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UNITED STATES
SECURITES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCXHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
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MICRO THERAPEUTICS, INC.
(Name of Small Business Issuer in its charter)
Delaware 33-0569235
(State or other jurisdiction (I.R.S. Employer
of 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 [X] NO [ ]
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 [ ]
Issuer's revenues for its most recent fiscal year were $2,714,047.
As of March 23, 1998, 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 $31,330,000.
6,591,890 shares of Common Stock were outstanding at March 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Information required under Items 9, 10 11 and 12 of Part III hereof are
incorporated by reference to portions of the registrants's definitive Proxy
Statement to be filed in connection with the solicitation of proxies for its
Annual Meeting of Stockholders to be held May 29, 1998.
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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 seventy products for the treatment of peripheral vascular disease and
will introduce products to treat neuro vascular disease in 1998.
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
EMBOLYX(TM) 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 and the Castaneda Over-The-Wire 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 part of 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 of the coronary arteries; neuro vascular disease, or disease of 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 an
estimated annual cost of over $30 billion, according to the National Stroke
Association. 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 therapeutic regimen employed 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, at the anastomosis, the site where the
artificial graft is joined to the native vessel. 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 183,000 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 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.
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, the vast majority of treatment consists of oral medication and
exercise. However, there are a small number of patients receiving interventional
treatment consisting of catheter directed thrombolysis over several days, as an
inpatient. This is extremely costly, but has been successful for acute cases of
DVT. 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(TM)Infusion 510(k) submitted 1997 CE Mark in 1998
FLOW RIDER(TM)Flow Directed Infusion 510(k) submitted 1998 CE Mark in 1998
EMBOLYX(TM)Liquid Embolic System 510(k) submission Clinical trials in 1998;
expected 1998 Submission for CE Mark
expected 1998
PERIPHERAL VASCULAR-BLOOD
CLOT THERAPY
Infusion Catheters
Cragg-McNamara Valved
Tip Sidehole Infusion 510(k) approved; 27 models Marketed in seven countries;
currently marketed CE Mark in 1997
MicroMewi Sidehole 510(k) approved; 5 models CE Mark in 1997
currently marketed
Mewi-5 510(k) approved; 18 models CE Mark in 1998
currently marketed
Infusion Wires
ProStream Multiple Sidehole 510(k) approved; 8 models CE Mark in 1997
currently marketed
ProStream End Hole 510(k) approved; 2 models CE Mark in 1997
currently marketed
MECHANICAL THROMBOLYSIS
Cragg Thrombolytic Brush 510(k) approved; Marketed in six countries;
currently marketed CE Mark in 1997
Castaneda OTW Brush 510(k) approved; CE Mark in 1998
currently marketed
</TABLE>
NEURO VASCULAR--STROKE THERAPY PRODUCTS
Micro Catheters
The Company has developed a line of micro catheters incorporating unique
shaft designs and innovative materials which allow access to small, remote
vessels in the brain. These micro catheters may be used for infusion of drugs to
dissolve blood clots associated with thromboembolic stroke, and to deliver the
EMBOLYX(TM) liquid embolic material used to embolize AVM's and aneurysms.
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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. The Company's EASY RIDER(TM) and FLOW RIDER(TM) micro
catheters may be used for infusion of thrombolytic drugs to dissolve blood
clots.
The Company has submitted 510(k) applications for its neuro micro
catheters and plans to introduce these products in 1998. 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.
EMBOLYX(TM) Liquid Embolic System
The Company's proprietary EMBOLYX(TM) Liquid Embolic System ("LES"),
currently under development, is designed for rapid and controlled embolization
of aneurysms and AVMs. The EMBOLYX(TM) System 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
EMBOLYX(TM) System 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 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
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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 EMBOLYX(TM) procedure, the micro catheter is positioned at the
embolization site and the material is delivered with a single injection. The
EMBOLYX(TM) 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 EMBOLYX(TM) 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 EMBOLYX(TM)
and has initiated human clinical trials. In 1997, the Company filed a pre-IDE
(Investigational Device Exemption) to conduct human clinical trials in the
United States. The Company anticipates that the first indicated use of the
EMBOLYX(TM) 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 EMBOLYX(TM) include neuro and peripheral tumor
embolization.
PERIPHERAL VASCULAR--BLOOD CLOT THERAPY PRODUCTS
Catheters and Infusion Wires
MTI has introduced 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 artificial graft is surgically connected
above and below the occlusion. Blood can then flow around the occlusion.
These surgical procedures require an operating room and attending 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.
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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.
Treatment modalities for blood clots in veins are much more limited than
those for arteries. The most common treatment for DVT is oral
medication/exercise regimens. 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 valves and walls of the vein.
Recently, a number of high profile interventional radiology centers in
the United States have begun treating DVT with local 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 183,000 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 50,000 are
interventional. The Company also estimates that an additional 5,000 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.
Mewi-5 Sidehole Infusion Catheters. The Company's Mewi-5 catheters
provide sidehole infusion in the peripheral vasculature. These catheters can be
used alone or as the outer catheter of a coaxial infusion system.
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.
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
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anatomy. These infusion wires can also be passed through infusion catheters in a
coaxial manner, 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 27 models both domestically
and internationally. The Company received 510(k) clearance for the ProStream
sidehole infusion wires in January 1996 and is currently marketing eight models
in the United States and internationally. These products, together with MTI's
MicroPatency, Mewi- 5, and MicroMewi infusion catheter lines, are marketed in
the United States through a direct sales force and internationally through
distributors.
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. Third, drug cost must be reduced. The cost of drugs for a long-term
thrombolytic infusion lasting several days is thousands of dollars.
In August 1997, MTI received approval of its 510(k) market clearance
application from the U.S. Food and Drug Aministration ("FDA") and began an
active sales campaign for the Cragg Thrombolytic Brush in hemodialysis access
grafts. This product 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. In February 1998, the Company received approval of its
510(k) for the next generation of the Thrombolytic Brush, called the Castaneda
Over-The-Wire ("OTW") Brush, which 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 native vessels and
additional peripheral grafts.
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.
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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 approximately 700 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, New
Zealand and Canada through a network of specialty medical device distributors.
These arrangements provide the Company with distributors experienced 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.
On November 17, 1997, the Company entered into a distribution agreement
with Guidant Corporation, which provides for European distribution of the
Company's neuro products. The distribution agreement has a five-year term, which
will commence upon the first commercial sale of such products, and may be
canceled by the Company upon a sale of substantially all of the Company's assets
or change in control of the Company. In such event, the cancellation penalty to
be paid to the distributor is the greater of $1 million or an amount based on
the distributor's gross profit, as defined in the distribution agreement.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 1996 and 1997, the Company's research
and development expenses amounted to $1,805,000 and $3,425,000, respectively.
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. In the peripheral vascular area, efforts are being directed at further
expansion of its catheter and infusion wire product offerings for the treatment
of deep vein thrombosis. Additionally, extensions of the Cragg Thrombolytic
Brush technology for application in native vessel grafts, arteries and veins are
planned for 1998 release.
The Company believes that the EMBOLYX(TM) 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.
The Company has successfully performed studies on representative animal models
in this area. In addition, the Company has filed patents related to certain
non-vascular applications of the EMBOLYX(TM) LES, and is sponsoring preclinical
studies of its use in certain urological and gynecological procedures through
its new subsidiary, Genyx Medical, Inc.
In addition to its work on the EMBOLYX(TM) LES, the Company is actively
investigating alternative treatment modalities for disease associated with
stroke. The primary focus of this work
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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 1998 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 18 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, manufacturing and finance. Consultants are utilized where
additional specialized expertise is required.
MANUFACTURING
The Company manufactures its proprietary catheters, infusion wires and
the Cragg Thrombolytic Brush in a controlled environment 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.
Quality System Regulations ("QSR") 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 QSR for medical devices. There can be no assurance,
however, that the Company will remain in compliance with QSR. Failure to do so
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company implemented policies and procedures which allowed it to
achieve ISO 9001/EN 46001 certification of its quality control systems in April
1997. Additionally, in March 1997, it received CE mark certification with
respect to its products other than the LES. In March 1998, the Company
successfully completed its ISO 9001 annual surveillance audit. The European
Union has promulgated rules which require that
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medical products receive by mid-1998 the right to affix the CE Mark, an
international symbol of adherence to quality assurance standards. However, there
can be no assurance that the Company will be successful in meeting the European
quality standards or other certification requirements in the future.
The Company has developed the necessary capabilities for micro valve
molding, micro machining, catheter and infusion wire assembly, packaging and
product 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 molding, sterilization, and
other common technologies. Vertical integration will occur 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.
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 and Target Therapeutics divisions of Boston Scientific, Inc., Cook,
Inc., 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.
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<PAGE> 13
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 currently composed of
the following individuals:
<TABLE>
<CAPTION>
<S> <C>
Andrew H. Cragg, M.D. Director, Interventional Vascular Medicine,
Chairman of the 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
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
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
John Perl II, M.D. Section of Neuroradiology, The Cleveland Clinic
Foundation
Cass Pinkerton, M.D. Senior Consultant, Interventional Cardiology, Nasser,
Smith & Pinkerton Cardiology
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
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.
Except for Dr. Cragg, who receives compensation and holds a significant
number of shares of the Company's Common Stock, most 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, 1997, the Company held 16 issued U.S. patents, one
issued foreign patent and has 33 U.S. and 18 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 2009 to 2015. The pending claims cover various aspects of its
infusion catheter, infusion
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<PAGE> 15
wire, Thrombolytic Brush, micro catheter, Liquid Embolic System, carotid and
intra-cerebral stent technologies, coatings 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 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.
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<PAGE> 16
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 QSRs) 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
and implantable devices, or new devices that have not been found substantially
equivalent to legally marketed Class I, Class II or pre-amendment Class III
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
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<PAGE> 17
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 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 March 15, 1998, the Company had received five 510(k) clearances
for certain therapeutic indications of its infusion products (infusion
catheters, micro catheters and infusion wires) and its mechanical thrombolysis
device which cover 72 products offered for market. The Company has made
modifications which affect a number of its products covered under these 510(k)
clearances, which modifications, the Company believes, do not affect the safety
and efficacy of the products and thus, under FDA guidelines, do not require 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")
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<PAGE> 18
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 State of California
Department of Health Services (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
QSR 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 QSR 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 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
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<PAGE> 19
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, Patency infusion catheters and
Thrombolytic Brush Catheters in Germany, The Netherlands, Belgium, the United
Kingdom, Canada, New Zealand 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 9001/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 needs to
obtain certification that its processes meet the ISO 9001/EN 46001 quality
standards and applicable medical device directives promulgated by the European
Union. Such certification was obtained by the Company with respect to its
products other than the LES in March 1997 and, thus, the Company currently has
the right to affix the CE Mark to such products. However, this certification is
reviewed on an annual basis, and there can be no assurance that such right to
affix the CE Mark will be retained by the Company in the future. The Company
will seek to obtain certification with respect to the LES upon successful
completion of required clinical studies, however, there can be no assurance that
such certification will be obtained.
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. 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.
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<PAGE> 20
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's
experience is that procedures using its Cragg Thrombolytic Brush have been
reimbursed in the United States under existing procedure codes for diagnosis and
re-establishment of patency of hemodialysis access grafts and native vessels,
and the Company believes that it will obtain similar experience with the
Castaneda OTW Brush. 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 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
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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.
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 full
clinical trials in the United States and the Company recently filed its 510(k)
market clearance application covering its micro-catheters for neuro vascular
use. 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
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Company's products will gain market acceptance. Acceptance of the Company's LES
and Thrombolytic Brush products 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 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. No assurance can be given that the
Company will be able to locate such clinical
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<PAGE> 23
sites on a timely basis, a delay in which 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, 1997, the Company
incurred cumulative losses of approximately $17.1 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 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 from its initial public
offering and under the terms of a convertible subordinated note agreement with
Guidant Corporation ("Guidant") entered into in November 1997, and the interest
earned thereon, should be adequate to satisfy its capital requirements through
1998. There can be no assurance, however, that the Company will not need
additional capital before such time. The Company's need for additional financing
will depend upon numerous factors, including the extent and duration of the
Company's future operating losses, the level and timing of future revenues and
expenditures, market acceptance of new products, the results and scope of
ongoing research and development projects, competing technologies, and market
and regulatory developments. Should the Company achieve, before December 31,
1998, certain milestones, as defined in the agreement with Guidant, the Company
has the option to require Guidant to purchase up to an additional $3 million of
the Company's common stock and to loan to the Company up to an additional $2
million. There is no assurance, however, that the Company will achieve either of
these milestones before December 31, 1998, or, should the Company achieve either
or both milestones, that the resulting proceeds under the agreement with Guidant
would satisfy the Company's then-current working capital requirements. The
Company currently has no other 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 "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, 1997, the
23
<PAGE> 24
Company held sixteen issued U.S. patents, one issued foreign patent and has
thirty-three U.S. and eighteen 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, coatings 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 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, 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 eight people in the United States, 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. Moreover, there
is 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
24
<PAGE> 25
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 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 substantially all of its products
covered under four 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 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
25
<PAGE> 26
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 maintain the
certifications necessary to affix the CE Mark to its products other than LES,
and to obtain the certifications with respect to LES, in order to sell its
products in member countries of the European Union after mid-1998. 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
affixing products with the CE Mark is already necessary to achieve meaningful
sales. The Company received its CE Mark certification in March 1997 with respect
to products other than the LES, however, there can be no assurance that the
Company will be able to maintain such certification, or, with respect to LES,
obtain such certification, in the future. 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 Quality
System Requirements, which include development, testing, control and
documentation requirements. The Company's manufacturing processes also are
subject to stringent federal, state and local regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. Although the Company believes that it has complied in all material
respects with such laws and regulations, the Company is subject to periodic
inspection to ensure its compliance with such laws and regulations. There can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations, or
that the Company will not be required to cease operations in the event of its
continued failure to effect compliance. 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."
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<PAGE> 27
Dependence on Single Source Suppliers; Independent Contract
Manufacturers. The Company purchases certain components used in its products and
receives certain services with respect to its products from third parties. The
Company's dependence on third-party suppliers involves several risks, including
limited control over pricing, availability, quality and delivery schedules. Any
delays in delivery of such components or provision of such services or shortages
of such components could cause delays in the shipment of the Company's products,
which could cause the Company's business, operating results and financial
condition to be adversely affected. The Company's single-source components are
generally acquired pursuant to purchase orders placed in the ordinary course of
business, and the Company has no guaranteed supply arrangements with any of its
single-source suppliers. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could have a
material adverse effect on its business, operating results and financial
condition. There can be no assurance that the Company will not experience
quality control problems, supply shortages or price increases with respect to
one or more of these components in the future. The establishment of additional
or replacement suppliers for certain of these components may delay accessibility
of such components as the Company qualifies such suppliers. Any quality control
problems, interruptions in supply or component price increases with respect to
one or more components could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company relies on independent contract manufacturers for the
manufacture and assembly of certain of its products and components. Reliance on
independent contract manufacturers involves several risks, including the
potential inadequacy of capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs. Such manufacturers have
possession of and at times title to molds for certain manufactured components of
the Company's products. Shortages of raw materials, production capacity
constraints or delays by the Company's contract manufacturers could negatively
affect the Company's ability to meet its production obligations and result in
increased prices for affected parts. Any such reduction, constraint or delay may
result in delays in shipments of the Company's products or increases in the
prices of components, either of which could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
has no supply agreements with its current contract manufacturers and utilizes
purchase orders which are subject to supplier acceptance. The unanticipated loss
of any of the Company's contract manufacturers could cause delays in the
Company's ability to deliver product while the Company identifies and qualifies
a replacement manufacturer. There can be no assurance that current or future
independent contract manufacturers will be able to meet the Company's
requirements for manufactured products. Such an event would have a material
adverse effect on the Company's business, operating results and financial
condition. 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
27
<PAGE> 28
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 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
28
<PAGE> 29
international markets vary significantly by country, and by region within some
countries, and reimbursement approvals must be obtained on a country-by-country
basis. Many international markets have government managed health care systems
that govern reimbursement for new devices and procedures. In most markets, there
are private insurance systems as well as government-managed systems. Obtaining
reimbursement approvals in each country can require 12-18 months or longer.
Anti-Takeover Provisions. The Company's Certificate of Incorporation
provides for 5,000,000 authorized shares of Preferred Stock, the rights,
preferences, qualifications, limitations and restrictions of which may be fixed
by the Board of Directors without any further vote or action by the
stockholders. In addition, the Company's stock option plans provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could materially adversely affect the price of the Company's Common
Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may materially adversely affect the market price of the Company's
Common Stock. In addition, the market price of the shares of Common Stock is
likely to be highly volatile. Factors such as fluctuations in the Company's
results of operations, failure of such results of operations to meet the
expectations of public market analysts and investors, timing and announcements
of technological innovations or new products by the Company or its competitors,
FDA and foreign regulatory actions, developments with respect to patents and
proprietary rights, timing and announcements of developments, including clinical
trials related to the Company's products, public concern as to the safety of
technology and products developed by the Company or others, changes in health
care policy in the United States and internationally, changes in stock market
analyst recommendations regarding the Company, the medical device industry
generally and general market conditions may have a material adverse effect on
the market price of the Common Stock. In addition, it is likely that during a
future quarterly period, the Company's results of operations will fail to meet
the expectations of stock market analysts and investors and, in such event, the
Company's stock price could be materially and adversely affected.
Risks Associated with Year 2000 Issue. In the next two years, many
companies will face a potentially serious information systems (computer) problem
because many software applications and operational programs written in the past
may not properly recognize calendar dates beginning in the Year 2000. This
problem could force computers to either shut down or provide incorrect
information and could result in an inability to process transactions, send
invoices or engage in normal business activities. Based on a recent assessment,
which included correspondence the Company obtained from the maufacturer of the
financial system software utilized by the Company, the Company believes that
such software will not be affected by the Year 2000 issue. In addition, the
Company believes that its existing information systems equipment, primarily
composed of personal computers, will be minimally impacted by the Year 2000
Issue, as the Company intends to replace the majority of those systems affected
by this problem by the end of 1999 due to technological obsolescence. The
Company has not initiated communications with any of its vendors regarding the
Year 2000 Issue. If the Company determines a particular vendor will be impacted
by this problem, the Company may attempt to identify additional or replacement
vendors, which could delay accessibility of the products and/or services
29
<PAGE> 30
provided by such vendors. Such a delay or failure to identify an additional or
replacement vendor could have a material adverse effect on the Company's
business, operating results and financial condition.
EMPLOYEES
At February 28, 1998, the Company had 84 employees, all of whom were
employed on a full-time status.
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<PAGE> 31
ITEM 2. PROPERTIES
The Company occupies approximately 20,000 square feet in a multi-user
complex in San Clemente, California. The facility is subject to a lease which
expires in May 1998, with two one-year renewal options. The current monthly rent
is $13,876. The Company believes that this space is adequate for its immediate
needs, and that it will be able to obtain additional space if necessary. In
addition, the Company intends to exercise its option to renew the lease for an
additional one-year term.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation
incidental to its business, none of which, individually or in the aggregate, is
expected to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 18, 1997, the Common Stock of Micro Therapeutics, Inc.
