods ended June 30, 1998. Segment
information is presented as follows:
15
<PAGE>
NMT MEDICAL, INC. (FOMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. Segment Reporting--(continued)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment Revenues:
Core technologies products $ 3,708,001 $3,374,137 $ 6,718,705 $6,752,774
Neurosurgical products 8,556,328 -- 16,567,328 --
----------- ---------- ----------- ----------
Total revenues $12,264,329 $3,374,137 $23,286,033 $6,752,774
=========== ========== =========== ==========
Segment Interest Income:
Core technologies products $ 165,554 $ 392,771 $ 333,161 $ 791,376
Neurosurgical products -- -- 17,000 --
----------- ---------- ----------- ----------
Total $ 165,554 $ 392,771 $ 350,161 $ 791,376
=========== ========== =========== ==========
Segment Interest Expense:
Core technologies products $ (174,219) $ (14,828) $ (393,421) $ (30,555)
Neurosurgical products (579,050) -- (1,177,100) --
----------- ---------- ----------- ----------
Total $ (753,269) $ (14,828) $(1,570,521) $ (30,555)
=========== ========== =========== ==========
Segment Income Tax Provision (Benefit):
Core technologies products $ 454,020 $ 218,500 $ 404,040 $ 550,500
Neurosurgical products (411,720) -- (437,440) --
----------- ---------- ----------- ----------
Total $ 42,300 $ 218,500 $ (33,400) $ 550,500
=========== ========== =========== ==========
Segment Depreciation and Amortization:
Core technologies products $ 324,470 $135,812 $ 649,068 $267,806
Neurosurgical products 305,757 -- 529,757 --
--------- -------- ----------- --------
Total revenues $ 630,227 $135,812 $ 1,178,825 $267,806
========= ======== =========== ========
Segment Equity in Net Loss of Investee:
Core technologies products $(165,241) $(93,337) $ (299,550) $(93,337)
Neurosurgical products -- -- -- --
--------- -------- ----------- --------
Total $(165,241) $(93,337) $ (299,550) $(93,337)
========= ======== =========== ========
Segment Income (Loss):
Core technologies products $(423,448) $330,780 $(1,195,287) $975,083
Neurosurgical products 105,970 -- 342,940 --
--------- -------- ----------- --------
Total $(317,478) $330,780 $ (852,347) $975,083
========= ======== =========== ========
Segment Expenditures for Long-Lived
Assets:
Core technologies products $ 5,276 $ 46,832 $ 15,261 $ 83,870
Neurosurgical products 404,969 -- 657,593 --
--------- -------- ----------- --------
Total $ 410,245 $ 46,832 $ 672,854 $ 83,870
========= ======== =========== ========
</TABLE>
16
<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 of the Company to be
materially different from any future results, performance, or achievement
expressed or implied by such forward-looking statements. Factors that might
cause such a difference include uncertainties in market demand and acceptance,
government regulation and approvals, and 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, and
dependence on significant corporate relationships, and other risks detailed in
the Company's Annual Report on Form 10-K as of December 31, 1998 filed with the
Securities and Exchange Commission on April 15, 1999.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared with three months ended June 30, 1998
Revenues. Revenues for the three months ended June 30, 1999 increased to $12.3
million from $3.4 million for the three months ended June 30, 1998. Product
sales increased to $11.8 million for the three months ended June 30, 1999 from
$2.9 million for the three months ended June 30, 1998. The increase is
primarily attributable to the Company's acquisition of the neurosurgical
instruments business (ENI) of Elekta AB (PUBL), a Swedish corporation, on July
8, 1998. This acquisition was accounted for as a purchase and accordingly ENI's
results of operations, including product revenues of $8.6 million for the three
month period ended June 30, 1999 are included with those of the Company.
Additionally, the Company had increased unit sales of CardioSEAL Septal
Occluders and vena cava filters during the three months ended June 30, 1999 as
compared with the three months ended June 30, 1998. License fees for the three
months ended June 30, 1999 amounted to $419,000 and consist of minimum quarterly
royalty payments of $375,000 and cost-sharing payments from Boston Scientific of
approximately $44,000. License fees for the three months ended June 30, 1998
amounted to $457,500 consisting of minimum quarterly royalty payments of
$375,000 and cost-sharing payments from Boston Scientific of approximately
$82,500.
Cost of Product Sales. Cost of product sales increased to $5.1 million for the
three months ended June 30, 1999 from $1.1 million for the three months ended
17
<PAGE>
June 30, 1998. The increase was primarily due to the Company's acquisition of
ENI whereby ENI's cost of product sales of $3.8 million are included with those
of the Company for the three months ended June 30, 1999. Additionally, the
Company had increased unit sales of CardioSEAL Septal Occluders and vena cava
filters during the three months ended June 30, 1999 as compared with the three
months ended June 30, 1998. Cost of product sales, as a percent of product
sales, increased to 43% for the three months ended June 30, 1999 from 38% for
the three months ended June 30, 1998. This increase is due to 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 partially offset by
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.
Research and Development. Research and development expense increased to $1.3
million for the three months ended June 30, 1999 from $908,000 for the three
months ended June 30, 1998. The increase is primarily attributable to the
Company's acquisition of ENI whereby ENI's research and development expenses of
$294,000 are included with those of the Company for the three months ended June
30, 1999. 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's) and increased activity in the Company's
development programs for vena cava filters and other products under development.
General and Administrative. General and administrative expenses increased to
$3.0 million for the three months ended June 30, 1999 from $666,000 for the
three months ended June 30, 1998. The increase is primarily attributable to the
inclusion of ENI's general and administrative expenses of $1.9 million for the
three months ended June 30, 1999 and the amortization of goodwill related to the
acquisition of ENI.
Selling and Marketing. Selling and marketing expenses increased to $2.4 million
for the three months ended June 30, 1999 from $404,000 for the three months
ended June 30, 1998. The increase is primarily attributable to the inclusion of
ENI's selling and marketing expenses of $2.3 million for the three months ended
June 30, 1999 and increased marketing activities related to the CardioSEAL
Septal Occluder in connection with the promotion of commercial sales that
commenced in Europe and other international markets in June 1997.
Equity in Net Loss of Image Technologies Corporation. During the three months
ended June 30, 1999 and 1998, the Company recorded $165,000 and $93,000,
respectively as its equity in the net 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 11 of the Notes to Consolidated Financial Statements in
the accompanying financial statements as of June 30, 1999.
18
<PAGE>
Interest Expense. Interest expense was $753,000 for the three months ended June
30, 1999 as compared to $15,000 for the three months ended June 30, 1998. The
increase was primarily the result of the Company's acquisition of ENI for which
the Company borrowed $20 million of subordinated debt which accrues interest at
10.101% per annum. In addition, the amortization of original issue discount
related to the subordinated note of $118,000 is included in the statement of
operations for the three months ended June 30, 1999.
Interest Income. Interest income was $166,000 for the three months ended June
30, 1999 as compared to $393,000 for the three months ended June 30, 1998. The
decrease was due to the Company's lower cash balances as a result of its
financing the acquisition of ENI with cash of $13.0 million, plus approximately
$3.1 million of acquisition costs.
