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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-6523
MICRO THERAPEUTICS, INC.
(Name of Small Business Issuer in its charter)
Delaware 33-0569235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1062 Calle Negocio #F, San Clemente, California 92673
(Address of principal executive offices) (Zip Code)
(714) 361-0616
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] NO [X]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [X]
Issuer's revenues for its most recent fiscal year were $1,388,000.
As of March 17, 1997, the aggregate market value of the voting stock
held by non-affiliates, computed by reference to the price at which the stock
was sold on such date, was approximately $27,597,845.
6,398,633 shares of Common Stock were outstanding at March 17, 1997
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
Micro Therapeutics, Inc. ("MTI" or the "Company") develops,
manufactures and markets minimally invasive medical devices for the diagnosis
and treatment of vascular disease. MTI focuses its efforts in two underserved
markets: (i) the treatment of neuro vascular disorders of the brain associated
with stroke; and (ii) the treatment of peripheral vascular disease, including
blood clot therapy in hemodialysis access grafts, arteries and veins. The
Company's objective is to provide physicians with new interventional treatment
alternatives which improve outcomes, reduce costs, shorten procedure times,
reduce drug usage and allow access to difficult-to-reach anatomical locations.
The Company currently markets more than forty products for the treatment of
peripheral vascular disease and will introduce products to treat neuro vascular
disease in 1997.
The Company's products and products under development in the neuro
vascular market designed to address stroke include: (i) a range of infusion
micro catheters incorporating shaft designs and innovative materials, which
allow access to the smallest, most remote blood vessels; and (ii) the Liquid
Embolic System ("LES"), which combines a unique material and special purpose
micro catheters designed to treat aneurysms and arteriovenous malformations
("AVMs"). The Company's products in the peripheral vascular market, designed
for less invasive treatment of blood clots, include: (i) a broad offering of
infusion catheters, micro catheters and infusion wires; and (ii) the Cragg
Thrombolytic Brush designed for rapid interventional clot disruption and
dissolution through mechanical mixing of a thrombolytic drug with the clot.
BACKGROUND
Vascular disease is, by Company estimates, the leading cause of death
in the industrialized world, and, according to Medical Data International, Inc.
("MDI"), is responsible for over 40% of all deaths in the United States.
Vascular disease may occur in any blood vessel in the body, and is generally
manifested as an occlusion or rupture in a vessel. The vascular disease market
consists of three segments, defined by anatomical location: cardiovascular
disease, or disease in the coronary arteries; neuro vascular disease, or
disease in the vessels in the brain; and peripheral vascular disease, or
disease in blood vessels throughout the rest of the body. MTI is focused on
the two segments it believes to be underserved: neuro vascular and peripheral
vascular disease.
Neuro Vascular Disease
The Company believes that the leading complication of neuro vascular
disease is stroke, the diminished blood flow to critical regions of the brain.
A significant need for effective stroke therapy exists because of the severity
of the disorder, its prevalence in society, the inadequacy of current therapies
and the high cost of treatment and care. Acute stroke is the third leading
cause of death in the United States and a major cause of long-term disability,
with, according to the National Stroke Association, an estimated annual cost of
over $30 billion. There are approximately 500,000 cases of stroke per year in
the United States, of which approximately one-third of the victims die as a
result of the event and another one-third become severely and permanently
disabled, according to the National Stroke Association. Over three million
people in the United States are stroke survivors and stroke is the leading
cause of disability among adults, according to an article published in
Neurology. The disabilities caused by stroke include paralysis, coma, impaired
cognition, reduced coordination, loss of
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visual acuity, loss of speech, loss of sensation or a combination of these
effects. Currently, no medical intervention exists that can reverse the brain
damage resulting from stroke.
Strokes are typically caused either by blockages (vaso-occlusive
stroke) or ruptures (hemorrhagic stroke) of vessels within or leading to the
brain. According to the American Heart Association, the most common type of
vaso-occlusive stroke, thromboembolic stroke, is caused by the existence of a
blood clot, or thrombus, within an artery, blocking blood flow. These blood
clots can originate in the heart or a peripheral vascular site and travel into
the neuro vasculature. The other type of vaso-occlusive stroke,
atherosclerotic stroke, results from blockage of blood flow by plaque in a
vessel. The majority of atherosclerotic strokes result from blockage in the
carotid artery in the neck. According to MDI, the annual number of cases of
thromboembolic and atherosclerotic stroke in the United States is 325,000 and
95,000, respectively.
Hemorrhagic stroke is generally caused by the rupture of a blood
vessel in the brain resulting from a vascular defect such as an aneurysm or
AVM. According to MDI, there are approximately 80,000 cases of hemorrhagic
stroke per year in the United States.
An aneurysm is a balloon-shaped structure which forms at a weak point
in the vessel wall and fills with blood. Aneurysms typically grow over time
and, due to pressure placed on the wall of the aneurysm, are prone to rupture.
Burst aneurysms result in massive intracranial bleeding and often death.
Patients with unruptured aneurysms may experience symptoms such as blurred
vision, headaches or dizziness; however, the large majority of these patients
are asymptomatic. While 30,000 hemorrhagic stroke cases are related to
ruptured intracranial aneurysms, autopsy studies have suggested that unruptured
aneurysms may occur in approximately 2% to 5% of the general population in the
United States, according to the American Association of Neurological Surgeons.
The Company believes that with the development of new diagnostic and
interventional technologies, the pool of candidate patients may be expanded to
include those with unruptured aneurysms discovered in conjunction with other
examinations.
In an AVM, the flow of blood between arteries and veins, which
normally occurs through capillary vessels, is shortcut by the development of
larger vessels connecting directly from arteries to veins. The higher pressure
on the arterial side makes these vessels highly prone to rupture.
The Company believes that, while the interventional treatment of
stroke in the United States is estimated by MDI to be approximately 30,000
procedures today, this market will grow significantly, driven by the
development of improved diagnostic, imaging and interventional technologies;
conversion from surgical to interventional procedures; the acceptance of
preventive treatment of unruptured aneurysms; the increasing number of trained
interventional neuroradiologists; the continued development of stroke centers;
and the impact of stroke public awareness programs.
Peripheral Vascular Disease
According to MDI, approximately eight million people have been
diagnosed with peripheral vascular disease in the United States, of which an
estimated one million are treated annually. Generally, these patients suffer
from degenerative atherosclerosis or blood clots, the same process that
produces coronary artery disease. For patients diagnosed with peripheral
vascular disease, there is currently no therapy of which the Company is aware,
able to halt the degenerative process.
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Vascular obstruction, or the resulting lack of blood flow, can lead to
skin discoloration, pain, ulceration, swelling or a change in blood chemistry,
and can result in the loss of limb and even death. These symptoms are most
often present in the legs and arms and may also develop in the neck and torso.
Thrombosis, or the stagnation and clotting of blood, most often occurs
at locations in blood vessels where the flow of blood has become restricted.
This is most evident in vascular grafts placed to augment blood flow and in
native arteries where the vessel bifurcates or atherosclerosis has narrowed the
channel through which blood flows. Blood clots may form at the point of
narrowing or may originate elsewhere in the cardiovascular system, break off,
travel downstream and lodge in a smaller peripheral vessel, decreasing or
completely blocking flow. Unless this condition is alleviated, tissue ischemia
and gangrene can occur.
One common site for vascular obstruction is in hemodialysis access
grafts. According to the Health Care Financing Administration, hemodialysis
access grafts have been surgically implanted in approximately 140,000 kidney
dialysis patients in the United States. These grafts are used as the access
site for dialysis needles which are inserted to withdraw and return blood from
a dialyzer, a procedure performed every 2-3 days for each such patient. These
hemodialysis access grafts occlude over time and, according to an article
published in the Journal of Surgical Research, fail approximately every 5-10
months, requiring treatment, generally surgery.
According to MDI, thrombosis in peripheral arteries affects
approximately 500,000 people per year in the United States. Approximately
200,000 of these patients receive surgical or interventional treatment, as
estimated by the Company.
Clotting of the deep veins in the lower extremities and torso is
commonly referred to as deep venous thrombosis ("DVT"). DVT and other venous
thrombosis associated with superficial veins are, according to an article
published in Cardiology Clinics, responsible for approximately 250,000
hospitalizations annually in the United States and approximately 600,000
additional cases result from long-term hospital stays, according to the
American Medical Association and an article published in American Family
Physician. Currently, virtually all treatment is systemic infusion of
anticoagulant drug over a seven day period or longer on an inpatient basis,
followed by an oral medication regimen for the remainder of the patient's life.
This treatment only stops the progression of the clotting and does not remove
the clot. Surgical removal of the obstruction is not considered to be a
desirable treatment alternative for DVT because of the potential injury to the
vein.
The Company estimates that the interventional market of peripheral
blood clots in the United States is approximately 100,000 procedures per year,
and believes this market will grow significantly, driven by the conversion from
surgical to interventional procedures and the development of advanced
technologies that decrease overall procedure costs.
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PRODUCTS
The following table sets forth the Company's principal products and
products under development and their current status:
<TABLE>
<CAPTION>
PRODUCT LINE U.S. STATUS INTERNATIONAL STATUS
------------ ----------- --------------------
<S> <C> <C>
NEURO VASCULAR-STROKE THERAPY
Micro Catheters
EASY RIDER Valved Tip Sidehole 510(k) submission 1997 Submission for CE Mark
Infusion expected 1997
EASY RIDER Endhole Infusion 510(k) submission 1997 Submission for CE Mark
expected 1997
Flow Directed Infusion 510(k) submission 1997 Submission for CE Mark
expected 1997
Liquid Embolic System Preclinical Clinical trials
PERIPHERAL VASCULAR-BLOOD
CLOT THERAPY
Infusion Catheters
Cragg-McNamara Valved
Tip Sidehole 510(k) approved; 21 Marketed in 7 countries
models currently
marketed; 6 models to
be launched in first
half 1997
Patency Sidehole and Endhole 510(k) approved; 10 Marketed in 7 countries
models currently marketed
MicroMewi Sidehole 510(k) approved; 2 models Submission for
currently marketed CE Mark expected first
half 1997
MicroPatency Endhole 510(k) approved; 3 models Marketed in 7 countries
currently marketed
Katzen Select Variable
Infusion Length 510(k) approved Submission for CE Mark
expected 1997
Infusion Wires
ProStream Multiple Sidehole 510(k) approved; 4 models Submission for CE Mark
currently marketed expected first half 1997
ProStream Endhole 510(k) approved; 2 models Submission for CE Mark
currently marketed expected first half 1997
Cragg Thrombolytic Brush 510(k) submitted Approved 2 countries;
September 1996 Submission for CE Mark
expected first half 1997
</TABLE>
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NEURO VASCULAR--STROKE THERAPY PRODUCTS
Micro Catheters
The Company has developed multiple lines of micro catheters
incorporating unique shaft designs and innovative materials which allow access
to small, remote blood vessels in the brain. These micro catheters may be used
for infusion of drugs to dissolve blood clots associated with thromboembolic
stroke.
The conventional treatment for neuro vascular blood clots involves the
systemic delivery of thrombolytic drugs capable of dissolving the clot.
Interventional thrombolytic therapy for neuro vascular occlusions involves the
use of subselective micro catheters to reach the site of the occlusion,
followed by the local infusion of thrombolytic drugs to dissolve the blood
clot. The Company believes that site-specific delivery of thrombolytic drugs
may prove to be more effective than traditional intravenous systemic
administration by requiring less drug, which may lead to reduced side effects
such as bleeding in other parts of the body.
Of the 325,000 patients who experience thromboembolic stroke each
year, the Company estimates that 150,000 of these patients could be treated by
interventional procedures with early intervention, patient selection and
improved micro catheters. One line of the Company's micro catheters is
designed for endhole infusion of thrombolytic drugs to dissolve short clots.
Another line, designed for longer clots, incorporates the Cragg MicroValve at
the tip of the catheter, which, when closed, forces fluid out infusion side
holes over the length of the clot.
The Company expects to submit 510(k) applications for its neuro micro
catheters and to introduce these products in 1997. Neuro micro catheters
historically have gained market clearance via the 510(k) process. Clinical
data has not been provided in support of neuro micro catheter 510(k)
submissions.
Liquid Embolic System
The Company's proprietary LES, currently under development, is
designed for rapid and controlled embolization of aneurysms and AVMs. The LES
consists of unique biomaterials and special purpose micro catheters. The micro
catheters are used to deliver the material, in liquid form, to small remote
blood vessels in the brain where it fills a vascular defect and transforms into
a solid polymer cast. The LES offers a unique form, fill and seal approach to
the interventional treatment of aneurysms or AVMs associated with hemorrhagic
stroke.
The conventional treatment of hemorrhagic stroke requires
highly-invasive neurosurgery, in which a portion of the skull is removed and
brain tissue is manipulated to gain access to the diseased vessel. This type
of surgery generally involves extensive blood loss and prolonged
hospitalization.
Interventional treatment of aneurysms currently involves advancing a
micro catheter through the cerebral vasculature to the aneurysm site. Tiny
metal coils attached to a delivery wire are passed, one at a time, through the
catheter and into the aneurysm. The coil is then released from the delivery
wire, the wire is removed and the next coil is advanced through the catheter.
This process is repeated until approximately 30% of the volume of the aneurysm
is filled with coils. The presence of these coils in the aneurysm disrupts
blood flow, leading to the formation of thrombus in the spaces within the coil
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mass. Numerous embolization coils are required to fill an aneurysm, a
procedure which generally takes two to three hours to complete.
Surgical treatment of AVMs includes both open neurosurgery and
radiosurgery. The Company estimates that 75% of AVM surgical procedures are
preceded by interventional embolization of the AVM. In the United States,
interventional AVM embolization, either as stand-alone treatment or as a bridge
to surgery, involves depositing polyvinyl alcohol ("PVA") particles, coils or
other embolic material into the AVM to reduce or stop blood flow. Embolization
with PVA particles is challenging due to the difficulty of placing the
particles into the proper location, the inability to visually confirm the
placement of the particles and the tendency for embolized vessels to reopen.
Outside the United States, the most widely used embolization technique for AVMs
is the injection of acrylic-based glues which have not been approved for use in
the United States. Glues have multiple drawbacks, such as lack of control in
delivery and extreme adhesion to all surfaces, including the delivery catheter.
In an LES procedure, the micro catheter is positioned at the
embolization site and the material is delivered with a single injection. The
LES material is visible under fluoroscopy and thus the interventionalist is
able to see and continuously monitor the penetration and location of the
material. When the vascular defect is completely filled with the polymer cast,
the delivery catheter is removed. Since the LES material is nonadhesive, the
controlled injection and filling of the vascular defect can take place over a
30-second or longer period, whereas a glue injection must be instantaneous to
avoid gluing the delivery catheter in place.
The Company has been conducting preclinical studies of the LES and has
initiated human clinical trials outside of the United States. The Company
expects an investigational device exemption ("IDE") to conduct human clinical
trials in the United States to be filed in the first half of 1997. The Company
anticipates that the first indicated use of the LES for which it will seek an
IDE is the treatment of AVMs. There can be no assurance, however, that the
Company will be successful in obtaining an IDE. Additional potential uses for
the LES include tumor embolization, urinary incontinence therapy and
reproductive sterilization. The Company does not intend to devote significant
resources to these applications, although it has undertaken preliminary animal
testing.