("MTI" or the "Company") 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.
High and low sales prices for the Company's Common Stock during the year
ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Q1 1997 (February 18 through March 31) $9 1/8 $6
Q2 1997 (April 1 through June 30) 7 5/16 4
Q3 1997 (July 1 through September 30) 5 5/8 2 1/2
Q4 1997 (October 1 through December 31) 8 3/4 4
</TABLE>
As of December 31, 1997, there were 65 stockholders of record of the
Company's Common Stock. All Preferred Stock outstanding prior to the Company's
Initial Public Offering ("IPO") of its Common Stock on February 14, 1997 was
converted to Common Stock as a result of the IPO. Accordingly, there is no
Preferred Stock outstanding. 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.
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<PAGE> 33
RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company during the
three months ended December 31, 1997, 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 three months ended December 31, 1997,
the Registrant issued incentive stock options and nonqualified stock options to
purchase Common Stock pursuant to the Registant'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 three months ended
December 31, 1997, options to purchase 133,500 shares of Common Stock were
granted pursuant to the 1996 Plan. During the three months ended December 31,
1997, options to purchase 1,338 shares of Common Stock granted pursuant to the
1993 Plan were exercised for an aggregate price of $1,143. No options to
purchase shares of Common Stock granted under the 1996 Plan were exercised.
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) On November 17, 1997, the Company sold to Guidant Corporation
("Guidant") a 5% Convertible Subordinated Note, due October 31, 2002, in the
aggregate principal amount of $5,000,000 (the "Note"). The principal balance of
the Note is convertible at any time at Guidant's option, in $100,000 increments,
into shares of Common Stock of the Company at a conversion price of $10.25 per
share, which conversion price is subject to adjustment in certain instances.
Exemption from the registration requirements of the Securities Act for the sale
of the Note was claimed under Section 4(2) of the Securities Act, among others,
on the basis that such transaction did not involve any public offering and the
purchaser was sophisticated with access to the kind of information registration
would provide. No underwriting or broker's commissions were paid in connection
with the foregoing transaction.
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."
33
<PAGE> 34
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 at least into fiscal 1999 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. To date, the majority of the Company's revenues have been
derived from sales of its initial infusion catheters and related accessories.
The Cragg Thrombolytic Brush received FDA approval in August 1997 and the
Castaneda Over-The-Wire Brush received FDA approval in February 1998, with
market introductions having been made upon obtaining such approvals. The Company
expects sales of the products mentioned above, and similar products, to provide
the majority of the Company's revenues at least through 1998.
The Company currently sells its products in international markets
through a limited number of distributors and, in November 1997, signed an
agreement with Guidant Corporation to distribute the Company's neurological
products in Europe. CE Mark certification for many of the Company's products was
received in 1997. The Company expects that it will obtain CE Mark certification
for currently released products in 1998, however, there can be no assurance that
such certification will be obtained.
The Company's products are currently manufactured by the Company at its
facility in San Clemente, California. Certain accessories are manufactured and
processes are performed by contract manufacturers. During 1996, the Company
expanded its manufacturing facilities in order to provide sufficient capacity
for future products, and to better control product costs and quality.
Future revenues and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, actions
relating to regulatory and reimbursement matters, the extent to which the
Company's products gain market acceptance, the rate at which the Company
establishes its international sales and distribution network, the progress of
clinical trials, and the introduction of competitive products for diagnosis and
treatment of neuro and peripheral vascular disease. The Company's limited
operating history makes accurate prediction of future operating results
difficult or impossible. Although the Company has experienced sales growth in
recent periods, there can be no assurance that, in the future, the Company will
sustain sales growth or gain profitability on a quarterly or annual basis or
that its growth will be consistent with predictions made by securities analysts
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.
34
<PAGE> 35
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended December 31, 1996 and December 31, 1997
Net sales for the year ended December 31, 1997 increased to $2.7 million
from $1.4 million for the year ended December 31, 1996. The increase is the
result of growth in sales of its peripheral infusion product lines and the
introduction in 1997 of the Cragg Thrombolytic Brush. International sales
represented 4% and 3% of the total sales for the years ended December 31, 1996
and 1997, respectively.
Cost of sales increased to $1.9 million for the year ended December 31,
1997 from $1.6 million for the year ended December 31, 1996. This increase was
primarily attributable to the increase in sales. Cost of goods sold as a
percentage of sales was 72% in 1997 and 118% in 1996. This improvement reflects
the effects of a larger volume of sales over which overhead could be spread and
the implementation of improved manufacturing processes, which allowed the
Company to re-deploy certain individuals to research and development functions
primarily in the fourth quarter of 1997.
Research and development expenses, which include regulatory and clinical
expenses, increased to $4.3 million for the year ended December 31, 1997 from
$2.4 million for the year ended December 31, 1996. The increase is primarily
attributable to the establishment of new research and development programs, the
attendant increase in personnel related to such programs and increased
expenditures related to development of the Liquid Embolic System ("LES").
Selling, general and administrative expenses increased to $4.3 million
for the year ended December 31, 1997 from $3.1 million for the year ended
December 31, 1996. This increase was primarily attributable to the increased
sales volume and the related increase in sales and marketing personnel,
development of marketing programs and materials in support of new product
introductions and increased costs as a result of becoming a publicly-held
entity.
Net interest and other income, net, increased to $529,000 for the year
ended December 31, 1997 from $172,000 for the year ended December 31, 1996. This
difference was attributable to higher average cash balances in 1997 arising from
the proceeds received from the Company's initial public offering in February
1997, and the note agreement with Guidant in November 1997. In addition, the
Company recognized non-recurring income of $167,000 from the sale of a privately
held company in which the Company held a minority interest.
As a result of the items discussed above, the Company had a net loss of
$7.2 million for the year ended December 31, 1997 compared to $5.6 million for
the year ended December 31, 1996.
Comparison of Fiscal Years Ended December 31, 1996 and December 31, 1995
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 was the result
of the growth in sales of its infusion products. Substantially all of the 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% of total sales for the year ended
December 31, 1995.
35
<PAGE> 36
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 of such facility in July 1996.
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 was 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 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 establishment
of a direct sales force in the United States, the addition of administrative
personnel, facility expansion costs and the amortization of the non-cash
deferred compensation charges associated with stock option grants to employees.
Net interest and other income, net, 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 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
$5.6 million for the year ended December 31, 1996 compared to $2.8 million for
the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $17.1 million at
December 31, 1997. The Company had 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. In November 1997, the Company received
$5,000,000 from Guidant under the terms of a convertible note agreement. The
note bears an interest rate of 5% per annum. Should the Company achieve, before
December 31, 1998, certain milestones, as defined in the note agreement, the
Company has the option to require Guidant to purchase up to an additional $3
million of the Company's Common Stock and to loan to the Company up to an
additional $2 million. There is no assurance, however, that the Company will be
able to achieve either or both of such milestones before December 31, 1998.
As of December 31, 1997, the Company had cash, cash equivalents and
short term investments of $11.5 million compared to $4.2 million at December 31,
1996, the growth of which is attributable to the items described below.
Cash used in operating activities was $7.1 million for the year ended
December 31, 1997, which reflected the loss from operations, as well as
increases in accounts receivable and inventories, net of increases in accounts
payable and accrued expenses, all of such increases relating to increases in the
Company's level of activity in 1997. Cash used in investing activities was $6.8
million for the year
36
<PAGE> 37
ended December 31, 1997. Of this amount, a net $6.3 million was invested in
short-term investments from the proceeds of the IPO and the Guidant note,
$264,000 was expended for property and equipment additions and $407,000 was
disbursed for patents and licenses. The Company received $170,000 during the
year as liquidation of a minority interest it held in a privately held company.
Cash provided by financing activities was $14.9 million in 1997, which amount
consisted primarily of the net proceeds from the IPO and the Guidant note.
The Company believes current resources will be sufficient to fund its
operations through 1998. However, the Company's future liquidity and capital
requirements will depend upon numerous factors, including the progress of the
Company's clinical research and product development programs, the receipt of,
and the time required to obtain, regulatory clearances and approvals, and the
resources the Company devotes to developing, manufacturing and marketing its
products. The Company's capital requirements will also depend 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 1998. However, there can be no assurance
that the Company will not require additional financing within this time frame
and, therefore, the Company 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.
IMPACT OF THE YEAR 2000 ISSUE
In the next two years, many companies will face a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the Year 2000. This problem could force computers to either
shut down or provide incorrect information and could result in an inability to
process transactions, send invoices or engage in normal business activities.
Based on a recent assessment, which included correspondence the Company obtained
from the manufacturer of the financial system software utilized by the Company,
the Company believes that such software will not be affected by the Year 2000
issue. In addition, the Company believes that its existing information systems
equipment, primarily composed of personal computers, will be minimally impacted
by the Year 2000 Issue, as the Company intends to replace the majority of those
systems affected by this problem by the end of 1999 due to technological
obsolescence. The Company has not initiated communications with any of its
vendors regarding the Year 2000 Issue. If the Company determines a particular
vendor will be impacted by this problem, the Company may attempt to identify
additional or replacement vendors, which could delay accessibility of the
products and/or services provided by such vendors. Such a delay or failure to
identify an additional or replacement vendor could have a material adverse
effect on the Company's business, operating results and financial condition.
37
<PAGE> 38
Management has determined that there is no exposure to contingencies
related to the Year 2000 Issue for the products it has sold.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which established standards for
reporting and displaying comprehensive income and its components in financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. The adoption of this standard is not expected to have a
material impact on the presentation of the Company's consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for
public business enterprises to report financial and descriptive information
about operating segments in annual financial statements on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 also establishes the standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 131.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this Item begin on
Page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
38
<PAGE> 39
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required hereunder is incorporated by reference from the
sections of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Nominees," "Executive Officers" and "Other Key
Advisors."
ITEM 10. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from the
sections of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Nominees," "Executive Officers" and "Other Key
Advisors."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from the
sections of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from the
sections of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled
"Certain Relationships and Related Transactions."
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 40 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.
39
<PAGE> 40
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)
10.10 Employment agreement dated December 1, 1997, between the Company and
Harold A. Hurwitz.(3)
10.11 Convertible Subordinated Note Agreement dated November 17, 1997,
between the Company and Guidant Corporation.
10.12 Distribution Agreement dated November 17, 1997, between the Company
and Guidant Corporation.(4)
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C>
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-1).
27.1 Financial Data Schedule - for the year ended December 31,1997.
27.3 Financial Data Schedule - for the year ended December 31, 1996
(restated).
</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.
(4) Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Company's application
requesting confidential treatment under Rule 406 of the Securities
Act of 1933.
41
<PAGE> 42
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 27, 1998.
MICRO THERAPEUTICS, INC.
Dated: March 27, 1998 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 Harold A. Hurwitz 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 27, 1998
- ----------------------------- Officer and Director
George Wallace (Principal Executive Officer)
/s/ Harold A. Hurwitz Chief Financial Officer March 27, 1998
- ----------------------------- (Principal Financial and
Harold A. Hurwitz Principal Accounting Officer)
/s/ H. DuBose Montgomery Chairman and Director March 27, 1998
- -----------------------------
H. DuBose Montgomery
/s/ Wende Hutton Director March 27, 1998
- -----------------------------
Wende Hutton
</TABLE>
S-1
<PAGE> 43
<TABLE>
<S> <C> <C>
/s/ Dick Allen Director March 27, 1998
- -----------------------------
Dick Allen
/s/ Kim Blickenstaff Director March 27, 1998
- -----------------------------
Kim Blickenstaff
</TABLE>
S-2
<PAGE> 44
REFER TO NEW FILE FOR 1997 F/S
F-1
<PAGE> 45
MICRO THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet At December 31, 1997 F-3
Consolidated Statements Of Operations For The Years Ended
December 31, 1996 And 1997 F-4
Consolidated Statements Of Stockholders' Equity For The Years Ended
December 31, 1996 And 1997 F-5
Consolidated Statements Of Cash Flows For The Years Ended
December 31, 1996 And 1997 F-6
Notes To Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Micro Therapeutics, Inc.
We have audited the accompanying consolidated balance sheet of Micro
Therapeutics, Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial position of Micro
Therapeutics, Inc. at December 31, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1997, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 18, 1998, except for the second paragraph of Note 18,
as to which the date is March 12, 1998
F-2
<PAGE> 47
MICRO THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
A S S E T S:
<S> <C>
Current assets:
Cash and cash equivalents $ 5,175,687
Short-term investments 6,304,433
Accounts receivable 399,821
Inventories, net 618,671
Prepaid expenses and other current assets
133,243
----------
Total current assets 12,631,855
Property and equipment, net 606,369
Patents and licenses, net of accumulated amortization of $52,443 702,547
Other assets 70,583
------------
Total assets $ 14,011,354
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of equipment line of credit $ 63,643
Accounts payable 290,751
Accrued salaries and benefits 305,763
Accrued liabilities 166,056
------------
Total current liabilities 826,213
Equipment line of credit 146,615
Convertible note payable, net 4,048,256
------------
Total liabilities 5,021,084
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; _
no shares issued or outstanding
Common stock, $0.001 par value, 20,000,000 shares authorized; 6,505
6,505,195
shares issued and outstanding
Additional paid-in capital 26,239,388
Unearned compensation (174,969)
Accumulated deficit
(17,080,654
------------
Total stockholders' equity 8,990,270
------------
Total liabilities and stockholders' equity $ 14,011,354
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 48
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1996 And 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net sales $ 1,387,865 $ 2,714,047
Cost of sales 1,632,960 1,948,188
----------- -----------
Gross margin (loss) (245,095) 765,859
Costs and expenses:
General and administrative 1,082,325 1,447,558
Research and development 1,804,578 3,425,019
Regulatory/quality assurance 590,333 848,637
Marketing and sales 2,062,360 2,816,232
--------- -----------
Total costs and expenses 5,539,596 8,537,446
----------- -----------
Loss from operations (5,784,691) (7,771,587)
Other income (expense):
Interest income 192,534 451,309
Interest expense (16,643) (81,540)
Other expense, net (4,384) (7,952)
Gain on sale of investment -- 167,456
----------- -----------
171,507 529,273
----------- -----------
Loss before provision for income taxes (5,613,184) (7,242,314)
Provision for income taxes 800 800
----------- -----------
Net loss ($5,613,984) ($7,243,114)
=========== ===========
Per share data
Net loss ($5,613,984) (7,243,114)
Net loss per share (basic and diluted) (1.27)
Weighted average shares outstanding 5,715,396
=========== ===========
Pro Forma:
Net loss per share (basic and diluted) ($1.45) ($1.17)
=========== ===========
Weighted average shares outstanding 3,873,186 6,190,486
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 49
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For The Years
Ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balances at January 1, 1996 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 values -- (15,030,884) -- (620,731)
Net loss -- -- -- --
---------- ------------ --------- ------------
Balances at December 31, 1996 3,612,664 3,613 894,235 894
Issuance of common stock (net of costs of $1,531,050) -- -- 1,840,000 1,840
Conversion of preferred shares into common stock (3,612,664) (3,613) 3,612,664 3,613
Compensation related to stock options vesting -- -- -- --
Unearned compensation related to terminated employees -- -- -- --
Common stock issued under employee stock purchase plan -- -- 31,198 31
Exercise of stock options -- -- 127,098 127
Imputed discount on convertible note payable -- -- -- --
Net loss -- -- -- --
---------- ------------ --------- ------------
Balances at December 31, 1997 -- -- 6,505,195 $ 6,505
========== ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Unearned Accumulated Stockholders'
Paid-In Capital Compensation Deficit Equity
--------------- ------------ ------- ------
<S> <C> <C> <C> <C>
Balances at January 1, 1996 $ -- ($ 6,518) ($ 4,223,556) $ 2,878,041
Issuance of Series C convertible preferred
stock (net of costs of $49,458) -- -- -- 8,072,082
Exercise of stock options -- -- -- 4,725
Unearned compensation related
to stock options granted -- (471,200) -- --
Compensation related to stock options vesting -- 101,500 -- 101,500
Reclassification of amounts to new par values 15,651,615 -- -- --
Net loss -- -- (5,613,984) (5,613,984)
------------- ------------ ------------ ------------
Balances at December 31, 1996 15,651,615 (376,218) (9,837,540) 5,442,364
Issuance of common stock (net of costs of $1,531,050) 9,507,112 -- -- 9,508,952
Conversion of preferred shares into common stock -- -- -- --
Compensation related to stock options vesting -- 108,898 -- 108,898
Unearned compensation related to terminated employees (92,351) 92,351 -- --
Common stock issued under employee stock purchase plan 139,190 -- -- 139,221
Exercise of stock options 59,494 -- -- 59,621
Imputed discount on convertible note payable 974,328 -- -- 974,328
Net loss -- -- (7,243,114) (7,243,114)
------------- ------------ ------------ ------------
Balances at December 31, 1997 $ 26,239,388 ($ 174,969) ($17,080,654) $ 8,990,270
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 50
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996 And 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 5,613,984) ($ 7,243,114)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 225,027 367,292
Amortization of note payable discount 22,584
Compensation related to stock options vesting 101,500 108,898
Gain on sale of investment (167,456)
Loss on sale of equipment 14
Change in operating assets and liabilities:
Accounts receivable (167,229) (155,985)
Inventories (266,596) (187,049)
Prepaid expenses and other assets (71,763) (70,106)
Accounts payable 82,898 (41,037)
Accrued salaries and benefits 122,524 104,838
Accrued liabilities 10,675 176,561
------------ ------------
Net cash used in operating activities (5,576,948) (7,084,560)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments (3,717,316) (15,278,316)
Maturity of short-term investments 3,717,316 8,973,883
Additions to property and equipment (577,944) (264,408)
Additions to patents and licenses (192,425) (406,848)
Sale of equipment -- 750
Sale of investment -- 170,000
------------ ------------
Net cash used in investing activities (770,369) (6,804,939)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 8,121,540 --
Proceeds from issuance of common stock -- 11,179,223
Costs of equity issuances (49,458) (1,302,334)
Deferred offering costs (228,716) --
Proceeds from exercise of stock options 4,725 59,621
Borrowings on convertible note payable -- 5,000,000
Borrowings on equipment line of credit 263,177 25,341
Repayments on equipment line of credit (24,448) (53,812)
------------ ------------
Net cash provided by financing activities 8,086,820 14,908,039
------------ ------------
Net increase in cash and cash equivalents 1,739,503 1,018,540
Cash and cash equivalents at beginning of year 2,417,644 4,157,147
------------ ------------
Cash and cash equivalents at end of year $ 4,157,147 $ 5,175,687
============ ============
Supplemental cash flow disclosures:
Cash paid during the year for interest $ 16,643 $ 29,095
============ ============
Cash paid during the year for income taxes $ 800 $ 800
============ ============
Supplemental schedule of noncash activities:
Unearned compensation related to stock options granted $ 471,200 --
Unearned compensation related to terminated employees -- $ 92,351
Conversion of preferred stock to common stock -- $ 3,613
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 51
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED 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:
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its majority-owned subsidiary (see Note 18). All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Cash Equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
The carrying amount of cash and cash equivalents approximates market
value.