Provision (Benefit) for Income Taxes. The Company had a provision for income
taxes of $42,300 for the three months ended June 30, 1999 based on an operating
income before nondeductible items and an estimated effective tax rate of
approximately 40%. The Company had a provision for income taxes of $218,500 for
the three months ended June 30, 1998 based on an operating income of $643,000
and an estimated effective tax rate of 34%.
Six months ended June 30, 1999 compared with six months ended June 30, 1998
Revenues. Revenues for the six months ended June 30, 1999 increased to $23.3
million from $6.8 million for the six months ended June 30, 1998. Product sales
increased to $22.4 million for the six months ended June 30, 1999 from $5.5
million for the six months ended June 30, 1998. 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 $16.6 million, are
included in those of the Company. Additionally, the Company had increased unit
sales of CardioSEAL Septal Occluders and vena cava filters during the six months
ended June 30, 1999 as compared to the six months ended June 30, 1998. License
fees for the six months ended June 30, 1999 amounted to $869,000 and consist of
minimum quarterly royalty payments of $750,000 and cost-sharing payments from
Boston Scientific of approximately $119,000. License fees for the six months
ended June 30, 1998 amounted to approximately $1.2 million and consist of
minimum quarterly royalty payments of $750,000, milestone payments of $300,000
and cost-sharing payments from Boston Scientific of approximately $176,000.
Cost of Product Sales. Cost of product sales increased to $9.4 million for the
six months ended June 30, 1999 from $2.1 million for the six months ended June
30, 1998 primarily due to the Company's acquisition of ENI on July 8, 1998 and
19
<PAGE>
accordingly $7.2 million of ENI's cost of product sales are included with those
of the Company. Cost of product sales also increased due to increases in unit
sales of CardioSEAL Septal Occluders and vena cava filters during the six months
ended June 30, 1999 as compared with the six months ended June 30, 1998. Cost
of product sales, as a percent of product sales, increased to 42% for the six
months ended June 30, 1999 from 38% for the six months ended June 30, 1998. This
increase is due to 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 partially offset by 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.
Research and Development. Research and development expenses increased to $2.4
million for the six months ended June 30, 1999 from $1.7 million for the six
months ended June 30, 1998. The increase is primarily attributable to the
Company's acquisition of ENI on July 8, 1998 and accordingly ENI's research and
development expenses of $578,000 are included with those of the Company.
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.
General and Administrative. General and administrative expenses increased to
$5.9 million for the six months ended June 30, 1999 from $1.3 million for the
six months ended June 30, 1998. The increase is primarily attributable to the
inclusion of ENI's general and administrative expenses of $3.7 million for the
six months ended July 30, 1999 and the amortization of goodwill related to the
acquisition of ENI. Additionally, the Company recorded $78,000 of expenses
pertaining to the Company's negotiations related to noncompliance with and
amendment to certain of its debt covenants as of March 31, 1999. The Company
also recorded an additional $134,000 of expenses consisting of legal,
accounting, and employee relocation costs.
Selling and Marketing. Selling and marketing expenses increased to $5.2 million
for the six months ended June 30, 1999 from $725,000 for the six months ended
June 30, 1998. The increase is primarily attributable to the inclusion of ENI's
selling and marketing expenses of $4.3 million for the six months ended June 30,
1999 and increased marketing activities related to the CardioSEAL Septal
Occluder in connection with the promotion of commercial sales that commenced in
Europe and other international markets in June 1997. Additionally, the Company
recorded $225,000 of expenses in conjunction with the termination and
replacement of certain individuals in the sales and product management
departments of the Company and for related legal and consulting costs.
20
<PAGE>
Equity in Net Loss of Image Technologies Corporation. During the six months
ended June 30, 1999 and 1998, the Company recorded $300,000 and $93,000,
respectively, as its equity in the net 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 11 to the Notes to Consolidated Financial Statements in
the accompanying financial statements as of June 30, 1999.
Interest Expense. Interest expense was $1.6 million for the six months ended
June 30, 1999 as compared to $31,000 for the six months ended June 30, 1998.
The increase was primarily the result of the Company's acquisition of ENI on
July 8, 1998 for which the Company borrowed $20 million of subordinated debt
which accrues interest at 10.101% per annum. In addition, the amortization of
original issue discount related to the subordinated note of $231,000 is included
in the statement of operations for the six months ended June 30, 1999. In
conjunction with the Company's renegotiation of its debt covenants as of March
31, 1999, the Company recorded $50,000 of interest expense related to the
issuance of warrants to the holder of the note.
Interest Income. Interest income was $350,000 for the three months ended June
30, 1999 as compared to $791,000 for the three months ended June 30, 1998. The
decrease was due to the Company's lower cash balances as a result of its
financing the acquisition of ENI with cash of $13.0 million, plus approximately
$3.1 million of acquisition costs.
Provision (Benefit) for Income Taxes. The Company had a benefit for income
taxes of $33,400 for the six months ended June 30, 1999, based on an operating
loss before nondeductible items an estimated effective tax rate of 40%. For the
six months ended June 30, 1998, the Company had a provision for income taxes of
$550,500 based on an operating income of $1.6 million before nondeductible items
and an estimated effective tax rate of 34%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and marketable securities equal to
$7.6 million at June 30, 1999 as compared to $9.1 million at December 31, 1998.
During the six months ended June 30, 1999, the Company's operations utilized
cash of approximately $1.0 million which consists of approximately $1.2 million
of cash generated by operations prior to approximately $2.1 million of noncash
charges and before changes in working capital items. During the second quarter
of 1999, the Company increased its focus on reducing levels of accounts
receivables and inventories in an effort to generate increased cash flows from
operations.
In July 1998, the Company financed a portion of the acquisition of ENI with $13
million of the Company's cash and a $20 million subordinated note issued to an
affiliate of a significant stockholder of the Company. The subordinated note,
which is secured by all of the assets of the Company, is due September 30,
21
<PAGE>
2003 with quarterly interest payable at 10.101% per annum. The subordinated debt
includes certain restrictive covenants relating to maintenance of certain ratios
and cash levels. As of June 30, 1999, the Company was not in compliance with
certain of the covenants contained in the subordinated note, as amended, and has
not obtained a waiver of default from the subordinated noteholder. As a result,
the Company has classified this subordinated note payable as a current liability
on the accompanying balance sheet as of June 30, 1999. The Company is currently
seeking to refinance this debt. Upon refinancing of this subordinated note
payable, the Company anticipates that it will record a non-cash extraordinary
loss on the early extinguishment of this subordinated note payable equal to
the difference between the face value of the note and its carrying value. As of
June 30, 1999, the discount from face value is approximately $2.8 million. There
can be no assurance that the Company will be able to refinance this debt on
acceptable terms. See Note 4 to the Notes to Consolidated Financial Statements
in the accompanying financial statements as of June 30, 1999.
Purchases and capitalized leases of property and equipment for use in the
Company's research and development and general and administrative activities
amounted to $673,000 for the six months ended June 30, 1999. The Company
anticipates that it will spend approximately $1.5 million on purchases of
property and equipment in 1999 consisting primarily in connection with the
Company's implementation of new management information systems. See "Year 2000
Readiness".
