<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
Commission file number 0-6523
MICRO THERAPEUTICS, INC.
- --------------------------------------------------------------------------------
(exact name of small business issuer as specified in its charter)
Delaware 33-0569235
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
1062 Calle Negocio #F, San Clemente, California 92673
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(Address of principal executive offices)
(714) 361-0616
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(Issuer's telephone number)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at November 7, 1997
----- -------------------------------
Common Stock, $.001 par value 6,489,591
Page 1 of 23 Pages
Exhibit Index on Page 22
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MICRO THERAPEUTICS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C>
Item 1.Financial Statements
Balance Sheet as of September 30, 1997 (unaudited)........................3
Statements of Operations (unaudited) for the three and nine
months ended September 30, 1997 and 1996..................................4
Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1997 and 1996...............................................5
Notes to Financial Statements (unaudited).................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................7-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................19
Item 2. Changes in Securities and Use of Proceeds................................19
Item 6. Exhibits and Reports on Form 8-K.........................................20
SIGNATURES...............................................................................21
</TABLE>
2
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MICRO THERAPEUTICS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
September
30, 1997
(Unaudited)
-----------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,804,241
Short term investments 4,339,393
Accounts receivable 364,601
Inventories 590,363
Prepaid expenses and other current assets 197,362
------------
Total current assets 9,295,960
Property and equipment, net of accumulated depreciation of 657,420
$ 537,669
Patents and licenses, net of accumulated amortization of $42,742 550,088
Other assets 80,636
------------
Total assets $ 10,584,104
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of equipment line of credit $ 61,431
Accounts payable 149,799
Accrued liabilities 425,769
------------
Total current liabilities 636,999
Equipment line of credit 163,379
------------
Total liabilities 800,378
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares --
authorized, no shares issued and outstanding at
September 30, 1997
Common stock, $.001 par value, 20,000,000 shares
authorized, 6,489,103 shares issued and outstanding at 6,489
September 30, 1997
Additional paid-in capital 25,227,859
Unearned compensation (239,733)
Accumulated deficit (15,210,889)
------------
Total stockholders' equity 9,783,726
------------
Total liabilities and stockholders' equity $ 10,584,104
============
</TABLE>
See notes to unaudited financial statements.
3
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MICRO THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 727,475 $ 411,536 $ 1,876,843 $ 968,990
Cost of sales 519,930 443,312 1,564,855 1,115,658
Gross profit (loss) 207,545 (31,776) 311,988 (146,668)
Costs and expenses:
Research and development 1,013,134 709,042 3,092,470 1,589,156
Selling, general & administrative 983,851 911,448 3,052,422 2,303,113
----------- ----------- ----------- -----------
Total costs and expenses 1,996,985 1,620,490 6,144,892 3,892,269
----------- ----------- ----------- -----------
Loss from operations (1,789,440) (1,652,266) (5,832,904) (4,038,937)
Other income (expense), net 107,143 74,528 460,355 118,513
----------- ----------- ----------- -----------
Loss before provision for
income taxes (1,682,297) (1,577,738) (5,372,549) (3,920,424)
----------- ----------- ----------- -----------
Provision for income taxes -- -- 800 800
----------- ----------- ----------- -----------
Net loss ($1,682,297) ($1,577,738) ($5,373,349) ($3,921,224)
=========== =========== =========== ===========
Net loss per common share and
common share equivalent ($ 0.26) ($ 0.47) ($ 0.87) ($ 1.16)
=========== =========== =========== ===========
Weighted average common shares and
common share equivalents outstanding 6,558,000 3,382,000 6,185,000 3,379,000
=========== =========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
4
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MICRO THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------
Sept. 30, Sept. 30,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,373,349) $ (3,921,224)
Adjustments to reconcile net loss to cash
used in
operating activities:
Depreciation and amortization 273,336 144,156
Compensation related to stock options 73,895 78,933
vesting
Gain on sale of investment (167,456) --
Loss on sale of fixed assets 14 --
Change in operating assets and
liabilities:
Accounts receivable (120,765) (115,036)
Inventories (158,741) (228,164)
Prepaid expenses and other assets 64,044 (98,933)
Accounts payable (65,723) 44,211
Accrued liabilities 82,261 73,511
------------ ------------
Net cash used in operating activities (5,392,484) (4,022,546)
Cash flows from investing activities:
Purchase of short-term investments (10,200,076) (3,717,316)
Sale of short-term investments 5,860,683 --
Additions to property and equipment (194,379) (458,249)
Sale of property and equipment 750 --
Additions to patents and licenses (244,687) (77,044)
Additions to other assets (38,348) --
------------ ------------
Net cash used in investing activities (4,816,057) (4,252,609)
Cash flows from financing activities:
Proceeds from issuance of common stock 10,340,586 --
Proceeds from issuance of preferred stock 8,121,540 --
Costs of equity issuances (529,535) (49,458)
Payment of deferred offering costs (61,143) --
Proceeds from exercise of stock options 58,504 3,150
Borrowings on equipment line of credit 25,341 206,343
Repayments on equipment line of credit (39,261) (15,170)
------------ ------------
Net cash provided by financing activities 9,855,635 8,205,262
Net decrease in cash and cash equivalents (352,906) (69,893)
Cash and cash equivalents at the beginning
of the period 4,157,147 2,417,644
------------ ------------
Cash and cash equivalents at the end of
the period $ 3,804,241 $ 2,347,751
============ ============
Supplemental cash flow disclosures:
Cash paid during the period for interest $ 22,268 $ 9,779
============ ============
Cash paid during the period for income taxes $ 800 $ 800
============ ============
Supplemental schedule of non-cash activities:
Conversion of preferred stock to common stock $ 15,034,497 --
Deferred offering costs $ 68,978 --
Unearned compensation related to stock
options granted $ 485,700 --
</TABLE>
See notes to unaudited financial statements.