PERIPHERAL VASCULAR--BLOOD CLOT THERAPY PRODUCTS
Catheters and Infusion Wires
MTI is introducing to the market a broad offering of less invasive
interventional catheters, micro catheters and infusion wires capable of
efficient delivery of thrombolytic agents for the dissolution of blood clots.
MTI's current offering of Cragg-McNamara valved tip infusion catheters and
ProStream infusion wires represents advanced technology in thrombolytic therapy
for the three peripheral vascular market subsegments: hemodialysis access
grafts, arteries and veins.
Surgical embolectomy is the most common procedure for removing blood
clots from the vascular system, including hemodialysis access grafts. In this
procedure, a surgical incision is made down to the occluded vessel, the vessel
is cut open and a balloon catheter is used to remove the clot through the
incision.
Vascular bypass surgery with native vessels or synthetic grafts is
also performed. In this procedure, either a native vessel, usually a vein
surgically harvested from the patient's leg, or an
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artificial graft is surgically connected above and below the occlusion. Blood
can then flow around, or bypass, the occlusion.
These surgical procedures require an operating room and attendant
staff, anesthesia, intensive care and associated in-hospital recovery
facilities and supplies. If the surgery is performed on an occluded graft
through which the patient had been receiving hemodialysis, the dialysis therapy
must be discontinued at the site of the graft for approximately two weeks and
an alternate access site established for hemodialysis.
Thrombolysis, or the dissolving of blood clots, can be performed
interventionally, often on an outpatient basis, by delivering thrombolytic
drugs through an infusion catheter directly into the clot. Various techniques
are used in these procedures including the "pulse-spray" infusion technique
where boluses of the drug are repeatedly hand injected into the thrombus with
high pressure syringes, and the "weep" infusion technique where the drug is
slowly infused into the clot over a longer period of time. In coaxial infusion
systems, a micro catheter or infusion wire is placed through a larger catheter,
and infusion is performed through both devices. This technique allows
simultaneous infusion into small, distal vessels and larger, proximal vessels.
Available treatments for blood clots in veins are much more limited
than those for arteries. Currently, virtually all treatment for DVT is
systemic infusion of anticoagulant drugs over a seven day period, or longer, on
an inpatient basis, followed by an oral medication regimen for the rest of the
patient's life. This treatment only stops the progression of the clotting and
does not remove the clot already present. Surgical embolectomy is not
considered to be a treatment alternative for DVT because of the potential for
injury to the veins.
Recently, a number of high profile interventional radiology centers in
the United States have begun treating DVT with the infusion of thrombolytic
drugs at the site of the clot through sidehole infusion catheter and infusion
wire systems. The Company believes the interventional treatment of DVT with
its catheters and infusion wires may represent a significant opportunity to
expand the patient population for interventional therapy.
Of the 140,000 hemodialysis access graft treatments currently
performed each year in the United States, the Company estimates that one third
are treated interventionally. Of the 200,000 arterial blood clot treatments
currently performed each year in the United States, the Company estimates that
45,000 are interventional. The Company also estimates that an additional
10,000 vein procedures are performed interventionally each year in the United
States for a total of 100,000 interventional treatments for peripheral blood
clots.
Cragg-McNamara Valved Tip Catheters. These catheters incorporate the
Company's Cragg MicroValve which allows a catheter to be advanced over a
guidewire, and when the wire is removed, the valve at the tip of the catheter
closes completely. This valve technology allows the use of the entire catheter
lumen for sidehole fluid delivery as compared to competitive products which
require a wire to be in place to occlude the catheter tip during sidehole
infusion.
Patency Sidehole and Endhole Catheters. The Company's Patency
catheters provide sidehole or endhole infusion in the peripheral vasculature.
These catheters can be used alone or as the outer catheter of a coaxial
infusion system.
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MicroMewi Sidehole Micro Catheters. The Company's MicroMewi micro
catheters provide sidehole infusion in small, distal vessels of the peripheral
vasculature. These catheters incorporate a two-section design which adds
pushability to the proximal segment and flexibility to the distal end. The
MicroMewi can be used either alone or as the inner catheter of a coaxial
infusion system.
MicroPatency Endhole Micro Catheters. These endhole micro catheters
provide infusion in small, distal vessels of the peripheral vasculature. They
incorporate a two-section design which adds pushability to the proximal segment
and flexibility to the distal end. The MicroPatency endhole micro catheters
can be used alone or as the inner catheter of a coaxial infusion system.
Katzen Select Variable Infusion Length Catheters. With the
introduction of the Katzen Select variable infusion length catheters, the
Company will expand the interventionalist's capability in thrombolytic therapy
by offering, for the first time, the ability to change the desired infusion
characteristics while the catheter is in the patient. With this catheter, the
physician has the option of changing the desired infusion length to match
changing anatomical needs as the blood clot dissolves. This unique sidehole
infusion capability is made possible by the proprietary Cragg MicroValve.
ProStream Infusion Wires. The Company's infusion wires can be
inserted into blood vessels, and navigated to the site of an obstruction to
allow the infusion of fluids through the wire to the distal anatomy. These
infusion wires can also be passed through infusion catheters to allow
simultaneous infusion at multiple sites.
MTI received 510(k) clearance of its Cragg-McNamara valved tip
infusion catheters in October 1994 and is currently marketing 21 models both
domestically and internationally. The Company received 510(k) clearance of the
ProStream sidehole infusion wires in January 1996, is currently marketing six
models of ProStream infusion wires in the United States and intends to begin
selling internationally in the first half of 1997. These products, together
with MTI's Patency, MicroPatency, MicroMewi and Katzen Select infusion catheter
lines are, or will be, marketed in the United States through its direct sales
force and internationally through a combination of direct sales and
distributors.
Cragg Thrombolytic Brush
The Company believes that most treatments for blood clots in the
peripheral vasculature could be performed interventionally. However, in order
for interventional thrombolysis procedures to surpass surgical procedures as
the treatment of choice, three main issues need to be addressed, all of which
have a direct impact on procedure cost.
First, the length of time to achieve lysis of the clot must be
shortened. If a clot is relatively "fresh," that is, several hours old or less
when treated, dissolution time is quick and the procedure can be completed in a
single session in the catheterization or special procedures lab. If, however,
the clot becomes more "organized" in the vessel, dissolution time lengthens.
In these circumstances, thrombolysis starts in the catheterization lab and
continues in a hospital room for 24-72 hours, making it an inpatient procedure.
The patient is then moved back to the lab a second time for angiographic
imaging to determine whether the infusion has been successful. Even a single
setting thrombolytic procedure on a fresh clot can require the interventional
radiologist to administer the drug for a considerable length of time. Second,
the dissolution of the clot must be complete. An established clot is resistant
to complete dissolution and any residual clot becomes a site for repropagation
of new clot.
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Third, drug cost must be reduced. The cost of drugs for a long-term
thrombolytic infusion lasting several days is thousands of dollars.
MTI is conducting a controlled clinical evaluation of the Cragg
Thrombolytic Brush in hemodialysis access grafts, which addresses the clinical
issues that remain in standard thrombolysis. The Cragg Thrombolytic Brush is
designed for rapid interventional clot disruption and dissolution through
mechanical mixing of a thrombolytic drug with the blood clot. A cylindrical,
soft nylon brush mounted on a wire cable is introduced into the vessel through
an infusion catheter. The cable drive is attached to a battery powered, low
speed motor drive. A side port on the catheter allows thrombolytic drugs to be
infused through the catheter immediately adjacent to the brush. Once
positioned in the clotted graft, infusion of thrombolytic drug is begun and the
motor is switched on, starting the brush rotation. The rotation of the brush
within the clot actively mixes the drug into the clot, exposing more clot
surface to the drug, thus accelerating the thrombolytic process. The Company
is developing an over-the-wire version of the Cragg Thrombolytic Brush that the
Company believes will further improve vascular access and ease of use. Future
studies using this design may include clinical evaluation in other
applications, including peripheral artificial grafts, arteries and veins.
In June 1994, the Company filed its original 510(k) market clearance
application with the FDA for the Cragg Thrombolytic Brush. The FDA requested
that MTI conduct clinical trials to support its substantial equivalence claim.
In September 1996, the Company filed a 510(k) with the requested clinical data.
Included in the application was statistical analysis covering the first 40
patients treated under an IDE clinical study. In this study, patients are
randomized to treatment with either the Cragg Thrombolytic Brush or
conventional pulse-spray thrombolytic infusion. The key clinical endpoints
being measured in the study are the length of time to reopen the occluded graft
and the amount of thrombolytic drug used. The results as of December 31, 1996,
including 63 patients, demonstrate substantial improvements with reductions in
both of these clinical endpoints for the Cragg Thrombolytic Brush, as compared
to conventional pulse-spray thrombolytic infusion. See "Government
Regulation."
SALES AND MARKETING
The primary users of the Company's products are interventional
radiologists and neuroradiologists. The Company estimates that approximately
1,500 hospitals in the United States perform interventional radiology
procedures and an estimated 500 institutions provide some neuro vascular and
peripheral vascular therapy.
In order to achieve early adoption of its products, the Company
believes it will need to establish and maintain relationships with the key
interventional radiologists and neuroradiologists. The Company believes that
these relationships can only be formed through the presence of a direct sales
organization. Currently the Company's domestic sales force consists of eight
direct sales representatives covering the United States. To date, sales
representatives have concentrated their efforts on 200 selected interventional
radiology centers, which the Company believes account for a majority of the
total procedures. It is anticipated that the interventional radiology and
neuroradiology centers will overlap substantially, allowing for efficient
selling into the overall interventional marketplace.
The Company has established international distribution arrangements in
Germany, the United Kingdom, the Netherlands, Belgium, Japan, Australia and
Canada through a network of specialty medical device distributors. These
arrangements provide the Company with distributors experienced
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in the interventional device markets who are able to access the top
interventional physicians and institutions worldwide. MTI's distributor
network has initially focused on the introduction and market penetration of
peripheral vascular products. The Company's Director of International
Operations, based in Europe, directs the Company's international sales efforts,
oversees the existing distributor network, evaluates new distribution
opportunities, and acts as a liaison for the Company's clinical investigation
programs.
RESEARCH AND DEVELOPMENT
The Company is directing its research efforts towards development of
products which expand the therapeutic alternatives available to interventional
radiologists and interventional neuroradiologists for treatment of vascular
disease. The primary efforts are directed at further expansion of its catheter
and infusion wire product offerings to simplify access to the venous system for
treatment of DVT, and extension of the Cragg Thrombolytic Brush technology for
application in native vessel grafts, arteries and veins.
While the development efforts for the LES are focused on AVMs and
aneurysms in the neuro vasculature, the Company believes that the LES may also
have utility for a variety of procedures throughout the vascular system,
including embolization of certain types of tumors whose growth is dependent on
adequate blood supply, and the Company has performed studies on representative
animal models. In addition, the Company has filed patents related to certain
non-vascular applications of the LES, and is sponsoring preclinical studies of
its use in certain urological and gynecological procedures.
In addition to its work on the LES, the Company is actively
investigating alternative treatment modalities for disease associated with
stroke. The primary focus of this work is the application of stent technology
in the head and neck. Stents are small tubular frameworks introduced
percutaneously and deployed to reestablish blood flow in an occluded section of
a vessel. In recent years stents have been used increasingly in coronary and
certain peripheral arteries that are blocked by atherosclerotic plaque. The
Company believes stents may provide a viable alternative to surgery for
exclusion of such plaque in the carotid arteries and exclusion of certain types
of aneurysms in cerebral arteries.
Work performed to date in the Company's stent program has been
directed principally towards establishment of intellectual property rights in
relevant technologies, development of designs and fabrication of initial
prototypes. The Company has executed two license agreements covering four
issued and several pending U.S. patents for certain stent technology and has
filed an additional patent of its own. Should the early research further
confirm the potential of the Company's technologies, efforts in 1997 would be
directed towards refinement of designs and initiation of preclinical trials.
All of these research efforts are at an early stage, and there can be
no assurance that any products will be successfully developed from them,
receive regulatory approvals, be capable of being manufactured
cost-effectively, be successfully introduced or receive market acceptance. See
"Certain Factors That May Affect the Company's Business and Future Results" for
additional information regarding risks generally applicable to development of
new products.
The Company's research and development staff consists of 20 full-time
engineers, technicians and regulatory personnel, and two full time consultants,
all of whom have substantial experience in medical device development. In
addition to these technical personnel, the Company's product development
process incorporates teams organized around each of the Company's core
technologies or product groups, with each team having representatives from
marketing, regulatory and clinical affairs,
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manufacturing and finance. Consultants are utilized where additional
specialized expertise is required. See "Management--Other Key Advisors."
MANUFACTURING
The Company manufactures its proprietary catheters, infusion wires and
the Cragg Thrombolytic Brush in a clean room setting at its facilities in San
Clemente, California. The Company has implemented quality control systems as
part of its manufacturing process, which comply with U.S. Good Manufacturing
Practices ("GMP") requirements. The Company has also been inspected by the
California Department of Health Services ("CDHS") on behalf of the State and
under contract with the FDA, and is registered with the State of California to
manufacture its medical devices. The Company believes that it is in compliance
with FDA GMP for medical devices. There can be no assurance, however, that the
Company will remain in compliance with GMP. Failure to do so could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company is also in the process of implementing policies and
procedures which are intended to allow the Company to achieve ISO 9001/EN 46001
certification of its quality control systems in the first half of 1997. The
European Union has promulgated rules which require that medical products
receive by mid-1998 the right to affix the CE Mark, an international symbol of
adherence to quality assurance standards. In order to obtain the right to
affix the CE Mark to its products, the Company will need to obtain
certification that its processes meet the ISO 9001/EN 46001 quality standards
and applicable medical device directives promulgated by the European Union.
Failure to receive the right to affix the CE Mark will prohibit the Company
from selling its products in member countries of the European Union, and there
can be no assurance that the Company will be successful in meeting the European
quality standards or other certification requirements.
The Company has developed the necessary capabilities for micro valve
molding, hole drilling, bonding, catheter assembly, balloon fabrication,
infusion wire assembly, tip forming, packaging and testing, and has developed
proprietary know-how and manufacturing expertise in several of these areas. An
endhole infusion wire and certain accessories are manufactured for the Company
on an OEM basis; all other fabrication and assembly operations are performed in
the Company's manufacturing facilities. The Company uses outside contractors
for extrusion, injection molding, hydrophilic coating, motor drive componentry
and sterilization. Outside services will be brought in-house as necessary or
appropriate to meet the Company's production, quality and profitability
objectives.
Raw materials are purchased from various qualified vendors, subjected
to stringent quality specifications and assembled by the Company into final
products. The Company routinely conducts quality audits of suppliers and has
adopted a vendor qualification program. Certain products are obtained by the
Company from single source suppliers. However, the Company believes that
alternative suppliers are available for its raw materials and other product
components and plans to qualify additional suppliers as sales volume warrants.