As a result, the Company's depreciation and amortization expense increased to
$1.2 million for the six months ended June 30, 1999 as compared with $268,000
for the six months ended June 30, 1998. The increase is also attributable
to the acquisition of ENI, whose depreciation and amortization is approximately
$306,000 for the six months ended June 30, 1999, as well as the amortization of
goodwill resulting from the acquisition itself.
In May 1997, the Company acquired a 23 percent ownership interest in ITC for
$2.3 million and incurred approximately $149,000 of expenses associated with the
investment. ITC was a development stage Company in May 1997 and was focusing
its efforts on developing certain early stage technologies. Due to the
uncertainty regarding the realization of its investment, the Company charged the
amount of the purchase price and related acquisition costs to operations during
the year ended December 31,1997 as in-process research and development.
In connection with the Company's investment in ITC, the Company extended to ITC
a credit line of up to $2.0 million of senior debt under a loan agreement (the
"loan agreement") that bears interest at 10% per annum. The note is convertible
into equity at the rate of one percent of ownership per $100,000 borrowed.
During the second quarter of 1998, ITC began to make borrowings against this
line in order to fund its operations and as of June 30, 1999 owes the Company
$2.0 million, plus accrued interest of approximately $169,000. In addition, in
December 1998 and February 1999 the Company amended its loan agreement with ITC
to provide ITC with an additional $50,000 and $100,000, respectively, of
financing under the same terms and conditions as the $2.0 million senior debt
financing. In connection with the February 1999 amendment, ITC issued to the
Company a warrant to purchase 10,030 shares of ITC's Series A Preferred Stock at
an exercise price of $9.97 per share. As of June 30, 1999, ITC had outstanding
borrowings of $100,000 under this facility. The Company has not
22
<PAGE>
recorded interest income on the note receivable from ITC because interest is not
due until the earlier of (i) the closing of any debt or equity financing by ITC
resulting in at lease $4.0 million in gross proceeds to ITC, (ii) the merger or
consolidation, or other combination, of ITC into or with another corporation or
the sale of all or substantially all of the assets of ITC or (iii) thirty months
following November 30, 1999 or following the date upon which the Company
exercises its option to purchase all of the outstanding capital stock of ITC. In
addition, under the loan agreement, the payment of all interest will be waived
if the Company exercises its option to convert its senior debt into additional
equity. This option to convert expired May 29, 1999 but was extended until
November 30, 1999 in accordance with the terms of the Company's agreement with
ITC. The Company believes that the amount due from ITC will be collectible from
ITC's future cash flows or from independent financing. During the three months
ended June 30, 1999, the Company recorded $165,000 as its equity in the loss of
ITC, and reduced the carrying value of the note receivable by such amount. The
Company believes that the carrying value of the note, approximately $1.4 million
as of June 30, 1999, is fully realizable. During the three and six month periods
ended June 30, 1999, ITC generated approximately $184,000 and $400,000 of
product revenues, respectively.
On March 30, 1999, ITC entered into an agreement for the issuance and sale of
120,361 shares of common stock at a purchase price of $9.97 per share to a third
party. In connection with this issuance, ITC issued 39,159 shares of Series A
redeemable convertible preferred stock to NMT in order for NMT to maintain its
23 percent ownership interest in ITC. A portion of the proceeds from this
financing was used to repay certain bridge financing, including approximately
$38,000 borrowed from the Company in December 1998, plus accrued interest
thereon. The agreement provided for the issuance of additional shares of common
stock to the purchaser if ITC does not reach certain milestones as set forth in
the agreement. As a result, on June 30, 1999, both the Company and the third
party were issued 267,072 shares and 894,110 shares of ITC Series A preferred
stock and common stock, respectively. On August 6, 1999, ITC signed a letter of
intent for a senior secured convertible note agreement with this same third
party for $1.5 million.
As an international concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time and could
have a material adverse impact on the Company's financial condition and results
of operations. The Company's most significant foreign currency exposures relate
to the United Kingdom and France, as a result of its manufacturing activities
and assets in those countries. The accounts of the Company's foreign
subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency
Translation. In translating the accounts of the foreign subsidiaries into U.S.
dollars, assets and liabilities are translated at the rate of exchange in effect
at the end of each reporting period, while stockholders' equity is translated at
historical rates. Revenue and expense accounts are translated using the weighted
average exchange rate in effect during the year. The Company's foreign currency
transaction gains or losses are included in the accompanying consolidated
statements of operations and amounted to a foreign currency transaction gain of
$227,000 for the six months ended June 30, 1999 as compared with a foreign
currency transaction loss of $69,000 for the six months ended June 30, 1998. The
Company records the effects of changes in balance sheet items (i.e., cumulative
foreign currency translation gains and losses) as a component of consolidated
stockholders' equity. For the three and six month periods ended June 30, 1999.
Cumulative foreign currency translation losses amounted to $542,000 and
$867,000, respectively.
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 10 of Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on April 15, 1999. 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.
23
<PAGE>
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, the Company had reviewed its internal
computer systems and their capabilities of recognizing the year 2000 and years
thereafter. At that time, the Company believed that it was Year 2000 compliant
in all material respects.
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 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. The new systems are expected to be fully
operational by the beginning of the fourth 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
capital component above and expects to fund the remainder from operating cash
flows.
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
24
<PAGE>
at its Neurosciences Division with a commercially available and tested ERP
product, it is believed that the project will proceed more efficiently than had
the Company chosen to modify its existing systems. Currently, the project is
30 to 60 days behind schedule due to a delayed start. However, target dates have
remained unchanged as the Company believes they continue to be realistic as the
largest of the three major divisions of the Neurosciences Division has
implemented and has been using its system successfully with the other two
divisions to follow by the end of the third quarter and the beginning of the
fourth quarter of 1999.
Since the Company interfaces with its major customers and suppliers via
telephone and fax, the Company does not expect to incur significant losses in
the event that either the Company or its customers and suppliers are not Year
2000 compliant. The Company has obtained notices from major customers and
suppliers that they are Year 2000 compliant. In addition, the Company's
products are 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 Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted the "euro" as their national currency unit and irrevocable established
fixed conversion rates between their existing sovereign currencies and the euro.
During the three year transition period between January 1, 1999 and January 1,
2002, the euro will be a "cashless" currency, existing only as a unit of
account. Payments made to accounts in these member states may be made either in
the denominated legacy currency unit of the account or in euros. Beginning on
January 1, 2002, euro banknotes and coins will be introduced, and legacy
currency banknotes and coins will be withdrawn from circulation. No later than
July 1, 2002, the euro will be the sole national currency unit in these member
states, and the legacy currency banknotes and coins will no longer be accepted
as legal tender.
The Company, 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 is designed
to facilitate continued euro currency compliance.
25
<PAGE>
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. The Company's foreign currency transaction
gains or losses are included in the accompanying consolidated statements of
operations and amounted to a foreign currency transaction gain of $227,000 for
the six months ended June 30, 1999 as compared with a foreign currency
transaction loss of $69,000 for the six months ended June 30, 1998.
Item 3. Quantitive and Qualitative Disclosures About Market Risk.