Short-Term Investments:
The Company's short-term investments at December 31, 1997 consist
primarily of funds invested in money market instruments and commercial
paper and which have maximum maturities of six months. The Company
classifies its investments as held to maturity. The carrying amount of
these investments is at cost plus accrued interest which approximates
market value. All short-term investments are held in the Company's name
and under the custody of one financial institution.
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 consolidated
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> 52
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
Use of 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> 53
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary Of Significant Accounting Policies, Continued:
Net Loss Per Share:
Net loss per share for all periods presented is calculated under the
provisions of Statement of Financial Accounting Standards No. 128,
Earnings per Share, (which the Company adopted in the fourth quarter of
1997) by dividing net loss by the weighted average number of common
shares issued and outstanding during the period. For the pro forma
calculations, such weighted averages include common shares that were
issued upon automatic conversion of all outstanding shares of the
Company's Preferred Stock, in connection with the Company's Initial
Public Offering of its Common Stock (the "IPO") in February 1997 (Note
9), as if such conversion had taken place at the beginning of the
earliest period presented. Historical net loss per share for 1996 is
not presented as it is not indicative of the ongoing entity. Potential
common shares, represented by options, warrants and convertible debt,
have been excluded from the calculations due to their anti-dilutive
effect. Basic and diluted loss per share are the same for the periods
presented.
Such calculations also conform to the requirements set forth in Staff
Accounting Bulletin ("SAB") Topic 98, issued by the Securities and
Exchange Commission in February 1998. SAB 98 provides that stock
options and warrants granted during the twelve months prior to the date
of the filing of a company's initial public offering at prices less
than the per share initial public offering price be excluded from loss
per share calculations. Previously existing rules set forth by SAB
Topic 4-D had required that such options and warrants be included in
loss per share calculations. Accordingly, the proforma net loss per
share amount for 1996 shown in the accompanying consolidated statement
of operations is different from the $1.40 per share previously
reported.
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 9). 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> 54
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Cash And Cash Equivalents:
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 222,433
Cash equivalents 4,953,254
----------
$5,175,687
==========
</TABLE>
Cash equivalents consist of United States government treasury bills and
commercial paper.
4. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and work-in-process $287,854
Finished goods 361,817
--------
649,671
Reserve for obsolescence (31,000)
--------
$618,671
========
</TABLE>
5. Property And Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $ 654,367
Tooling 78,349
Furniture and fixtures 143,222
Leasehold improvements 249,940
Construction-in-progress 22,711
----------
1,148,589
Less, Accumulated depreciation and amortization (542,220)
----------
$ 606,369
==========
</TABLE>
Property and equipment under capital lease at December 31, 1997 was
$288,517 with accumulated amortization of $121,389.
F-10
<PAGE> 55
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Equipment Line Of Credit:
The Company had 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 are due in monthly installments over the following 48
months. A total of $210,258 was outstanding under this equipment line
of credit as of December 31, 1997.
In connection with this equipment line of credit, the Company issued
two sets of warrants to the lessor to purchase shares of the Company's
preferred stock, which converted, upon the conversion of all
outstanding shares of preferred stock in connection with the Company's
initial public offering, into warrants to purchase an aggregate of
13,683 shares of the Company's Common Stock at prices ranging from
$4.23 to $6.46 per share. Such warrants expire in 2005 and 2006.
Future minimum payments under the equipment line of credit are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31, Equipment Line of Credit
------------------------- ------------------------
<S> <C>
1998 $ 85,516
1999 85,516
2000 70,987
2001 5,146
--------
247,165
Less, amount representing interest (36,907)
--------
$210,258
========
</TABLE>
7. Convertible Subordinated Note Payable:
In November 1997, the Company entered into a Convertible Subordinated
Note Agreement (the "Note Agreement") under which the Company borrowed
$5 million. The principal amount of the note is due in five years, and
is convertible, at any time, at the option of the note holder into
shares of the Company's Common Stock at a conversion price of $10.25
per share. The note bears interest at 5% per annum, which the Company
has determined is lower than interest rates typically associated with
similar debt instruments. Accordingly, as required by generally
accepted accounting principles, the Company recorded a discount on the
note of $974,328, resulting in an imputed interest rate over the term
of the note of 10%. Such discount had an unamortized balance of
$951,744 at December 31, 1997, and is presented net of the principal
amount of the note in the accompanying consolidated balance sheet.
Interest payments are due quarterly, in arrears, commencing January 31,
1998.
F-11
<PAGE> 56
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Convertible Subordinated Note Payable, Continued:
The Note Agreement provides for certain operational conditions with
which the Company must comply, a right of first offer to allow a pro
rata participation by the note holder in the issuance by the Company of
any "new security," as defined in the Note Agreement, and note holder
visitation rights at meetings of the Company's Board of Directors.
Moreover, the note holder may either convert the principal amount of
the note or declare the note to be immediately due and payable upon
notification of an impending sale of substantially all of the Company's
assets or a change of control of the Company.
Should the Company achieve, before December 31, 1998, certain
milestones, as defined in the Note Agreement, the Company has the
option to require the note holder to purchase up to an additional $3
million of the Company's Common Stock at a price per share based on an
average market price per share for the month preceding such purchase of
the Common Stock, and to loan to the Company up to an additional $2
million at 8% per annum.
The Company and the note holder concurrently entered into a
Distribution Agreement which is described in Note 15.
8. Preferred Stock:
Effective upon the closing of the Company's Initial Public Offering of
its Common Stock in February 1997 (Note 9), all 3,612,664 issued and
outstanding shares of the Company's Preferred Stock were converted into
shares of the Company's Common Stock on a share-for-share basis.
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences and privileges without stockholder approval. At
December 31, 1997, no shares of Preferred Stock were issued or
outstanding.
9. Initial Public Offering:
In February 1997, the Company completed an initial public offering (the
"IPO") of 1,600,000 shares of its Common Stock at $6.00 per share. In
March 1997, the underwriters of the IPO exercised their over allotment
options and purchased 240,000 shares of the Company's Common Stock.
Aggregate proceeds, net of offering costs of $1,531,050, were
$9,508,952. In connection with the IPO, all then outstanding shares of
convertible preferred stock were automatically converted to 3,612,664
shares of common stock (Note 8).
F-12
<PAGE> 57
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Common Stock 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
Common 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 Common Stock of the Company. The Board of
Directors has the authority to determine the time or times at which
options become exercisable, which generally occurs over a four-year
period. Options expire within a period of not more than ten years from
the date of grant. Options expire generally ninety days after
termination of employment.
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 January 1, 1996 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
Granted -- -- -- --
Exercised (99,575) (27,521) (127,096) $0.46-$1.54
Canceled (77,835 (15,439) (93,274) $0.46-$5.38
-------- -------- -------- ------------
Balances at December 31, 1997 269,626 138,611 408,237 $0.46-$5.38
======== ======== ======== ============
Exercisable at December 31, 1997 143,494 118,632 262,126 $0.46-$5.38
======== ======== ======== ============
</TABLE>
F-13
<PAGE> 58
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Common Stock Plans, Continued:
1993 Stock Option Plan, Continued:
The difference between the exercise price and the fair market value of
the options at the date of grant is accounted for as unearned
compensation and is being amortized to expense over the related service
period. During the years ended December 31, 1996 and 1997, amortized
compensation expense was $101,500 and $108,898, respectively.
At December 31, 1997, the weighted average exercise price per share
and weighted average remaining term of options outstanding under the
1993 Plan were $1.46 and 7.7 years, respectively. The weighted-average
exercise price of options exercisable under the 1993 Plan at December
31, 1997 was $1.02.
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 Common
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 directors or consultants. In addition, the 1996 Plan
provides that each non-employee director of the Company 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. Such directors shall also
automatically be granted options for an additional 2,000 shares each
year thereafter, subject to an aggregate stock ownership limitation of
1% of outstanding shares and options as defined in the 1996 Plan.
Options, other than those granted to the non-employee directors as
described above, generally vest over a four-year period.
Options expire within a period of not more than ten years from the date
of grant. Options expire generally 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:
F-14
<PAGE> 59
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Common Stock Plans, Continued:
1996 Stock Incentive Plan, Continued:
<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
Granted 341,450 42,000 383,450 $4.75-$6.50
Exercised -- -- -- --
Canceled (30,920) -- (30,920) $5.25-$5.38
-------- -------- -------- -----------
Balances at December 31, 1997 417,130 43,300 460,430 $4.75-$6.92
======== ======== ======== ===========
Exercisable at December 31, 1997 38,303 8,881 47,184 $4.75-$6.92
======== ======== ======== ===========
</TABLE>
At December 31, 1997, the weighted-average exercise price per share and
weighted-average remaining term of options outstanding under the 1996
Plan were $5.48 and 9.3 years, respectively.
Employee Stock Purchase Plan:
The Employee Stock Purchase Plan (the "Purchase Plan") covers an
aggregate of 100,000 shares of common stock and commenced on the
effective date of the Company's Initial Public Offering (Note 9). The
Purchase Plan permits an eligible employee to purchase common stock
through payroll deductions not to exceed 20% of the employee's
compensation. Moreover, an employee's participation is limited if such
participation results in an employee having the right to purchase,
through any of the Company's stock purchase or option plans, more than
either 2,500 shares or $25,000 of fair market value of the Company's
common stock in any given 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 the
Company's Initial Public Offering (Note 9). During 1997, 31,198 shares
of common stock were purchased at a cost of $139,221 through the Plan.
F-15
<PAGE> 60
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Common Stock 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,
1996 1997
---- ----
<S> <C> <C>
Net loss:
As reported ($5,613,984) ($7,243,114)
Pro forma for SFAS No. 123 ($5,755,344) ($7,514,628)
Loss per share (basic and diluted):
As reported ($1.27)
Pro forma for SFAS No. 123 ($1.31)
Pro forma loss per share (basic and diluted):
As reported ($1.45) ($1.17)
Pro forma for SFAS No. 123 ($1.49) ($1.20)
</TABLE>
The fair value of each option grant preceding the Company's Initial
Public Offering (Note 9) was estimated on the date of the grant using
the minimum value method. Such value was computed as the difference
between the current stock price less the present value, at that date,
of the exercise price for a stock that does not pay dividends. The fair
value of each option grant subsequent to the Company's Initial Public
Offering was estimated on the date of the grant using the Black-Scholes
option-pricing model. The assumptions used for the years ended December
31, 1996 and 1997 were as follows: the average risk-free interest rate
was 6.1% and 6.06%, respectively; generally 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; expected volatility is 55%; and
the common stock is expected to pay no dividends.
F-16
<PAGE> 61
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Net loss per Share:
Reconciliations of net loss and shares used in the calculations of net
loss per share are as follows:
<TABLE>
<CAPTION>
For the Year
Ended December 31, 1996
(Pro Forma)
Net Loss Shares Net Loss
(Numerator) (Denominator) Per Share
----------- ------------- ---------
<S> <C> <C> <C>
Loss available to common stockholders ($5,613,984)
Weighted average shares outstanding,
giving effect to the conversion of
Preferred Stock as of the beginning of
the period (Note 2) 3,873,186
------------ ---------
Net loss per share (basic and diluted) ($5,613,984) 3,873,186 ($1.45)
=========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997
Net Loss Shares Net Loss
(Numerator) (Denominator) Per Share
----------- ------------- ---------
<S> <C> <C> <C>
Pro forma:
Loss available to common stockholders ($7,243,144)
Weighted average shares outstanding,
giving effect to the conversion of
Preferred Stock as of the beginning
of the period (Note 2) 6,190,486
------------ ---------
Net loss per share (basic and diluted) ($7,243,114) 6,190,486 ($1.17)
Reduction of Weighted Average Shares
Outstanding, to give effect to the
conversion of Preferred Stock as of
the effective date of the IPO (Notes
2 and 9) (475,090) (0.10)
------------ --------- ------
Net loss per share
(basic and diluted) ($7,243,114) 5,715,396 ($1.27)
=========== ========= ======
</TABLE>
F-17
<PAGE> 62
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. 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,
1996 1997
---- ----
<S> <C> <C> <C>
Current:
Federal -- --
State $800 $800
---- ----
800 800
---- ----
Deferred:
Federal -- --
State -- --
---- ----
$800 $800
==== ====
</TABLE>
The tax effects of temporary differences which give rise to the
deferred tax provision (benefit) consist of:
<TABLE>
<CAPTION>
For The Years Ended
December 31,
1996 1997
---- ----
<S> <C> <C>
Capitalized research and development costs ($ 338,092) ($1,362,263)
Capitalized inventory costs (64,970) 65,001
Intangibles (71) (9,752)
Property and equipment (30,307) (83,387)
Accrued expenses (24,021) (89,851)
Stock options (41,870) (37,749)
Tax credit carryforwards (123,047) (163,384)
Net operating loss carryforwards (1,877,486) (1,168,476)
Valuation allowance 2,499,864 2,849,861
----------- -----------
$ - $ -
=========== ===========
</TABLE>
F-18
<PAGE> 63
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. 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,
1996 1997
---- ----
<S> <C> <C>
Statutory regular federal income tax rate (34.00%) (34.00%)
Meals and entertainment 0.20 0.10
State taxes 0.01 0.01
Tax credit carryforwards (0.82) (1.06)
Change in valuation allowance 34.62 35.44
Other, net -- (0.48)
------ ------
Effective tax rate 0.01% 0.01%
====== ======
</TABLE>
The components of the net deferred tax asset at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Capitalized research and development costs $ 1,839,095
Capitalized inventory costs 18,067
Intangibles 10,325
Property and equipment 116,182
Accrued expenses 132,066
State taxes 272
Stock options 79,173
Tax credit carryforwards 508,021
Net operating loss carryforwards 4,289,459
Valuation allowance (7,092,660)
-----------
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-19
<PAGE> 64
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Income Taxes, Continued:
At December 31, 1997, the Company had net operating loss carryforwards
for federal and state purposes of approximately $11,592,000 and
$5,073,000, 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 $282,000 and $181,000, 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
$46,000. 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.
13. Commitments And Contingencies:
On May 1, 1997, the Company exercised its option to extend its current
office operating lease and leased additional office space for a period
of one year. At December 31, 1997 two additional one year options
remain available to the Company. As of December 31, 1997, the future
noncancelable minimum lease commitments are $55,504, all relating to
1998.
Rent expense for the years ended December 31, 1996 and 1997 was
$205,123 and $206,442, respectively. The Company received $22,043 and
$4,454 of rental sublease income for the years ended December 31, 1996
and 1997, respectively.
14. Related Party Transactions:
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 1-1/2% of the net
revenues from products developed utilizing the patented technology for
a period of ten years from the first commercial sale of such products
and a royalty of 1% of net revenue on any product that bears the name
of the consultant (for as long as it bears the name). Commercial sale
of these products commenced in November 1995. Royalty expense under
these license agreements totaled $11,546 and $20,541 for the years
ended December 31, 1996 and 1997, respectively.
In November 1994, the Company licensed technology from a consultant for
which the Company pays a royalty of 1% of net sales on any product that
bears the name of the consultant. Royalties paid under this agreement
were $11,547 in 1996 and $17,614 in 1997.
F-20
<PAGE> 65
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Related Party Transactions, Continued:
In October 1996, the Company licensed technology from a consultant for
which a royalty of 1% of net sales of a specified product will be paid
until October 8, 1999 and thereafter as long as the product continues
to use a derivative of the consultant's name. Royalties paid under this
agreement were $1,415 in 1997.
15. Distribution Agreement
Concurrent with the execution of the Subordinated Convertible Note
Agreement described in Note 7, the parties also entered into a
Distribution Agreement, which provides for exclusive European
distribution of the Company's neuro products. The Distribution
Agreement has a five-year term, which will commence upon the first
commercial sale of such products, and may be canceled by the Company
upon a sale of substantially all the Company's assets or change in
control of the Company. In such event, the cancellation penalty to be
paid to the distributor is the greater of $1 million or an amount based
on the distributor's gross profit, as defined in the Distribution
Agreement.
16. Concentrations Of Credit Risk:
At December 31, 1997, the Company had approximately $5,270,000 of cash
and cash equivalents that were in excess of the federally-insured limit
of $100,000 per bank. Additionally, the Company had approximately
$6,304,000 invested in commercial paper having maximum maturities of
six months. All such investments are in the custody of one 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 as of any date or for any period presented.
17. Segment Information
The Company operates in one industry segment, and, geographically,
derives revenues from the United States and Europe. European revenues
for the years ended December 31, 1996 and 1997 constituted 4% and 3%,
respectively, of consolidated revenues.
F-21
<PAGE> 66
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. Genyx Medical, Inc.
On November 17, 1997, the Company licensed its proprietary Embolyx(TM)
technology to its new subsidiary, Genyx Medical, Inc., ("Genyx") in
connection with non-vascular applications for gynecological and
urological procedures. Genyx licensed back to the Company the right to
develop, manufacture and market any product which incorporates or uses
the Genyx modified Embolyx(TM) technology outside of the applications
licensed to Genyx. As consideration for the license agreement and for
certain commitments described below, Genyx issued 850,000 shares of its
common stock to the Company, which constitutes 85% of its currently
outstanding shares, and entered into a royalty arrangement whereby
Genyx compensates the Company based on net revenues derived from sale
of licensed products by Genyx. In addition, the Company agreed to fund
start-up costs of Genyx in an amount not to exceed $100,000 through
February 28, 1998. Such costs amounted to $30,784 in 1997 and were
recorded by the Company as research and development expense.
On March 12, 1998, Genyx received an equity financing commitment
aggregating $3 million, $1 million of which was received on that date,
and $2 million of which is expected to be received in April 1998 in
conformity with the terms of the equity financing agreement.
F-22
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
this 1st day of December 1997, by and between MICRO THERAPEUTICS, INC., a
Delaware corporation (the "Company"), and HAROLD A. HURWITZ, an individual (the
"Employee").
R E C I T A L
The Company desires to employ Employee in the capacity hereinafter
stated, and the Employee desires to enter into the employ of the Company in that
capacity for the period and pursuant to the terms and conditions set forth
herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Employee,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee as the Chief
Financial Officer, and Employee accepts such employment and agrees to devote all
of his efforts and skills diligently and on such basis as shall be assigned to
him by the Company as provided herein in performing his duties hereunder for the
benefit of the Company.
2. TERM. The term of the Employee's employment hereunder shall be for a
period of eighteen months (18), commencing on the date of this Agreement,
subject to earlier termination as hereafter specified. Thereafter, Employee will
continue employment as an "at will" employee of the Company.
3. POSITION AND DUTIES.
3.1 SERVICE WITH THE COMPANY. During the term of this Agreement,
the Employee agrees to perform such duties and on such basis as shall be
assigned to him from time to time by the Company's Chief Executive Officer (the
"CEO"), the Board of Directors of the Company; such duties, however, to be
commensurate with the Employee's position as the Chief Financial Officer.