Although the Company intends to maintain sufficient levels of inventory to
avoid any material disruption resulting from increased manufacturing, there can
be no assurance that the Company will be able to manufacture and supply
products to meet potential demand.
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COMPETITION
The medical device industry is characterized by rapidly evolving
technologies and significant competition. The Company expects competition in
the interventional radiology and interventional neuroradiology markets to
increase substantially. The Company believes that interventional procedures
with products like its own are substantially less costly than highly invasive
surgical procedures and may ultimately replace these procedures in certain
applications. In certain cases, the Company's products may be used in
conjunction with traditional surgical techniques.
The Company competes primarily with other producers of catheter and
wire based products for interventional treatment of neuro vascular and
peripheral vascular disease. In neuro vascular interventional applications
Target Therapeutics, Inc. is the market leader. The Company expects to compete
against Target Therapeutics and other recent entrants in the neuro vascular
interventional market including Boston Scientific, Inc., the Cordis, Inc.
subsidiary of Johnson & Johnson, and Medtronic Micro Interventional Systems.
In peripheral blood clot therapy applications the Company competes with the
MediTech division of Boston Scientific, Inc., Cook, Inc., Target Therapeutics
and the AngioDynamics division of E-Z-EM Corporation. All of these companies
have significantly greater financial, manufacturing, marketing, distribution
and technical resources, name recognition and experience than the Company.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than those
developed by the Company or that would render the Company's products obsolete
or noncompetitive. Additionally, there can be no assurance that the Company
will be able to compete effectively against such competitors based on its
ability to manufacture, market and sell its products.
The length of time required for product development and regulatory
approval plays an important role in a company's competitive position.
Consequently, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development,
clinical evaluation and commercialization of new products. Product development
involves a high degree of risk and there can be no assurance that the Company's
research and development efforts will result in commercially successful
products.
MEDICAL ADVISORY BOARD
The Company has a group of physicians which advise it on medical
matters in areas of the Company's business. The Company's Medical Advisory
Board (the "MAB") includes experts in vascular disease diagnosis and therapy in
interventional radiology and interventional neuroradiology. The Company
regularly consults with members of the MAB regarding the Company's research and
development, preclinical trials and clinical trials.
The Micro Therapeutics Medical Advisory Board is composed of the
following individuals:
<TABLE>
<S> <C>
Andrew H. Cragg, M.D. Director, Interventional Vascular Medicine,
Chairman of MAB and a Fairview Riverside Medical Center and Clinical
Founder of the Company Associate Professor of Radiology, University of
Minnesota Hospitals
Flavio Castaneda, M.D. Clinical Associate Professor of Radiology and Surgery,
and Radiology Research Director, University of Illinois
College of Medicine at Peoria
</TABLE>
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<PAGE> 14
<TABLE>
<S> <C>
Bart Dolmatch, M.D. Section Head, Vascular and Interventional Radiology,
The Cleveland Clinic Foundation
Barry Katzen, M.D. Medical Director, Miami Vascular Institute, and Clinical
Professor of Radiology, University of Miami School of
Medicine
Thomas O. McNamara, M.D. Professor of Radiological Sciences, UCLA School of
Interventional Radiology Section, Medicine, Vascular Interventional Radiology Section,
UCLA Medical Center for the Health Sciences
Mark Mewissen, M.D. Associate Professor of Radiology, Director of Vascular/
Interventional Radiology, Medical College of Wisconsin,
Froedtert Memorial Lutheran Hospital
Alex Norbash, M.D. Assistant Professor of Interventional Neuroradiology,
Stanford University Hospital
John Perl II, M.D. Section of Neuroradiology, The Cleveland Clinic
Foundation
Cass Pinkerton, M.D. Senior Consultant, Interventional Cardiology, Nasser,
Smith & Pinkerton Cardiology
Don F. Schomer, M.D. Assistant Professor of Radiology, The University of
Texas, M.D. Anderson Cancer Center, Diagnostic
Radiology
Donald Schwarten, M.D. Director of Interventional Radiology, St. Vincent's
Hospital
Tony Smith, M.D. Professor of Radiology and Director of Interventional
Neuro and Peripheral Vascular Radiology, Duke
University Medical Center
Sidney Wallace, M.D. Professor Emeritus, Deputy Division Head for Research,
Division of Diagnostic Imaging, The University of Texas,
M.D. Anderson Cancer Center
</TABLE>
All MAB members have entered into consulting agreements with the
Company. These agreements generally provide that all inventions conceived by
such consultants in the course of rendering service to the Company are the
exclusive property of the Company. These agreements further provide that
performance of such agreements will not conflict with any individual
consultant's obligation to maintain the secrecy of confidential information of
any third parties and that all confidential information developed or made known
to such consultants by the Company during the course of such relationships with
the Company is to be kept confidential and not disclosed to third parties.
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<PAGE> 15
Except for Dr. Cragg, who receives compensation and holds a
significant number of shares of the Company's Common Stock, all MAB members
have been granted options to purchase shares of the Company's Common Stock for
their services and are reimbursed for reasonable expenses, but receive no other
compensation. All of the members of the MAB are employed by employers other
than the Company and may have commitments to, or consulting or advisory
agreements with, other entities, including potential competitors of the
Company, that may limit their availability to the Company. Although these
advisors may contribute significantly to the affairs of the Company, none,
other than Dr. Cragg, is expected to devote more than a small portion of his
time to the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to aggressively protect its proprietary
position by, among other things, filing U.S. and foreign patent applications to
protect technology, inventions and improvements that are important to the
development of its business. The Company's strategy includes extending the
patent protection of its licensed technology by filing procedure-specific
method patents wherever possible for the use of the Company's products in new
clinical applications.
As of December 31, 1996, the Company held ten issued U.S. patents,
one issued foreign patent and has eighteen U.S. and eight foreign patent
applications pending. The Company's issued U.S. patents cover technology
underlying the Cragg MicroValve, infusion wire, Cragg Thrombolytic Brush,
Liquid Embolic System and carotid and intra-cerebral stent products. The
expiration dates of these patents range from February 2009 to December 2015.
The pending claims cover various aspects of its infusion catheter, infusion
wire, Thrombolytic Brush, micro catheter, Liquid Embolic Systems, carotid and
intra-cerebral stent technologies and non-vascular liquid embolic products.
Although the Company aggressively works to protect its technology, no
assurance can be given that any patents from pending patent applications or
from any future patent applications will be issued, that the scope of any
patent protection will exclude competitors or provide competitive advantages to
the Company, that any of the Company's patents will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around the
Company's patents. In addition, others may hold or receive patents or file
patent applications which contain claims having a scope that covers products
developed by the Company.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and many
companies in the industry have employed intellectual property litigation to
gain a competitive advantage. There can be no assurance that the Company will
not become subject to patent infringement litigation or an interference
proceeding declared by the U.S. Patent and Trademark Office ("PTO") to
determine the priority of inventions. The defense and prosecution of patent
suits, PTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to the Company, to protect the Company's trade secrets
or know-how or to determine the enforceability, scope and validity of the
proprietary rights of others.
Any litigation or interference proceedings involving the Company would
result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. An adverse
determination in litigation or interference proceedings to which the Company
may become a party could subject the Company to significant liabilities to
third parties or
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<PAGE> 16
require the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations 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,
operating results and financial condition.
In addition to patents, the Company relies on trade secrets and
proprietary know-how to compete, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These
agreements generally provide that all confidential information developed or
made known to individuals by the Company during the course of the relationship
with the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that
all inventions conceived by the individual in the course of rendering service
to the Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
GOVERNMENT REGULATION
United States
The research, development, manufacture, labeling, distribution and
marketing of the Company's products are subject to extensive and rigorous
regulation by the FDA and, to varying degrees, by state and foreign regulatory
agencies. The Company's products are regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act (the "FDC
Act") and require clearance or approval by the FDA prior to commercialization.
In addition, significant changes or modifications to medical devices also are
subject to regulatory review and clearance or approval. Under the FDC Act, the
FDA regulates the research, clinical testing, manufacturing, safety, labeling,
storage, record keeping, advertising, distribution, sale and promotion of
medical devices in the United States. The testing for, preparation of and
subsequent review of applications by the FDA and foreign regulatory authorities
is expensive, lengthy and uncertain. Noncompliance with applicable
requirements can result in, among other things, warning letters, proceedings to
detain imported products, fines, injunctions, civil and criminal penalties
against the Company, its officers and its employees, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals and a recommendation by the FDA that the Company not be
permitted to enter into government contracts.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and efficacy. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to GMPs) and Class II devices are subject
to general and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval ("PMA") by the FDA to
ensure their safety and efficacy (for example, life-sustaining, life-supporting
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<PAGE> 17
and implantable devices, or new devices that have not been found substantially
equivalent to legally marketed Class I or Class II devices).
The FDA also has the authority to require clinical testing of certain
medical devices as part of the clearance or approval process. If clinical
testing of a device is required and if the device presents a "significant
risk," an IDE application must be approved prior to commencing clinical trials.
The IDE application must be supported by data, typically including the results
of laboratory and animal testing. If the IDE application is approved by the
FDA, clinical trials may begin at a specific number of investigational sites
with a maximum number of patients, as approved by the agency. Sponsors of
clinical trials are permitted to sell those devices distributed in the course
of the study provided such costs do not exceed recovery of the costs of
manufacture, research, development and handling. The clinical trials must be
conducted under the auspices of investigational sites institutional review
boards pursuant to FDA regulations.
Generally, before a new device can be introduced into the market in
the United States, the manufacturer or distributor must obtain FDA clearance of
a 510(k) submission or approval of a PMA application. If a medical device
manufacturer or distributor can establish, among other things, that a device is
"substantially equivalent" in intended use and technological characteristics to
a legally marketed Class I or Class II medical device, or to a Class III
medical device for which the FDA has not required a PMA, the manufacturer or
distributor may seek clearance from the FDA to market the device by filing a
510(k). The 510(k) submission must establish to the satisfaction of the FDA
the claim of substantial equivalence to the predicate device. In recent years,
the FDA has been requiring a more rigorous demonstration of substantial
equivalence, including the requirement for IDE clinical trials.
Following submission of the 510(k), the manufacturer or distributor
may not place the device into commercial distribution unless and until an order
is issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information, including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA. Such a request for additional
information including clinical trials or a determination that the device is not
substantially equivalent would delay market introduction of the products that
are the subject of the 510(k). It generally takes four to twelve months from
the date of submission to obtain 510(k) clearance, although it may take longer,
in particular if clinical trials are required.
If the manufacturer or distributor cannot establish that a proposed
device is substantially equivalent to a legally marketed Class I or II
predicate device, the manufacturer or distributor must seek premarket approval
of the proposed device through submission of a PMA application. A PMA
application must be supported by extensive data, including laboratory,
preclinical and clinical trial data to prove the safety and efficacy of the
device, as well as extensive manufacturing information. If the FDA determines,
upon initial review, that a submitted PMA application is sufficiently complete
to permit substantive review, the FDA will accept the PMA application for
filing. FDA review of a PMA application generally takes approximately two
years or more from the date of acceptance for filing, but review times vary
depending upon FDA resources and workload demands and the complexity of PMA
submissions. There can be no assurance that the FDA will review and approve
the PMA in a timely manner, if at all. Failure to obtain PMA approvals could
have a material adverse effect on the Company's business, operating results and
financial condition. Additionally, as one of the conditions
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<PAGE> 18
for approval, the FDA will inspect the manufacturing establishment at which the
subject device will be manufactured to determine whether the quality control
and manufacturing procedures conform to GMP regulations. If granted, the PMA
approval may include significant limitations on the indicated uses for which a
product may be marketed.
As of November 30, 1996, the Company had received three 510(k)
clearances for certain diagnostic or therapeutic indications of its infusion
catheters, micro catheters and infusion wires which cover 40 products offered
to the market. The Company has made modifications which affect 17 of its
products covered under these 510(k) clearances, which modifications, the
Company believes, do not affect 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 the 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.
The use of certain materials may require that the device be evaluated
as a drug rather than as a device, and thus the FDA's investigational new drug
("IND") and new drug application ("NDA") regulations would be applicable to the
clinical study and commercialization of the product. Otherwise the product
will be treated as a medical device. The steps required before a drug may be
marketed in the United States include preclinical and laboratory tests, the
submission to the FDA of an application for an IND which must become effective
before clinical trials may commence, adequate and well controlled clinical
trials to establish the safety and efficacy of the drug, the submission to the
FDA of an NDA, and FDA approval of the NDA prior to any commercial sale or
shipment of the product. In January 1996, the Company met with representatives
of both the drug and device divisions of the FDA to discuss their respective
new product approval requirements. Based on the information presented by the
Company regarding the material composition of the LES, the Company believes the
LES would be regulated as a device. There can be no assurance, however, that
upon more detailed review of the LES, the FDA will not at a later date
determine that the LES should be regulated as a drug. Such a change could
significantly delay the commercial availability of the LES and have a material
adverse effect on the Company's business, operating results and financial
condition.
There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMA or NDA approvals to market its products for
the intended uses on a timely basis, if at all, and delays in receipt of or
failure to receive such approvals, the loss of previously received approvals,
or failure to comply with existing or future regulatory requirements would have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the CDHS and to list its
products with the FDA. As such, the Company will be inspected by both the FDA
and CDHS for compliance with GMP and other applicable regulations. These
regulations require that the Company manufacture its products and maintain its
documents in a prescribed manner. The Company has not yet been inspected by
the FDA for GMP compliance. In September 1995, the Company's original facility
in Aliso Viejo, California was inspected by the CDHS, acting on behalf of the
State and under contract with the FDA. The Company received no significant
inspection observations and was subsequently granted a California medical
device manufacturing license. In November 1995, the Company's present facility
in San Clemente was inspected by the CDHS, again acting on behalf of the State
and under contract with the FDA. No significant inspection observations were
received. There can be no assurance that the Company will
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<PAGE> 19
not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company's ability to do business.
The Company is required to provide information to the FDA on death or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. In addition, the FDA
strictly prohibits the marketing of approved devices for uses other than those
specifically cleared for marketing by the FDA. If the FDA believes that a
company is not in compliance with the law or regulations, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against a company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, operating
results and financial condition.
Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. The Company is also subject to regulation by the Occupational
Safety and Health Administration and by other government entities.
Regulations regarding the manufacture and sale of the Company's
products are subject to change. The Company cannot predict what impact, if
any, such changes might have on its business, operating results and financial
condition.
International
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain clearance required by foreign countries may be longer
or shorter than that required for FDA clearance, and requirements for licensing
a product in a foreign country may differ significantly from FDA requirements.
Some countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other
countries, such as Japan, have requirements similar to those of the United
States. This disparity in the regulation of medical devices may result in more
rapid product clearance in certain countries than in others.
The Company or its distributors have received registrations and
approvals to market its Cragg-McNamara and Patency infusion catheters in
Germany, The Netherlands, Belgium, the United Kingdom, Canada, Japan and
Australia.