--------------------------------------------------------
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. Interest rate risk is immaterial to the Company. As an
international concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time and could
have a material adverse impact on the Company's financial condition and results
of operations. The Company's most significant foreign currency exposures relate
to the United Kingdom and France as a result of its manufacturing activities and
assets in those countries. The accounts of the Company's foreign subsidiaries
are translated in accordance with SFAS No. 52, Foreign Currency Translation. In
translating the accounts of the foreign subsidiaries into U.S. dollars, assets
and liabilities are translated at the rate of exchange in effect at the end of
each reporting period, while stockholders' equity is translated at historical
rates. Revenue and expense accounts are translated using the weighted average
exchange rate in effect during the year. The Company's foreign currency
transaction gains or losses are included in the accompanying consolidated
statements of operations and amounted to a foreign currency transaction gain of
$227,000 for the six months ended June 30, 1999 as compared with a foreign
currency transaction loss of $69,000 for the six months ended June 30, 1998. The
Company records the effects of changes in balance sheet items (i.e., cumulative
foreign currency translation gains and losses) as a component of consolidated
stockholders' equity. For the three and six month periods ended June 30, 1999,
cumulative foreign currency translation losses amounted to $542,000 and
$867,000, respectively.
26
<PAGE>
Part II -- Other Information
- ----------------------------
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
(c) Recent Sales of Unregistered Securities. On April 14, 1999, the Company
---------------------------------------
issued to Whitney Subordinated Debt Fund, L.P. ("WSDF") a warrant to purchase
25,000 shares of the Company's Common Stock at an exercise price of $3.41 per
share. The warrant was issued pursuant to the terms of Waiver No. 1 to the
Subordinated Note and Common Stock Purchase Agreement, dated as of July 8, 1998,
by and among the Company, WSDF and, for certain purposes, J.H. Whitney & Co. The
warrant was offered and issued in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act of 1933, as amended. No
underwriters were engaged in connection with the issuance of the warrant.
The warrant is exercisable at any time or from time to time on or after
April 14, 1999 and expires on February 14, 2001. The warrant contains weighted-
average anti-dilution price protection.
(d) 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 March 31, 1999, 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.
The Company financed a significant portion of the acquisition of ENI with
$20 million of subordinated debt borrowed from an affiliate of a significant
stockholder of the Company. The subordinated note agreement dated July 8, 1998
contains working capital restrictions and limitations upon the payment of
dividends. The subordinated note agreement, as amended to date, is filed as an
exhibit to the Company's Current Report on Form 8-K dated July 8, 1998 and
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
Item 3. Defaults Upon Senior Securities
-------------------------------
(a) Material Default with Respect to Indebtedness. As of June 30, 1999,
---------------------------------------------
the Company was not in compliance with certain of the restrictive covenants
contained in its subordinated note agreement. See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources, and Note 4 of Notes to the Company's Consolidated Financial
Statements for the quarter ended June 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders. The 1999 Annual
---------------------------------------------------
Meeting of Stockholders of the Company was held on June 3, 1999 (the "Meeting").
Present at the Meeting in person or through representation by proxy were a
total of 9,282,428 shares of Common Stock out of a total of 10,700,417 shares
entitled to vote, thereby making a quorum. The following actions were taken at
the Meeting:
1. The election of seven members of the Board of Directors, each to
serve for a one-year term; and
2. The approval of the Certificate of Amendment to the Company's Second
Amended and Restated Certificate of Incorporation, which changed the
Company's name from Nitinol Medical Technologies, Inc. to NMT Medical,
Inc.
The results of the voting on each of the matters presented to the
stockholders at the Meeting are set forth below:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C>
1. Election of Directors:
Thomas M. Tully............... 9,268,178 14,250 N.A. N.A. N.A.
Morris Simon, M.D............. 9,268,178 14,250 N.A. N.A. N.A.
C. Leonard Gordon............. 9,268,178 14,250 N.A. N.A. N.A.
Jeffrey F. Thompson........... 9,268,178 14,250 N.A. N.A. N.A.
R. John Fletcher.............. 9,268,178 14,250 N.A. N.A. N.A.
Jeffrey R. Jay, M.D........... 9,207,461 79,467 N.A. N.A. N.A.
Robert A. Van Tassel, M.D..... 9,268,178 14,250 N.A. N.A. N.A.
2. Certificate of Amendment to
to Company's Second
Amended and Restated
Certificate of Incorporation.. 9,264,992 N.A. 3,586 13,850 N.A.
</TABLE>
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
3.1 Certificate of Amendment to the Company's Second Amended and
Restated Certificate of Incorporation, as filed with the
office of the Secretary of State of the State of Delaware on
June 3, 1999
3.2 Certificate of Designation, as filed with the office of the
Secretary of State of the State of Delaware on June 14, 1999
4.1 Rights Agreement between the Company and American Stock
Transfer & Trust Company, as Rights Agent, dated June 7,
1999
10.1 Common Stock Purchase Warrant No. WSDF-4
27.1 Financial Data Schedule
(b) Reports on Form 8-K. On June 4, 1999, the Company filed a Form 8-K
-------------------
(the "June 4 Form 8-K") with the Securities and Exchange Commission (the
"Commission"), disclosing that on June 3, 1999, the Company's stockholders had
approved a Certificate of Amendment to the Company's Second Amended and Restated
Certificate of Incorporation (the "Certificate of Amendment") which changed the
Company's name to NMT Medical, Inc. A copy of the Company's June 3, 1999 press
release regarding stockholder approval of the Certificate of Amendment was
included as Exhibit 99.1 to the June 4 Form 8-K.
On June 8, 1999, the Company filed a Form 8-K (the "June 8 Form 8-K") with
the Commission, disclosing that on May 26, 1999, the Company's Board of
Directors declared a dividend of one Right for each outstanding share of the
Company's Common Stock to stockholders of record at the close of business on
June 10, 1999. The description and terms of the Rights are set forth in a Rights
Agreement dated as of June 7, 1999 (the "Rights Agreement") between the Company
and American Stock Transfer & Trust Company, as Rights Agent. Both the Rights
Agreement and the Company's press release, dated May 27, 1999, announcing
adoption of the Stockholder Rights Plan, were included as Exhibits 4.1 and 99.1,
respectively, to the June 8 Form 8-K.
28
<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.
NMT MEDICAL, INC.
Date: August 16, 1999 By: /s/ Thomas M. Tully
--------------------------------
Thomas M. Tully
President and Chief Executive
Officer
Date: August 16, 1999 By: /s/ William J. Knight
--------------------------------
William J. Knight
Vice President of Finance
and Administration
and Chief Financial Officer
29
<PAGE>
EXHIBIT INDEX
Exhibits
- --------
3.1 Certificate of Amendment to the Company's Second Amended and Restated
Certificate of Incorporation, as filed with the office of the Secretary
of State of the State of Delaware on June 3, 1999.
3.2 Certificate of Designation, as filed with the office of the Secretary of
State of the State of Delaware on June 14, 1999
4.1 Rights Agreement between the Company and American Stock Transfer & Trust
Company, as Rights Agent, dated June 7, 1999 (1)
10.1 Common Stock Purchase Warrant No. WSDF-4
27.1 Financial Data Schedule
(1) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K, dated June 7, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
<PAGE>
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NITINOL MEDICAL TECHNOLOGIES, INC.