3.2 NO CONFLICTING DUTIES. During the term hereof, the Employee
shall not serve as an officer, director, employee, consultant or advisor to any
other business; provided, however, that the Employee may serve as a director of
another corporation so long as (i) such corporation does not compete, directly
or indirectly, with the Company or any of its Affiliates (as defined in Section
8.7), (ii) such services do not adversely effect Employee's ability to perform
his duties under this Agreement, and (iii) such service is first approved by the
Board of Directors of the Company. The Employee hereby confirms that he is under
no contractual commitments inconsistent with his obligations set forth in this
Agreement, and agrees that during the term of this Agreement he will not render
or perform services, or enter into any contract to do so, for any other
corporation, firm, entity
1
<PAGE> 2
or person which are inconsistent with the provisions of this Agreement.
4. COMPENSATION.
4.1 BASE SALARY. As compensation for all services to be rendered
by the Employee under this Agreement, the Company shall pay to the Employee a
base annual salary of One Hundred Thirty-five Thousand Dollars ($135,000) (the
"Base Salary"), which shall be paid on a regular basis in accordance with the
Company's normal payroll procedures and policies. The amount of the Base Salary
shall be reviewed annually by the Board of Directors, and the Company's Board of
Directors shall determine, in its sole discretion, whether Employee's Base
Salary shall be increased, such determination to be made on the basis of an
evaluation of the Employee's performance, the performance of the Company and
such other factors as the Board of Directors deem appropriate.
4.2 INCENTIVE COMPENSATION PLANS.
(i) GENERAL TERMS. Commencing the date hereof, Employee
shall become eligible to participate in an incentive compensation plan as
specifically provided for herein for 1998 and as later agreed upon for future
years based upon the plan developed by the Company and Employee. All amounts to
which Employee may be entitled under such incentive compensation plan shall be
subject to the provisions of Section 5 below with respect to the effect of any
termination of employment on compensation of the Employee and to the provisions,
rules and regulations of any such plan.
(ii) PAYMENT OF BONUSES. The Company shall pay the bonuses
provided in this Section 4.2 on a quarterly basis forty-five (45) days following
the end of each calendar quarter.
(iii) INCENTIVE STOCK OPTION. Concurrent herewith, the
Company shall grant Employee an incentive stock option to purchase Fifty
Thousand (50,000) shares of the Company's Common Stock pursuant to the terms and
conditions of that certain Incentive Stock Option Agreement of even date
herewith, at an exercise price of Five and 75/100 Dollars ($5.75) per share, of
which twenty-five percent (25%) of such options shall vest on December 1, 1998
and 1,042 Shares shall vest in equal monthly installments over the next three
years, subject to the provisions of such Incentive Stock Option Agreement until
1,030 Shares vest on December 1, 2001.
4.3 PARTICIPATION IN BENEFIT PLANS. Employee shall be entitled to
participate in all employee benefit plans or programs generally available to
employees of the Company, to the extent that his position, title, tenure,
salary, age, health and other qualifications make him eligible to participate
therein.
2
<PAGE> 3
4.4 EXPENSES. In accordance with the Company's policies
established from time to time, the Company will pay or reimburse the Employee
for all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentment of
appropriate vouchers, including reimbursement of travel expenses, provided that
such travel expenses are approved in advance by the Company.
5. COMPENSATION UPON THE TERMINATION OF THE EMPLOYEE'S EMPLOYMENT BY THE
COMPANY.
5.1 VOLUNTARY TERMINATION. In the event that the Employee ceases
to be employed by the Company by reason of a voluntary termination by Employee
pursuant to Section 6.5 below, then he shall not be entitled to any compensation
or any other sum other than the portion of his then current Base Salary which
has accrued through his date of termination and Employee shall forfeit any
Performance Bonus to which the Employee would, but for such termination of
employment, be entitled as of the date of termination. All payments required to
be made by the Company to the Employee pursuant to this Section 5.1 shall be
paid on a regular basis in accordance with the Company's normal payroll
procedures and policies.
5.2 INVOLUNTARY TERMINATION FOR CAUSE. In the event that the
Employee ceases to be employed by the Company by reason of the termination of
Employee's employment by the Company pursuant to Section 6.1, 6.2 or 6.3 below,
then he shall not be entitled to any compensation, nor shall the Company have
any obligation to pay any sum or have any liability to Employee whether as
compensation for his services or as a result of such termination of employment,
other than (i) the portion of his then current Base Salary which has accrued
through his date of termination, and (ii) only in the event of the termination
of Employee's employment pursuant to Section 6.1 or 6.2, Employee shall receive
that portion of the Performance Bonus to which the Employee would have been
entitled to if he remained in employment through the end of the current quarter
multiplied by a fraction the numerator of which is the number of full months
Employee was employed by the Company for such quarter and the denominator is
three. All payments required to be made by the Company to the Employee pursuant
to this Section 5.2 shall be paid in accordance with the Company's normal
payroll procedures and policies.
5.3 INVOLUNTARY TERMINATION WITHOUT CAUSE. In the event that the
Employee ceases to be employed by the Company by reason of the involuntary
termination of Employee by the Company without Cause pursuant to Section 6.4
below, Employee shall not be entitled to any compensation, nor shall the Company
have any obligation to pay any sum or have any liability to Employee, whether as
compensation for his services or as a result of such termination of employment,
other than (i) the portion of his then current Base Salary which has accrued
through his date of termination, and (ii) Employee shall receive that portion of
the Performance Bonus to which Employee would have been entitled to if he
remained in employment through the end of the then current calendar quarter
multiplied by a fraction the numerator of which is the number of full months
Employee was employed by the Company for such quarter and the denominator is
three. In the event that the Employee ceases to be employed by the Company by
reason of the involuntary termination of Employee by the Company without Cause
pursuant to Section 6.4 below following a Change of Control of the Company
occurring during the first twelve months of the term of this Agreement and such
termination occurs within six months of the Change of Control, then the Company
shall pay the amounts in items (i) and (ii) above plus the Company shall pay
Employee an amount of severance of
3
<PAGE> 4
One Hundred Fifty Thousand Dollars ($150,000) ("Severance Amount"). All payments
required to be made by the Company to the Employee pursuant to this Section 5.3
shall be paid in a single payment at the time of such termination on a basis in
accordance with the Company's normal payroll procedures and policies.
6. TERMINATION PRIOR TO EXPIRATION OF THE TERM.
6.1 DISABILITY. Employee's employment shall terminate
immediately, without notice, upon the Employee's becoming totally disabled. For
purposes of this Agreement, the term "totally disabled" or "total disability"
means an inability of Employee, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of his duties for a period of 90 or
more days during any twelve month period hereunder, as determined by the
Company's Board of Directors.
6.2 DEATH OF EMPLOYEE. Employee's employment shall terminate
immediately, without notice, upon the death of Employee.
6.3 TERMINATION FOR CAUSE. The Company may terminate Employee's
employment at any time for "Cause" (as hereinafter defined) immediately upon
written notice to Employee. As used herein, the term "Cause" shall mean Employee
(i) commits a material breach of his covenants under this Agreement; (ii)
commits an action that (A) under applicable law or government regulations, could
either be held to constitute the commission of any felony, or a misdemeanor
involving moral turpitude, or subject the Company to significant civil
liabilities or penalties, (B) in the reasonable judgment of the CEO or Board of
Directors of the Company could materially adversely affect, or has materially
adversely affected, the reputation of the Company or any Affiliate, or the
relationship of the Company with any client or customer or any government
agency; or (iii) has refused or failed to perform any of his material duties to
the reasonable satisfaction of the CEO or the Board of Directors of the Company
and such refusal or failure has continued after Employee has received at least
one (1) written warning specifically advising the Employee of such failure or
refusal and the remedial action which are necessary to be taken by him and he
has been given a reasonable time period after such warning to take such remedial
action.
6.4 TERMINATION WITHOUT CAUSE. The Company may terminate
Employee's employment without Cause immediately upon written notice to Employee.
6.5 VOLUNTARY TERMINATION. Employee may terminate his employment
for any reason or no reason at any time upon thirty (30) days' prior written
notice to the Company's CEO; provided, however, that, at the CEO's sole election
the effective date of such termination may be shortened to any date between the
fifth (5th) and the thirtieth (30th) day following the date of the Employee's
notice of termination hereunder.
7. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Employee, assign its rights and
obligations under this Agreement to an Affiliate or to any corporation, firm or
other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
4
<PAGE> 5
provisions of this Agreement including this Section 7.
8. MISCELLANEOUS.
8.1 GOVERNING LAW. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
California.
8.2 PRIOR AGREEMENTS. This Agreement together with the employment
letter from the Company to Employee and the Employee's Confidentiality Agreement
contain the entire agreement of the parties relating to the subject matter
hereof and supersedes all agreements and understanding with respect to such
subject matter not described herein, and the parties hereto have made no other
agreements, representations or warranties relating to the subject matter of this
Agreement which are not set forth herein.
8.3 WITHHOLDING TAXES. The Company may withhold from any salary
and benefits payable under this Agreement, including, without limitation, the
Shares to be delivered hereunder, all federal, state, city or other taxes or
amounts as shall be required to be withheld pursuant to any law or governmental
regulation or ruling.
8.4 AMENDMENTS. No amendment or modification of this Agreement
shall be deemed effective unless made in writing signed by the parties hereto.
8.5 NO WAIVER. No term or condition of this Agreement shall be
deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
8.6 SEVERABILITY. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect. In furtherance and not in limitation of
the foregoing, should the duration or geographical extent of, or business
activities covered by any provision of this Agreement be in excess of that which
is valid and enforceable under applicable law, then such provision shall be
construed to cover only the maximum duration, extent or activities which may be
validly and enforceably covered under applicable law. The Employee acknowledges
the uncertainty of the law in this respect and expressly stipulates that this
Agreement shall be given the construction which renders its provisions valid and
enforceable to the maximum extent (not exceeding its express terms) possible
under applicable law.
8.7 DEFINITIONS. As used in this Agreement, the term "Affiliate"
means any corporation, association or other business entity of which more than
50% of the total voting power of shares of stock entitled to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by the Company. The term "monthly Base
Salary" shall refer to an amount equal to one-twelfth of Employee's annual Base
Salary. Term "Change of Control" as used in Section 5.3 shall mean (i) the
acquisition, directly or indirectly, by any person or group (within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the
beneficial ownership of more than fifty percent (50%) of the outstanding
securities of the
5
<PAGE> 6
Company; (ii) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated; (iii) the sale, transfer
or other disposition of all or substantially all of the assets of the Company;
(iv) a complete liquidation or dissolution of the Company; or (v) any reverse
merger in which the Company is the surviving entity but in which securities
possessing more than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
merger.
8.8 COUNTERPART EXECUTION. This Agreement may be executed by facsimile
and in counterparts, each of which shall be deemed an original and all of which
when taken together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
"Company"
MICRO THERAPEUTICS, INC. a Delaware corporation
By: /s/ GEORGE WALLACE
-------------------------------------------
George Wallace, Chief Executive Officer
"Employee"
/s/ HAROLD HURWITZ
-------------------------------------------
Harold A. Hurwitz
6
<PAGE> 1
EXHIBIT 10.11
EXECUTION COPY
CONVERTIBLE SUBORDINATED NOTE AGREEMENT
BY AND BETWEEN
GUIDANT CORPORATION
AND
MICRO THERAPEUTICS, INC.
DATED AS OF NOVEMBER 17, 1997
$5,000,000
5% CONVERTIBLE SUBORDINATED NOTE, DUE OCTOBER 31, 2002
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Section 1. Description of Note and Commitment.................................. 2
Section 1.1 Description of Note......................................... 2
Section 1.2 Commitment, Closing Date.................................... 2
Section 2. Interpretation of Agreement; Definitions............................ 2
Section 2.1 Definitions................................................. 2
Section 2.2 Accounting Principles....................................... 4
Section 2.3 Directly or Indirectly...................................... 5
Section 2.4 Legal Holidays.............................................. 5
Section 3. Representations and Warranties of the Company and its Subsidiaries.. 5
Section 3.1 Subsidiaries of the Company................................. 5
Section 3.2 Corporate Organization and Authority........................ 5
Section 3.3 Capital Structure........................................... 5
Section 3.4 Equity Investments.......................................... 6
Section 3.5 Authority................................................... 6
Section 3.6 Financial Statements........................................ 6
Section 3.7 Securities and Exchange Commission Documents................ 7
Section 3.8 Business Changes............................................ 7
Section 3.9 Indebtedness................................................ 8
Section 3.10 Litigation.................................................. 9
Section 3.11 Compliance with Law......................................... 9
Section 3.12 Title to Properties......................................... 9
Section 3.13 Licenses, etc............................................... 9
Section 3.14 No Default.................................................. 9
Section 3.15 Proprietary Rights.......................................... 10
Section 3.16 Taxes....................................................... 11
Section 3.17 Use of Proceeds............................................. 11
Section 3.18 Private Offering............................................ 11
Section 3.19 Employee Plans and Relations................................ 11
Section 3.20 Environmental Matters....................................... 12
Section 3.21 Brokers or Finders.......................................... 12
Section 3.22 Full Disclosure............................................. 12
Section 4. Representations and Warranties of Guidant........................... 12
Section 4.1 Corporate Organization...................................... 12
Section 4.2 Authority................................................... 13
Section 4.3 Restricted Note............................................. 13
Section 4.4 No Conflict................................................. 13
Section 4.5 Brokers or Finders.......................................... 14
Section 5. Covenants of the Company............................................ 14
Section 5.1 Corporate Existence......................................... 14
Section 5.2 Conduct of Business in Normal Course........................ 14
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Section 5.3 Maintenance................................................. 14
Section 5.4 Preservation of Business and Relationships.................. 14
Section 5.5 Merger; Acquisitions........................................ 14
Section 5.6 Sale or Lease of Assets; Dispositions....................... 15
Section 5.7 Indebtedness................................................ 15
Section 5.8 Insurance................................................... 15
Section 5.9 Taxes, Claims for Labor and Materials, Compliance
with Laws................................................... 15
Section 5.10 Notice of Claims and Litigation............................. 15
Section 5.11 Disposal of Shares of a Subsidiary.......................... 16
Section 5.12 Transactions with Affiliates................................ 16
Section 5.13 Reports and Access to Information........................... 16
Section 5.14 Visitation Rights Regarding the Board of Directors.......... 16
Section 5.15 Rule 144 Reporting.......................................... 17
Section 6. Additional Agreements............................................... 18
Section 7. Stock Purchase Agreement............................................ 18
Section 7.1 Stock Purchase Option....................................... 18
Section 7.2 Termination of Stock Purchase Option........................ 18
Section 7.3 Definition of Milestone..................................... 19
Section 7.4 Default and Cross Defaults.................................. 19
Section 8. Credit Agreement.................................................... 19
Section 8.1 Credit Agreement............................................ 19
Section 8.2 Termination of the Credit Agreement......................... 19
Section 8.3 Default and Cross Defaults.................................. 20
Section 9. Conditions Precedent................................................ 20
Section 9.1 Conditions to Obligations of Guidant........................ 20
Section 9.2 Conditions to Obligations of the Company.................... 20
Section 10. Events of Default................................................... 21
Section 10.1 Payments.................................................... 21
Section 10.2 Bankruptcy.................................................. 21
Section 10.3 Commencement of an Action................................... 21
Section 10.4 Default of Senior Indebtedness.............................. 21
Section 10.5 Covenants and Agreements.................................... 22
Section 10.6 Default Under Other Agreements.............................. 22
Section 10.7 Change of Control of the Company............................ 22
Section 10.8 Other Remedies.............................................. 22
Section 11. Subordination....................................................... 22
Section 11.1 Senior Indebtedness......................................... 22
Section 11.2 Default on Senior Indebtedness.............................. 22
Section 11.3 Effect of Subordination..................................... 23
Section 11.4 Subrogation................................................. 23
Section 11.5 Undertaking................................................. 23
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Section 12. Conversion of Note.................................................. 24
Section 12.1 Conversion Privilege and Conversion Price................... 24
Section 12.2 Exercise of Conversion Privilege............................ 24
Section 12.3 Fractions of Shares......................................... 24
Section 12.4 Adjustment of Conversion Price.............................. 25
Section 12.5 Notice of Adjustments of Conversion Price................... 29
Section 12.6 Notice of Certain Corporate Action.......................... 29
Section 12.7 Company to Reserve Common Stock............................. 30
Section 12.8 Taxes on Conversions........................................ 30
Section 12.9 Covenant as to Common Stock................................. 30
Section 12.10 Provisions in Case of Consolidation, Merger or Sale
of Assets................................................... 30
Section 12.11 Transfer and Exchange of Note............................... 31
Section 12.12 Loss, Theft, Mutilation or Destruction of Note.............. 31
Section 12.13 Expenses, Stamp Tax Indemnity............................... 31
Section 12.14 Cancellation of Converted Note.............................. 31
Section 13. Right of First Offer................................................ 32
Section 13.1 The Right of First Offer.................................... 32
Section 13.2 Grant....................................................... 32
Section 13.3 Definition of New Securities................................ 32
Section 13.4 Exercise of Right of First Offer............................ 32
Section 13.5 Termination of Right of First Offer......................... 33
Section 14. Indemnification..................................................... 33
Section 14.1 Indemnification by the Company.............................. 33
Section 14.2 Indemnification by Guidant.................................. 34
Section 14.3 Indemnification Procedure................................... 34
Section 15. Miscellaneous....................................................... 35
Section 15.1 Powers and Rights Not Waived; Remedies Cumulative........... 35
Section 15.2 Notice...................................................... 35
Section 15.3 Successors and Assigns...................................... 36
Section 15.4 Survival of Covenants and Representations................... 36
Section 15.5 Severability................................................ 36
Section 15.6 Waiver of Conditions........................................ 37
Section 15.7 Counterparts................................................ 37
Section 15.8 Governing Law............................................... 37
Section 15.9 Captions.................................................... 38
</TABLE>
EXHIBITS
Exhibit A Form of 5% Convertible Subordinated Note
Exhibit B Form of Distribution Agreement
Exhibit C Form of Stock Purchase Agreement
Exhibit D Form of Credit Agreement
Exhibit E Disclosure Schedule
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<PAGE> 5
CONVERTIBLE SUBORDINATED NOTE AGREEMENT
THIS CONVERTIBLE SUBORDINATED NOTE AGREEMENT (this "Agreement"),
entered into as of the 17th day of November, 1997, by and between GUIDANT
CORPORATION, an Indiana corporation ("Guidant"), and MICRO THERAPEUTICS, INC., a
Delaware corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, Guidant desires to purchase from the Company, and the Company
desires to sell to Guidant, a certain 5% Convertible Subordinated Note, due
October 31, 2002, in the aggregate principal amount of Five Million Dollars
($5,000,000) (the "Note"), in the form attached hereto as Exhibit A, all as more
fully described below, on the terms and conditions set forth herein; and
WHEREAS, the Company and Guidant desire to enter into a Distribution
Agreement (the "Distribution Agreement") in the form attached hereto as Exhibit
B, and the Company and Guidant acknowledge that the Agreement and Note are the
consideration for the Distribution Agreement; and
WHEREAS, upon the achievement of certain Milestones (as defined herein)
and at the Company's option, the Company and Guidant may enter into the Stock
Purchase Agreement (the "Stock Purchase Agreement") in the form attached hereto
as Exhibit C which provides that the Company shall sell to Guidant and Guidant
shall purchase up to Three Million Dollars ($3,000,000) worth of common stock,
par value $0.001 per share, of the Company (the "Common Stock"); and
WHEREAS, upon the achievement of certain Milestones and at the
Company's option, the Company and Guidant may enter into the Credit Agreement
(the "Credit Agreement") in the form attached hereto as Exhibit D which provides
that Guidant, as lender, shall loan to the Company, as borrower, an amount not
to exceed an aggregate of Two Million Dollars ($2,000,000); and
WHEREAS, the Company and Guidant desire to make certain
representations, warranties, covenants and agreements in connection with the
purchase and sale of the Note and desire to prescribe certain conditions
precedent to such purchase and sale; and
WHEREAS, the Company and Guidant desire to make certain
representations, warranties, covenants and agreements in connection with
entering into the Stock Purchase Agreement and the Credit Agreement and desire
to prescribe certain conditions precedent to such agreements:
NOW, THEREFORE, in consideration of the promises and of the mutual
provisions, agreements and covenants contained herein, the Company and Guidant
hereby agree as follows:
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Section 1. Description of Note and Commitment.