The European Union has promulgated rules which require that medical
products receive by mid-1998 the right to affix the CE Mark, an international
symbol of adherence to quality assurance standards. ISO 9000/EN 46001
certification is one of the CE Mark certification requirements. In order to
obtain the right to affix the CE Mark to its products, the Company will need to
obtain certification that its processes meet the ISO 9001/EN 46001 quality
standards and applicable medical device directives promulgated by the European
Union. Failure to receive the right to affix the CE Mark will prohibit the
Company from selling its products in member countries of the European Union and
there can be no assurance that the Company will be successful in meeting the
European quality standards or other certification requirements.
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<PAGE> 20
Exports of products subject to the 510(k) notification requirements,
but not yet cleared to market, are permitted without FDA export approval
provided certain requirements are met. Unapproved products subject to the PMA
requirements must receive prior FDA export approval unless they are approved
for use by any member country of the European Union and certain other
countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland
and South Africa, in which case they can be exported to any country without
prior FDA approval. To obtain FDA export approval, when it is required,
certain requirements must be met and information must be provided to the FDA,
including documentation demonstrating that the product is approved for import
into the country to which it is to be exported and, in some instances, safety
data from animal or human studies. The Company has received export approvals
for the Cragg Thrombolytic Brush in the Netherlands and Australia, and is
seeking approvals for other key European countries. There can be no assurance
that the Company will receive FDA export approval when such approval is
necessary, or that countries to which the devices are to be exported will
approve the devices for import. Failure of the Company to receive import
approval from foreign countries, or to obtain Certificates for Products for
Export, meet FDA's export requirements, or obtain FDA export approval when
required to do so, could have a material adverse effect on the Company's
business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, catheterization laboratories,
physicians and other healthcare providers that purchase medical devices
generally rely on third-party payors, such as private health insurance plans,
to reimburse all or part of the costs associated with the treatment of
patients.
The Company's success will depend upon, among other things, its
customer's ability to obtain satisfactory reimbursement from healthcare payors
for its products. Reimbursement in the United States for the Company's
infusion catheter and infusion wire products is currently available under
existing procedure codes from most third-party payors, including most major
private health care insurance plans, Medicare and Medicaid. The Company does
not expect that third-party reimbursement in the United States will be
available for use of its other products unless and until FDA clearance or
approval is received. If FDA clearance or approval is received, third-party
reimbursement for these products will be dependent upon decisions by individual
health maintenance organizations, private insurers and other payors. However,
the Company believes that procedures using its Cragg Thrombolytic Brush may be
reimbursed in the United States under existing procedure codes for diagnosis
and re-establishment of patency of hemodialysis access grafts and native
vessels. Similarly, the Company believes that procedures using its LES may be
reimbursed in the United States under existing procedure codes for diagnosis
and treatment of aneurysms and AVMs. However, there can be no assurance that
such procedure codes will remain available or that the reimbursement under
these codes will be adequate. Given the efforts to control and decrease health
care costs in recent years, there can be no assurance that any reimbursement
will be sufficient to permit the Company to achieve or maintain profitability.
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. Large-scale market acceptance of the
Company's thrombolytic infusion and other products will depend on the
availability and level of reimbursement in international markets targeted by
the Company. Currently, the Company has been informed by its international
distributors that its Cragg-McNamara and Patency infusions catheters have been
approved for reimbursement in
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countries in which the Company markets such products. Obtaining reimbursement
approvals can require 12-18 months or longer. There can be no assurance that
the Company will obtain reimbursement in any country within a particular time,
for a particular amount, or at all. Failure to obtain such approvals could
have a material adverse effect on the Company's sales, business, operating
results and financial condition.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of its products will be required to obtain
reimbursement. Availability of reimbursement will depend on the clinical
efficacy and cost of the Company's products. There can be no assurance that
reimbursement for the Company's products will be available in the United States
or in international markets under either government or private reimbursement
systems, or that physicians will support and advocate reimbursement for use of
the Company's systems for all uses intended by the Company. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products would have a material adverse
effect on the Company's business, operating results and financial condition.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves an inherent risk of exposure to
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. Although the Company has not experienced any product
liability claims to date, there can be no assurance that the Company will be
able to avoid significant product liability claims and potential related
adverse publicity. The Company maintains product liability insurance with
coverage limits of $2 million per occurrence and an annual aggregate maximum of
$2 million, which the Company believes is comparable to that maintained by
other companies of similar size serving similar markets. However, there can be
no assurance that product liability claims will not exceed such insurance
coverage limits, which could have a material adverse effect on the Company, or
that such insurance will continue to be available on commercially reasonable
terms, or at all.
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CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
THIS ANNUAL 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. The Liquid Embolic System ("LES") has not
yet entered clinical trials in the United States and the Company recently filed
its 510(k) market clearance application covering the Cragg Thrombolytic Brush.
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. See "Business-- Government Regulation" and
"--Products."
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 LES and 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. See "Business--Products," "--Sales and Marketing" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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
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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 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. See "Business--Research and
Development," "--Background" and "--Sales and Marketing."
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.
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. See "Business--Competition."
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 December 31, 1996, the Company
incurred cumulative losses of approximately $9.8 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. See "Business--Products" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Possible 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
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<PAGE> 24
and operating expenditures to increase. The Company believes that its existing
capital resources and anticipated cash flow from planned operations, together
with the net proceeds of its initial public offering and the interest earned
thereon, should be adequate to satisfy its capital requirements through 1997.
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. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business."
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
December 31, 1996, the Company held ten issued U.S. patents, one issued
foreign patent and has eighteen U.S. and eight foreign patent applications
pending. The Company's issued U.S. patents cover technology underlying the
Cragg MicroValve, infusion wire, Cragg Thrombolytic Brush, Liquid Embolic
System and carotid and intra-cerebral stent products. The expiration dates of
these patents range from February 2009 to December 2015. The pending claims
cover various aspects of its infusion catheter, infusion wire, Thrombolytic
Brush, micro catheter, Liquid Embolic System, carotid and intra-cerebral stent
technologies and non-vascular liquid embolic products. 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. See "Business--Patents and Proprietary Rights."
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
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<PAGE> 25
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 nine 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 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. See "Business--Sales and Marketing."
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 eighteen 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 eighteen 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.
See "Business--Sales and Marketing" and "--Manufacturing."
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 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
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<PAGE> 26
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 17 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.
Utilization of the Company's LES and its Cragg Thrombolytic Brush 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 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 the LES, the Company believes the LES would be regulated as a
device. There can be no assurance, however, that upon more detailed review of
the LES, the FDA will not at a later date determine that the LES should be
regulated as a drug. Such a change could significantly delay the commercial
availability of the LES 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 the European Union, the Company will be required to obtain the
certifications necessary to affix the CE Mark to its products by mid-1998 in
order to continue sales in member countries of the European Union. Although
the CE Mark requirement for medical devices does not become effective until
June 1998, the Company's experience to date in European Union countries is that
the CE Mark is already necessary to achieve meaningful sales. The Company
intends to acquire the certifications necessary to affix the CE Mark to its
products; however, there can be no assurance that the Company will be able to
obtain such certifications 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
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<PAGE> 27
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. See "Business--Government Regulation."
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 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. See "Business--Product Liability and Insurance."
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
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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. See "Business--Manufacturing."
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. See "Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a) Of the Exchange Act."
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. See
"Business-- Third-Party Reimbursement."
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
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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 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. See "Business-- Government
Regulation--International" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 effected.
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ITEM 2. PROPERTIES
The Company occupies approximately 19,000 square feet in a multi-user
complex in San Clemente, California. The facility is subject to a lease which
expires in May 1997, with two one-year renewal options. The current monthly
rent is approximately $13,300. The Company believes that this space is
adequate for its immediate needs, and that it will be able to renew its lease
or obtain additional space if necessary.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1996,
the following matters were submitted to a vote of the Company's security
holders:
1. Prior to the consummation of the Company's initial public
offering of Common Stock, on December 30, 1996, the Company solicited the
written consent of the holders of its Common Stock, Series A-1 Preferred Stock,
Series A-2 Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock to amend the Company's Certificate of Incorporation upon the consummation
of the Company's initial public offering to (i) increase the authorized number
of shares of Common Stock from 10,000,000 to 20,000,000, (ii) decrease the
authorized number of shares of Preferred Stock from 5,635,992 to 5,000,000,
(iii) provide that the 5,000,000 authorized shares of Preferred Stock shall be
issued in one or more series with rights, preferences and privileges to be
determined by the Board of Directors and (iv) effect a .65-for-1 reverse stock
split of the Company's Common Stock.
The proposed amendment to the Company's Certificate of Incorporation
was approved, and the votes cast for such amendment were as follows: (i)
813,042 shares of Common Stock, (ii) 541,666 shares of Series A-1 Preferred
Stock, (iii) 578,500 shares of Series A-2 Preferred Stock, (iv) 1,181,818
shares of Series B Preferred Stock, and (v) 1,229,397 shares of Series C
Preferred Stock. The number of shares which were not voted on this matter were
as follows: (i) 79,408 shares of Common Stock, (ii) 6,500 shares of Series
A-2 Preferred Stock, (iii) 47,273 shares of Series B Preferred Stock and (iv)
27,508 shares of Series C Preferred Stock. There were no votes cast against
this matter.
2. Prior to the consummation of the Company's initial public
offering of Common Stock, on December 30, 1996, the Company solicited the
written consent of the holders of its Common Stock, Series A-1 Preferred Stock,
Series A-2 Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock to elect directors of the Company to serve until the next annual meeting
of the Company's stockholders, or until the directors' successors have been
elected and duly qualified. George Wallace, H. DuBose Montgomery, Dick Allen
and Wende Hutton were each elected to serve as directors of the Company and the
votes cast for their election were as follows: (i) 813,042 shares of Common
Stock, (ii) 541,666 shares of Series A-1 Preferred Stock, (iii) 578,500 shares
of Series A-2 Preferred Stock, (iv) 1,181,818 shares of Series B Preferred
Stock, and (v) 1,229,397 shares of Series C Preferred Stock. The number of
shares which were not voted on the election of the Company's directors were as
follows: (i) 79,408 shares of Common Stock, (ii) 6,500 shares of Series A-2
Preferred Stock, (iii) 47,273 shares of Series B Preferred Stock and (iv)
27,508 shares of Series C Preferred Stock. There were no votes cast against the
election of any of the nominees.
3. Prior to the consummation of the Company's initial public
offering of Common Stock, on December 30, 1996, the Company solicited the
written consent of the holders of its Common Stock, Series A-1 Preferred Stock,
Series A-2 Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock to amend the terms of the Company's Amended and Restated Investors'
Rights Agreement dated February 9, 1995, as amended on May 17, 1996 and June
27, 1996 (the "Investors' Rights Agreement") to provide that the right of first
offer in Section 2.10 of the Investors' Rights Agreement shall not be
applicable to certain enumerated issuances of securities.
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The proposed amendment to the Investors' Rights Agreement was
approved, and the votes cast for such amendment were as follows: (i) 813,042
shares of Common Stock, (ii) 541,666 shares of Series A-1 Preferred Stock,
(iii) 578,500 shares of Series A-2 Preferred Stock, (iv) 1,181,818 shares of
Series B Preferred Stock, and (v) 1,229,397 shares of Series C Preferred Stock.
The number of shares which were not voted on this matter were as follows: (i)
79,408 shares of Common Stock, (ii) 6,500 shares of Series A-2 Preferred
Stock, (iii) 47,273 shares of Series B Preferred Stock and (iv) 27,508 shares
of Series C Preferred Stock. There were no votes cast against this matter.
32
<PAGE> 33
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 18, 1997, the Company's Common Stock has traded on the
Nasdaq National Market. The Company's Common Stock was not traded on the
Nasdaq National Market, or any other exchange, during the year ended December
31, 1996.
As of December 31, 1996, there were 49 stockholders of record of the
Company's Common Stock and Preferred Stock, the Preferred Stock was subsequently
all converted to Common Stock. The Company has not paid any dividends on its
Common Stock since its inception and does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future. It is currently
anticipated that earnings, if any, will be used to finance the development and
expansion of the Company's business.
RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company during the
year ended December 31, 1996 involving sales of the Company's securities that
were not registered under the Securities Act of 1993 (the "Securities Act"):
(1) From time to time during the year ended December 31,
1996, the Registrant issued incentive stock options and nonqualified stock
options to purchase Common Stock pursuant to the Registrant's Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan--1993 (the
"1993 Plan") and 1996 Stock Incentive Plan (the "1996 Plan") to officers,
directors, employees and consultants of the Registrant. During the year ended
December 31, 1996, options to purchase 225,223 shares of Common Stock were
granted pursuant to the 1993 Plan and options to purchase 107,900 shares of
Common Stock were granted pursuant to the 1996 Plan. During the year ended
December 31, 1996, options to purchase 10,238 shares of Common Stock granted
pursuant to the 1993 Plan were exercised for an aggregate exercise price of
$4,725, and no options were exercised pursuant to the 1996 Plan. Exemption
from the registration provisions of the Securities Act is claimed, with respect
to the grant of options referred to above, on the basis that the grant of
options did not involve a "sale" of securities and, therefore, registration
thereof was not required and, with respect to the exercise of options referred
to above, on the basis that such transactions met the requirements of Rule 701
as promulgated under Section 3(b) of the Securities Act.
(2) In May and June 1996, the Registrant issued 1,256,906
shares of Series C Preferred Stock at a price of $6.46 per share to Menlo
Ventures and a related partnership, two related Mayfield partnerships, and
twelve other purchasers.
Except as set forth in item (1) above, exemption from the registration
requirements of the Securities Act for the transactions described above was
claimed under Section 4(2) of the Securities Act, among others, on the basis
that such transactions did not involve any public offering and the purchasers
were sophisticated with access to the kind of information registration would
provide. No underwriting or broker's commissions were paid in connection with
the foregoing transactions.
33
<PAGE> 34
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 Annual
Report on Form 10-KSB. This Annual Report on Form 10-KSB 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 "Business - Certain
Factors That May Affect the Company's Business and Future Results."
GENERAL
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 international
markets through a limited number of distributors. During September 1996 four of
the Company's seven sales representatives left the Company to join three other
companies. In the fourth quarter 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 had the effect
of reducing the rate of growth of sales during the fourth quarter. The Company
plans to increase its direct sales force in the United States and has hired a
Director of International Operations in France to establish a sales presence
outside North America. Increases in the Company's direct sales force will
require significant expenditures and additional management resources.
To date virtually all the Company's revenues have been derived from
sales of its initial infusion catheters and related accessories. The Company
expects sales of these and similar products to provide the majority of the
Company's revenues at least through 1997. Clinical trials of the Cragg
Thrombolytic Brush are currently underway and market introduction is expected
in 1997. However, there can be no assurance that FDA approval will be obtained
or, if obtained, that the Company will be successful in generating sales of
this or other future products. In addition, the Company expects to generate
only minimal revenues in the European Community nations until it obtains CE
Mark notification for its products.
The Company's thrombolytic infusion catheters and sidehole infusion
wire are currently manufactured by the Company at its facility in San Clemente,
California. An end hole infusion wire and certain accessories are manufactured
by contract manufacturers. During 1996 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
34
<PAGE> 35
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 in the future.