Pursuant to Section 242
of the General Corporation Law
of the State of Delaware
Nitinol Medical Technologies, Inc. (hereinafter called the "Corporation"),
a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
By vote of the Board of Directors of the Corporation, a resolution was duly
adopted pursuant to Section 242 of the General Corporation Law of the State of
Delaware, setting forth an amendment to the Second Amended and Restated
Certificate of Incorporation of the Corporation and declaring said amendment to
be advisable. At a meeting of the stockholders of the Corporation, the
stockholders of the Corporation duly approved said proposed amendment in
accordance with Section 242 of the General Corporation Law of the State of
Delaware. The resolution setting forth the amendment is as follows:
RESOLVED: That Article FIRST of the Second Amended and Restated
Certificate of Incorporation of the Corporation be and
hereby is deleted in its entirety and the following new
Article FIRST is inserted in lieu thereof:
FIRST. The name of the Corporation is NMT Medical, Inc.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President and Chief Executive Officer this 3rd day
of June, 1999.
NITINOL MEDICAL TECHNOLOGIES, INC.
By: /s/ Thomas M. Tully
-------------------
Name: Thomas M. Tully
Title: President and Chief Executive Officer
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
NMT MEDICAL, INC.
_________________________
(Pursuant to Section 151 of the
General Corporation Law of Delaware)
_________________________
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.), a Delaware
corporation (the "Corporation"), pursuant to authority conferred on the Board of
Directors of the Corporation by the Second Amended and Restated Certificate of
Incorporation and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, certifies that the Board of
Directors of the Corporation, at a meeting duly called and held, at which a
quorum was present and acting throughout, duly adopted the following resolution:
RESOLVED: That pursuant to the authority vested in the Board of Directors
of NMT Medical, Inc. (formerly Nitinol Medical Technologies,
Inc., and hereinafter called the "Corporation") in accordance
with the provisions of the Second Amended and Restated
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series
of Preferred Stock, $.001 par value per share (the "Preferred
Stock"), of the Corporation having the designation and relative
rights, preferences and limitations as set forth on Exhibit A
attached hereto.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by its President on this 11th day of June, 1999.
NMT MEDICAL, INC.
By: /s/ Thomas M. Tully
--------------------------------------
Thomas M Tully
President
<PAGE>
Exhibit A
---------
NMT MEDICAL, INC.
CERTIFICATE OF DESIGNATION OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation Law of Delaware)
___________________________________
RESOLVED: That pursuant to the authority vested in the Board of Directors
of NMT Medical, Inc. (formerly Nitinol Medical Technologies,
Inc., and hereinafter called the "Corporation") in accordance
with the provisions of the Second Amended and Restated
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series
of Preferred Stock, $.001 par value per share (the "Preferred
Stock"), of the Corporation having the designation and relative
rights, preferences and limitations as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 50,000. Such number of shares may be increased or decreased by
resolution of the Board prior to issuance; provided, that no decrease shall
--------
reduce the number of shares of Series A Preferred Stock to a number less than
the number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
---------------------------
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, par value $.001
per share (the "Common Stock"), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board out
of funds of the Corporation legally available for the payment of dividends,
quarterly dividends payable in cash on the last day of each fiscal quarter of
the Corporation in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $10 or (b) subject to the provision for
<PAGE>
adjustment hereinafter set forth, 1,000 times the aggregate per share amount of
all cash dividends, and 1,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
clause (b) of the first sentence of this Section 2(A) shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Series A Preferred Stock that were outstanding immediately prior to
such event and the denominator of which is the number of shares of Series A
Preferred Stock outstanding immediately after such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock) and the Corporation shall pay such
dividend or distribution on the Series A Preferred Stock before the dividend or
distribution declared on the Common Stock is paid or set apart; provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
2
<PAGE>
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board may fix a record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
-------------
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Series A Preferred Stock that were
outstanding immediately prior to such event and the denominator of which is the
number of
3
<PAGE>
shares of Series A Preferred Stock outstanding immediately after such event.
(B) Except as otherwise provided herein, in the Certificate of
Incorporation or by law, the holders of shares of Series A Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock shall
be in arrears in an amount equal to six quarterly dividends thereon, the holders
of the Series A Preferred Stock, voting as a separate series from all other
series of Preferred Stock and classes of capital stock, shall be entitled to
elect two members of the Board in addition to any Directors elected by any other
series, class or classes of securities and the authorized number of Directors
will automatically be increased by two. Promptly thereafter, the Board of the
Corporation shall, as soon as may be practicable, call a special meeting of
holders of Series A Preferred Stock for the purpose of electing such members of
the Board. Such special meeting shall in any event be held within 45 days of the
occurrence of such arrearage.
(ii) During any period when the holders of Series A Preferred Stock,
voting as a separate series, shall be entitled and shall have exercised their
right to elect two Directors, then, and during such time as such right
continues, (a) the then authorized number of Directors shall be increased by
two, and the holders of Series A Preferred Stock, voting as a separate series,
shall be entitled to elect the additional Directors so provided for, and (b)
each such additional Director shall not be a member of any existing class of the
Board, but shall serve until the next annual meeting of stockholders for the
election of Directors, or until his successor shall be elected and shall
qualify, or until his right to hold such office terminates pursuant to the
provisions of this Section 3(C).
(iii) A Director elected pursuant to the terms hereof may be
removed with or without cause by the holders of Series A Preferred Stock
entitled to vote in an election of such Director.
(iv) If, during any interval between annual meetings of stockholders
for the election of Directors and while the holders of Series A Preferred Stock
shall be entitled to elect two Directors, there is no such Director in office by
reason of resignation, death or removal, then, promptly thereafter, the Board
shall call a special meeting of the holders of Series A Preferred Stock for the
purpose of filling such vacancy and such vacancy shall be filled at such special
meeting. Such special meeting shall in any event be held within 45 days of the
occurrence of such vacancy.
(v) At such time as the arrearage is fully cured, and all dividends
accumulated and unpaid on any shares of Series A Preferred Stock outstanding are
4
<PAGE>
paid, and, in addition thereto, at least one regular dividend has been paid
subsequent to curing such arrearage, the term of office of any Director elected
pursuant to this Section 3(C), or his successor, shall automatically terminate,
and the authorized number of Directors shall automatically decrease by two, the
rights of the holders of the shares of the Series A Preferred Stock to vote as
provided in this Section 3(C) shall cease, subject to renewal from time to time
upon the same terms and conditions, and the holders of shares of the Series A
Preferred Stock shall have only the limited voting rights elsewhere herein set
forth.
(D) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
--------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a parity
with the Series A Preferred Stock, except in accordance with a purchase offer
made in writing
5
<PAGE>
or by publication (as determined by the Board) to all holders of such shares
upon such terms as the Board, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
-----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designation
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
(A) Upon any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $1000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up.
(B) Neither the consolidation, merger or other business combination of the
Corporation with or into any other corporation nor the sale, lease, exchange or
conveyance of all or any part of the property, assets or business of the
Corporation shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for purposes of this Section 6.
6
<PAGE>
(C) In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision, combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (1) of paragraph (A) of this Section 6 shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of paragraph (A) of this Section 6 shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Series A Preferred Stock that were outstanding immediately
prior to such event and the denominator of which is the number of shares of
Series A Preferred Stock outstanding immediately after such event.