Section 1.1 Description of Note. The Company has authorized the
purchase and sale of Five Million Dollars ($5,000,000) aggregate principal
amount of the Note to be dated the date of issue, to bear interest from such
date at the rate of five percent (5%) per annum, payable quarterly in arrears on
January 31, April 30, July 30 and October 31, each year (commencing January 31,
1998) and at maturity and to bear interest on overdue principal and premium, if
any, and (to the extent legally enforceable) on any overdue installment of
interest at the rate of eight percent (8%) per annum after the date due, whether
at maturity or by declaration, acceleration or otherwise, until paid, to be
expressed to mature on October 31, 2002, and to be substantially in the form
attached hereto as Exhibit A. The Note is not subject to redemption or
prepayment. The Note is convertible into Common Stock on the terms and
conditions set forth in Section 0 hereof. The term "Note" as used herein shall
include the Note delivered pursuant to this Agreement in the form attached
hereto as Exhibit A.
Section 1.2 Commitment, Closing Date. Subject to the terms and
conditions hereof and on the basis of the representations, warranties, covenants
and agreements set forth herein, the Company agrees to sell to Guidant, and
Guidant agrees to purchase from the Company, the Note in the respective
aggregate principal amount as set forth in Exhibit A at a purchase price of one
hundred percent (100%) of the principal amount thereof on the Closing Date (as
defined herein).
The closing of the purchase and sale of the Note will be made at the
offices of Pillsbury Madison & Sutro LLP, 2550 Hanover Street, Palo Alto,
California 94304, against payment therefor of the purchase price in immediately
available funds at 4:00 p.m. Pacific time, on November 17, 1997, or such later
date as shall mutually be agreed upon by the Company and Guidant (the "Closing
Date"). The Note delivered to Guidant on the Closing Date will be delivered to
Guidant in the form of a single Note in the form attached hereto as Exhibit A
for the full amount of Guidant's purchase.
Section 2. Interpretation of Agreement; Definitions.
Section 2.1 Definitions. Unless the context otherwise requires, the
terms hereinafter set forth when used herein shall have the following meanings
and the following definitions shall be equally applicable to both the singular
and plural forms of any of the terms herein defined:
"Affiliate" shall mean any Person (other than a Subsidiary) (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Company, (ii) which
beneficially owns or holds five percent (5%) or more of any class of the Voting
Stock of the Company or (iii) five percent (5%) or more of the Voting Stock (or
in the case of a Person which is not a corporation, five percent (5%) or more of
the equity interest) of which is beneficially owned or held by the Company or a
Subsidiary. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of Voting Stock, by contract or otherwise.
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"Agreement" shall mean this Note Agreement.
"Board of Directors" shall mean either the board of directors of the
Company or any duly authorized committee thereof.
"Board Resolution" shall mean a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification.
"Business Day" shall mean any day other than a Saturday, Sunday, legal
holiday or other day on which commercial banks located in San Francisco,
California are not authorized or required by law to be closed.
"Closing Date" shall have the meaning specified in Section 1.2 hereof.
"Commission" shall mean the Securities and Exchange Commission, or
successor regulatory entity.
"Common Stock" shall mean the Common Stock, par value $0.001 per share,
of the Company.
"Company" shall mean Micro Therapeutics, Inc., a Delaware corporation,
and any Person who succeeds to all, or substantially all, of the assets or
business of Micro Therapeutics, Inc.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"Event of Default" shall have the meaning set forth in Section 10
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"GAAP" shall mean generally accepted accounting principles at the time
in the United States.
"Holder" shall mean the registered holder of the Note, initially
Guidant.
"Interest Payment Date" shall mean the Stated Maturity of an
installment of interest on the Note.
"Lien" shall mean any interest in property securing an obligation owed
to, or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions,
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<PAGE> 8
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting property. For the purposes of this
Agreement, the Company or a Subsidiary shall be deemed to be the owner of any
property which it has acquired or holds subject to a conditional sale agreement,
capitalized lease or other arrangement pursuant to which title to the property
has been retained by or vested in some other Person for security purposes and
such retention or vesting shall constitute a Lien.
"Nasdaq" and "Nasdaq National Market" shall have the meanings specified
in Section 12.4(h) hereof.
"Person" shall mean an individual, partnership, corporation, limited
liability company, trust or unincorporated organization, and a government or
agency or political subdivision thereof.
"Preferred Stock" shall mean stock of the Company or a Subsidiary of
any class or series ranking prior to any other class or series of stock of the
Company or the Subsidiary with respect to whether the payment of dividends or
the distribution of assets upon the liquidation, dissolution or winding up of
the Company or the Subsidiary.
"Purchased Shares" shall have the meaning specified in Section 12.4(f)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stated Maturity," when used with respect to the Note or any
installment of interest hereon, shall mean the date specified in the Note as the
fixed date on which the principal of the Note or any installment of interest is
due and payable.
"Subsidiary" shall mean a subsidiary of the Company.
"Voting Stock" shall mean Securities of any class or classes, the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
Section 2.2 Accounting Principles. Where the character or amount of any
asset or liability or item of income or expense is required to be determined or
any consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP, to
the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
Section 2.3 Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether the action in
question is taken directly or indirectly by such Person.
Section 2.4 Legal Holidays. In any case where any Interest Payment Date
or Stated Maturity of the Note or the last date on which Guidant has the right
to convert
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<PAGE> 9
the Note shall not be a Business Day, then (notwithstanding any other provision
of this Agreement or of the Note) payment of interest or principal or conversion
of the Note, as the case may be, need not be made on such date, but may be made
on the next succeeding Business Day with the same force and effect as if made on
the Interest Payment Date, or at the Stated Maturity, or on such last day for
conversion, provided that no interest shall accrue for the period from and after
such Interest Payment Date or Stated Maturity, as the case may be.
Section 3. Representations and Warranties of the Company and its
Subsidiaries. Except as otherwise set forth in the Disclosure Schedule attached
hereto as Exhibit E (the "Disclosure Schedule") or in any document expressly
referenced in the Disclosure Schedule, the Company and its Subsidiaries
represent and warrant to Guidant as of the date hereof as follows:
Section 3.1 Subsidiaries of the Company. The Disclosure Schedule states
the name of each of the Subsidiaries of the Company, its jurisdiction of
incorporation and the percentage of its Voting Stock owned by the Company and/or
its Subsidiaries. The Company and each of its Subsidiaries has good and
marketable title to all of the shares it purports to own of the stock of each
Subsidiary, free and clear in each case of any Lien.
Section 3.2 Corporate Organization and Authority. The Company, and each
of its Subsidiaries: (a) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation; (b) has
all requisite power and authority and all necessary licenses and permits to own
and operate its properties and to carry on its business as now conducted and as
presently proposed to be conducted; and (c) is duly licensed or qualified and is
in good standing as a foreign corporation in each jurisdiction wherein the
nature of the business transacted by it or the nature of the property owned or
leased by it makes such licensing or qualification necessary.
Section 3.3 Capital Structure. The authorized capital stock of the
Company consists of Twenty Million (20,000,000) shares of Common Stock, par
value $0.001 per share, and Five Million (5,000,000) shares of Preferred Stock,
par value $0.001 per share. As of October 31, 1997, Six Million Four Hundred
Eighty-Nine Thousand Five Hundred Ninety-One (6,489,591) shares of the Common
Stock were issued and outstanding and no shares of the Preferred Stock were
issued and outstanding.
All of the outstanding Common Stock was issued in compliance with
applicable federal and state securities laws and regulations. All of the
outstanding shares of the Common Stock are, and any shares of Common Stock
issuable upon conversion of the Note and pursuant to the Stock Purchase
Agreement (as defined in Section 7 hereof) will be, duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, the Company's Certificate of Incorporation or Bylaws, or any
agreement to which the Company is a party or is bound.
Section 3.4 Equity Investments. The Company does not own any equity
stock or interest, directly or indirectly, in any corporation, partnership,
joint venture, firm or other entity. The Company has no Subsidiaries except
those set forth in the Disclosure Schedule.
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<PAGE> 10
Section 3.5 Authority. The Company has all requisite corporate power
and authority to enter into this Agreement and to issue the Note, and will have
all requisite corporate power and authority to enter into the Stock Purchase
Agreement and the Credit Agreement and, subject to satisfaction of the
conditions set forth herein and therein, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Note and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company. This Agreement and the Note have been duly executed and delivered by
the Company, and constitutes the valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to the effect of applicable
bankruptcy, insolvency, reorganization or other similar laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies. Provided
the conditions set forth in Section 9 hereof are satisfied, the execution and
delivery of this Agreement and the Note do not or will not, and the consummation
of the transactions contemplated hereby will not, conflict with, or result in
any violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation under (a) any provision of the Certificate of Incorporation or
Bylaws of the Company, or (b) any material agreement or instrument, permit,
franchise, license, judgment or order, applicable to the Company or its
respective properties or assets.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority (a "Governmental Entity"), is required by, or with
respect to, the Company in connection with the execution and delivery of this
Agreement or the consummation by the Company of the transactions contemplated
hereby or thereby, except for such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country.
Section 3.6 Financial Statements. The Company has furnished to Guidant
its audited consolidated statement of operations, statement of stockholders'
equity and statement of cash flows for the fiscal year ended December 31, 1996
and the Company's audited consolidated balance sheet at December 31, 1996; and
the unaudited consolidated statement of operations and statement of cash flows
for the ten (10) months ended October 31, 1997 and the unaudited consolidated
balance sheet at October 31, 1997. The Company will furnish to Guidant as soon
as available its audited consolidated financial statements for the fiscal year
ended December 31, 1997. The balance sheet at October 31, 1997 is hereinafter
referred to as the "Company Balance Sheet," and all such financial statements
are hereinafter referred to collectively as the "Company Financial Statements."
The Company Financial Statements have been and will be prepared in accordance
with GAAP applied on a consistent basis during the periods involved, and fairly
present and will present the consolidated financial position of the Company and
the results of its operations as of the date and for the periods indicated
thereon. At the date of the Company Balance Sheet (the "Company Balance Sheet
Date"), neither Company nor its consolidated subsidiaries had any liabilities or
obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise) not reflected on the Company Balance Sheet or the accompanying notes
thereto.
Section 3.7 Securities and Exchange Commission Documents.
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The Company has furnished to Guidant a true and complete copy of the Company's
Form 10-KSB for the year ended December 31, 1996, Form 10-QSB for each of the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 (the
"Company SEC Documents"). As of their respective filing dates, the Company SEC
Documents comply or will comply in all material respects with the requirements
of the Exchange Act or the Securities Act, and none of the Company SEC Documents
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading, except to the extent corrected by a subsequently filed Company SEC
Document.
Section 3.8 Business Changes. Since September 30, 1997, except as
otherwise contemplated by this Agreement or as disclosed in writing to Guidant,
the Company has conducted its business only in the ordinary and usual course
and, without limiting the generality of the foregoing:
(a) There have been no changes in the condition (financial or
otherwise), business, net worth, assets, properties, employees, operations,
obligations or liabilities of the Company which, in the aggregate, have had or
may be reasonably expected to have a materially adverse effect on the condition,
business, net worth, assets, prospects, properties or operations of the Company.
(b) The Company has not issued, or authorized for issuance, or entered
into any commitment to issue, any equity security, bond, note or other security
of the Company.
(c) The Company has not incurred debt for borrowed money, nor incurred
any obligation or liability except in the ordinary and usual course of business
and in any event not in excess of Fifty Thousand Dollars ($50,000) for any
single occurrence.
(d) The Company has not paid any obligation or liability, or
discharged, settled or satisfied any claim, lien or encumbrance, except for
current liabilities in the ordinary and usual course of business and in any
event not in excess of Fifty Thousand Dollars ($50,000) for any single
occurrence.
(e) The Company has not declared or made any dividend, payment or other
distribution on or with respect to any share of capital stock of the Company.
(f) The Company has not purchased, redeemed or otherwise acquired or
committed itself to acquire, directly or indirectly, any share or shares of
capital stock of the Company.
(g) The Company has not mortgaged, pledged, or otherwise encumbered any
of its assets or properties, other than inventory sold in the normal course of
business or accounts receivable.
(h) The Company has not disposed of, or agreed to dispose of, by sale,
lease, license or otherwise, any asset or property, tangible or intangible,
except, in the case of such other assets and property, in the ordinary and usual
course of business, and in each case for a consideration believed to be at least
equal to the fair value of such asset or property and in any event not in excess
of Fifty Thousand Dollars ($50,000) for any single item or One Hundred Thousand
Dollars ($100,000) in the aggregate other than inventory sold or returned in the
normal course
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of business.
(i) The Company has not purchased or agreed to purchase or otherwise
acquire any securities of any corporation, partner ship, joint venture, firm or
other entity; the Company has not made any expenditure or commitment for the
purchase, acquisition, construction or improvement of a capital asset, except in
the ordinary and usual course of business and in any event not in excess of
Fifty Thousand Dollars ($50,000) for any single item or One Hundred Thousand
Dollars ($100,000) in the aggregate.
(j) The Company has not entered into any transaction or contract, or
made any commitment to do the same, except in the ordinary and usual course of
business.
(k) The Company has not sold, assigned, transferred or conveyed, or
committed itself to sell, assign, transfer or convey, any Proprietary Rights (as
defined in Section 3.15 hereof).
(l) The Company has not adopted or amended any bonus, incentive,
profit-sharing, stock option, stock purchase, pension, retirement,
deferred-compensation, severance, life insurance, medical or other benefit plan,
agreement, trust, fund or arrangement for the benefit of employees of any kind
whatsoever, nor entered into or amended any agreement relating to employment,
services as an independent contractor or consultant, or severance or termination
pay, nor agreed to do any of the foregoing.
(m) The Company has not effected or agreed to effect any change in its
directors, officers or key employees.
(n) The Company has not effected or committed itself to effect any
amendment or modification in its Certificate of Incorporation or Bylaws, except
as contemplated by this Agreement.
Section 3.9 Indebtedness. The Disclosure Schedule correctly describes
all debt of the Company and its Subsidiaries in excess of Two Hundred Fifty
Thousand Dollars ($250,000) outstanding of the Closing Date.
Section 3.10 Litigation. There is no claim, dispute, action,
proceeding, notice, order, suit, appeal or investigation, at law or in equity,
pending against the Company, or involving any of its assets or properties,
before any court, agency, authority, arbitration panel or other tribunal (other
than those, if any, with respect to which service of process or similar notice
has not yet been made on the Company), and none have been threatened. The
Company is aware of no facts which, if known to stockholders, customers,
governmental authorities or other persons, would result in any such claim,
dispute, action, proceeding, suit or appeal or investigation which would have a
material adverse effect on the condition (financial or otherwise), business, net
worth, assets, prospects, properties or operations of the Company. The Company
is not subject to any order, writ, injunction or decree of any court, agency,
authority, arbitration panel or other tribunal, nor is it in default with
respect to any notice, order, writ, injunction or decree.
Section 3.11 Compliance with Law. All material licenses, franchises,
permits, clearances, consents, certificates and other evidences of authority of
the
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<PAGE> 13
Company which are necessary to the conduct of the Company's business ("Permits")
are in full force and effect and the Company is not in violation of any Permit
in any material respect. Except for possible exceptions, the curing or
non-curing of which would not have a material adverse effect on the condition
(financial or otherwise), business, net worth, assets, prospects, properties or
operations of the Company, the business of the Company has been conducted in
accordance with all applicable laws, regulations, orders and other requirements
of governmental authorities.
Section 3.12 Title to Properties. The Company and each of its
Subsidiaries has good and marketable title in fee simple (or its equivalent
under applicable law) to all material parcels of real property and has good
title to all the other material items of property it purports to own, except as
sold or otherwise disposed of in the ordinary course of business.
Section 3.13 Licenses, etc. The Company and each of its Subsidiaries
owns or possesses all the material trade names, service marks, licenses and
rights with respect to the foregoing necessary for the present conduct of its
business, without any known conflict with the rights of others.
Section 3.14 No Default.
(a) Each of the Company's material agreements or contracts is a legal,
binding and enforceable obligation by or against the Company, subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium or other
similar federal or state laws affecting the rights of creditors and the effect
or availability of rules of law governing specific performance, injunctive
relief or other equitable remedies (regardless of whether any such remedy is
considered in a proceeding at law or in equity). To the Company's knowledge, no
party with whom the Company has an agreement or contract is in default
thereunder or has breached any term or provision thereof which is material to
the conduct of the Company's business.
(b) The Company has performed, or is now performing, the obligations
of, and the Company is not in material default (or would by the lapse of time
and/or the giving of notice be in material default) in respect of, any contract,
agreement or commitment binding upon it or its assets or properties and material
to the conduct of its business. No third party has raised any claim, dispute or
controversy with respect to any of the contracts of the Company, whether fully
performed or currently being performed, nor has the Company received written
notice or warning of alleged nonperformance, delay in delivery or other
noncompliance by the Company with respect to its obligations under any of those
contracts, nor are there any facts which exist indicating that any of those
contracts may be totally or partially terminated or suspended by the other
parties thereto.
Section 3.15 Proprietary Rights.
(a) The Company has provided Guidant with a complete list in writing of
all patents and applications for patents, trade marks, trade names, service
marks, and copyrights, and applications therefor, owned or used by the Company
or in which it has any rights or licenses, except for software used by the
Company and generally available on the commercial market. The Company has
provided Guidant with a complete and accurate list of all agreements of the
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Company with each officer, employee or consultant of the Company providing the
Company with title and ownership to patents, patent applications, trade secrets
and inventions developed or used by the Company in its business. All of such
agreements so described are valid, enforceable and legally binding, subject to
the effect of applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the rights of creditors or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity).