The Company currently manufactures product for stock and ships product
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 material backlog in the future.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended December 31, 1995 and December 31, 1996
Net sales for the year ended December 31, 1996 increased to $1.4
million from $292,000 for the year ended December 31, 1995. The increase is the
result of the growth in sales of its infusion products. Substantially all of
this growth occurred in the U.S. market due to the establishment of a domestic
sales force in the third quarter of 1995. International sales represented 4% of
total sales for the year ended December 31, 1996 and 12% in the year ended
December 31, 1995.
Cost of sales increased to $1.6 million for the year ended December
31, 1996 from $316,000 for the year ended December 31, 1995. The increase was
attributable to the increase in sales as well as non-recurring production costs
and inefficiencies associated with the rapid increase and expansion of
production operations, and the expansion of the Company's manufacturing
facilities in conjunction with its move to a new facility in November 1995 and
subsequent expansion thereof in July 1996. The Company continues to incur high
manufacturing overhead costs relative to sales and does not expect to achieve
positive gross margins until 1997.
Research and development expenses, which include regulatory and
clinical expenses, increased to $2.4 million for the year ended December 31,
1996 from $1.5 million for the year ended December 31, 1995. The increase is
primarily attributable to increases in the number of employees and increased
expenditures related to development of the Liquid Embolic System ("LES") and the
Cragg Thrombolytic Brush. The Company expects to significantly increase research
and development costs in 1997, particularly for human clinical trials of the LES
and completion of development of the Cragg Thrombolytic Brush.
Selling, general and administrative expenses increased to $3.1 million
for the year ended December 31, 1996 from $1.5 million for the year ended
December 31, 1995. This increase was primarily attributable to the result of
the establishment of a direct sales force in the United States, development of
marketing programs and materials in support of new product introductions,
addition of administrative personnel, facility expansion costs and the
amortization of non-cash deferred compensation charges associated with stock
option grants to employees.
Net interest and other income and expense decreased to $172,000 for
the year ended December 31, 1996 from $202,000 for the year ended December 31,
1995. This difference was attributable to higher average cash balances in
1995.
As a result of the items discussed above, the Company had a net loss
of $5.6 million for the year ended December 31, 1996 compared to $2.8 million
for the year ended December 31, 1995.
35
<PAGE> 36
Comparison of Fiscal Years Ended December 31, 1995 and December 31, 1994
Net sales for the year ended December 31, 1995 increased to $292,000
from $26,000 for the year ended December 31, 1994. The increase is the result
of the U.S. market launch of the Cragg-McNamara valved tip infusion catheters.
Substantially all of the growth occurred in the U.S. market due to the
establishment of a domestic sales force in the second half of 1995.
International sales represented 12% of total sales for the year ended December
31, 1995, versus 71% of total sales for the year ended December 31, 1994.
Cost of sales for the year ended December 31, 1995 increased to
$316,000 from $27,000 for the year ended December 31, 1994. The increase was
attributable to the increase in sales as well as non-recurring production costs
and inefficiencies associated with the transition from contracting
manufacturing to in-house production operations, and the expansion of the
Company's manufacturing facilities in conjunction with its move to a new
facility in November 1995.
Research and development expenses, which include regulatory and
clinical expenses, for the year ended December 31, 1995 increased to $1.5
million from $769,000 for the year ended December 31, 1994. The increase is
primarily attributable to increases in the number of employees and increased
expenditures related to development of the LES and the Cragg Thrombolytic
Brush.
Selling, general and administrative expenses increased for the year ended
December 31, 1995 to $1.5 million from $547,000 for the year ended December 31,
1994. This increase was primarily attributable to the establishment of a
direct sales force in the United States, the addition of administrative
personnel and the development of marketing programs and materials in support of
new product introductions.
Net interest and other income for the year ended December 31, 1995
increased to $202,000 from $17,000 for the year ended December 31, 1994. This
difference was attributable to higher average cash balances in 1995 due to the
$5.2 million private placement of equity in February 1995.
As a result of the items discussed above, the Company had a net loss
of $2.8 million for the year ended December 31, 1995 compared to $1.3 million
for the year ended December 31, 1994.
36
<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $9.8 million at
December 31, 1996. The Company has funded its operations from incorporation
through December 1996 primarily through the private placement of equity
securities, as well as through interest income and equipment financing.
Through December 31, 1996, the Company had raised approximately $15.2 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 December 31, 1996, the Company had cash, cash equivalents and
short term investments of $4.2 million compared to $2.4 million at December 31,
1995. The increase was primarily the result of cash provided from the private
placement of $8.2 million of equity securities in May and June 1996 reduced by
cash used in the Company's operations, purchases of capital assets not financed
through the asset lease line and expenditures relating to the Company's initial
public offering of Common Stock, completed in February 1997.
Cash used in the Company's operations increased to $5.6 million for
the year ended December 31, 1996 from $2.8 million for the year ended December
31, 1995. This increase relates 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
during the year ended December 31, 1996 were $578,000 which included equipment
purchased under a lease-line of credit entered into in 1996. The agreement
under the lease-line of credit provides financing on qualified equipment
purchases through June 15, 1997 up to a maximum of $900,000 at an implicit rate
of 14.23% for a 48 month term. Cash provided under the capital financing
agreement was $263,000 in 1996. The Company plans to finance its capital and
operational needs principally from its existing capital resources at December
31, 1996, the net proceeds of the initial public offering completed in February
1997, including interest thereon, and, to the extent available, from bank and
lease financing.
The Company believes current resources and the proceeds from the
Initial Public Offering, including interest will be sufficient to fund its
operations through 1997. 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 upon the demands
created by the 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 facilities
nor is additional capacity anticipated for 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 of the Company's business, financial
condition and results of operations.
37
<PAGE> 38
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this Item begin on
Page F-1 of this Report.
38
<PAGE> 39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In September 1995, the Board of Directors appointed Coopers & Lybrand
L.L.P. as the Company's auditors, replacing Ernst & Young LLP, who were
dismissed.
There were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, auditing
scope or procedure or any reportable event. Ernst & Young LLP's reports on the
financial statements for the fiscal years ending March 31, 1994 and 1995,
respectively, contained no adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles.
39
<PAGE> 40
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning the
executive officers, directors and key employees of the Company as of December
31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George Wallace 38 Chief Executive Officer, President, Director
Thomas Berryman 41 Chief Financial Officer
George (Robert) Greene, Jr. 43 Vice President--Research & Development
William M. McLain 46 Vice President--Operations
Glenn Latham 42 Vice President--Sales
John L. Gehrich, Ph.D. 60 Vice President--Regulatory & Clinical Affairs
Karen L. Davis 37 Director of Marketing
Martine Forissier 47 Director of International Operations
Helene Spencer 49 Director of Quality and Compliance
H. DuBose Montgomery(2) 47 Chairman of the Board, Director
Dick Allen(1)(2) 52 Director
Wende Hutton(1)(2) 37 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Wallace is a founder of the Company and has served as President
and Chief Executive Officer since the Company's formation in June 1993. From
1989 to 1993, Mr. Wallace was with Applied Medical Resources (AMR) holding a
number of positions, the last of which was the General Manager of its Applied
Vascular and Applied Urology Divisions. AMR is a manufacturer of specialty
surgical products used in general, vascular and urologic surgery. From 1986 to
1989, Mr. Wallace was Vice President of Marketing and Sales for Vaser, Inc., a
laser angioplasty company with peripheral and coronary laser angioplasty
systems. From 1980 to 1986, Mr. Wallace held various positions in sales, sales
management, marketing and marketing management at Edwards Laboratories, a
division of American Hospital Supply and later Baxter International. Mr.
Wallace holds a B.S. in Marketing from Arizona State University.
Mr. Berryman initially served as a consultant to the Company beginning
in December 1993, and joined the Company as Chief Financial Officer on a full
time basis in January 1995. During 1994, Mr. Berryman served as Chief
Financial Officer of Oncotech, Inc., a biotechnology company focused on the
oncology market. From June 1988 to December 1993, Mr. Berryman was Chief
Financial Officer of Advanced Surgical Intervention, Inc., a medical device
company focused on the urology market. From March 1985 through June 1988, Mr.
Berryman was Chief Financial Officer of VLI
40
<PAGE> 41
Corporation, a publicly held manufacturer of women's healthcare products. Mr.
Berryman holds an M.B.A. from the University of California, Irvine and a B.S.
in Accounting from California State Polytechnic University, Pomona. Mr.
Berryman is a licensed CPA in the State of California.
Mr. Greene joined the Company in October 1995 as Vice
President--Operations and became Vice President--Research & Development in
September 1996. From January 1994 to September 1995, he served as Vice
President of Operations of Vesica Medical, Inc., a medical device company
focused on developing and manufacturing products for urological applications,
with responsibilities including research, development and manufacturing. From
May 1987 to September 1993, Mr. Greene served as Vice President of
Manufacturing at Advanced Surgical Intervention, Inc., a medical device company
focused on the urology market. From May 1979 to May 1987, Mr. Greene served as
Senior Manufacturing Engineer for Shiley, Inc., a division of Pfizer, Inc. and
manufacturer of artificial heart valves. Mr. Greene holds a B.S. in Industrial
Technology from California State University, Long Beach.
Mr. McLain joined the Company in September 1996 as Vice
President--Operations. From January 1990 until joining the Company, Mr. McLain
held several positions at Applied Medical Resources, including Vice President
of Operations from January 1994 until January 1995, Director of Materials and
Planning, Director of Product Development for Laparoscopy and Director of
Process Development from January 1990 until January 1994. From 1976 to 1990,
Mr. McLain held various engineering and management positions with C.R. Bard,
American Hospital Supply, and Allergan, Inc. Mr. McLain holds an M.B.A. from
Pepperdine University and a B.S. in Physics from the University of Colorado.
Mr. Latham joined the Company in May 1995 as National Sales Manager
and became Vice President--Sales in January 1996. From 1981 to 1995, Mr.
Latham held various sales and marketing positions with Cordis, Inc., a medical
device manufacturer, serving most recently as Sales Manager for its Cordis
Endovascular Systems subsidiary, specializing in the development and marketing
of interventional radiology and neuroradiology devices. From 1978 to 1981, Mr.
Latham held positions in market research and sales administration with Althin
Medical (formerly Cordis Dow Corporation), a manufacturer of hemodialysis
disposable products. Mr. Latham holds a B.S. in Chemistry and an M.B.A. in
Marketing from the University of Florida.
Mr. Gehrich joined the Company in December 1996 as Vice
President--Regulatory & Clinical Affairs. From 1981 to 1996, Mr. Gehrich was
with Cardiovascular Devices, Inc. (CDI), a division of 3M Healthcare, holding a
number of positions, the last of which was Vice President, R&D and Scientific
and Regulatory Affairs. CDI, which Mr. Gehrich co-founded, is a manufacturer
of products for real time measurement of blood gases. From 1978 to 1981, Mr.
Gehrich was Manager, Product Evaluation and Planning for the Edwards
Laboratories division of American Hospital Supply, a manufacturer of
cardiovascular catheters and artificial heart valves. Mr. Gehrich holds a
Ph.D. in Electrical/Biomedical Engineering from the University of Southern
California (USC), an MSEE from USC, and BSEE from the University of Dayton.
Ms. Davis joined the Company in April 1995 as Marketing Manager and
became Director of Marketing in July 1995. From 1992 to 1994, Ms. Davis was
Product Director for Applied Medical Resources. From 1989 to 1992, Ms. Davis
was a Vice President in Corporate Finance for Needham & Company, Inc., an
investment banking firm based in New York City. From 1984 to 1988, Ms. Davis
was an Associate in Corporate Finance for Merrill Lynch Capital Markets. Ms.
Davis holds an M.B.A. from Stanford University and a B.A. in Mathematics from
The Colorado College, Colorado Springs.
41
<PAGE> 42
Ms. Forissier joined the Company in August 1996, as a Director of
International Operations. From 1993 to 1996, Ms. Forissier served as
International Clinical Manager with Cyberonics, Inc., a manufacturer of a vagus
nerve stimulation devices for epilepsy patients. From 1990 to 1993, she was
Manager of Trade Marketing and Sales for Magneti Marelli Distribution, a
division of Group FIAT. From 1986 to 1990, Ms. Forissier was Area Sales
Manager with Valeo, a major supplier to Renault. From 1975 to 1986, she held
various positions in marketing management with Renault. Ms. Forissier holds a
D.U. in International Management from the University of Paris--Val de Marne.
Ms. Spencer joined the Company in January 1996, as the Director of
Quality and Compliance. From 1993 to 1995, Ms. Spencer was the Director of
Regulatory Affairs and Quality Assurance for Vesica Medical, Inc., a medical
device company focused on developing and manufacturing products for urological
applications, which was acquired by Boston Scientific, Inc. From 1992 to 1993,
she held the same position at Pilot Cardiovascular Systems, Inc., a
manufacturer of angioplasty guidewires, which was acquired by C.R. Bard.
Prior to 1992, Ms. Spencer directed quality assurance and regulatory functions
of start-up companies, including Directed Energy, Inc. and Orange Medical
Instruments, Inc. Ms. Spencer holds a B.S. in Chemistry from the University of
California at Santa Barbara.
Mr. Montgomery has served as Chairman of the Board of the Company
since December 1993. Since 1976, Mr. Montgomery has been a general partner of
Menlo Ventures, a venture capital firm in Menlo Park, California. Mr.
Montgomery is a director of EndoVascular Technologies, Inc. and Infoseek
Corporation, as well as several private companies. Mr. Montgomery holds a B.S.
in Electrical Engineering and Management Science and an M.S. in Electrical
Engineering from M.I.T. and an M.B.A. from the Harvard University Graduate
School of Business.
Mr. Allen has been a director of the Company since June 1994. He is
the President of DIMA Ventures, Inc., a private investment firm providing seed
capital and board-level support for start-up companies in the healthcare field
which he founded in 1987. He was a founder of Caremark, Inc., a home infusion
therapy company, and served as a Vice President from its inception in 1979
until 1986. From 1968 to 1978, Mr. Allen held various management positions
with Baxter International. Mr. Allen also served as a Lecturer in Management
at the Stanford University Graduate School of Business from 1989 to 1992. He
was a founder and Director of Pyxis Corporation (recently acquired by Cardinal
Health Inc.) and a member of the boards of Hoag Memorial Hospital Presbyterian
and several private companies. Mr. Allen holds a B.S. from Yale University and
an M.B.A. from Stanford University Graduate School of Business.
Ms. Hutton has been a director of the Company since February 1995.
From July 1993 until March 1995, Ms. Hutton was a venture partner, and since
March 1995 has been a general partner of Mayfield Fund VIII, a venture capital
firm, in Menlo Park, California. Since August 1993, Ms. Hutton has served as a
director of Heartstream where she served as Vice President of Marketing from
February 1993 until November 1993. From March 1991 to January 1993 she was
General Manager of the Transgenic Laboratory products division of GenPharm
International, Inc., a biotechnology company. From August 1986 to March 1991,
Ms. Hutton was employed by Nellcor, Inc., where she held various senior
positions in international marketing and business development. Ms. Hutton
holds a B.A. in Human Biology from Stanford University and an M.B.A. from
Harvard University Graduate School of Business.