5
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MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
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1. Description of The Company and Basis of Presentation:
Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated in June
1993 in California and was reincorporated in Delaware in November 1996 to
develop, manufacture and market minimally invasive medical devices for
diagnosis and treatment of neuro and peripheral vascular diseases.
The unaudited financial statements of the Company presented herein have
been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-QSB and do not include all of
the information and footnote disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the audited financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1996.
Certain expense reclassifications have been made to the prior period
statements of operations to conform to the current period presentation.
2. Summary of Significant Accounting Policies:
Unaudited Interim Financial Information:
The financial information at September 30, 1997 and for the three and nine
month periods ended September 30, 1997 and 1996 is unaudited but includes
all adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for such
periods. Results of the quarter ended September 30, 1997 are not
necessarily indicative of the results for the entire year.
Short-Term Investments:
The Company's short-term investments at September 30, 1997 consist
primarily of funds invested in money market instruments and commercial
paper and which have maximum maturities of six months. The carrying amount
of these investments is at cost plus accrued interest which approximates
market value. All short-term investments are held in the Company's name and
custodied with one financial institution.
Statements of Financial Accounting Standards Not Yet Adopted:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997 and requires restatement of all
prior period earnings per share (EPS) data presented. Earlier application
is not permitted. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for EPS. The implementation of SFAS No. 128 is not
expected to have a material effect on the EPS data presented by the
Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose 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 nonowner sources. The implementation of SFAS No. 130 is
not expected to have a material effect on the Company's results of
operations.
In June 1997, the FSAB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131, which is effective
for fiscal years beginning after December 15, 1997 and requires restatement
of earlier periods presented, establishes standards for the way that a
public enterprise reports information about key revenue-producing segments
in the annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
implementation of SFAS No. 131 is not expected to have a material effect on
the Company's current reporting and disclosures.
3. Sale of Common Stock:
In February 1997, the Company completed its initial public offering of its
common stock, in which 1,840,000 shares of common stock was sold,
generating net proceeds of approximately $10 million. In connection with
the offering, all 3,612,664 outstanding shares of preferred stock were
converted into equal shares of common stock.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Quarterly
Report on Form 10-QSB. This Quarterly Report on Form 10-QSB contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Certain Factors That May Affect
the Company's Business and Future Results."
OVERVIEW
Since its inception in June 1993, MTI has been primarily engaged in the
design, development and marketing of minimally invasive devices for treatment of
vascular disease. The Company has a limited history of operations and has
experienced significant operating losses since inception. Operating losses are
expected to continue as the Company expends substantial resources to fund
research and development, clinical trials, and regulatory approvals and
increased marketing and sales activities.
The Company commenced U.S. commercial shipments of its first
thrombolytic infusion catheters in November 1994, but did not generate
significant revenues until it established a direct domestic sales force in the
second half of 1995. The Company currently sells its products in selected
international markets through a limited number of distributors. During September
1996, four of the Company's seven sales representatives left the Company. In the
fourth quarter of 1996 the Company hired four new sales representatives to
replace those who left, plus one representative to cover an additional
territory. The temporary reduction of the sales force reduced sales growth
during the fourth quarter of 1996. During the months of June and July 1997, two
sales representatives left the Company and two other sales representatives were
terminated. The Company hired two new representatives in the latter part of the
third quarter. In July 1997, a Vice President of Sales and Marketing (a new
position) was hired to direct the worldwide marketing efforts for the Company.
To date, the majority of the Company's revenues have been derived from
sales of its peripheral infusion catheters, wires and related accessories. The
Company expects sales of these and similar products to provide the majority of
the Company's revenues through 1997. Approval of the Company's 510(k) market
clearance application for the Cragg Thrombolytic Brush was received from the
U.S. Food and Drug Administration ("FDA") in August 1997, and U.S. market
introduction has been initiated. The Company received CE Mark certification for
its existing products in May 1997. However, the Company is still in the process
of formulating its sales and marketing strategy for the European Union ("EU")
and, consequently, sales in EU member countries in the third quarter were
minimal. During the second quarter of 1997 an investigational device exemption,
sponsored by the University of California, Los Angeles ("UCLA"), for study of
the Company's EMBOLYX(TM) liquid embolic system for the endovascular treatment
of arteriovenous malformations (AVMs) in the brain, received conditional
approval from the FDA and final approval was received in July 1997. Commencement
of human trials at UCLA are anticipated in
7
<PAGE> 8
the fourth quarter of 1997. In September 1997, a U.S. patent was issued to the
Company which covers novel material compositions of EMBOLYX and methods of its
use to embolize (block) blood vessels in the treatment of neurovascular
disorders of the brain associated with stroke.