(b) The Company owns or possesses licenses or other rights to use all
patents, patent applications, trademarks, trademark applications, trade secrets,
service marks, trade names, copy rights, inventions, drawings, designs, customer
lists, proprietary know-how or information, or other rights with respect
thereto (collectively referred to as "Proprietary Rights"), used in the business
of the Company, and the same are sufficient to conduct the Company's business as
it has been and is now being conducted.
(c) The operations of the Company do not conflict with or infringe, and
no one has asserted to the Company that such operations conflict with or
infringe, on any Proprietary Rights, owned, possessed or used by any third
party. There are no claims, disputes, actions, proceedings, suits or appeals
pending against the Company with respect to any Proprietary Rights (other than
those, if any, with respect to which service of process or similar notice may
not yet have been made on the Company), and, none has been threatened against
the Company. To the knowledge of the Company, there are no facts or alleged
facts which would reasonably serve as a basis for any claim that the Company
does not have the right to use, free of any rights or claims of others, all
Proprietary Rights in the development, manufacture, use, sale or other
disposition of any or all products or services presently being used, furnished
or sold in the conduct of the business of the Company as it has been and is now
being conducted.
(d) To the Company's knowledge, no employee of the Company is in
violation of any term of any employment contract, proprietary information and
inventions agreement, non-competition agreement, or any other contract or
agreement relating to the relationship of any such employee with the Company or
any previous employer.
Section 3.16 Taxes. All tax returns required to be filed by the Company
or its Subsidiaries in any jurisdiction have, in fact, been filed, and all
taxes, assessments, fees and other governmental charges upon the Company or its
Subsidiaries or upon any of their respective properties, income or franchises,
which are shown to be due and payable in such returns have been paid. For all
taxable years ending on or before December 31, 1996, the federal income tax
liability of the Company and its Subsidiaries has been satisfied. The Company
does not know of any proposed additional tax assessment against it for which
adequate provision has not been made on its accounts, and no material
controversy in respect of additional federal or state income taxes due since
said date is pending or, to the knowledge of the Company, threatened. The
provisions for taxes on the books of the Company and each of its Subsidiaries
are adequate in all material respects for all open years, and for its current
fiscal period.
Section 3.17 Use of Proceeds. The net proceeds from the sale of the
Note will be used to make an infusion of capital into the Company and for other
corporate purposes.
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Section 3.18 Private Offering. Neither the Company, directly or
indirectly, nor any agent on its behalf has offered or will offer the Note or
any similar security or has solicited or will solicit an offer to acquire the
Note or any similar security from or has otherwise approached or negotiated or
will approach or negotiate in respect of the Note or any similar security with
any Person other than Guidant. Neither the Company, directly or indirectly, nor
any agent on its behalf has offered or will offer the Note or any similar
security or has solicited or will solicit an offer to acquire the Note or any
similar security from any Person so as to bring the issuance of the Note within
the provisions of section 5 of the Securities Act.
Section 3.19 Employee Plans and Relations.
(a) Except as provided in the Company SEC Documents, the Company does
not have any: (i) employee benefit plans, multi-employer plans and employee
benefit plans (as defined in section 3(2) or section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended); (ii) bonus, deferred
compensation, incentive, restricted stock, stock purchase, stock option, stock
appreciation right, phantom stock, debenture, supplemental pension,
profit-sharing, royalty pool, commission or similar plan or arrangement; (iii)
employment, consulting or termination agreement; or (iv) other plan, program,
agreement, procedure, policy, commitment, understanding or other arrangement
relating to employee benefits, executive compensation, fringe benefits,
severance pay, terms of employment or services as a director, officer, employee
or independent contractor.
(b) The Company has not been and is not a party to, or subject to, or
affected by, any collective bargaining agreement or other labor contract. The
Company has complied in all respects with all laws, rules and regulations
relating to employment, equal employment opportunity, nondiscrimination,
immigration, wages, hours, benefits, collective bargaining, the payment of
social security and similar taxes, occupational safety and health and plant
closing.
Section 3.20 Environmental Matters. The Company is, and at all times
during the period prior to the date hereof the Company has been, in compliance
with all applicable local, state and federal statutes, orders, rules, ordinances
and regulations relating to pollution or protection of the environment,
including, without limitation, laws relating to zoning and land use and to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, hazardous or toxic materials or wastes into or on land, ambient
air, surface water, ground water, personal property or structures (including the
protection, cleanup, removal, remediation or damage thereof), or otherwise
related to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, discharge or handling of pollutants, contaminants or
hazardous or toxic substances, materials or wastes.
Section 3.21 Brokers or Finders. The Company has not dealt with any
broker or finder in connection with the transactions contemplated by this
Agreement. The Company has not incurred, and shall not incur, directly or
indirectly, any liability for any brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
Section 3.22 Full Disclosure. Neither the Company Financial Statements
referred to in Section 3.6 hereof nor this Agreement, or any other written
statement furnished by the Company to Guidant in connection with the negotiation
of the sale of the Note,
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contains any untrue statement of a material fact or omits a material fact
necessary to make the statements contained herein or therein not misleading.
There is no fact peculiar to the Company or the Subsidiaries which the Company
has not disclosed to Guidant in writing which materially affects adversely nor,
so far as the Company can now foresee, will materially affect adversely, the
properties, business, profits or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole.
Section 4. Representations and Warranties of Guidant. Except as
contemplated by this Agreement, Guidant represents and warrants to the Company
as of the date hereof as follows:
Section 4.1 Corporate Organization. Guidant is a corporation duly
incorporated, validly existing and in good standing under the laws of Indiana.
Guidant is duly qualified to do business and is in good standing in its state of
incorporation and in each other jurisdiction in which it owns or leases property
or conducts business, except where the failure to be so qualified would not have
a material adverse effect on the business of Guidant. Guidant has all requisite
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted, and possesses all licenses, franchises, rights
and privileges material to the conduct of its business.
Section 4.2 Authority. Guidant has all requisite corporate power and
authority to enter into this Agreement and the related agreements contemplated
herein, and, subject to satisfaction of the conditions set forth herein, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Guidant.
This Agreement has been duly executed and delivered by Guidant and constitutes
the valid and binding obligation of Guidant enforce able in accordance with its
terms, subject to the effect of applicable bankruptcy, insolvency,
reorganization or other similar federal or state laws affecting the rights of
creditors and the effect or availability of rules of law governing specific
performance, injunctive relief or other equitable remedies. Provided the
conditions set forth in Section 9 are satisfied, the execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation under (a) any
provision of the Certificate of Incorporation or Bylaws of Guidant, or (b) any
material agreement or instrument, permit, license, judgment, order, statute,
law, ordinance, rule or regulation applicable to Guidant or its properties or
assets, other than any such conflicts, violations, defaults, terminations,
cancellations or accelerations which individually or in the aggregate would not
have a material adverse effect on Guidant.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required by or with
respect to Guidant in connection with the execution and delivery of this
Agreement by Guidant or the consummation by Guidant of the transactions
contemplated hereby or thereby.
Section 4.3 Restricted Note. Guidant represents and agrees, and in
entering into this Agreement the Company understands, that (a) Guidant is
acquiring the Note for Guidant's own account, and for the purpose of investment
and not with a view to the
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distribution thereof, and that Guidant has no present intention of selling,
negotiating or otherwise disposing of the Note; it being understood, however,
that the disposition of Guidant's property shall at all times be and remain
within its control, and (b) the Note has not been registered under section 5 of
the Securities Act and that Guidant will only re-offer or resell the Note
purchased by Guidant under this Agreement pursuant to an effective registration
statement under the Securities Act or in accordance with an available exemption
from the requirements of section 5 of the Securities Act.
Section 4.4 No Conflict. The execution and delivery of this Agreement
by Guidant and the performance of Guidant's obligations hereunder, (a) are not
in violation or breach of, and will not conflict with or constitute a default
under, any of the terms of the Articles of Incorporation or Bylaws of Guidant or
any of its Subsidiaries, or any material contract, agreement or commitment
binding upon Guidant or any of its assets or properties; (b) will not result in
the creation or imposition of any lien, encumbrance, equity or restriction in
favor of any third party upon any of the assets or properties of Guidant; and
(c) will not conflict with or violate any applicable law, rule, regulation,
judgment, order or decree of any government, governmental instrumentality or
court having jurisdiction over Guidant or any of its assets or properties.
Section 4.5 Brokers or Finders. Guidant has not dealt with any broker
or finder in connection with the transactions contemplated by this Agreement.
Guidant has not incurred, and shall not incur, directly or indirectly, any
liability for any brokerage or finders' fees or agents commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
Section 5. Covenants of the Company.From and after the Closing Date
and continuing so long as any amount remains unpaid on the Note, the Company and
its Subsidiaries covenant and agree with Guidant that:
Section 5.1 Corporate Existence. The Company shall do or cause to be
done all things necessary to preserve and keep in full force and effect the
existence, rights and franchises of the Company and its Subsidiaries.
Section 5.2 Conduct of Business in Normal Course. The Company and its
Subsidiaries shall carry on the business and their activities diligently and in
the ordinary course and shall not make or institute any unusual or novel methods
of purchase, sale, lease, management, accounting or operation that will vary
materially from the methods used by the Company as of September 30, 1997. The
Company and its Subsidiaries shall maintain the business and their activities in
a normal and customary manner consistent with prior practice.
Section 5.3 Maintenance. The Company will maintain, preserve and keep,
and will cause each of its Subsidiaries to maintain, preserve and keep, its
material properties which are used or useful in the conduct of its business
(whether owned in fee or a leasehold interest) in good repair and working order
and from time to time will make all necessary repairs, replacements, renewals
and additions so that at all times the efficiency thereof shall be maintained in
all material respects.
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Section 5.4 Preservation of Business and Relationships. Neither the
Company nor any of its Subsidiaries will engage in any business if, as a result,
the general nature of the business, taken on a consolidated basis, which would
then be engaged in by the Company and its Subsidiaries would be substantially
changed from the general nature of the business engaged in by the Company and
its Subsidiaries on the date of this Agreement.
Section 5.5 Merger; Acquisitions. Except with contemporaneous notice to
Guidant, the Company shall not (a) consolidate with or merge into any other
Person, (b) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or (c) otherwise acquire or agree to acquire
any assets which are material to the Company except in the ordinary course of
business consistent with prior practice.
Section 5.6 Sale or Lease of Assets; Dispositions. Except with
contemporaneous notice to Guidant, the Company shall not sell, lease, transfer
or otherwise dispose of any of its assets (other than the sale of inventory in
the ordinary course of business), except in the ordinary course of business
consistent with prior practice.
Section 5.7 Indebtedness. Except with contemporaneous notice to
Guidant, the Company shall not incur any indebtedness for borrowed money other
than customary Senior Indebtedness (as defined herein) or guarantee any such
indebtedness or issue or sell any debt securities of the Company or guarantee
any debt securities of others except in connection with the purchase of
inventory pursuant to the existing bank line of credit.
Section 5.8 Insurance. The Company shall at all times during the term
of the Agreement maintain product liability insurance covering the products with
minimum annual limits of Two Million Dollars ($2,000,000) per occurrence and Two
Million Dollars ($2,000,000) in the aggregate. The Company shall maintain such
insurance for a minimum of five (5) years after termination of the Agreement.
Within thirty (30) days of the Closing Date, the Company shall deliver to
Guidant a certificate of insurance evidencing such insurance and stating that
the policy will not be canceled or modified without at least thirty (30) days
prior written notice to Guidant.
Section 5.9 Taxes, Claims for Labor and Materials, Compliance with
Laws. The Company will promptly pay and discharge, and will cause each of its
Subsidiaries promptly to pay and discharge, all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or such Subsidiary,
respectively, or upon or in respect of all or any part of the property or
business of the Company or such Subsidiary, all trade accounts payable in
accordance with usual and customary business terms, and all claims for work,
labor or materials, which if unpaid might become a Lien upon any property of the
Company or such Subsidiary; provided, however, that the Company or such
Subsidiary shall not be required to pay any such tax, assessment, charge, levy,
account payable or claim if (a) the validity, applicability or amount thereof is
being contested in good faith by appropriate actions or proceedings which will
prevent the forfeiture or sale of any property of the Company or such Subsidiary
or any material interference with the use thereof by the
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<PAGE> 19
Company or such Subsidiary, and (b) the Company or such Subsidiary shall set
aside, in accordance with GAAP, on its books, reserves deemed by it to be
adequate with respect thereto. The Company will promptly comply and will cause
each of its Subsidiaries to comply with all laws, ordinances or governmental
rules and regulations to which it is subject including, without limitation, the
Occupational Safety and Health Act of 1970, as amended, ERISA and all laws,
ordinances, governmental rules and regulations relating to environmental
protection in all applicable jurisdictions, the violation of which could
materially and adversely affect the properties, business, profits or condition
of the Company and its Subsidiaries, taken as a whole.
Section 5.10 Notice of Claims and Litigation. The Company will give
prompt notice to Guidant of any claim or action at law or in equity, or before
any governmental, administrative or regulatory body or arbitration panel
instituted against the Company or its Subsidiaries, or disputes that have a high
probability of resulting in a suit of significance against the Company or its
Subsidiaries involving a claim against the Company or its Subsidiaries, for
damages in excess of Two Hundred Fifty Thousand Dollars ($250,000) or which, if
concluded adverse to the Company or its Subsidiaries, would materially and
adversely affect the business or assets of the Company or its Subsidiaries.
Section 5.11 Disposal of Shares of a Subsidiary. Neither the Company
nor its Subsidiaries will sell, pledge or otherwise dispose of any shares of the
stock (including as "stock" for the purposes of this Section 5.11 any options or
warrants to purchase stock or other Securities exchangeable for or convertible
into stock) of the Subsidiary, nor will the Subsidiary issue, sell, pledge,
encumber or otherwise dispose of any shares of its own stock, if the effect of
the transaction would be to reduce the proportionate interest of the Company and
its other Subsidiaries in the outstanding stock of its Subsidiary whose shares
are the subject of the transaction, nor will its Subsidiary issue, sell, pledge,
encumber or dispose of any shares of its own Preferred Stock.
Section 5.12 Transactions with Affiliates. Except for transactions and
arrangements with employee Affiliates, the Company will not, and will not permit
its Subsidiaries to, enter into or be a party to any material transaction or
arrangement with any Affiliate (including, without limitation, the purchase
from, sale to or exchange of property with, or the rendering of any service by
or for, any Affiliate), except pursuant to the reasonable requirements of the
Company's or its Subsidiaries' business and upon fair and reasonable terms no
less favorable to the Company or its Subsidiaries than would be obtained in a
comparable arm's-length transaction with a Person other than an Affiliate.
Section 5.13 Reports and Access to Information. Not more than once
during any twelve (12) month period, the Company shall afford to Guidant and
shall cause its independent accountants to afford to Guidant, and its
accountants, counsel and other representatives, reasonable access during normal
business hours to the Company's properties, books, contracts, commitments and
records and to the independent accountants reasonable access to the audit work
papers and other records of the Company's accountants. If for any reason Guidant
is not exercising its visitation rights in accordance with Section 5.14 hereof,
the Company shall use reasonable efforts to furnish promptly to Guidant (a) a
copy of each report, schedule and other document filed or received by the
Company during such period pursuant to the requirements of federal and state
securities laws and (b) all other material information concerning the business,
properties and personnel of the Company and any other
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materials as Guidant may reasonably request. Guidant will not use such
information for purposes other than this Agreement and will otherwise hold such
information in confidence (and Guidant will cause its consultants and advisors
to also hold such information in confidence).
Section 5.14 Visitation Rights Regarding the Board of Directors
(a) Non-Voting Observer. Guidant shall be entitled to designate a
designee as a non-voting observer who shall have the right to attend, but not
the right to participate in any discussions nor vote on or otherwise influence
or control any matters considered at, all annual, regular and special meetings
of the Board of Directors (the "Non-Voting Observer"). Subject to the execution
of an appropriate confidentiality agreement, the Non-Voting Observer shall have
the same access to information, and limitations thereto, concerning the
business and operations of the Company as members of the Board of Directors;
provided, however, that the Non-Voting Observer may be excluded from access to
any meeting or portion thereof and the Company shall have the right to withhold
delivery of such other information as it relates to such matter, (i) if the
matters to be addressed relate to a transaction directly involving Guidant, (ii)
if such access would adversely affect the attorney-client privilege between the
Company and its counsel, (iii) if personnel or other similarly sensitive issues
are under discussion or (iv) if the matters relate to the sale of the Company.
The Non-Voting Observer shall not be deemed a "Director" of the Company for any
purpose whatsoever nor subject to the provisions of section 16 of the Exchange
Act.
(b) Notice of Meetings. In addition to the requirements set forth in
the Bylaws, in the event that Guidant has designated a Non-Voting Observer
pursuant to this Section 5.14, the Company shall notify Guidant of every meeting
or proposed action by written consent of the Board of Directors, by telecopy or
other reasonable method of notification, at least three (3) days in advance of
such meeting or proposed action by written consent; provided, however, that in
the event that such advance notification with respect to any meeting or proposed
action by written consent is impracticable under the circumstances then
existing, the Company shall provide such notice as soon in advance of any such
meeting or proposed action by written consent as is practicable under such
circumstances.
(c) Termination of Visitation Rights. The visitation rights described
in this Section 0 shall terminate and be of no further force or effect upon the
earlier to occur of (i) the date upon which the Note shall have been paid in
full, (ii) the date upon which Guidant has fully converted the Note and holds
fewer than 100,000 shares of Common Stock (with appropriate adjustments
resulting from stock splits and the like), or (iii) the date on which Guidant,
in its discretion, terminates this provision by written notice to the Company;
provided, however, that such termination will not relieve the Company of its
obligation to provide Guidant with reports and access to information in
accordance with Section 5.13 hereof until such time as (A) the Note has been
paid in full, (B) the Option (as defined herein) is terminated, (C) Guidant
holds fewer than one hundred thousand (100,000) shares of Common Stock, and (D)
the Credit Facility (if any) has been paid in full.
Section 5.15 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of the restricted Common Stock to the public without registration, as long
as a public
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market exists for the Common Stock, the Company agrees to use its best efforts
to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) Use its best efforts to file with the Commission in a timely manner
all reports and other documents required of the Company under the Securities Act
and the Exchange Act;
(c) So long as a Holder owns any restricted Common Stock, furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144, and of the Securities
Act and the Exchange Act, a copy of the most recent annual or quarterly report
of the Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the Company as a
Holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing a Holder to sell any such securities without
registration.
Section 6. Additional Agreements. Notwithstanding the covenants and
agreements of the Company set forth in Section 5 hereof, the Company and Guidant
further agree that no such covenants and agreements shall prevent any sale,
disposition, spin-off, spin-out, license or any other transfer of the Company's
or any Subsidiary's assets and technology outside the Field (as such term is
defined in the Distribution Agreement).