42
<PAGE> 43
OTHER KEY ADVISORS
Ms. Linda D'Abate joined the Company in August 1994 as Vice
President--Regulatory & Clinical Affairs. Starting in January 1997, Ms.
D'Abate became a consultant for the Company, focusing her efforts on regulatory
and clinical support for the Liquid Embolic System.
Richard Greff, Ph.D. began consulting for the Company in August 1994.
Dr. Greff has focused on the development and clinical evaluation of the
Company's Liquid Embolic System.
Jay Lenker, Ph.D. began consulting for the Company in August 1996.
Dr. Lenker has focused on the development and clinical evaluation of the
Company's carotid and intracerebral stent technology.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
The Company did not have any class of its equity securities registered
pursuant to Section 12 of the Exchange Act during the year ended December 31,
1996. Consequently, none of the Company's directors, officers or beneficial
owners of more than 10% of its Common Stock were required to file reports
required by Section 16(a) of the Exchange Act during such period.
43
<PAGE> 44
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued for services rendered to the Company in all
capacities during the year ended December 31, 1996, to the Company's Chief
Executive Officer, and the Company's other most highly compensated executive
officers whose salary and bonus exceeded $100,000 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------ ALL
COMPENSATION SECURITIES OTHER
------------ UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS SATION(1)
- --------------------------- ------ ----- ------- ---------
<S> <C> <C> <C> <C>
George Wallace $159,000 $ -- -- $ --
Chief Executive
Officer and President
Thomas Berryman 113,250 -- 9,750 --
Chief Financial
Officer
Robert Greene, Jr. 107,333 -- 3,250 --
Vice President--
Research & Development
Glenn Latham 100,875 7,025(2) 22,750 50,855(3)
Vice President--Sales
</TABLE>
(1) Does not reflect certain personal benefits, which in the aggregate are less
than 10% of each Named Executive Officer's salary and bonus.
(2) Performance bonus based upon achieving certain revenue amounts.
(3) Consists of an automobile allowance of $6,000 and a moving expense
reimbursement of $44,855 to reimburse Mr. Latham for his expenses incurred
in moving from Florida to Southern California.
44
<PAGE> 45
OPTION GRANTS TABLE
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in fiscal year 1996 to
the Named Executive Officers.
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
PERCENT
NUMBER OF TOTAL
OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
OPTIONS IN EXERCISE
GRANTED FISCAL YEAR PRICE
NAME (#)(1) (%)(2) ($ PER SHARE) EXPIRATION DATE
- ---- ------ ------ ------------- ---------------
<S> <C> <C> <C> <C>
George Wallace -- -- -- --
Thomas Berryman 9,750 2.9 1.54 5/23/02
Robert Greene, Jr. 3,250 1.0 1.54 5/23/02
Glenn Latham 22,750 6.7 1.87 1/01/02-10/09/02
</TABLE>
(1) One quarter of the options vest on the first anniversary of the date of
grant and the remainder vest in equal quarterly installments over the next
three succeeding years.
(2) Options to purchase an aggregate of 333,123 shares of Common Stock were
granted to employees, including the Named Executive Officers, during the
year ended December 31, 1996.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
None of the Named Executive Officers exercised any options to purchase
shares of the Company's Common Stock during fiscal year 1996. The following
table sets forth certain information regarding options held at December 31,
1996 by the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(1)
----------- ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
George Wallace 9,750 16,250 $ 54,015 $ 90,025
Thomas Berryman 25,148 39,202 156,199 189,770
Robert Greene, Jr. 10,563 34,937 73,148 175,412
Glenn Latham 10,157 28,843 56,271 127,809
</TABLE>
(1) Calculated by determining the difference between an initial public
offering price of $6.00 per share and the exercise price of the options.
45
<PAGE> 46
EMPLOYMENT AGREEMENTS
The Company has not entered into employment agreements with any of its
executive officers or key employees.
INCENTIVE STOCK PLANS
1993 Stock Option Plan
The Company's 1993 Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan (the "Plan") was adopted by the Company's
stockholders and Board of Directors as of December 1993 and provides for the
granting of "incentive stock options," within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonstatutory
options. The Plan authorized for issuance up to 650,000 shares of the
Company's Common Stock. Under the Plan, shares of the Company's Common Stock
may be granted to directors, officers, employees and consultants of the
Company, except that incentive stock options may not be granted to non-employee
directors or consultants. The Plan is administered by the Compensation
Committee, which has sole discretion and authority, consistent with the
provisions of the Plan, to determine which eligible participants will receive
options, the time when options will be granted, the terms of options granted
and the number of shares which will be subject to options granted under the
Plan. As of December 31, 1996, there were 628,607 options outstanding under
the Plan at a weighted average exercise price of $1.25.
The exercise price of incentive stock options must be not less than
the fair market value of a share of Common Stock on the date the option is
granted (110% with respect to optionees who own at least 10% of the outstanding
Common Stock). Nonstatutory options shall have such exercise price as
determined by the Board. The Board of Directors has the authority to determine
the time or times at which options granted under the Plan become exercisable,
provided that options expire no later than ten years from the date of grant
(five years with respect to optionees who own at least 10% of the outstanding
Common Stock). Options are nontransferable, other than upon death by will and
the laws of descent and distribution, and generally may be exercised only by an
employee while employed by the Company or within 90 days after termination of
employment (one year for termination resulting from death or disability).
1996 Stock Incentive Plan
The Company adopted the 1996 Stock Incentive Plan (the "1996 Plan") in
July 1996. The 1996 Plan provides for the granting of "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and nonstatutory options. The 1996 Plan provides
for options to purchase shares of the Company's Common Stock and restricted
stock grants covering an aggregate of 600,000 shares of the Company's Common
Stock which may be granted to directors, officers, employees and consultants of
the Company, except that incentive stock options may not be granted to
non-employee directors or consultants. In addition, the 1996 Plan provides
each non-employee director of the Company who is initially elected as a
director during the term of the Director Plan shall be granted an option
consisting of 8,000 shares of Common Stock, which option shall vest and become
exercisable at the rate of 25% immediately and 25% on each anniversary of such
director's initial election during the three-year period following the grant
date. In addition, upon reelection as a director for each year of such
non-employee director's term of office such non-employee director shall receive
an additional option covering 2,000 shares of Common Stock, with the same
46
<PAGE> 47
vesting schedule, subject to the limitations set forth in the 1996 Plan. The
existing non-employee directors shall be granted options under the 1996 Plan as
of the date hereof at the price of the Offering. The purpose of the 1996 Plan
is to provide participants with incentives which will encourage them to acquire
a proprietary interest in, and continue to provide services to, the Company.
The 1996 Plan is administered by the Compensation Committee, which has sole
discretion and authority, consistent with the provisions of the 1996 Plan, to
determine which eligible participants will receive options, the time when
options will be granted, the terms of options granted and the number of shares
which will be subject to options granted under the 1996 Plan. As of December
31, 1996, there were 107,900 options outstanding under the 1996 Plan at a
weighted average exercise price of $5.60 per share.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors as of July 1996 and approved by the Company's
stockholders as of July 1996, covering an aggregate of 100,000 shares of Common
Stock. The Purchase Plan, which is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code, will be
implemented by six-month offerings with purchases occurring at six month
intervals commencing on the date of this Prospectus. The Purchase Plan will be
administered by the Board of Directors of the Company. Employees will be
eligible to participate if they are employed by the Company for at least 20
hours per week and if they have been employed by the Company for at least 90
days. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 20% of an employee's
compensation. The price of stock purchased under the Purchase Plan will be 85%
of the lower of the fair market value of the Common Stock at the beginning of
the six-month offering period or on the applicable purchase date. Employees
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment. The
Board may at any time amend or terminate the Purchase Plan, except that no such
amendment or termination may adversely affect options previously granted under
the Purchase Plan. The Purchase Plan will in all events terminate ten years
after its effective date.
47
<PAGE> 48
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1996
(assuming conversion of all outstanding shares of convertible preferred stock),
by (i) each person (or group of affiliated persons) who is known by the Company
to own beneficially 5% or more of the Company's Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, and (iv) all
directors and executive officers of the Company as a group. Unless otherwise
indicated, the persons named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) NUMBER PERCENT
- ---------------------------------------- ---------- ---------
<S> <C> <C>
Menlo Ventures VI, L.P 1,674,209 37.1%
Menlo Entrepreneurs Fund VI, L.P.(2)
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, California 94025
Mayfield VII 864,441 19.2
Mayfield Associates Fund II(3)
2800 Sand Hill Road
Suite 250
Menlo Park, California 94025
The CIT Group/Venture Capital, Inc.(4) 309,725 6.9
650 CIT Drive
Livingston, New Jersey 07039-5795
Kingsbury Capital Partners II, L.P.(5) 309,725 6.9
3655 Nobel Drive
Suite 490
San Diego, California 92122
H. DuBose Montgomery(6) 1,674,209 37.1
c/o Menlo Ventures
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, California 94025
George Wallace(7) 309,291 6.8
Andrew Cragg, M.D. 297,916 6.6
Getz Bros. Co. Ltd.(8) 253,500 5.6
3-1-30, Minami-Aoyama, Minato-Ku
Tokyo 107 Japan
Dick Allen(9) 44,623 1.0
Wende Hutton(10) -- --
</TABLE>
48
<PAGE> 49
Thomas Berryman(11) 28,397 *
Robert Greene, Jr.(12) 13,204 *
Glenn Latham(13) 10,157 *
All executive officers and directors as
a group (12 persons)(14) 2,959,044 64.4
* Less than 1%
(1) Unless otherwise indicated, the address for each of the indicated
owners is 1062 Calle Negocio #F, San Clemente, California 92673.
(2) Includes (i) 1,649,467 shares owned by Menlo Ventures VI, L.P. and
(ii) 24,742 shares owned by Menlo Entrepreneurs Fund VI, L.P.
(3) Includes (i) 821,187 shares owned by Mayfield VII, and (ii) 43,254
shares owned by Mayfield Associates Fund II. A. Grant Heidrich is a
General Partner of Mayfield VII Management Partners, the General
Partner of Mayfield VII and, accordingly, may be deemed to
beneficially own such shares. Mr. Heidrich disclaims beneficial
ownership of the shares owned by Mayfield VII, except to the extent of
his pecuniary interest therein.
(4) All of the outstanding shares of capital stock of The CIT
Group/Venture Capital, Inc. are owned by The CIT Group/Equity
Investments, Inc., the beneficial owner of which is CIT Group
Holdings, Inc. The outstanding capital stock of CIT Group Holdings,
Inc. is beneficially owned by The Dai-Ichai Kangyo Bank, Ltd. and a
holding Company for the Chase Manhattan Corporation. None of their
respective officers or directors are affiliated with the Company.
(5) Timothy P. Wollaeger is the General Partner of Kingsbury Associates,
L.P., the General Partner of Kingsbury Capital Partners II, L.P., and,
accordingly, may be deemed to beneficially own such shares. Mr.
Wollaeger disclaims beneficial ownership of the shares owned by
Kingsbury Capital Partners II, L.P., except to the extent of his
pecuniary interest therein.
(6) Includes shares described in Note (2) above. Mr. Montgomery is the
general partner of MV Management VI, L.P., the general partner of both
Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. and
accordingly, may be deemed to beneficially own such shares. Mr.
Montgomery disclaims beneficial ownership of the shares owned by Menlo
Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P., except to
the extent of his pecuniary interest therein.
(7) Includes 11,375 shares subject to options exercisable within 60 days
of December 31, 1996.
(8) Getz Bros. Co. Ltd. is a publicly held Japanese corporation. None of
its officers or directors are affiliated with the Company.
(9) Includes 10,823 shares subject to options exercisable within 60 days
of December 31, 1996. Also includes 7,800 shares owned by The Allen
Investment Partnership, of which Mr. Allen is the managing partner and
26,000 shares owned by DIMA Ventures, Incorporated. Mr. Allen
49
<PAGE> 50
disclaims beneficial ownership of the shares owned by The Allen
Investment Partnership, except to the extent of his pecuniary interest
therein.
(10) Ms. Hutton is a general partner in Mayfield VIII, but is not a general
partner of either Mayfield VII nor Mayfield Associates Fund II.
(11) Consists of shares subject to options exercisable within 60 days of
December 31, 1996.
(12) Consists of shares subject to options exercisable within 60 days of
December 31, 1996.
(13) Consists of shares subject to options exercisable within 60 days of
December 31, 1996.
(14) Includes directors' and executive officers' shares listed above,
including 87,703 shares subject to options exercisable within 60
days of December 31, 1996 and includes the shares described in Notes
(2) and (3) above.
50
<PAGE> 51
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of a Consulting Agreement dated June 1, 1993, as
replaced by a Consulting Agreement dated October 1, 1996, and a License
Agreement dated June 1, 1993, the Company has paid fees and royalties to Andrew
Cragg, M.D., a stockholder of the Company, totaling $156,500 and $14,197,
respectively, for the period from October 1, 1994 through December 31, 1996.
Pursuant to the terms of the current Consulting Agreement, Dr. Cragg will
consult with the Company for a period of two years on an exclusive basis with
respect to the development of less invasive, percutaneous catheters used to
dissolve, disrupt or remove blood clots from the human body and to treat
cerebral aneurysms, and, on a nonexclusive basis, with respect to the
development of less invasive, percutaneous catheters used to diagnose and treat
disorders of the circulatory system. Under the Consulting Agreement, the
Company pays Dr. Cragg $7,000 per month for services provided plus a royalty
for products developed under the Consulting Agreement equal to 1% of net sales
of certain products of the Company that bear his name and 1.5% of net sales of
the Company's products that are primarily based upon an issued U.S. patent for
which Dr. Cragg was the inventor. Dr. Cragg's Consulting Agreement may be
terminated by either party at any time upon written notice. Under the License
Agreement, the Company pays Dr. Cragg a royalty equal to 1% of net sales of
any product utilizing the Cragg MicroValve.
On February 9, 1995, the Company entered into a Series B Stock
Purchase Agreement with Menlo Ventures VI, L.P. ("Menlo VI"), which is a
principal stockholder of the Company, together with other investors, pursuant
to which the Company issued 465,741 shares of Series B Preferred Stock to Menlo
VI for $4.23 per share. H. DuBose Montgomery, a director of the Company, is
the general partner of the general partner of Menlo VI.
On May 17, 1996, the Company entered into a Series C Stock Purchase
Agreement with Menlo VI and Mayfield VII both of which are principal
stockholders of the Company, together with other investors, pursuant to which
the Company issued 224,315 and 155,350 shares of Series C Preferred Stock to
Menlo VI and Mayfield VII, respectively, for $6.46 per share.
The Company has granted options to certain of its directors and
executive officers. See "Management--Option Grants Table" and "Security
Ownership of Certain Beneficial Owners and Management."
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could otherwise be obtained
from unaffiliated third parties. All future transactions, including loans,
between the Company and its officers, directors, principal stockholders and
their affiliates will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested outside directors on
the Board of Directors.
51
<PAGE> 52
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits:
See Index to Exhibits on Page 53 of this Annual
Report on Form 10-KSB.