The Company's thrombolytic infusion catheters and sidehole infusion wire
are currently manufactured by the Company at its facility in San Clemente,
California. An endhole infusion wire and certain accessories are manufactured by
contract manufacturers. During 1996 the Company expanded its manufacturing
facilities in order to provide sufficient capacity for future products, and to
better control product costs and quality. Future revenues and results of
operations may fluctuate significantly from quarter to quarter and will depend
upon, among other factors, actions relating to regulatory and reimbursement
matters, the extent to which the Company's products gain market acceptance, the
rate at which the Company establishes its international sales and distribution
network, the progress of clinical trials, and the introduction of competitive
products for diagnosis and treatment of neuro and peripheral vascular disease.
The Company's limited operating history makes accurate prediction of future
operating results difficult or impossible. Although the Company has experienced
sales growth in recent periods, there can be no assurance that, in the future,
the Company will sustain sales growth or gain profitability on a quarterly or
annual basis or that its growth will be consistent with predictions made by
securities analysts.
The Company currently manufactures products for stock and ships products
shortly after the receipt of orders, and anticipates that it will do so in the
future. Accordingly, the Company has not developed a significant backlog and
does not anticipate that it will develop a significant backlog in the future.
RESULTS OF OPERATIONS
Net sales in the third quarter ended September 30, 1997 increased 77% to
$727,000 as compared to $412,000 in the third quarter of 1996. The increase is
primarily the result of the growth in sales of infusion products. International
sales represented 2% of total sales for both the third quarter ended September
30, 1997 and third quarter ended September 30, 1996. Net sales for the nine
month period ended September 30, 1997 increased 94% to $1,877,000 as compared to
$969,000 for the corresponding period in 1996. International sales represented
3% and 4% of total sales for the nine month periods ended September 30, 1997 and
September 30, 1996, respectively.
Cost of sales increased to $520,000 for the quarter ended September 30,
1997 from $443,000 in the third quarter of 1996. Cost of sales increased to
$1,565,000 for the nine months ended September 30, 1997 from $1,116,000 in the
corresponding period of 1996. These increases were attributable to the increase
in sales, offset in part by a reduction of inefficiencies associated with the
increase and expansion of production operations, and the expansion of the
Company's manufacturing facilities in July 1996. In the third quarter of 1997
the Company continued to achieve positive gross margins. However, the Company
continues to incur high manufacturing overhead costs relative to sales, and
there can be no assurance that positive gross margins will be maintained or
improved.
Research and development expenses, which include regulatory and clinical
expenses, increased 43% from $709,000 in the third quarter of 1996 to $1,013,000
in the third quarter of 1997, and 95% from $1,589,000 in the first nine months
of 1996 to $3,092,000 in the first nine months of 1997. These increases are
primarily attributable to increases in the number of employees
8
<PAGE> 9
and increased expenditures related to development of EMBOLYX(TM) and its initial
lines of neuro micro catheters. The Company expects to continue to significantly
increase research and development costs during the remainder of 1997
particularly for human clinical trials of EMBOLYX(TM) and continued development
of its neuro micro catheters.
Selling, general and administrative expenses increased 8% from $911,000
in the third quarter of 1996 to $984,000 in the third quarter of 1997, and 33%
from $2,303,000 in the first nine months of 1996 to $3,052,000 in the first nine
months of 1997. The increases in the nine month period ended September 30, 1997
were primarily attributable to the expansion of the Company's direct sales force
in the United States, establishment of a European office, development of
marketing programs and materials in support of new product introductions, and
addition of administrative personnel.
Other income and expense increased from $75,000 in the third quarter of
1996 to $107,000 in the third quarter of 1997, and from $119,000 in the first
nine months of 1996 to $460,000 in the first nine months of 1997. Included in
other income for the first nine months of 1997 was non-recurring income of
$167,000 from the sale of common stock received in a 1996 sale of a privately
held company in which MTI had held a minority interest. Net interest income
increased for both periods in 1997, reflecting higher average cash balances in
1997 as a result of proceeds from the Company's initial public offering in
February 1997.
As a result of the items discussed above, the Company had a net loss of
$1.7 million for the third quarter of 1997 compared to $1.6 million for the
third quarter of 1996 and a net loss of $5.4 million for the first nine months
of 1997 compared to $3.9 million for the corresponding period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $15.2 million at
September 30, 1997. The Company has funded its operations from incorporation
through September 30, 1997 primarily through the private placement of equity
securities and the net proceeds from its February 1997 initial public offering.
Through September 30, 1997, the Company had raised approximately $15.3 million
from the private placement of equity securities. In February 1997 the Company
completed an initial public offering of 1,840,000 shares of Common Stock,
raising net proceeds of approximately $10 million.