Section 7. Consolidation, Merger, etc. Notwithstanding anything to the
--------------------------
contrary contained herein, in case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of Series A
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event. In the event the Corporation shall at
7
<PAGE>
any time declare or pay any dividend on the Series A Preferred Stock payable in
shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the amount set forth in the first
sentence of this Section 7 with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Series A Preferred
Stock that were outstanding immediately prior to such event and the denominator
of which is the number of shares of Series A Preferred Stock outstanding
immediately after such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
-------------
be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
----
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Preferred Stock issued either before or after the
issuance of the Series A Preferred Stock, unless the terms of any such series
shall provide otherwise.
Section 10. Amendment. At such time as any shares of Series A Preferred
---------
Stock are outstanding, the Certificate of Incorporation, as amended, of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
Section 11. Fractional Shares. Series A Preferred Stock may be issued in
-----------------
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of Series A Preferred Stock.
8
<PAGE>
EXHIBIT 10.1
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS
EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT
-----------------------------------------------------------------------
Warrant No. WSDF-4 Number of Shares: 25,000
(subject to adjustment)
Date of Issuance: April 14, 1999
Nitinol Medical Technologies, Inc.
----------------------------------
Common Stock Purchase Warrant
-----------------------------
(Void after February 14, 2001)
Nitinol Medical Technologies, Inc., a Delaware corporation (the "Company"),
for value received, hereby certifies that Whitney Subordinated Debt Fund, L.P.,
or its registered assigns (the "Registered Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company, at any time or from time to
time on or after the date of issuance and on or before February 14, 2001 at not
later than 5:00 p.m. (Boston, Massachusetts time), 25,000 shares of Common
Stock, $.001 par value per share, of the Company, at a purchase price of $3.41
per share. The shares purchasable upon exercise of this Warrant, and the
purchase price per share, each as adjusted from time to time pursuant to the
provisions of this Warrant, are hereinafter referred to as the "Warrant Shares"
and the "Purchase Price," respectively.
1. Exercise.
--------
(a) This Warrant may be exercised by the Registered Holder, in whole
or in part, by surrendering this Warrant, with the purchase form appended hereto
as Exhibit I duly executed by such Registered Holder or by such Registered
---------
Holder's duly authorized attorney, at the principal office of the Company, or at
such other office or agency as the Company may designate, accompanied by payment
in full, in lawful money of the United States, of the Purchase Price payable in
respect of the number of Warrant Shares purchased upon such exercise.
(b) The Registered Holder may, at its option, elect to pay some or
all of the Purchase Price payable upon an exercise of this Warrant by cancelling
a portion of this Warrant exercisable for such number of Warrant Shares as is
determined by dividing (i) the total Purchase Price payable in respect of the
number of Warrant Shares being purchased upon such exercise by (ii) the excess
of the Fair
-1-
<PAGE>
Market Value per share of Common Stock as of the effective date of exercise, as
determined pursuant to subsection 1(c) below (the "Exercise Date") over the
Purchase Price per share. If the Registered Holder wishes to exercise this
Warrant pursuant to this method of payment with respect to the maximum number of
Warrant Shares purchasable pursuant to this method, then the number of Warrant
Shares so purchasable shall be equal to the total number of Warrant Shares,
minus the product obtained by multiplying (x) the total number of Warrant Shares
by (y) a fraction, the numerator of which shall be the Purchase Price per share
and the denominator of which shall be the Fair Market Value per share of Common
Stock as of the Exercise Date. The Fair Market Value per share of Common Stock
shall be determined as follows:
(i) If the Common Stock is listed on a national securities
exchange, the NASDAQ National Market System, the NASDAQ system, or another
nationally recognized exchange or trading system as of the Exercise Date, the
Fair Market Value per share of Common Stock shall be deemed to be the last
reported sale price per share of Common Stock thereon on the Exercise Date; or,
if no such price is reported on such date, such price on the next preceding
business day (provided that if no such price is reported on the next preceding
business day, the Fair Market Value per share of Common Stock shall be
determined pursuant to clause (ii)).
(ii) If the Common Stock is not listed on a national securities
exchange, the NASDAQ National Market System, the NASDAQ system or another
nationally recognized exchange or trading system as of the Exercise Date, the
Fair Market Value per share of Common Stock shall be deemed to be the amount
most recently determined by the Board of Directors to represent the fair market
value per share of the Common Stock (including without limitation a
determination for purposes of granting Common Stock options or issuing Common
Stock under an employee benefit plan of the Company); and, upon request of the
Registered Holder, the Board of Directors (or a representative thereof) shall
promptly notify the Registered Holder of the Fair Market Value per share of
Common Stock. Notwithstanding the foregoing, if the Board of Directors has not
made such a determination within the three-month period prior to the Exercise
Date, then (A) the Fair Market Value per share of Common Stock shall be the
amount next determined by the Board of Directors to represent the fair market
value per share of the Common Stock (including without limitation a
determination for purposes of granting Common Stock options or issuing Common
Stock under an employee benefit plan of the Company), (B) the Board of Directors
shall make such a determination within 15 days of a request by the Registered
Holder that it do so, and (C) the exercise of this Warrant pursuant to this
subsection 1(b) shall be delayed until such determination is made.
(c) Each exercise of this Warrant shall be deemed to have been
effected immediately prior to the close of business on the day on which this
Warrant
-2-
<PAGE>
shall have been surrendered to the Company as provided in subsection 1(a) above.
At such time, the person or persons in whose name or names any certificates for
Warrant Shares shall be issuable upon such exercise as provided in subsection
1(d) below shall be deemed to have become the holder or holders of record of the
Warrant Shares represented by such certificates.
(d) As soon as practicable after the exercise of this Warrant in full
or in part, and in any event within 10 days thereafter, the Company, at its
expense, will cause to be issued in the name of, and delivered to, the
Registered Holder, or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of full Warrant
Shares to which such Registered Holder shall be entitled upon such exercise
plus, in lieu of any fractional share to which such Registered Holder would
otherwise be entitled, cash in an amount determined pursuant to Section 3
hereof; and
(ii) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on the
face or faces thereof for the number of Warrant Shares equal (without giving
effect to any adjustment therein) to the number of such shares called for on the
face of this Warrant minus the sum of (a) the number of such shares purchased by
the Registered Holder upon such exercise plus (b) the number of Warrant Shares
(if any) covered by the portion of this Warrant cancelled in payment of the
Purchase Price payable upon such exercise pursuant to subsection 1(b) above.
2. Adjustments.
-----------
(a) General. The Purchase Price shall be subject to adjustment from
-------
time to time pursuant to the terms of this Section 2.
(b) Diluting Issuances.
------------------
(i) Special Definitions. For purposes of this subsection 2(b),
-------------------
the following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to
------
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities, excluding options described in clause (III) of subsection 2(b)(i)(D)
below.
(B) "Original Issue Date" shall mean the date on which this
-------------------
Warrant was first issued.
(C) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock.
-3-
<PAGE>
(D) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to subsection 2(b)(iii) below,
deemed to be issued) by the Company after the Original Issue Date, other than
shares of Common Stock issued or issuable:
(I) upon conversion of shares of Preferred Stock
outstanding on the Original Issue Date;
(II) by reason of a dividend, stock split, split-up or
other distribution on shares of Common Stock that are
excluded from the definition of Additional Shares of
Common Stock by the foregoing clause (I) or this
clause (II); or
(III) to employees or directors of, or consultants to, the
Company pursuant to a plan adopted by the Board of
Directors of the Company.