Section 7. Stock Purchase Agreement.
Section 7.1 Stock Purchase Option. Upon the achievement of the
Milestones (as defined herein) on or before December 31, 1998, the Company shall
have the option (the "Option") to require Guidant to purchase up to Three
Million Dollars ($3,000,000) worth of Common Stock (the "Option Common Stock")
pursuant to that form of Stock Purchase Agreement as attached hereto as Exhibit
C. Pursuant to the Option and upon the achievement of one of the Milestones on
or before December 31, 1998, the Company may require Guidant to purchase up to
Two Million Five Hundred Thousand Dollars ($2,500,000) worth of shares of the
Option Common Stock (in minimum increments of Five Hundred Thousand Dollars
($500,000)) pursuant to the terms and conditions of the Stock Purchase
Agreement; provided, however, that upon the achievement of one of the
Milestones, the Company, at its sole option, shall receive only up to Two
Million Five Hundred Thousand Dollars ($2,500,000) from Guidant in any
combination of (a) the exercise of the Option and/or (b) the borrowing pursuant
to the Credit Agreement subject to their respective limitations. The Company may
exercise the Option for the remainder of the Option Common Stock only upon the
achievement of the second of the Milestones on or before December 31, 1998.
The Option Common Stock shall be at a price equal to the average
closing sale price of the Common Stock as quoted on the Nasdaq National Market
over the thirty (30) consecutive trading days immediately preceding the date two
(2) days before the Company exercises the Option. In the event that such
security is not traded on the Nasdaq National Market, the average closing sale
price shall be as reported or quoted on such other national or regional
securities exchange or automated quotations system upon which the Common Stock
is listed and principally traded. In the event the Common Stock is not listed on
any exchange or quoted on a quotation system, the average closing sale price
shall be as reported or quoted on any trading
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market in which quotes can be obtained.
Section 7.2 Termination of Stock Purchase Option. The Option shall
terminate upon the earlier of (a) December 31, 1998, (b) the termination of the
Distribution Agreement pursuant to its terms (except for termination of the
Distribution Agreement by Guidant without cause) or otherwise resulting from a
material breach or default by the Company of any covenant, condition or other
provision thereof, or (c) upon notice from Guidant following an Event of Default
(as defined herein).
Section 7.3 Definition of Milestone. The two "Milestones" are (a) the
submission with the Food and Drug Administration of a 510(k) application or a
premarket approval ("PMA") application for the Company's Liquid Embolic System
("LES") for brain arteriovenous malformations ("AVMs") and (b) completion of the
first successful (no death or minor or major stroke attributable to the device)
human clinical using LES in brain aneurysms. The Company shall provide Guidant
with written documentation, satisfactory to Guidant, that each of the Milestones
has been satisfied, as applicable.
Section 7.4 Default and Cross Defaults. If an Event of Default occurs,
the Option shall not be exercisable by the Company during the time of the Event
of Default, and Guidant will have the right to terminate the Option upon written
notice to the Company. If Guidant does not exercise its right to terminate the
Option during the Event of Default, thirty (30) days after such Event of Default
is cured or remedied, the Company may exercise the Option unless the Option has
terminated in accordance with Section 7.2 hereof.
Section 8. Credit Agreement
Section 8.1 Credit Agreement. Upon the achievement of the Milestones
(as defined in Section 7.3 hereof) on or before December 31, 1998, the Company
shall have the option to enter into and require Guidant to enter into the Credit
Agreement in the form attached hereto as Exhibit D. Pursuant to the Credit
Agreement, Guidant, as lender, shall loan to the Company, as borrower, an amount
not to exceed an aggregate of Two Million Dollars ($2,000,000) (the "Credit
Facility"). Pursuant to the terms and conditions of the Credit Agreement and
upon the achievement of one of the Milestones on or before December 31, 1998,
the Company may borrow up to Two Million ($2,000,000) from Guidant under the
Credit Facility (in minimum increments of Five Hundred Thousand Dollars
($500,000)); provided, however, that upon the achievement of one of the
Milestones, the Company, at its sole option, shall receive only up to Two
Million Five Hundred Thousand Dollars ($2,500,000) from Guidant in any
combination of (a) the exercise of the Option and/or (b) the borrowing pursuant
to the Credit Agreement subject to their respective limitations. The Company may
borrow the remainder of the Credit Facility, if any, only upon achievement of
the second of the Milestones on or before December 31, 1998.
Section 8.2 Termination of the Credit Agreement. The Company's option
to enter into the Credit Agreement shall terminate upon the earlier of (a)
December 31, 1998, (b) the termination of the Distribution Agreement pursuant to
its terms (except for termination of the Distribution Agreement by Guidant
without cause) or otherwise resulting from a material breach or default by the
Company of any covenant, condition or other provision thereof, or (c) upon
notice from Guidant following an Event of Default (as
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defined herein). In no event shall the Credit Agreement extend beyond the
Maturity Date (as defined in the Credit Agreement).
Section 8.3 Default and Cross Defaults. If an Event of Default (as
defined herein) occurs, the Company shall not borrow pursuant to the Credit
Facility during the time of the Event of Default, and Guidant will have the
right to terminate the Credit Facility upon written notice to the Company. If
Guidant does not exercise its right to terminate the Credit Facility during the
Event of Default, thirty (30) days after such Event of Default is cured or
remedied, the Company may borrow pursuant to the Credit Facility unless the
Credit Facility has terminated in accordance with Section 8.2 hereof.
Section 9. Conditions Precedent.
Section 9.1 Conditions to Obligations of Guidant. The obligations of
Guidant to consummate this Agreement are subject to the satisfaction on or prior
to the Closing Date of the following conditions, unless waived by Guidant:
(a) Representations and Warranties. The representations and warranties
of the Company and its Subsidiaries set forth in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and as if
made at and as of the Closing Date, except as otherwise contemplated by this
Agreement, and Guidant shall have received a certificate or certificates signed
by the Chief Executive Officer of the Company to such effect.
(b) Performance of Obligations. The Company shall have performed all
obligations required to be performed by it under this Agreement prior to the
Closing Date, and Guidant shall have received a certificate signed by the Chief
Executive Officer of the Company to such effect.
(c) No Material Adverse Change. There shall have been no changes in the
condition (financial or otherwise), business, prospects, employees, operations,
obligations or liabilities of the Company which, in the aggregate, have had or
may be reasonably expected to have a materially adverse effect on the financial
condition, business, or operations of the Company on a consolidated basis.
(d) Distribution Agreement. The Company and Guidant shall have entered
into a Distribution Agreement in the form attached hereto as Exhibit B.
(e) Note. The Company shall have tendered to Guidant the Note.
Section 9.2 Conditions to Obligations of the Company. The obligations
of the Company to consummate the transactions contemplated hereby are subject to
the satisfaction on or prior to the Closing Date of the following conditions,
unless waived by the Company:
(a) Representations and Warranties. The representations and warranties
of Guidant set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as if made at and as of the
Closing Date, except as otherwise contemplated by this Agreement.
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(b) Performance of Obligations of Guidant. Guidant shall have performed
in all material respects all obligations required to be performed by it under
this Agreement prior to the Closing Date.
(c) Distribution Agreement. The Company and Guidant shall have entered
into a Distribution Agreement in the form attached hereto as Exhibit B.
(d) Payment. Guidant shall have tendered to the Company Five Million
Dollars ($5,000,000) in exchange for the Note.
Section 10. Events of Default. If any of the events specified in this
Section 10 shall occur (herein individually referred to as an "Event of
Default"), the Holder of the then outstanding Note issued pursuant to this
Agreement may, so long as such condition exists, declare the entire principal
and unpaid accrued interest hereon immediately due and payable, by notice in
writing to the Company:
Section 10.1 Payments. Default in the payment of the principal and
unpaid accrued interest of the Note when due and payable if such default is not
cured by the Company within ten (10) days after the Holder has given the Company
written notice of such default.
Section 10.2 Bankruptcy. The institution by the Company of proceedings
to be adjudicated as bankrupt or insolvent, or the consent by it to institution
of bankruptcy or insolvency proceedings against it or the filing by it of a
petition or answer or consent seeking reorganization or release under the
federal Bankruptcy Code, or any other applicable federal or state law, or the
consent by it to the filing of any such petition or the appointment of a
receiver, liquidator, assignee, trustee or other similar official of the
Company, or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the taking of corporate action by
the Company in furtherance of any such action.
Section 10.3 Commencement of an Action. If, within sixty (60) days
after the commencement of an action against the Company (and service of process
in connection therewith on the Company) seeking any bankruptcy, insolvency,
reorganization, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such action shall not have been resolved in
favor of the Company or all orders or proceedings thereunder affecting the
operations or the business of the Company stayed, or if the stay of any such
order or proceeding shall thereafter be set aside, or if, within sixty (60) days
after the appointment without the consent or acquiescence of the Company of any
trustee, receiver or liquidator of the Company or of all or any substantial part
of the properties of the Company, such appointment shall not have been vacated.
Section 10.4 Default of Senior Indebtedness. Any declared default of
the Company under any Senior Indebtedness (as defined in Section 11 hereof) that
gives the holder thereof the right to accelerate such Senior Indebtedness, and
such Senior Indebtedness is in fact accelerated by the holder.
Section 10.5 Covenants and Agreements. The
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Company shall default in the performance of any of its material covenants and
agreements set forth in any provision of this Agreement and the continuance of
such default for thirty (30) days after the Holder has given the Company written
notice of such default.
Section 10.6 Default Under Other Agreements. The Company breaches or
defaults on any material covenant, condition or other provision of the
Distribution Agreement, the Stock Purchase Agreement or the Credit Agreement and
such breach or default continues after the applicable grace period, if any,
specified therein but in no event more than thirty (30) days after the Holder
has given the Company written notice of such breach or default.
Section 10.7 Change of Control of the Company. Any change in control of
the Company which includes any consolidation of the Company with, or merger of
the Company into, any other Person, any merger of another Person into the
Company (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock) or
any sale or transfer of all or substantially all of the stock or assets of the
Company (a "Change of Control"), or Guidant's receipt of written notice from the
Company that a Change of Control will occur as described in Section 12.10
hereof.
Section 10.8 Other Remedies. If any Event of Default shall occur and be
continuing, Guidant shall have, in addition to the remedies set forth in Section
0 hereof, all other remedies otherwise available at law and equity. In addition,
if an Event of Default shall occur and be continuing, Guidant may terminate one
or both of the Option and the Company's right to enter the Credit Facility as
described in Section 7.2 and Section 8.2 hereof, and declare the entire
principal and unpaid interest due under the Credit Facility, if any, immediately
due and payable in accordance with the terms of the Credit Agreement.
Section 11. Subordination. The indebtedness evidenced by the Note is
hereby expressly subordinated, to the extent and in the manner hereinafter set
forth, in right of payment to the prior payment in full of all the Company's
Senior Indebtedness (as defined herein).
Section 11.1 Senior Indebtedness. As used in the Note, the term "Senior
Indebtedness" shall mean the principal of and unpaid accrued interest on: (a)
all indebtedness of the Company to banks, insurance companies or other
financial institutions regularly engaged in the business of lending money, which
is for money borrowed by the Company (whether or not secured), and (b) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a guarantor.
Section 11.2 Default on Senior Indebtedness. If there should occur any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation or any other marshalling of the assets and
liabilities of the Company, or if the Note shall be declared due and payable
upon the occurrence of an Event of Default with respect to any Senior
Indebtedness, then (a) no amount shall be paid by the Company in respect of the
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principal of or interest on the Note at the time outstanding, unless and until
the principal of and interest on the Senior Indebtedness then outstanding shall
be paid in full, and (b) no claim or proof of claim shall be filed with the
Company by or on behalf of the Holder of the Note that shall assert any right to
receive any payments in respect of the principal of and interest on the Note,
except subject to the payment in full of the principal of and interest on all of
the Senior Indebtedness then outstanding. If there occurs an Event of Default
that has been declared in writing with respect to any Senior Indebtedness, or in
the instrument under which any Senior Indebtedness is outstanding, permitting
the holder of such Senior Indebtedness to accelerate the maturity thereof, then,
unless and until such Event of Default shall have been cured or waived or shall
have ceased to exist, or all Senior Indebtedness shall have been paid in full,
no payment shall be made in respect of the principal of or interest on the Note,
unless within three (3) months after the happening of such Event of Default, the
maturity of such Senior Indebtedness shall not have been accelerated.
Section 11.3 Effect of Subordination. Subject to the rights, if any, of
the holders of Senior Indebtedness under this Section 11 to receive cash,
securities or other properties otherwise payable or deliverable to the Holder of
the Note, nothing contained in this Section 11 shall impair, as between the
Company and the Holder, the obligation of the Company, subject to the terms and
conditions hereof, to pay to the Holder the principal hereof and interest hereon
as and when the same become due and payable, or shall prevent the Holder of the
Note, upon default hereunder, from exercising all rights, powers and remedies
otherwise provided herein or by applicable law.
Section 11.4 Subrogation. Subject to the payment in full of all Senior
Indebtedness and until the Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the extent of
payments or distributions previously made to such holders of Senior Indebtedness
pursuant to the provisions of Section 11.2 hereof) to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness. No
such payments or distributions applicable to the Senior Indebtedness shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and the Holder, be deemed to be a payment by the Company to or on
account of the Note; and for the purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness to which the Holder would be
entitled except for the provisions of this Section 11 shall, as between the
Company and its creditors, other than the holders of Senior Indebtedness and the
Holder, be deemed to be a payment by the Company to or on account of the Senior
Indebtedness.
Section 11.5 Undertaking. By its acceptance of the Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 11.
Section 12. Conversion of Note
Section 12.1 Conversion Privilege and Conversion Price. Subject to and
upon compliance with the provisions of this Section 12, at the option of Guidant
at any time and at Guidant's sole discretion without regard to the price of the
Common Stock and the Conversion Price (as defined herein), the Note or any
portion of the
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principal amount thereof which is One Hundred Thousand Dollars ($100,000) or an
integral multiple of One Hundred Thousand Dollars ($100,000) (an "$100,000
Integral Multiple") may be converted at the principal amount thereof, or of such
portion thereof, into fully paid and nonassessable shares of Common Stock at the
Conversion Price, in effect at the time of conversion. Such conversion right
shall expire at the close of business on October 31, 2002.
The price at which shares of Common Stock shall be delivered upon
conversion (the "Conversion Price") shall be initially Ten Dollars and
Twenty-Five Cents ($10.25) per share of Common Stock. The Conversion Price shall
be adjusted in certain instances as provided in this Section 12.
Section 12.2 Exercise of Conversion Privilege. In order to exercise the
conversion privilege, Guidant shall surrender the Note or any $100,000 Integral
Multiple of the Note duly endorsed or assigned to the Company or in blank, at
any office or agency of the Company maintained for that purpose, accompanied by
written notice of conversion in the form provided on the Note (or such other
notice as is acceptable to the Company) at such office or agency that Guidant
elects to convert such Note or $100,000 Integral Multiple thereof. No payment or
adjustment shall be made upon any conversion on account of any interest accrued
on the Note surrendered for conversion or on account of any dividends on the
Common Stock issued upon conversion.
The Note shall be deemed to have been converted immediately prior to
the close of business on the day of surrender of the whole portion of the
principal amount or any $100,000 Integral Multiple thereof for conversion in
accordance with the foregoing provisions, and at such time the rights of Guidant
shall cease, and the Person or Persons entitled to receive the Common Stock
issuable upon conversion shall be treated for all purposes as the record holder
or holders of such Common Stock at such time. As promptly as practicable on or
after the conversion date, the Company shall issue and shall deliver at such
office or agency a certificate or certificates for the number of duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
issuable upon conversion, together with payment in lieu of any fraction of a
share, as provided in Section 12.3 hereof.
In the case of any Note which is converted in part only, upon such
conversion, the Company shall execute and deliver to Guidant, at the expense of
the Company, a new Note or Notes of authorized denominations in the aggregate
principal amount equal to the unconverted portion of the principal amount of the
Note.
Section 12.3 Fractions of Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Note or Integral Multiple thereof.
Instead of any fractional share of Common Stock which would otherwise be
issuable upon the conversion of the Note or the $100,000 Integral Multiple
thereof, the Company shall pay a cash adjustment in respect of such fraction of
a share of Common Stock in an amount equal to the remaining amount which is not
converted by reason of this Section 12.3.
Section 12.4 Adjustment of Conversion Price
(a) In case the Company shall pay or make a dividend or other
distribution on any class of capital stock of the Company in Common Stock, the
Conversion Price in effect at the opening
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of business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction the numerator of
which shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator shall be
the sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the date fixed
for such determination. For the purposes of this Section 12.4(a), the number of
shares of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock. The
Company will not pay any dividend or make any distribution on shares of Common
Stock held in the treasury of the Company.
(b) In case the Company shall issue rights, options or warrants to all
holders of its Common Stock (not being available on an equivalent basis to
Guidant upon conversion) entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the current market price per share
of the Common Stock (determined as provided in Section 12.4(h) hereof) on the
date fixed for the determination of stockholders entitled to receive such
rights, options or warrants (other than pursuant to a dividend reinvestment
plan), the Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced to a price
(calculated to the nearest cent) determined by multiplying such Conversion Price
by a fraction the numerator of which shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of additional shares
of Common Stock so offered for subscription or purchase would purchase at such
Conversion Price in effect immediately prior to the date fixed for such
determination and the denominator of which shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For purposes of calculating the Conversion Price in this Section
12.4(b), the number of shares of Common Stock outstanding immediately prior to
the date fixed for such determination of rights, option or warrants shall be
calculated as if all shares had been fully converted into shares of Common
Stock. Also, for the purposes of this Section 12.4(b), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
will not issue any rights, options or warrants in respect of shares of Common
Stock held in the treasury of the Company.
(c) In case outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller number
of shares of Common Stock, the Conversion Price in effect at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
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(d) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock evidences of its indebtedness or assets
(including securities, but excluding any rights, options or warrants referred to
in Section 12.4(b) hereof, any dividend or distribution paid exclusively in cash
and any dividend or distribution referred to in Section 12.4), the Conversion
Price shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the close of
business on the date fixed for the determination of stockholders entitled to
receive such distribution by a fraction the numerator of which shall be the
current market price per share (determined as provided in Section 12.4(h)) of
the Common Stock on the date fixed for such determination less the then fair
market value (as determined by an independent majority of the Board of
Directors, whose determination shall be conclusive and described in a board
resolution) of the portion of the assets or evidences of indebtedness so
distributed applicable to one share of Common Stock and the denominator shall be
such current market price per share of the Common Stock, such adjustment to
become effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such distribution. In any case in which this Section 12.4(d) is
applicable, Section 12.4(b) hereof shall not be applicable.