As of September 30, 1997, the Company had cash, cash equivalents and
short term investments of $8,144,000. Cash used in the Company's operations was
$5.4 million and $3.9 million for the nine months ended September 30, 1997 and
1996, respectively. These increases relate to costs associated with increased
levels of research and development activities, clinical trials, initial
marketing of new products in the United States, establishment of initial direct
marketing activities in Europe and additional general and administrative
expenses required to support increased operations. The Company's capital
expenditures were $194,000 and $458,000 for the nine months ended 1997 and 1996,
respectively. These expenditures include equipment acquired under a lease-line
of credit entered into in 1996. The agreement under the lease-line of credit
provided financing of up to $900,000 on qualified equipment purchases through
June 15, 1997. The Company plans to finance its capital and operational needs
principally from its existing capital resources at September 30, 1997, and, to
the extent available, from bank and lease financing.
9
<PAGE> 10
There can be no assurance, however, that such financing options will be
available to the Company, or, if available, will be upon terms acceptable to the
Company.
MTI believes current resources will be sufficient to fund its operations
into 1998. However, the Company's future liquidity and capital requirements will
depend upon numerous factors, including the progress of the Company's clinical
research and product development programs, the receipt of and the time required
to obtain regulatory clearances and approvals, and the resources the Company
devotes to developing, manufacturing and marketing its products. The Company's
capital requirements will also depend on the demands created by its operational
and development programs, including requirements for domestic and international
sales and marketing growth. The Company does not have any commitments for any
future expansion of its manufacturing faculties nor is additional capacity
anticipated for the remainder of 1997. However, there can be no assurance that
the Company will not require additional financing within this time frame and,
therefore, may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. Additional
funding may not be available when needed or on acceptable terms, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE
ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS OF THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION ARE UNCERTAIN AND MAY BE IMPACTED BY
THE FOLLOWING FACTORS, AMONG OTHERS, WHICH MAY CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENT. BECAUSE
OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION, THE COMPANY'S PAST PERFORMANCE SHOULD NOT BE
CONSIDERED AN INDICATOR OF FUTURE PERFORMANCE AND INVESTORS SHOULD NOT USE
HISTORICAL RESULTS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.
Early Stage of Development. The Company has only recently commercially
introduced a number of products. Several of its key products are in the early
stage of development. EMBOLYX(TM) has not yet entered clinical trials in the
United States. The FDA approved the Company's 510(k) market clearance
application covering the Cragg Thrombolytic Brush in mid August.
Commercialization of the Company's products will depend on a number of factors,
including the Company's ability to demonstrate the safety and efficacy of such
products in the clinical setting. There can be no assurance that the Company's
products will be safe and effective in clinical trials or will ultimately be
cleared for marketing by U.S. or foreign regulatory authorities. Failure to
develop safe and effective products, which are approved for sale on a timely
basis, would have a material adverse effect on the Company's business, operating
results and financial condition.
10
<PAGE> 11
Uncertainty of Market Acceptance. Even if the Company is successful in
developing safe and effective products that have received marketing clearance,
there can be no assurance that the Company's products will gain market
acceptance. Acceptance of the Company's EMBOLYX(TM) and the Cragg Thrombolytic
Brush will require the Company to satisfactorily address the needs of potential
customers. The target customers for the Company's products are interventional
radiologists and interventional neuroradiologists. However, there can be no
assurance that acceptance of the Company's products by interventional
radiologists and interventional neuroradiologists will translate into sales. In
addition, no assurance can be given that the Company's market share for its
existing products will grow or that its products which have yet to be introduced
will be accepted in the market. If the Company is unable to gain market
acceptance of its current and future products, the Company's business, operating
results and financial condition would be materially adversely affected.
Rapid Technological Change; New Product Development. The markets for the
Company's products are characterized by rapidly changing technologies and new
product introductions and enhancements. In addition to the risks associated with
market acceptance of the Company's products, the Company's success will depend
to a significant extent upon its ability to enhance and expand the utility of
its products and to develop and introduce innovative new products that gain
market acceptance. Moreover, the Company may encounter technical problems in
connection with its product development that could delay introduction of new
products or product enhancements. There can be no assurance that new
technologies, products or drug therapies developed by others will not reduce the
demand for the Company's products. The Company maintains research and
development programs to continually improve its product offerings, including
adding new interventional devices. There can be no assurance however that such
efforts will be successful or that other companies will not develop and
commercialize products based on new technologies that are superior in either
performance or cost-effectiveness to the Company's products.
Intense Competition. The medical technology industry is characterized by
intense competition. The Company's products will compete with other medical
devices, surgical procedures and pharmaceutical products. A number of the
companies in the medical technology industry, including manufacturers of neuro
vascular and peripheral vascular products, have substantially greater capital
resources, larger customer bases, broader product lines, greater marketing and
management resources, larger research and development staffs and larger
facilities than the Company. Such entities have developed, or may develop,
additional products competitive with the Company's products. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more readily accepted than those
developed or marketed by the Company or that such competing products would not
render the Company's technology and products obsolete or noncompetitive.