(ii) No Adjustment of Purchase Price. No adjustments to the
-------------------------------
Purchase Price shall be made unless the consideration per share (determined
pursuant to subsection 2(b)(v)) for an Additional Share of Common Stock issued
or deemed to be issued by the Company is less than the Purchase Price in effect
on the date of, and immediately prior to, the issue of such Additional Shares.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock. If the Company at any time or from time to time after the
- ------------
Original Issue Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum
number of shares of Common Stock (as set forth in the instrument relating
thereto without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined pursuant to subsection 2(b)(v)
hereof) of such Additional Shares of Common Stock would be less than the
Purchase Price in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any such case
in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Purchase Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock
-4-
<PAGE>
upon the exercise of such Options or conversion or exchange of such Convertible
Securities;
(B) If such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, upon the exercise, conversion or exchange
thereof, the Purchase Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase becoming effective, be
recomputed to reflect such increase insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities;
(C) Upon the expiration or termination of any unexercised
Option, the Purchase Price shall not be readjusted, but the Additional Shares of
Common Stock deemed issued as the result of the original issue of such Option
shall not be deemed issued for the purposes of any subsequent adjustment of the
Purchase Price;
(D) In the event of any change in the number of shares of
Common Stock issuable upon the exercise, conversion or exchange of any Option or
Convertible Security, including, but not limited to, a change resulting from the
anti-dilution provisions thereof, the Purchase Price then in effect shall
forthwith be readjusted to such Purchase Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security not exercised or converted prior to such change been made upon the
basis of such change; and
(E) No readjustment pursuant to Clause (B) or (D) above
shall have the effect of increasing the Purchase Price to an amount which
exceeds the lower of (i) the Purchase Price on the original adjustment date, or
(ii) the Purchase Price that would have resulted from any issuances of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Purchase Price Upon Issuance of Additional
--------------------------------------------------------
Shares of Common Stock. In the event the Company shall at any time after the
- ----------------------
Original Issue Date issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to subsection
2(b)(iii), but excluding shares issued as a dividend or distribution or upon a
stock split or combination as provided in subsection 2(c)), without
consideration or for a consideration per share less than the Purchase Price in
effect on the date of and immediately prior to such issue, then and in such
event, such Purchase Price shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by multiplying such Purchase
Price by a fraction, (A) the numerator of which shall be (1) the number of
shares of Common Stock outstanding immediately prior to such issue plus (2) the
number of shares of Common Stock which the aggregate consideration received or
to be received by the Company for the total
-5-
<PAGE>
number of Additional Shares of Common Stock so issued would purchase at such
Purchase Price; and (B) the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Common Stock so issued; provided that, (i) for the
-------- ----
purpose of this subsection 2(b)(iv), all shares of Common Stock issuable upon
exercise or conversion of Options or Convertible Securities outstanding
immediately prior to such issue shall be deemed to be outstanding (other than
shares excluded from the definition of "Additional Shares of Common Stock" by
virtue of clause (III) of subsection 2(b)(i)(D)), and (ii) the number of shares
of Common Stock deemed issuable upon conversion of such outstanding Options and
Convertible Securities shall not give effect to any adjustments to the
conversion price or conversion rate of such Options or Convertible Securities
resulting from the issuance of Additional Shares of Common Stock that is the
subject of this calculation.
Notwithstanding the foregoing, the applicable Purchase Price shall not
be so reduced at such time if the amount of such reduction would be an amount
less than $.05, but any such amount shall be carried forward and reduction with
respect thereto made at the time of and together with any subsequent reduction
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate $.05 or more.
(v) Determination of Consideration. For purposes of this
------------------------------
subsection 2(b), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
-----------------
(I) insofar as it consists of cash, be computed at
the aggregate of cash received by the Company, excluding amounts paid or payable
for accrued interest or accrued dividends;
(II) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Company for Additional Shares of Common Stock deemed
to have been issued pursuant to subsection 2(b)(iii), relating to Options and
Convertible Securities, shall be determined by dividing
-6-
<PAGE>
(x) the total amount, if any, received or receivable
by the Company as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Company upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(vi) Multiple Closing Dates. In the event the Company shall
----------------------
issue on more than one date Additional Shares of Common Stock which are
comprised of shares of the same series or class of Preferred Stock, and such
issuance dates occur within a period of no more than 120 days, then the Purchase
Price shall be adjusted only once on account of such issuances, with such
adjustment to occur upon the final such issuance and to give effect to all such
issuances as if they occurred on the date of the final such issuance.
(c) Recapitalizations. If outstanding shares of the Company's Common
-----------------
Stock shall be subdivided into a greater number of shares or a dividend in
Common Stock shall be paid in respect of Common Stock, the Purchase Price in
effect immediately prior to such subdivision or at the record date of such
dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced.
If outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
(d) Mergers, etc. If there shall occur any capital reorganization or
------------
reclassification of the Company's Common Stock (other than a change in par value
or a subdivision or combination as provided for in subsection 2(c) above), or
any consolidation or merger of the Company with or into another corporation, or
a transfer of all or substantially all of the assets of the Company, then, as
part of any such reorganization, reclassification, consolidation, merger or
sale, as the case may be, lawful provision shall be made so that the Registered
Holder of this Warrant shall have the right thereafter to receive upon the
exercise hereof the kind and amount of shares of stock or other securities or
property which such Registered Holder would have been entitled to receive if,
immediately prior to any such reorganization, reclassification, consolidation,
merger or sale, as the case may be, such Registered Holder had held the number
of shares of Common Stock which were then
-7-
<PAGE>
purchasable upon the exercise of this Warrant. In any such case, appropriate
adjustment (as reasonably determined in good faith by the Board of Directors of
the Company) shall be made in the application of the provisions set forth herein
with respect to the rights and interests thereafter of the Registered Holder of
this Warrant, such that the provisions set forth in this Section 2 (including
provisions with respect to adjustment of the Purchase Price) shall thereafter be
applicable, as nearly as is reasonably practicable, in relation to any shares of
stock or other securities or property thereafter deliverable upon the exercise
of this Warrant.
(e) Adjustment in Number of Warrant Shares. When any adjustment is
--------------------------------------
required to be made in the Purchase Price, the number of Warrant Shares
purchasable upon the exercise of this Warrant shall be changed to the number
determined by dividing (i) an amount equal to the number of shares issuable upon
the exercise of this Warrant immediately prior to such adjustment, multiplied by
the Purchase Price in effect immediately prior to such adjustment, by (ii) the
Purchase Price in effect immediately after such adjustment.
(f) Certificate of Adjustment. When any adjustment is required to be
-------------------------
made pursuant to this Section 2, the Company shall promptly mail to the
Registered Holder a certificate setting forth the Purchase Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. Such certificate shall also set forth the kind and amount of stock
or other securities or property into which this Warrant shall be exercisable
following such adjustment.
3. Fractional Shares. The Company shall not be required upon the
-----------------
exercise of this Warrant to issue any fractional shares, but shall make an
adjustment therefor in cash on the basis of the Fair Market Value per share of
Common Stock, as determined pursuant to subsection 1(b) above.