(b) Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the
last quarter of the period covered by this report, and none were required.
52
<PAGE> 53
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
2.1 Agreement and Plan of Merger between the Company and Micro
Therapeutics, Inc., a California corporation, effective November 6,
1996.(1)
3.1 Certificate of Incorporation of the Company, as currently in
effect.(2)
3.2 Bylaws of the Company, as currently in effect.(1)
4.1 Warrant Agreement dated December 20, 1995 between the Company and Comdisco, Inc.(1)
4.2 Warrant Agreement dated May 21, 1996 between the Company and Comdisco, Inc.(1)
10.1 Form of Directors' and Officers' Indemnification Agreement.(1)
10.2 License Agreement dated June 1, 1993 between the Company and Andrew Cragg.(1)
10.3 Consulting Agreement dated October 1, 1996 between the Company and Andrew Cragg.(1)
10.4 Real Property Lease dated April 15, 1996 between the Company and Reuben L. Casey.(1)
10.5 Amended and Restated Investors Rights Agreement dated February 9,
1995, among the Company, the Investors named therein and the Common
Holders named therein, as amended on May 17, 1996 and June 27,
1996.(1)
10.6 1993 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan.(1)
10.7 1996 Stock Incentive Plan.(1), (3)
10.8 Employee Stock Purchase Plan.(1), (3)
10.9 Equipment Leasing Line of Credit dated December 20, 1995
between the Company and ComDisco Ventures, as amended on May 21,
1996.(1)
16.1 Letter from Ernst & Young LLP on changes in certifying accountant.(1)
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney.(see signature page S-2).
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
________________
(1) Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form SB-2, No. 333-17345.
(2) Incorporated by reference to Exhibit number 3.4 of the Company's
Registration Statement on Form SB-2, No. 333-17345.
(3) These exhibits are identified as management contracts or compensatory
plans or arrangements of the Company pursuant to item 13(a) of Form
10-KSB.
54
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of San
Clemente, State of California, on March 26, 1997.
MICRO THERAPEUTICS, INC.
Dated: March 26, 1997 By: /s/ George Wallace
----------------------------------
George Wallace
President, Chief Executive Officer
and Director
We, the undersigned directors and officers of Micro Therapeutics,
Inc., do hereby constitute and appoint George Wallace and Thomas Berryman our
true and lawful attorneys and agents, with full powers of substitution to do
any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorneys and agents may
deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-KSB, including specifically but without limitation,
power and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments hereto; and we do hereby ratify and
confirm all that said attorneys and agents, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ George Wallace President, Chief Executive March 26, 1997
- -------------------------------------- Officer and Director
George Wallace (Principal Executive Officer)
/s/ Thomas Berryman Chief Financial Officer, March 26, 1997
- -------------------------------------- (Principal Financial and
Thomas Berryman Principal Accounting Officer)
/s/ H. DuBose Montgomery Chairman and Director March 26, 1997
- --------------------------------------
H. DuBose Montgomery
Director March , 1997
- --------------------------------------
Wende Hutton
/s/ Dick Allen Director March 26, 1997
- --------------------------------------
Dick Allen
</TABLE>
S-1
<PAGE> 56
MICRO THERAPEUTICS, INC.
__________
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Balance Sheet At December 31, 1996 F-3
Statements Of Operations For The Years Ended December 31, 1995 And 1996 F-4
Statements Of Stockholders' Equity For The Years Ended December 31, 1995 And 1996 F-5
Statements Of Cash Flows For The Years Ended December 31, 1995 And 1996 F-6
Notes To Financial Statements F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Micro Therapeutics, Inc.
We have audited the accompanying balance sheet of Micro Therapeutics, Inc. as
of December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Micro Therapeutics, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 14, 1997
F-2
<PAGE> 58
MICRO THERAPEUTICS, INC.
BALANCE SHEET
December 31, 1996
A S S E T S:
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 4,157,147
Accounts receivable 243,836
Inventories 431,622
Prepaid expenses and other current assets 90,973
-----------
Total current assets 4,923,578
Property and equipment, net 713,613
Patents and licenses, net of accumulated amortization of $19,196 328,928
Other assets 274,006
-----------
Total assets $ 6,240,125
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of equipment line of credit $ 50,909
Accounts payable 331,788
Accrued salaries and benefits 200,925
Accrued liabilities 26,319
--------
Total current liabilities 609,941
Equipment line of credit 187,820
-------
Total liabilities 797,761
Commitments and contingencies (Note 11)
Stockholders' equity:
Convertible preferred stock, $0.001 par value, 3,663,395 shares authorized;
3,612,664 shares issued and outstanding 3,613
Common stock, $0.001 par value, 6,500,000 shares authorized;
894,235 shares issued and outstanding 894
Additional paid-in capital 15,651,615
Unearned compensation (376,218)
Accumulated deficit (9,837,540)
-----------
Total stockholders' equity 5,442,364
-----------
Total liabilities and stockholders' equity $ 6,240,125
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
MICRO THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1995 And 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net sales $292,302 $1,387,865
Cost of sales 316,404 1,632,960
----------- -----------
Gross margin (loss) (24,102) (245,095)
Costs and expenses:
General and administrative 597,368 1,082,325
Research and development 1,147,403 1,804,578
Regulatory/quality assurance 337,968 590,333
Marketing and sales 901,735 2,062,360
----------- -----------
Total costs and expenses 2,984,474 5,539,596
Loss from operations (3,008,576) (5,784,691)
Other income (expense):
Interest income 202,378 192,534
Interest expense - (16,643)
Other income (expense), net - (4,384)
----------- -----------
202,378 171,507
----------- --------
Loss before provision for income taxes (2,806,198) (5,613,184)
Provision for income taxes 800 800
----------- -----------
Net loss ($2,806,998) ($5,613,984)
=========== ===========
Pro forma net loss ($2,806,998) ($5,613,984)
=========== ===========
Pro forma net loss per share ($0.83) ($1.40)
=========== ===========
Pro forma weighted average shares outstanding 3,390,000 4,009,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
MICRO THERAPEUTICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1995 And 1996
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
--------------------- ---------------------
Shares Amount Shares Amount
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 1,126,667 $1,795,066 945,747 $137,500
Issuance of Series B convertible preferred
stock (net of costs of $32,651) 1,229,091 5,167,349 - -
Repurchase of common stock - - (65,000) (100)
Exercise of stock options - - 3,250 1,500
Unearned compensation related to stock
options granted - - - 6,800
Compensation related to stock options - - -
vesting
Net loss - - - -
--------- ----------- --------- ---------
Balances at December 31, 1995 2,355,758 6,962,415 883,997 145,700
Issuance of Series C convertible preferred
stock (net of costs of $49,458) 1,256,906 8,072,082 - -
Exercise of stock options - - 10,238 4,725
Unearned compensation related to stock
options granted - - - 471,200
Compensation related to stock options - - - -
vesting
Reclassification of amounts to new par - (15,030,884) - (620,731)
values
Net loss - - - -
--------- ----------- --------- ---------
Balances at December 31, 1996 3,612,664 $3,613 894,235 $894
========= ====== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Unearned Accumulated Stockholders'
Paid-In Capital Compensation Deficit Equity
--------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ - $ - ($1,416,558) $516,008
Issuance of Series B convertible preferred
stock (net of costs of $32,651) - - - 5,167,349
Repurchase of common stock - - - (100)
Exercise of stock options - - - 1,500
Unearned compensation related to stock
options granted - (6,800) - -
Compensation related to stock options - 282 - 282
vesting
Net loss - - (2,806,998) (2,806,998)
----------- ---------- ----------- ------------
Balances at December 31, 1995 - (6,518) (4,223,556) 2,878,041
Issuance of Series C convertible preferred 8,072,082
stock (net of costs of $49,458) - - -
Exercise of stock options - - - 4,725
Unearned compensation related to stock
options granted - (471,200) - -
Compensation related to stock options - 101,500 - 101,500
vesting
Reclassification of amounts to new par 15,651,615 - - -
values
Net loss - - (5,613,984) (5,613,984)
----------- ---------- ----------- ------------
Balances at December 31, 1996 $15,651,615 ($376,218) ($9,837,540) $5,442,364
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
MICRO THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1995 And 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,806,998) ($5,613,984)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 72,496 225,027
Compensation related to stock options vesting 282 101,500
Change in operating assets and liabilities:
Accounts receivable (64,990) (167,229)
Inventories (105,381) (266,596)
Prepaid expenses and other assets (33,112) (71,763)
Accounts payable 100,283 82,898
Accrued salaries and benefits 53,189 122,524
Accrued liabilities 10,601 10,675
----------- -----------
Net cash used in operating activities (2,773,630) (5,576,948)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (1,955,688) (3,717,316)
Sale of short-term investments 1,955,688 3,717,316
Additions to property and equipment (322,850) (577,944)
Additions to patents and licenses (112,039) (192,425)
---------- ----------
Net cash used in investing activities (434,889) (770,369)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 5,200,000 8,121,540
Costs of equity issuances (32,651) (49,458)
Deferred offering costs - (228,716)
Proceeds from exercise of stock options 1,500 4,725
Repurchase of common stock (100) -
Borrowings on equipment line of credit - 263,177
Repayments on equipment line of credit - (24,448)
---------- ----------
Net cash provided by financing activities 5,168,749 8,086,820
---------- ----------
Net increase in cash and cash equivalents 1,960,230 1,739,503
Cash and cash equivalents at beginning of year 457,414 2,417,644
---------- ----------
Cash and cash equivalents at end of year $2,417,644 $4,157,147
========== ==========
Supplemental cash flow disclosures:
Cash paid during the year for interest $ - $ 16,643
========== ==========
Cash paid during the year for income taxes $ 800 $ 800
========== ==========
Supplemental schedule of noncash activities:
Unearned compensation related to stock options granted $ 6,800 $ 471,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 62
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description Of The Company:
Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated on
June 11, 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.
2. Summary Of Significant Accounting Policies:
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The
carrying amount of cash and cash equivalents approximates market
value.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property And Equipment:
Property and equipment are carried at cost less accumulated
depreciation and amortization. Maintenance and repairs are expensed
as incurred while renewals or betterments are capitalized. Upon sale
or disposition of assets, any gain or loss is included in the
statement of operations. Capital leases are recorded at the fair
market value of the leased asset. The leased assets are amortized on
a straight-line basis over their economic useful lives.
The cost of property and equipment is generally depreciated using the
straight-line method over the estimated useful lives of the respective
assets, which are generally not greater than five years. Leasehold
improvements are amortized over the lesser of the estimated useful
lives of the assets or the related lease terms.
F-7
<PAGE> 63
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
2. Summary Of Significant Accounting Policies, Continued:
Patents And Licenses:
Costs incurred to obtain patents and licenses are capitalized. All
amounts assigned to these patents and licenses are amortized on a
straight-line basis over an estimated five-year useful life from date
of issue or acquisition. The Company continually evaluates the
amortization period and carrying basis of patents and licenses to
determine whether later events and circumstances warrant a revised
estimated useful life or reduction in value.
Research And Development:
The Company's research and development costs are expensed as incurred.
Revenue Recognition:
Sales and related cost of sales are recognized upon shipment of
products. The Company's products are generally under warranty against
defects in material and workmanship for a period of one year.
Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Income Taxes:
The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
F-8
<PAGE> 64
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
2. Summary Of Significant Accounting Policies, Continued:
Pro Forma Net Loss Per Share:
Pro forma net loss per share has been computed by dividing pro forma
net loss by the pro forma weighted average number of common shares and
certain common equivalent shares, as described below, outstanding
during the period. Weighted average common shares and common
equivalent shares include common shares and common shares issuable
upon conversion of all outstanding shares of the Company's preferred
stock. Additionally, pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Topic 4-D, stock options and warrants
granted during the twelve months prior to the date of the filing of
the Company's public offering, at prices less than the per share
initial public offering price, have been included in the calculation
of common equivalent shares using the treasury stock method as if they
were outstanding as of the beginning of the earliest period presented.
Historical net loss per share is not presented as it is not indicative
of the ongoing entity.
Stock-Based Compensation:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting
for Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option. Fair value
of the stock option is determined considering factors such as the
exercise price, the expected life of the option, the current price of
the underlying stock and its volatility, expected dividends on the
stock, and the risk-free interest rate for the expected term of the
option. Under the fair value based method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period. Pro forma disclosures for
entities that elect to continue to measure compensation cost under the
intrinsic method provided by Accounting Principles Board Opinion No.
25 must include the effects of all awards granted in fiscal years that
begin after December 15, 1994.
Reverse Stock Split:
In December 1996, the Board of Directors authorized a 0.65 to 1.0
reverse stock split of all outstanding common stock, preferred stock
and common stock options and warrants. This reverse stock split was
effective with the closing of the Company's initial public offering
(Note 14). All share and per share amounts have been adjusted to give
retroactive effect to the reverse stock split for all periods
presented.
F-9
<PAGE> 65
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
3. Cash And Cash Equivalents:
Cash and cash equivalents consist of the following:
<TABLE>
<S> <C>
Cash $ 119,136
Cash equivalents 4,038,011
----------
$4,157,147
==========
</TABLE>
Cash equivalents consist of United States government treasury bills
and commercial paper.
4. Inventories:
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials and work-in-process $194,549
Finished goods 237,073
-------
$431,622
=======
</TABLE>
5. Property And Equipment:
Property and equipment consist of the following:
<TABLE>
<S> <C>
Machinery and equipment $ 526,229
Tooling 18,075
Furniture and fixtures 142,094
Leasehold improvements 311,420
Construction-in-progress 6,080
----------
1,003,898
Less, Accumulated depreciation and amortization (290,285)
---------
$ 713,613
==========
</TABLE>
Property and equipment under capital lease at December 31, 1996 was
$263,177 with accumulated amortization of $25,703.
F-10
<PAGE> 66
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
6. Equipment Line Of Credit:
The Company has entered into an equipment line of credit to finance
qualified equipment purchases through June 15, 1997 up to a maximum
amount of $900,000, at an implicit interest rate of 14.23%.
Outstanding amounts are collateralized by the assets financed. The
amounts outstanding at June 15, 1997 will be due in 48 monthly
installments to expire on June 15, 2001. The agreement contains a
provision to extend these terms of payment for an additional year. A
total of $238,729 was outstanding under this equipment line of credit
as of December 31, 1996.
In connection with this equipment line of credit, the Company issued a
warrant to the lessor to purchase up to 7,638 shares of the Company's
Series B preferred stock at a price of $4.23 per share and a warrant
to purchase up to 6,045 shares of the Company's Series C preferred
stock at a price of $6.46 per share. These warrants are convertible
into warrants for common stock in the event that the remaining
outstanding preferred stock of the same series is converted to common
stock. These warrants are exercisable for a period of: (a) ten years
from their original issue date, or (b) five years from the effective
date of an initial public offering, whichever is longer.
7. Preferred Stock:
At December 31, 1996, the Company had authorized 3,663,395 shares of
preferred stock with $0.001 par value which may be issued in one or
more series and are designated as 541,667 shares of Series A-1,
585,000 shares of Series A-2, 1,236,728 shares of Series B and
1,300,000 shares of Series C (collectively, "convertible preferred
stock").