Although the Company believes that its products may offer certain advantages
over its competitors' currently-marketed products, earlier entrants in the
market often obtain and maintain significant market share relative to later
entrants. While the Company has designed its products to be cost effective and
more efficient than competing technologies, there can be no assurance that
competitors will not provide better methods or products at comparable or lower
costs. The Company may experience competitive pricing pressures that may
adversely affect unit prices and sales levels and, consequently, materially
adversely affect the Company's business, operating results and financial
condition.
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<PAGE> 12
The Company also competes with other manufacturers of medical devices
for clinical sites to conduct human trials. The Company's ability to locate such
clinical sites on a timely basis could have a material adverse effect on the
Company's ability to conduct trials of its products which may be necessary to
obtain required FDA clearance or approval of such products. Such delays could
have a material adverse effect on the Company's business, operating results and
financial condition.
Limited Operating History; Absence of Profitability. The Company was
incorporated in 1993. To date, the Company's business has generated limited
product sales. From its inception through September 30, 1997, the Company
incurred cumulative losses of approximately $15.2 million. The Company expects
to incur additional losses as it expands its research and development,
manufacturing and marketing efforts. No assurance can be given that the Company
will achieve significant sales of its products or that such sales will lead to
profitability. There can be no assurance that the Company will not encounter
substantial delays and unexpected expenses related to the introduction of its
current and future products, or the Company's research and development,
manufacturing and marketing efforts. Such delays or expenses could have a
material adverse effect on the Company's business, operating results and
financial condition.
Need for Additional Funds; Uncertainty of Additional Financing. The
Company's operations to date have consumed substantial amounts of cash, and the
Company expects its capital and operating expenditures to increase. The Company
believes that its existing capital resources and anticipated cash flow from
planned operations should be adequate to satisfy its capital requirements into
1998. There can be no assurance, however, that the Company will not need
additional capital before such time. The Company's need for additional financing
will depend upon numerous factors, including the extent and duration of the
Company's future operating losses, the level and timing of future revenues and
expenditures, market acceptance of new products, the results and scope of
ongoing research and development projects, competing technologies, and market
and regulatory developments. The Company currently has no committed external
sources of funds. To the extent that existing resources are insufficient to fund
the Company's activities, the Company may seek to raise additional funds through
public or private financing. There can be no assurance that additional financing
will be available or, if available, that it will be available on acceptable
terms. If additional funds are raised by issuing equity securities, further
dilution to then-existing stockholders may result. If adequate funds are not
available, the Company's business, operating results and financial condition may
be materially adversely affected.
Dependence on Patents and Proprietary Technology. The success of the
Company will depend, in part, on its ability to obtain and maintain patent
protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of others. The patent position of a
medical device company may involve complex legal and factual issues. As of
October 21, 1997, the Company held 14 issued U.S. patents, one issued foreign
patent and has 28 U.S. and nine foreign patent applications pending. The
Company's issued U.S. patents cover technology underlying the Cragg MicroValve,
infusion wire, Cragg Thrombolytic Brush,
12
<PAGE> 13
EMBOLYX(TM) and carotid and intra-cerebral stent products under development. The
expiration dates of these patents range from 2008 to 2014. The pending patent
applications cover various aspects of its infusion catheter, infusion wire,
thrombolytic brush, micro catheter, EMBOLYX(TM), and carotid and intra-cerebral
stent technologies. Each product area the Company is pursuing is covered by at
least one issued and pending patent. One of the patents used by the Company is
currently licensed by the Company from Andrew Cragg, M.D. There can be no
assurance that issued patents will provide significant proprietary protection,
that pending patents will be issued, or that products incorporating the
technology in issued patents or pending applications will be free of challenge
from competitors. There also can be no assurance that patents belonging to
competitors will not require the Company to alter its technology and products,
pay licensing fees or cease to market or develop its current or future
technology and products. The Company also relies on trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire equivalent technology or that the
Company can maintain such technology as trade secrets. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States. The failure of the Company to
protect its intellectual property rights could have a material adverse effect on
its business, operating results and financial condition.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. There can
be no assurance that infringement, invalidity, right to use or ownership claims
by third parties will not be asserted against the Company in the future.
Although patent and intellectual property disputes in the medical device
industry have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, should the Company decide to
litigate such claims, such litigation could be expensive and time consuming,
could divert management's attention from other matters and could have a material
adverse effect on the Company's business, operating results and financial
condition, regardless of the outcome of the litigation.
Limited Marketing Experience; Lack of Distribution. The Company's sales
force consists of six people in the United States and one person in Europe, all
of whom have been with the Company for a limited time. The Company believes it
will have to increase the number of sales personnel to fully cover its target
markets. Recently, there has been an increase in competition for sales personnel
experienced in interventional medical device sales and, as a result, the Company
has experienced significant turnover in its sales force. There can be no
assurance that the Company will be able to successfully respond to this
competition and attract, motivate and retain qualified sales personnel. The
Company intends to market and sell its products outside the United States
principally through distributors and believes that it will need to significantly
expand its distributor network or develop its own sales force. The Company's
ability to market its products in certain areas may depend on strategic
alliances with marketing partners. There can be no assurance that the Company
will be able to enter into distribution agreements on acceptable terms or at
all, that such agreements will be successful in developing the Company's
13
<PAGE> 14
marketing capabilities or that the Company will be able to successfully develop
a direct sales force. Such failure could have a material adverse effect on the
Company's business, operating results and financial condition.