4. Requirements for Transfer.
-------------------------
(a) This Warrant and the Warrant Shares shall not be sold or
transferred unless either (i) they first shall have been registered under the
Securities Act of 1933, as amended (the "Act"), or (ii) the Company first shall
have been furnished with an opinion of legal counsel, reasonably satisfactory to
the Company, to the effect that such sale or transfer is exempt from the
registration requirements of the Act.
(b) Notwithstanding the foregoing, no registration or opinion of
counsel shall be required for (i) a transfer by a Registered Holder which is a
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, if the transferee agrees in writing to be subject to
the terms of this Section 4, or (ii) a transfer made in accordance with Rule 144
under the Act.
-8-
<PAGE>
(c) Each certificate representing Warrant Shares shall bear a legend
substantially in the following form:
"The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended, and may not be offered, sold or otherwise
transferred, pledged or hypothecated unless and until
such securities are registered under such Act or an
opinion of counsel satisfactory to the Company is
obtained to the effect that such registration is not
required."
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act.
5. No Impairment. The Company will not, by amendment of its charter or
-------------
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
6. Liquidating Dividends. If the Company pays a dividend or makes a
---------------------
distribution on the Common Stock payable otherwise than in cash out of earnings
or earned surplus (determined in accordance with generally accepted accounting
principles) except for a stock dividend payable in shares of Common Stock (a
"Liquidating Dividend"), then the Company will pay or distribute to the
Registered Holder of this Warrant, upon the exercise hereof, in addition to the
Warrant Shares purchased upon such exercise, the Liquidating Dividend which
would have been paid to such Registered Holder if it or he had been the owner of
record of such Warrant Shares immediately prior to the date on which a record is
taken for such Liquidating Dividend or, if no record is taken, the date as of
which the record holders of Common Stock entitled to such dividends or
distribution are to be determined.
7. Notices of Record Date, etc. In case:
---------------------------
(a) the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time deliverable upon the exercise of
this Warrant) for the purpose of entitling or enabling them to receive any
dividend or other distribution, or to receive any right to subscribe for or
purchase any shares of stock of any class or any other securities, or to receive
any other right; or
-9-
<PAGE>
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving entity), or any
transfer of all or substantially all of the assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other stock or securities at the
time deliverable upon the exercise of this Warrant) shall be entitled to
exchange their shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be mailed at least ten (10) days prior to the
record date or effective date for the event specified in such notice.
8. Reservation of Stock. The Company will at all times reserve and keep
--------------------
available, solely for issuance and delivery upon the exercise of this Warrant,
such number of Warrant Shares and other stock, securities and property, as from
time to time shall be issuable upon the exercise of this Warrant.
9. Exchange of Warrants. Upon the surrender by the Registered Holder of
--------------------
any Warrant or Warrants, properly endorsed, to the Company at the principal
office of the Company, the Company will, subject to the provisions of Section 4
hereof, issue and deliver to or upon the order of such Holder, at the Company's
expense, a new Warrant or Warrants of like tenor, in the name of such Registered
Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, calling in the aggregate on the face
or faces thereof for the number of shares of Common Stock called for on the face
or faces of the Warrant or Warrants so surrendered.
10. Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
-10-
<PAGE>
11. Transfers, etc.
--------------
(a) The Company will maintain a register containing the names and
addresses of the Registered Holders of this Warrant. Any Registered Holder may
change its or his address as shown on the warrant register by written notice to
the Company requesting such change.
(b) Subject to the provisions of Section 4 hereof, this Warrant and
all rights hereunder are transferable, in whole or in part, upon surrender of
this Warrant with a properly executed assignment (in the form of Exhibit II
----------
hereto) at the principal office of the Company.
(c) Until any transfer of this Warrant is made in the warrant
register, the Company may treat the Registered Holder of this Warrant as the
absolute owner hereof for all purposes; provided, however, that if and when this
-------- -------
Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
12. Mailing of Notices, etc. All notices and other communications from
-----------------------
the Company to the Registered Holder of this Warrant shall be mailed by first-
class certified or registered mail, postage prepaid, to the address furnished to
the Company in writing by the last Registered Holder of this Warrant who shall
have furnished an address to the Company in writing. All notices and other
communications from the Registered Holder of this Warrant or in connection
herewith to the Company shall be mailed by first-class certified or registered
mail, postage prepaid, to the Company at its principal office set forth below.
If the Company should at any time change the location of its principal office to
a place other than as set forth below, it shall give prompt written notice to
the Registered Holder of this Warrant and thereafter all references in this
Warrant to the location of its principal office at the particular time shall be
as so specified in such notice.
13. No Rights as Stockholder. Until the exercise of this Warrant, the
------------------------
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
14. Change or Waiver. Any term of this Warrant may be changed or waived
----------------
only by an instrument in writing signed by the party against which enforcement
of the change or waiver is sought.
15. Headings. The headings in this Warrant are for purposes of reference
--------
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
-11-
<PAGE>
16. Governing Law. This Warrant will be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Massachusetts.
Nitinol Medical Technologies, Inc.
By: /s/ Thomas M. Tully
---------------------------------------
[Corporate Seal] Name: Thomas M. Tully
Title: President and Chief Executive Officer
-12-
<PAGE>
EXHIBIT I
---------
PURCHASE FORM
-------------
To:_________________ Dated:____________
The undersigned, pursuant to the provisions set forth in the attached
Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the
Common Stock covered by such Warrant. The undersigned herewith makes payment of
$____________, representing the full purchase price for such shares at the price
per share provided for in such Warrant. Such payment takes the form of (check
applicable box or boxes):
[_] $______ in lawful money of the United States; and/or
[_] The cancellation of such portion of the attached Warrant as is exercisable
for a total of _____ Warrant Shares (using a Fair Market Value of $_____
per share for purposes of this calculation).
Signature:_____________________
Address:_______________
_________________
<PAGE>
EXHIBIT II
----------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, ________________________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant (No. ____) with respect to the number of shares of Common Stock covered
thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
Dated:_____________________ Signature:________________________________
Dated:_____________________ Witness:_________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND FOR THE THREE AND SIX
MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,693,185
<SECURITIES> 3,867,051
<RECEIVABLES> 11,237,633
<ALLOWANCES> 756,240
<INVENTORY> 11,478,069
<CURRENT-ASSETS> 33,441,146
<PP&E> 15,098,266
<DEPRECIATION> 2,635,279
<TOTAL-ASSETS> 61,952,658
<CURRENT-LIABILITIES> 27,282,097
<BONDS> 0
0
0
<COMMON> 10,770
<OTHER-SE> 31,936,822
<TOTAL-LIABILITY-AND-EQUITY> 61,952,658
<SALES> 22,417,095
<TOTAL-REVENUES> 23,286,033
<CGS> 9,364,019
<TOTAL-COSTS> 13,514,895
<OTHER-EXPENSES> 72,506
<LOSS-PROVISION> (180,000)
<INTEREST-EXPENSE> (1,220,360)
<INCOME-PRETAX> (885,747)
<INCOME-TAX> (852,347)
<INCOME-CONTINUING> (852,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (852,347)
<EPS-BASIC> ($.08)
<EPS-DILUTED> ($.08)
</TABLE>