Shares of convertible preferred stock are convertible at the holder's
option into shares of common stock on a share-for-share basis (Note
14). The conversion ratio may be adjusted from time to time in the
event of certain subsequent sales of common stock, grants of stock
options, stock splits, stock dividends or other distributions of
common stock. Conversion is automatic in the event of a public
offering of the Company's common stock meeting certain specified
criteria.
Dividends are noncumulative, and if declared, are payable at the rate
of $0.09, $0.12, $0.27 and $0.43 per annum on each share of Series
A-1, A-2, B and C convertible preferred stock, respectively. Each
share of convertible preferred stock has voting rights equal to the
number of shares of common stock into which it is then convertible.
In the event of liquidation, dissolution or merger of the Company, as
defined, each share of Series A-1, A-2, B and C preferred stock
entitles its holder to receive an amount equal to $1.38 per Series A-1
share, $1.85 per Series A-2 share, $4.23 per Series B share and $6.46
per Series C share of convertible preferred stock plus declared but
unpaid dividends and, thereafter, to receive on a
F-11
<PAGE> 67
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
7. Preferred Stock, Continued:
share-for-share basis with common stock outstanding the remaining
assets in an amount not to exceed in the aggregate $4.15 per Series
A-1 share, $5.54 per Series A-2 share, $6.34 per Series B share and
$8.08 per Series C share of convertible preferred stock. No dividends
have been declared through December 31, 1996.
8. Common Stock:
Pursuant to a September 1993 stockholders' agreement between the
Company and holders of 650,000 shares of its common stock (the
"founding stockholders"), in the event that a founding stockholder's
involvement with the Company as an employee or consultant was
terminated before September 30, 1996, the Company could have been
obligated to repurchase all or a portion of the stockholder's shares
of common stock for $0.0015 per share. In March 1995, the Company
terminated a consulting agreement with one of its founding
stockholders. In conjunction with the termination, the Company
repurchased 65,000 shares of common stock from the stockholder. There
were no other terminations/ repurchases through December 31, 1996.
The Company's obligation under this agreement terminated automatically
with the initial public offering of the Company's common stock in
February 1997 (Note 14).
9. Stock Option Plans:
1993 Stock Option Plan:
The 1993 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan (the "Plan") provides for the direct
sale of shares and the grant of options to purchase shares of the
Company's common stock to employees, officers, consultants and
directors. The Plan includes nonqualified stock options ("NSOs") and
incentive stock options ("ISOs"). The option price for the ISOs and
NSOs shall not be less than the fair market value of the shares of the
Company's stock on the date of the grant. For ISOs, the exercise
price per share may not be less than 110% of the fair market value of
a share of common stock on the grant date for any individual
possessing more than 10% of the total outstanding stock of the
Company. The Board of Directors has the authority to determine the
time or times at which options become exercisable. Options expire
within a period of not more than ten years from the date of grant.
Options expire ninety days after termination of employment.
F-12
<PAGE> 68
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
9. Stock Option Plans, Continued:
1993 Stock Option Plan, Continued:
The Plan provides for the issuance of up to 650,000 shares of common
stock. A summary of the option activity under the 1993 Stock Option
Plan is as follows:
<TABLE>
<CAPTION>
Exercise
Price
Incentive Nonqualified Total Per Share
--------- ------------- ------ ---------
<S> <C> <<C> <C> <C>
Balances at December 31, 1994 187,200 121,225 $308,425 $0.46
Granted 217,100 9,100 226,200 $0.46
Exercised - (3,250) (3,250) $0.46
Canceled (48,750) - (48,750) $0.46
-------- -------- --------- -----
Balances at December 31, 1995 355,550 127,075 482,625 $0.46
Granted 168,023 57,200 225,223 $0.46-$6.92
Exercised (9,263) (975) (10,238) $0.46
Canceled (67,274) (1,729) (69,003) $0.46-$5.38
-------- ---------- -------- -----------
Balances at December 31, 1996 447,036 181,571 628,607 $0.46-$6.92
======= ======= ======= ===========
Exercisable at December 31, 1996 177,570 119,051 296,621 $0.46-$5.38
======= ======= ======= ===========
</TABLE>
The difference between the exercise price and the fair market value of
the options at the date of grant of $6,800 and $471,200 at December
31, 1995 and 1996, respectively, is accounted for as unearned
compensation and will be amortized to expense over the related service
period. During the years ended December 31, 1995 and 1996, amortized
compensation expense was $282 and $101,500, respectively.
1996 Stock Incentive Plan:
The 1996 Stock Incentive Plan (the "1996 Plan") provides for options
to purchase shares of the Company's common stock and restricted stock
grants. The 1996 Plan includes NSOs and ISOs and may include grants
to directors, officers, employees and consultants of the Company,
except that incentive stock options may not be granted to non-employee
F-13
<PAGE> 69
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
9. Stock Option Plans, Continued:
1996 Stock Incentive Plan, Continued:
directors or consultants. In addition, the 1996 Plan provides that
each non-employee director of the Company who is initially elected as
a director during the term of the Director Plan shall be granted an
option consisting of 8,000 shares of common stock, which option shall
vest and become exercisable at the rate of 25% immediately and 25% on
the anniversary of such director's initial election during the
three-year period following the grant date. Options expire within a
period of not more than ten years from the date of grant. Options
expire thirty days after termination of employment.
The 1996 Plan provides for the issuance of up to 600,000 shares of
common stock. A summary of the option activity under the 1996 Plan is
as follows:
<TABLE>
<CAPTION>
Exercise
Price
Incentive Nonqualified Total Per Share
--------- ------------ ------ ----------
<S> <C> <C> <C> <C>
Granted 106,600 1,300 107,900 $5.38-$6.92
Exercised - - - -
------- ----- ------- -----------
Canceled - - - -
------- ----- ------- -----------
-
Balances at December 31, 1996 106,600 1,300 107,900 $5.38-$6.92
======= ===== ======= ===========
Exercisable at December 31, 1996 - 36 36 $5.38
======= ===== ======= ============
</TABLE>
F-14
<PAGE> 70
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
9. Stock Option Plans, Continued:
Pro Forma Effect Of Stock-Based Compensation:
The Company has adopted the disclosure-only provisions of SFAS No.
123. Had compensation cost been determined on the fair value at the
grant dates for awards under those plans consistent with the method
promulgated by SFAS No. 123, the Company's net loss and loss per share
would have been increased to the pro forma amounts below:
<TABLE>
<CAPTION>
For The Years Ended
December 31,
------------------------------------
1995 1996
---- ----
<S> <C> <C>
Net loss:
As reported ($2,806,998) ($5,613,984)
Pro forma ($2,824,748) ($5,755,344)
Loss per share:
As reported ($0.83) ($1.40)
Pro forma ($0.83) ($1.44)
</TABLE>
The fair value of each option grant was estimated on the date of the
grant using the minimum value method as the Company was a nonpublic
entity when such options were granted. This value is the current
stock price less the present value of the exercise price for a stock
that does not pay dividends. The assumptions used for the minimum
value computation for the years ended December 31, 1995 and 1996 are
as follows: the risk-free interest rate is 6.1%; the exercise price
is equal to the fair market value of the underlying common stock at
the grant date, after consideration of any related unearned
compensation recorded in the financial statements; the expected life
of the option is the term to expiration, generally 4 years; and the
common stock will pay no dividends.
Employee Stock Purchase Plan:
The Employee Stock Purchase Plan (the "Purchase Plan") covers an
aggregate of 100,000 shares of common stock. The Purchase Plan will
allow for purchases commencing on the effective date of an initial
public offering. The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions not to exceed 20% of
an employee's compensation and not to exceed $25,000 per calendar
year. The price of the common stock purchased under the Purchase Plan
will be 85% of the lower of the fair market value of the common stock
at the beginning of the six-month offering period (July 1 or January 1
of each calendar year) or on the applicable purchase date. Employees
may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination
of employment. The Purchase Plan will, in all events, terminate ten
years after the effective date of an initial public offering.
F-15
<PAGE> 71
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
10. Income Taxes:
The following table presents the current and deferred income tax
provision for federal and state income taxes:
<TABLE>
<CAPTION>
For The Years
Ended
December 31,
-----------
1995 1996
---- ----
<S> <C> <C>
Current:
Federal $ - $ -
State 800 800
--- ---
800 800
--- ---
Deferred:
Federal - -
State - -
------- -------
$800 $800
=== ===
</TABLE>
The tax effects of temporary differences which give rise to the
deferred tax provision (benefit) consist of:
<TABLE>
<CAPTION>
For The Years Ended
December 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
Capitalized research and development costs ($85,033) ($338,092)
Capitalized inventory costs (12,126) (64,970)
Intangibles 572 (71)
Property and equipment (4,109) (30,307)
Accrued expenses (10,058) (24,021)
Stock options - (41,870)
Tax credit carryforwards (134,103) (123,047)
Net operating loss carryforwards (886,806) (1,877,486)
Valuation allowance 1,131,663 2,499,864
--------- ---------
$ - $ -
========= =========
</TABLE>
F-16
<PAGE> 72
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
10. Income Taxes, Continued:
The provision (benefit) for income taxes differs from the amount that
would result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
For The Years
Ended
December 31,
-----------------
1995 1996
---- ----
<S> <C> <C>
Statutory regular federal income tax rate (34.00%) (34.00%)
Meals and entertainment 3.03 0.20
State taxes 0.02 0.01
Tax credit carryforwards (2.25) (0.82)
Change in valuation allowance 33.23 34.62
----- -----
Effective tax rate 0.03% 0.01%
===== =====
</TABLE>
The components of the net deferred tax asset at December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Capitalized research and development costs $490,999
Capitalized inventory costs 83,959
Intangibles 578
Property and equipment 33,145
Accrued expenses 42,657
State taxes 272
Stock options 41,870
Tax credit carryforwards 344,637
Net operating loss carryforwards 3,239,680
---------
4,277,797
Valuation allowance (4,277,797)
---------
Net deferred tax asset $ -
=========
</TABLE>
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such
assets. Management periodically evaluates the recoverability of the
deferred tax assets. At such time as it is determined that it is more
likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
F-17
<PAGE> 73
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
10. Income Taxes, Continued:
At December 31, 1996, the Company had net operating loss carryforwards
for federal and state purposes of approximately $8,417,000 and
$4,065,000, respectively. The net operating loss carryforwards begin
expiring in 2008 and 1998, respectively. The Company also has
research and experimentation credit carryforwards for federal and
state purposes of approximately $205,000 and $114,000, respectively.
The research and experimentation credits begin to expire in 2008 for
federal purposes and carry forward indefinitely for state purposes.
The Company has a manufacturer's investment credit for state purposes
of approximately $26,000. The manufacturer's investment credit will
begin to expire in 2006.
The utilization of net operating loss and credit carryforwards may be
limited under the provisions of Internal Revenue Code Section 382 and
similar state provisions.
11. Commitments And Contingencies:
On February 1, 1994, the Company entered into a three-year operating
lease for office, research and manufacturing space. On December 1,
1995, the Company entered into a one-year operating lease for
additional office space. On May 1, 1996, the Company entered into an
agreement to extend the current operating lease and to lease
additional office space for a period of one year. This lease contains
a provision to extend the lease for three additional one-year terms.
As of December 31, 1996, the future noncancelable minimum lease
commitments are $57,875, all relating to 1997.
Rent expense for the years ended December 31, 1995 and 1996 was
$66,828 and $205,123, respectively. On December 15, 1995, the Company
entered into an agreement to sublease certain office space. The
Company received $989 and $22,043 of rental income for the years ended
December 31, 1995 and 1996, respectively.
12. Related Party Transactions:
License And Royalty Agreements:
In June 1993, the Company acquired from a stockholder an exclusive worldwide
license to manufacture, market and sell devices utilizing certain catheter
technology developed by the stockholder/licensor. As consideration for the
license, the Company is obligated to pay the stockholder/licensor royalties at
the rate of 1% of the net revenues from products developed utilizing the
patented technology for a period of twelve years from the first commercial sale
of such products. Commercial sale of the products commenced in November 1995.
Royalty expense under the license agreement totaled $4,868 and $23,093 for the
years ended December 31, 1995 and 1996, respectively.
F-18
<PAGE> 74
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
12. Related Party Transactions, Continued:
Contract Services:
Through March 1995, the Company contracted with Novel Biomedical, Inc.
("Novel"), a stockholder of the Company, for design, development and
patent services. Research and development expenses for the year ended
December 31, 1995 include $65,745 of charges from Novel which
approximates cost of these services.
13. Concentrations Of Credit Risk:
At December 31, 1996, the Company had approximately $4,057,000 of cash
balances that were in excess of the federally-insured limit of
$100,000 per bank.
The Company's customers are primarily hospitals in the United States
and distributors in certain foreign countries. There were no
customers which accounted for greater than 10% of accounts receivable
or net sales for any date or period presented.
14. Subsequent Events (Unaudited):
On February 14, 1997, the Securities and Exchange Commission declared
effective the Company's initial public offering ("IPO") on Form SB-2.
The Company sold 1,600,000 shares of its common stock for net proceeds
of approximately $8,388,000. In conjunction with the IPO, each of the
3,612,664 outstanding shares of the Company's preferred stock
converted to common stock (Note 7). The authorized shares of common
stock increased to 20,000,000 and the authorized shares of preferred
stock increased to 5,000,000.
On March 3, 1997, the underwriters of the IPO exercised their
overallotment option and purchased 240,000 shares of the Company's
common stock for net proceeds of approximately $1,339,000.
On February 21, 1997, the Company issued 24,000 nonqualified stock
options pursuant to the 1996 Plan to its non-employee directors at
$6.00 per share.
On February 26, 1997, the Company repriced 27,950 incentive stock
options previously granted in January and February 1997 pursuant to
the 1996 Plan to employees from $10.00 per share to $6.50 per share.
F-19
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Micro Therapeutics, Inc. on Forms S-8 (File No. 333-23361 and File No.
333-23367) for the Employee Stock Purchase Plan, and for the 1993 Incentive
Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan and
1996 Stock Incentive Plan of our report dated February 14, 1997 on our audits of
the consolidated financial statements of Micro Therapeutics, Inc. as of
December 31, 1996 and for the years ended December 31, 1996 and 1995, which
report is included in this 1996 Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
/s/ COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000311407
<NAME> MICRO THERAPEUTICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,157
<SECURITIES> 0
<RECEIVABLES> 244
<ALLOWANCES> 0
<INVENTORY> 432
<CURRENT-ASSETS> 4,924
<PP&E> 1,004
<DEPRECIATION> 291
<TOTAL-ASSETS> 6,240
<CURRENT-LIABILITIES> 610
<BONDS> 0
0
4
<COMMON> 1
<OTHER-SE> 5,439
<TOTAL-LIABILITY-AND-EQUITY> 6,240
<SALES> 1,388
<TOTAL-REVENUES> 1,388
<CGS> 1,632
<TOTAL-COSTS> 5,540
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (5,613)
<INCOME-TAX> 1
<INCOME-CONTINUING> (5,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,614
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> 0
</TABLE>