Limited Manufacturing Experience. The Company's experience in
manufacturing its products is limited. The Company anticipates that it will be
necessary to expand its manufacturing capacity in connection with the continued
commercialization of its products. Such commercialization may require the
additional commitment of capital resources for facilities, tooling and equipment
and for leasehold improvements. The Company expects that the expansion of its
manufacturing capacity within the next fifteen months will be achieved from
improved efficiencies, automation and the acquisition of additional tooling and
equipment. The Company does not expect to require any expansion of its
manufacturing facilities during the next fifteen months. Any delay or inability
in expanding its manufacturing capacity or in obtaining the commitment of such
resources could materially adversely affect the Company's manufacturing ability,
business, operating results and financial condition.
Government Regulation. The development, testing, manufacturing and
marketing of MTI's products in the United States are regulated by the U.S. Food
and Drug Administration ("FDA") as well as various state and foreign agencies.
The FDA requires governmental clearance of such products before they are
marketed. The process of obtaining FDA and other required regulatory clearances
is lengthy, expensive and uncertain. Moreover, regulatory clearance, if granted,
may include significant limitations on the indicated uses for which a product
may be marketed. Failure to comply with applicable regulatory requirements can
result in, among other things, warning letters, fines, suspensions of approvals,
product seizures, injunctions, recalls of products, operating restrictions and
criminal prosecutions. The restriction, suspension or revocation of regulatory
approvals or any other failure to comply with regulatory approvals or
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. The offer and sale of the
Company's current products required the submission of information to the FDA in
the form of a 510(k) pre-market notification to substantiate label claims and to
demonstrate "substantial equivalence" to a legally marketed Class I or II
medical device or a Class III medical device for which the FDA has not called
for premarket approvals ("PMAs"). Although the Company has received FDA
clearance for many of these products, there can be no assurance that the Company
will be able to obtain the necessary regulatory clearance for the manufacture
and marketing of enhancements to its existing products or future products either
in the United States or in foreign markets on a timely basis or at all. The
Company has made modifications which affect some of its products covered under
three 510(k) clearances, which modifications, the Company believes, do not
affect the safety or efficacy of the products and thus, under FDA guidelines, do
not require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or would not require the
Company to submit a new 510(k) notice for any of the changes made to a device.
If the FDA requires the Company to submit a new 510(k) notice for any device
modification, the Company may be prohibited from marketing the modified device
until the 510(k) notice is cleared by the FDA. Commercialization of the
Company's EMBOLYX(TM) may require submission of a PMA application to the FDA,
which generally involves a substantially longer and less certain review process
than that of a 510(k) pre-market notification. In either event, such
14
<PAGE> 15
approvals or clearances may require human clinical testing prior to any action
on such products by the FDA. Based on the information presented by the Company
regarding the material composition of EMBOLYX(TM), the Company believes
EMBOLYX(TM) would be regulated as a device. There can be no assurance, however,
that upon more detailed review of EMBOLYX(TM), the FDA will not at a later date
determine that it should be regulated as a drug. Such a change could
significantly delay the commercial availability of EMBOLYX(TM) and have a
material adverse effect on the Company's business, operating results and
financial condition. Delays in receipt of, or failure to receive, regulatory
approvals or clearances to market such products, or loss of previously received
approvals or clearances, would materially adversely affect the marketing of such
products and the Company's business, operating results and financial condition.
In May 1997, the Company received CE Mark Certification, enabling the
Company to sell its entire line of existing products in the 17 countries of the
European Union. There can be no assurance, however, that the Company will be
able to obtain such certifications for future products in a timely manner, if at
all. In addition, federal, state, local and international government regulations
regarding the manufacture and sale of health care products and diagnostic
devices are subject to future change and additional regulations may be adopted
which may materially adversely affect the Company's business, operating results
and financial condition.
Commercial distribution and clinical trials in most foreign countries
also are subject to varying government regulations which may delay or restrict
marketing of the Company's products. Any inability or delay in obtaining
approvals would materially adversely affect the Company's business, operating
results and financial condition.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed Good
Manufacturing Practices requirements, which include testing, control and
documentation requirements. The Company's manufacturing processes also are
subject to stringent federal, state and local regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. Although the Company believes that it has complied in all material
respects with such laws and regulations, the Company is subject to periodic
inspection to ensure its compliance with such laws and regulations. There can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations, or
that the Company will not be required to cease operations in the event of its
continued failure to effect compliance.
Risk of Product Liability Claims. The nature of the Company's business
exposes it to risk from product liability claims. The risk of such claims has
increased in light of a U.S. Supreme Court decision in 1996 concluding that the
FDA regulatory framework does not necessarily preempt personal injury actions
against medical device manufacturers. The Company currently maintains product
liability insurance for its products, with limits of $2 million per occurrence
and an annual aggregate maximum of $2 million. However, such coverage is
becoming increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be successful in
15
<PAGE> 16
maintaining adequate product liability insurance at acceptable rates. Any losses
that the Company may suffer from any liability claims, and the effect that any
product liability litigation may have upon the reputation and marketability of
the Company's products, may divert management's attention from other matters and
may have a material adverse effect on the Company's business, operating results
and financial condition.
Dependence on Single Source Suppliers; Independent Contract
Manufacturers. The Company purchases certain components used in its products and
receives certain services with respect to its products from third parties. The
Company's dependence on third-party suppliers involves several risks, including
limited control over pricing, availability, quality and delivery schedules. Any
delays in delivery of such components or provision of such services or shortages
of such components could cause delays in the shipment of the Company's products,
which could cause the Company's business, operating results and financial
condition to be adversely affected. The Company's single-source components are
generally acquired pursuant to purchase orders placed in the ordinary course of
business, and the Company has no guaranteed supply arrangements with any of its
single-source suppliers. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could have a
material adverse effect on its business, operating results and financial
condition. There can be no assurance that the Company will not experience
quality control problems, supply shortages or price increases with respect to
one or more of these components in the future. The establishment of additional
or replacement suppliers for certain of these components may delay accessibility
of such components as the Company qualifies such suppliers. Any quality control
problems, interruptions in supply or component price increases with respect to
one or more components could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company relies on independent contract manufacturers for the
manufacture and assembly of certain of its products and components. Reliance on
independent contract manufacturers involves several risks, including the
potential inadequacy of capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs. Such manufacturers have
possession of and at times title to molds for certain manufactured components of
the Company's products. Shortages of raw materials, production capacity
constraints or delays by the Company's contract manufacturers could negatively
affect the Company's ability to meet its production obligations and result in
increased prices for affected parts. Any such reduction, constraint or delay may
result in delays in shipments of the Company's products or increases in the
prices of components, either of which could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
has no supply agreements with its current contract manufacturers and utilizes
purchase orders which are subject to supplier acceptance. The unanticipated loss
of any of the Company's contract manufacturers could cause delays in the
Company's ability to deliver product while the Company identifies and qualifies
a replacement manufacturer. There can be no assurance that current or future
independent contract manufacturers will be able to meet the Company's
requirements for manufactured products. Such an event would have a material
adverse effect on the Company's business, operating results and financial
condition.
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<PAGE> 17
Dependence Upon Key Personnel. The Company is dependent to a significant
extent upon the contributions, experience and expertise of its founders, certain
members of its management team and key consultants. The Company maintains a
key-man life insurance policy in the amount of $1 million on the life of George
Wallace, the Company's President and Chief Executive Officer; however, there can
be no assurance that the Company's insurance is adequate. In addition, the
Company's success will depend upon its ability to attract and retain additional
highly qualified management, sales, technical, clinical and consulting
personnel, particularly as the Company increases its manufacturing capability.
The loss of the services of any of such key personnel or the inability to
attract and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Third-Party Reimbursement. In the United States, health care providers
such as hospitals and physicians that purchase medical devices generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic procedures. With the implementation of Medicare's Prospective Payment
System for hospital inpatient care (Diagnosis Related Groups or "DRGs") in the
1980s, public and private payors began to reimburse providers on a fixed payment
schedule for patients depending on the nature and severity of the illness. Many
tests and procedures that would have been performed under cost-plus
reimbursement formulas are subject to scrutiny and must be justified in terms of
their impact on patient outcomes. As a result, the incentives are now to conduct
only those tests that will optimize cost-effective care.
The Company could be materially adversely affected by changes in
reimbursement policies of governmental (both domestic and international) or
private healthcare payors to the extent any such changes affect reimbursement
for therapeutic or diagnostic procedures in which the Company's products are
used. Adverse changes in governmental and private third party payors' policies
toward reimbursement for such procedures would have a material adverse effect on
the Company's business, operating results and financial condition.
Risks Associated with International Sales. To date, the Company has
derived very little revenue from international sales. The Company believes that
its future performance will be dependent in part upon its ability to increase
international sales. Although the perceived demand for certain products may be
lower outside the United States, the Company intends to continue to expand its
international operations and to enter additional international markets, which
will require significant management attention and financial resources. There can
be no assurance, however, that the Company will be able to successfully expand
its international sales. The Company's success in international markets will
depend on its ability to establish and maintain agreements with suitable
distributors, or establish a direct sales presence.
Furthermore, international sales in general are subject to inherent
risks, including unexpected changes in regulatory requirements, fluctuating
exchange rates, difficulties in staffing and managing foreign sales and support
operations, additional working capital requirements, customs, duties, tariff
regulations, export license requirements, political and economic instability,
potentially limited intellectual property protection and difficulties with
distributors. In addition, sales and distribution of the Company's products
outside the United States are subject to
17
<PAGE> 18
extensive foreign government regulation. The Company has in the past avoided
losses due to fluctuating exchange rates associated with international sales by
selling its products in U.S. dollars; however, the Company expects to sell
products in selected markets in local currency and thus be subject to currency
exchange risks in association with such sales. There can be no assurance that
any of these factors will not have a material adverse effect on the Company's
future international sales and, consequently, on the Company's business,
operating results and financial condition.
Large-scale market acceptance of the Company's products will depend on
the availability and level of reimbursement in international markets targeted by
the Company. Reimbursement systems in international markets vary significantly
by country, and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Obtaining reimbursement approvals in each country
can require 12-18 months or longer.
Anti-Takeover Provisions. The Company's Certificate of Incorporation
provides for 5,000,000 authorized shares of Preferred Stock, the rights,
preferences, qualifications, limitations and restrictions of which may be fixed
by the Board of Directors without any further vote or action by the
stockholders. In addition, the Company's stock option plans provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could materially adversely affect the price of the Company's Common
Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may materially adversely affect the market price of the Company's
Common Stock. In addition, the market price of the shares of Common Stock is
likely to be highly volatile. Factors such as fluctuations in the Company's
results of operations, failure of such results of operations to meet the
expectations of public market analysts and investors, timing and announcements
of technological innovations or new products by the Company or its competitors,
FDA and foreign regulatory actions, developments with respect to patents and
proprietary rights, timing and announcements of developments, including clinical
trials related to the Company's products, public concern as to the safety of
technology and products developed by the Company or others, changes in health
care policy in the United States and internationally, changes in stock market
analyst recommendations regarding the Company, the medical device industry
generally and general market conditions may have a material adverse effect on
the market price of the Common Stock. In addition, it is likely that during a
future quarterly period, the Company's results of operations will fail to meet
the expectations of stock market analysts and investors and, in such event, the
Company's stock price could be materially and adversely affected.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
The Company effected a registration with the Securities and Exchange
Commission Form SB-2, Registration No. 333-17345 (the "Registration Statement"),
whereby the Company registered up to 2,300,000 shares of its Common Stock. On
February 18, 1997, the Registration Statement was declared effective by the
Securities and Exchange Commission. On February 21, 1997, the Company completed
its initial public offering of Common Stock (the "IPO") by consummating the sale
of 1,600,000 shares of its Common Stock to the underwriters identified in the
Registration Statement, UBS Securities and Volpe, Welty & Company serving as the
representatives thereof. The price of the Company's Common Stock was $6.00 per
share, less underwriting discounts and commissions of $.42 per share. The
Company received proceeds of $8.9 million (net of underwriters' discounts and
commissions), from the sale of such shares of Common Stock before deducting
offering expenses. Effective upon the closing of the IPO, all of the outstanding
shares of Convertible Preferred Stock of the Company were converted into
3,612,664 shares of Common Stock and all accrued dividends payable thereon were
reversed and eliminated.
On March 3, 1997, the underwriters of the Company's IPO exercised their
option to purchase an additional 240,000 shares of Common Stock directly from
the Company at a price of $6.00 per share, less underwriting discounts and
commissions of $.42 per share. The Company received net proceeds of $1.3 million
(net of underwriters' discounts and commissions), before other offering
expenses, from the sale of the Common Stock pursuant to the exercise of such
option.
In conjunction with completing the IPO, the Company incurred total
direct offering expenses of approximately $758,000, all of which were payable to
third parties. Total net proceeds to the Company from the IPO and the exercise
of the over-allotment option, after deducting underwriting discounts and
commissions and total direct offering expenses, were approximately $9.5 million.
The Company has used approximately $1.4 million for working capital
purposes all of which was paid directly to unrelated third parties. The
remaining net proceeds of the offering, equal to approximately $8.1 million,
have been invested (in short-term investments grade money market instruments).
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Index to Exhibits on Page 22 of this Quarterly Report on Form
10-QSB.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
quarterly period ended September 30, 1997, and none were
required.
20
<PAGE> 21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICRO THERAPEUTICS, INC.
Date: November 7, 1997 By: /s/ Thomas J. Berryman
------------------------------
Thomas J. Berryman
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Page
Number Description Number
------- ----------- ------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AND STATEMENTS OF
OPERATIONS IN FORM 10-QSB FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,804
<SECURITIES> 4,339
<RECEIVABLES> 365
<ALLOWANCES> 0
<INVENTORY> 590
<CURRENT-ASSETS> 9,296
<PP&E> 1,195
<DEPRECIATION> 538
<TOTAL-ASSETS> 10,584
<CURRENT-LIABILITIES> 637
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 9,777
<TOTAL-LIABILITY-AND-EQUITY> 10,584
<SALES> 1,877
<TOTAL-REVENUES> 1,877
<CGS> 1,565
<TOTAL-COSTS> 6,145
<OTHER-EXPENSES> (460)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (5,372)
<INCOME-TAX> 1
<INCOME-CONTINUING> (5,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,373)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> 0
</TABLE>