(e) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock cash (excluding any cash that is distributed
upon a merger or consolidation to which Section 12.10 hereof applies or as part
of a distribution referred to in paragraph (d) of this Section 12.4) in an
aggregate amount that, combined together with (i) the aggregate amount of any
other distributions to all holders of its Common Stock made exclusively in cash
within the twelve (12) months preceding the date of payment of such distribution
and in respect of which no adjustment pursuant to this paragraph (e) has been
made and (ii) the aggregate of any cash plus the fair market value (as
determined by an independent majority of the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) of
consideration payable in respect of any tender offer by the Company or any of
its Subsidiaries for all or any portion of the Common Stock concluded within the
twelve (12) months preceding the date of payment of such distribution and in
respect of which no adjustment pursuant to paragraph (f) of this Section 12.4
has been made, exceeds ten percent (10%) of the product of the current market
price per share of the Common Stock on the date for the determination of holders
of shares of Common Stock entitled to receive such distribution multiplied with
the number of shares of Common Stock outstanding on such date, then, and in each
such case, immediately after the close of business on such date for
determination, the Conversion Price shall be reduced so that the same shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for determination
of the stockholders entitled to receive such distribution by a fraction (A) the
numerator of which shall be equal to the current market price per share of the
Common Stock (determined as provided in paragraph (h) of this Section 12.4) on
the date fixed for such determination less an amount equal to the quotient of
(x) the excess of such combined amount over such ten percent (10%) and (y) the
number of shares of Common Stock outstanding on such date for determination and
(B) the denominator of which shall be equal to the current market price per
share of the Common Stock (determined as provided in paragraph (h) of this
Section 12.4) on such date for determination.
(f) In case a tender offer made by the Company or any Subsidiary for
all or any portion of the Common Stock shall expire and such tender offer (as
amended upon the expiration thereof) shall require the payment to stockholders
(based on the acceptance (up to any maximum
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specified in the terms of the tender offer) of Purchased Shares (as
defined herein)) of an aggregate consideration having a fair market value (as
deter mined by an independent majority of the Board of Directors, whose
determination shall be conclusive and described in a board resolution) that
combined together with (i) the aggregate of the cash plus the fair market value
(as determined by an independent majority of the Board of Directors, whose
determination shall be conclusive and described in a board resolution), as of
the expiration of such tender offer, of consideration payable in respect of any
other tender offer, by the Company or any Subsidiary for all or any portion of
the Common Stock expiring within the twelve (12) months preceding the expiration
of such tender offer and in respect of which no adjustment pursuant to this
paragraph (f) has been made and (ii) the aggregate amount of any distributions
to all holders of the Common Stock made exclusively in cash within twelve (12)
months preceding the expiration of such tender offer and in respect of which no
adjustment pursuant to paragraph (e) of this Section 12.4 has been made, exceeds
ten percent (10%) of the product of the current market price per share of the
Common Stock (determined as provided in paragraph (h) of this Section 12.4) as
of the last time (the "Expiration Time") tenders could have been made pursuant
to such tender offer (as it may be amended) multiplied with the number of shares
of Common Stock outstanding (including any tendered shares) on the Expiration
Time, then, and in each such case, immediately prior to the opening of business
on the day after the date of the Expiration Time, the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on the
date of the Expiration Time by a fraction (A) the numerator of which shall be
equal to (1) the product of (a) the current market price per share of the Common
Stock (determined as provided in paragraph (h) of this Section 12.4) on the date
of the Expiration Time and (b) the number of shares of Common Stock outstanding
(including any tendered shares) on the Expiration Time, less (2) the amount of
cash plus the fair market value (determined as aforesaid) of the aggregate
consideration payable to stockholders based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares, and (B) the
denominator of which shall be equal to the product of (1) the current market
price per share of the Common Stock (determined as provided in paragraph (h) of
this Section 12.4) as of the Expiration Time and (2) the number of shares of
Common Stock outstanding (including any tendered shares) as of the Expiration
Time less the number of all shares validly tendered and not withdrawn as of the
Expiration Time (the shares deemed so accepted up to any such maximum, being
referred to as the "Purchased Shares").
(g) The reclassification of Common Stock into securities including
securities other than Common Stock (other than any reclassification upon a
consolidation or merger to which Section 12.10 hereof applies) shall be deemed
to involve (i) a distribution of such securities other than Common Stock to all
holders of Common Stock (and the effective date of such reclassification shall
be deemed to be "the date fixed for the determination of stockholders entitled
to receive such distribution" and the "date fixed for such determination" within
the meaning of paragraph (d) of this Section 12.4), and (ii) a subdivision or
combination, as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such reclassification into the number of shares
of Common Stock outstanding immediately thereafter (and the effective date of
such reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes effective,"
as the case may be, and "the day upon which such subdivision or combination
becomes effective" within the meaning of paragraph (c) of this Section 12.4).
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(h) For the purpose of any computation under paragraphs (d), (e) and
(f) of this Section 12.4, the current market price per share of Common Stock on
any date shall be deemed to be the average of the daily Closing Prices for the
five (5) consecutive trading days selected by the Company commencing not more
than twenty (20) trading days before, and ending not later than, the earlier of
the day in question and the day before the "ex" date with respect to the
issuance or distribution requiring such computation. The "Closing Price" for
each trading day shall be the reported last sale price regular way or, in case
no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, on the National Association of Securities Dealers Automated Quotations
system ("Nasdaq") National Market System ("Nasdaq National Market") or, if not
listed or admitted to trading on Nasdaq National Market, on Nasdaq, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or Nasdaq National Market or quoted on Nasdaq, the average of the
closing bid and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm selected from time to time by the Company
for that purpose, or, if the Common Stock does not have any closing bid and
asked prices in the over-the-counter market during the relevant period of time,
the book value per share as of the most recent available month-end determined
pursuant to GAAP. For purposes of this paragraph, the term "'ex' date," when
used with respect to any issuance or distribution, shall mean the first date on
which the Common Stock trades regular way on such exchange or in such market
without the right to receive such issuance or distribution.
(i) No adjustment in the Conversion Price shall be required unless such
adjustment (plus any adjustments not previously made by reason of this paragraph
(i)) would require an increase or decrease of at least one percent (1%) in such
price; provided, however, that any adjustments which by reason of this paragraph
(i) are not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this paragraph (i) shall be
made to the nearest cent.
(j) The Company may make such reductions in the Conversion Price, in
addition to those required by paragraphs (a), (b), (c), (d), (e) and (f) of this
Section 12.4, as it considers to be advisable in order to avoid or diminish any
income tax to any holders of shares of Common Stock resulting from any dividend
or distribution of stock or issuance of rights or warrants to purchase or
subscribe for stock or from any event treated as such for federal income tax
purposes or for any other reasons. The Company shall have the power to resolve
any ambiguity or correct any error in this Section 12.4(j) and its actions in so
doing shall be final and conclusive.
Section 12.5 Notice of Adjustments of Conversion Price. Whenever the
Conversion Price is adjusted as herein provided:
(a) the Company shall compute the adjusted Conversion Price in
accordance with Section 12.4 hereof and shall prepare a certificate signed by
the Chief Financial Officer of the Company setting forth the adjusted Conversion
Price and showing in reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be filed at the offices of the
Company.
(b) a notice stating that the Conversion Price has been adjusted and
setting forth the
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adjusted Conversion Price shall forthwith be required, and as soon as
practicable after it is required, such notice shall be mailed by the Company to
the Holder in accordance with the terms of Section 15.2 herein.
Section 12.6 Notice of Certain Corporate Action. In case:
(a) the Company shall declare a dividend (or any other distribution) on
its Common Stock payable otherwise than in cash out of its earned surplus; or
(b) the Company shall authorize the granting to the holders of its
Common Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(c) of any reclassification of the Common Stock of the Company (other
than a subdivision or combination of its outstanding shares of Common Stock), or
of any consolidation, merger or share exchange to which the Company is a party
and for which approval of any stockholders of the Company is required, or of the
sale or transfer of all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company;
then the Company shall cause to be filed at the offices of the Company, and
shall cause to be mailed to the Holder at its last addresses as it shall appear
in the Note Register, at least twenty (20) days (or ten (10) days in any case
specified in clause (a) or (b) of this Section 12.6) prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
rights or warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend, distribution,
rights or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up. Neither the
failure to give such notice nor any defect therein shall affect the legality or
validity of the proceedings described in clauses (a) through (d) of this Section
12.6.
Section 12.7 Company to Reserve Common Stock. The Company shall at all
times reserve and keep available out of its authorized but unissued Common
Stock, for the purpose of effecting the conversion of the Note and for the sale
pursuant to the Stock Purchase Agreement, the full number of shares of Common
Stock then issuable upon the conversion of the Note that is subject to this
Agreement and for the sale pursuant to the Stock Purchase Agreement.
Section 12.8 Taxes on Conversions. The Company will pay any and all
taxes that may be payable in respect of the issuance or delivery of shares of
Common Stock on conversion of the Note pursuant hereto and for the sale pursuant
to the Stock
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Purchase Agreement. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of shares of Common Stock in a name other than that of Guidant and no
such issuance or delivery shall be made unless and until the Person requesting
such issuance has paid to the Company the amount of any such tax, or has
established to the satisfaction of the Company that such tax has been paid.
Section 12.9 Covenant as to Common Stock. The Company covenants that
all shares of Common Stock which may be issued upon conversion of the Note and
for the sale pursuant to the Stock Purchase Agreement will upon issuance be
fully paid and nonassessable and, except as provided in Section 12.8 hereof, the
Company will pay all taxes, liens and charges with respect to the issue thereof.
Section 12.10 Provisions in Case of Consolidation, Merger or Sale of
Assets. In case of any Change of Control of the Company, the Company will notify
Guidant at least thirty (30) days prior to the closing of the transaction that
will effect the Change of Control, and Guidant may convert the Note in
accordance with Section 12 hereof prior to the transaction or declare an Event
of Default and accelerate the Note and terminate this Agreement in accordance
with Section 10 hereof.
Section 12.11 Transfer and Exchange of Note. The Note may be freely
transferred or assigned by Guidant without the consent of the Company. Such
transfer and assignment shall be made in accordance with applicable federal and
state securities laws. At any time and from time to time, upon not less than ten
(10) days' notice to that effect given by Guidant and, upon surrender of the
Note at the Company's office by Guidant, the Company will deliver in exchange
therefor, without expense to Guidant, except as set forth below, one or more
Notes for the same aggregate principal amount as the then unpaid principal
amount of the Note so surrendered, provided such Notes are in denominations of
at least Five Hundred Thousand Dollars ($500,000) or any amount in excess
thereof as Guidant shall specify, dated as of the date to which interest has
been paid on the Note so surrendered or, if such surrender is prior to the
payment of any interest thereon, then dated as of the date of issue, registered
in the name of such Person or Persons as may be designated by Guidant, and
otherwise of the same form and tenor as the Note so surrendered for exchange.
The Company may require the payment of a sum sufficient to cover any stamp tax
or governmental charge imposed upon such exchange or transfer.
Section 12.12 Loss, Theft, Mutilation or Destruction of Note. Upon
receipt of evidence satisfactory to the Company of the loss, theft, mutilation
or destruction of the Note, the Company will make and deliver without expense to
Guidant thereof, a new Note, of like tenor, in lieu of such lost, stolen,
mutilated or destroyed Note.
Section 12.13 Expenses, Stamp Tax Indemnity. The Company agrees to pay
duplicating and printing costs and charges for shipping the Note, adequately
insured to Guidant's home office or at such other place as Guidant may
designate, and all reasonable expenses of Guidant (including, without
limitation, the reasonable fees and expenses of any financial advisor to
Guidant) relating to any proposed or actual amendment, waivers or consents
pursuant to the provisions hereof, including, without limitation, any proposed
or actual amendments, waivers, or consents resulting from any work-out,
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renegotiation or restructuring relating to the performance by the Company of its
obligations under this Agreement and the Note. The Company also agrees that it
will pay and hold Guidant harmless against any and all liabilities with respect
to stamp and other taxes, if any, which may be payable or which may be
determined to be payable in connection with the execution and delivery of this
Agreement or the Note, whether or not the Note is then outstanding. The Company
agrees to protect and indemnify Guidant against any liability for any and all
brokerage fees and commissions payable or claimed to be payable to any Person
(other than any Person engaged by a Purchaser) in connection with the
transactions contemplated by this Agreement.
Section 12.14 Cancellation of Converted Note. The Note or Integral
Multiple portions thereof delivered for conversion shall be canceled by or at
the direction of the Company.
Section 13. Right of First Offer
Section 13.1 The Right of First Offer. Subject to the terms and
conditions specified in this Section 0, the Company covenants not to sell or
issue any New Securities (as defined herein) without complying with the
provisions of this Section 13.
Section 13.2 Grant. In the event the Company proposes to sell or issue
any New Securities to any Person or entity, the Company hereby grants to Guidant
a right of first offer to purchase a pro rata share of New Securities that the
Company may, from time to time, propose to sell and issue. For purposes of this
Section 13, Guidant's pro rata share of New Securities is the ratio of the
number of shares of Common Stock owned by Guidant (assuming full conversion of
the Note and shares owned pursuant to the Stock Purchase Agreement) immediately
prior to the issuance of New Securities to the total number of shares of Common
Stock outstanding immediately prior to the issuance of New Securities (assuming
full conversion of all convertible securities).
Section 13.3 Definition of New Securities. "New Securities" shall mean
any capital stock (including Common Stock) of the Company whether now authorized
or not, and rights, options or warrants to purchase capital stock of the
Company, and securities of any type whatsoever that are, or may become,
convertible into capital stock of the Company; provided, however, that the term
"New Securities" does not include (a) shares of Common Stock issued upon
conversion of the Note, (b) shares purchased by Guidant pursuant to the Stock
Purchase Agreement upon exercise of the Option by the Company, (c) shares of
Common Stock (or options therefore) issued or sold to employees, directors,
consultants or advisors of the Company for the primary purpose of soliciting or
retaining their services, provided each such person executes an agreement, in
substantially the form as approved by the Company's Board of Directors, (d)
securities issued pursuant to the acquisition of another business entity or
business segment of any such entity by the Company by merger, purchase of
substantially all the assets or other reorganization whereby the Company will
own more than fifty percent (50%) of the voting power of such business entity or
business segment, (e) any borrowings, direct or indirect, from financial
institutions or other persons by the Company, whether or not presently
authorized, including any type of loan or payment evidenced by any type of debt
instrument, provided such borrowings do not have any equity features including
warrants, options or other rights to purchase capital stock and are not
convertible into capital stock of the Company, (f) securities issued to vendors
or customers or to
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other persons in similar commercial situations with the Company if such issuance
is approved by the Board of Directors, (g) securities issued in connection with
any stock split, stock dividend or recapitalization of the Company in which all
holders of Common Stock are entitled to receive their proportionate share of
such issuance, and (h) any right, option or warrant to acquire any security
convertible into the securities excluded from the definition of New Securities
pursuant to clauses (a) through (f) above.
Section 13.4 Exercise of Right of First Offer. If the Company proposes
to issue New Securities, the Company shall give written notice to Guidant
stating (a) its bona fide intention to offer or issue New Securities, (b) the
number of such New Securities to be offered, (c) the price and general terms
upon which it proposes to offer such New Securities, and (d) the identity of the
persons or entities or classes of persons or entities to whom such New
Securities are proposed to be issued. Within twenty (20) calendar days after
receipt of such notice, Guidant may elect to purchase or obtain, at the price
and on the terms specified in the notice, up to its pro rata share of such New
Securities, as such pro rata share is calculated pursuant to Section 0 hereof,
in the event the Company proposes to issue such New Securities to persons or
entities by giving written notice to the Company and stating therein the
quantity of New Securities to be purchased. Guidant shall retain its right of
first offer pursuant to Section 13 hereof until (i) this Agreement terminates or
(ii) upon a Change of Control described in Section 12.10 hereof and shall not be
affected in any way by any previous refusals to exercise its right of first
offer and to purchase any New Securities.
Section 13.5 Termination of Right of First Offer. If Guidant does not
fully exercise its right to purchase or obtain all such New Securities that
Guidant has the right to purchase or obtain pursuant to Section 13.4 hereof, the
Company may, during the one hundred twenty (120) day period following the
expiration of the period provided in Section 13.4 hereof, offer the remaining
unsubscribed New Securities to the persons or entities or classes of person or
entities specified in the notice sent to Guidant pursuant to Section 13.4
hereof, at a price not less than that, and upon terms no more favorable to the
offeree than those, specified in such notice. If the Company does not enter into
an agreement for the sale of the New Securities within such period, or if such
agreement is not consummated within one hundred twenty (120) days of the
execution thereof, the right provided hereunder shall be deemed to be revived
and such New Securities shall not be offered unless first reoffered to Guidant
in accordance herewith.
Section 14. Indemnification.
Section 14.1 Indemnification by the Company.
(a) The Company agrees to defend and indemnify Guidant and their
respective affiliates, directors, officers and share holders, and their
respective successors and assigns (collectively, the "Guidant Indemnitees"),
against and hold each of them harmless from any and all losses, liabilities,
taxes, claims, suits, proceedings, demands, judgments, damages, expenses and
costs, including, without limitation, reasonable counsel fees, costs and
expenses incurred in the investigation, defense or settlement of any claims
covered by this indemnity (in this Section 14.1 collectively, the "Indemnifiable
Damages") which any such indemnified person may suffer or incur by reason of (i)
the inaccuracy or breach of any of the representations, warranties and covenants
of the Company contained in this Agreement or any documents, certificate or
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<PAGE> 36
agreement delivered pursuant hereto; or (ii) any claim by any person under any
provision of any federal or state securities law relating to any transaction,
event, act or omission of or by the Company occurring before or after the
Closing Date; provided, however, that the total indemnity shall not exceed the
consideration received by the Company. Nothing herein shall limit in any way
Guidant's remedies in the event of breach by the Company of any of its covenants
or agreements hereunder which are not also a representation or warranty or for
willful fraud or intentionally deceptive material misrepresentation or omission
by the Company in connection herewith or with the transactions contemplated
hereby.
(b) Without limiting the generality of the foregoing, with respect to
the measurement of Indemnifiable Damages, Guidant and the Company and the
affiliates of any of them, shall have the right to be put in the same financial
position as they would have been in had each of the representations, warranties
and covenants of the Company been true and accurate or the same said parties had
not breached any such covenants or had any of the events, claims or liabilities
referred to (a) of this Section 14.1 not occurred or been made or incurred.
(c) Any indemnitee under this Agreement may not seek recovery under the
indemnities set forth herein unless and until the Indemnifiable Damages of such
party are greater than Twenty-Five Thousand Dollars ($25,000), at which point
such indemnity shall apply to all Indemnifiable Damages.
Section 14.2 Indemnification by Guidant. After the Closing Date,
Guidant shall, as to those representations, warranties, covenants and agreements
which are herein made or agreed to by Guidant, indemnify and hold harmless the
Company's officers and directors and in respect of:
(a) any damage, deficiency, losses or costs incurred by the Company
resulting from any material misrepresentation or breach of warranty or any
nonfulfillment of any covenant or agreement on the part of Guidant under this
Agreement;
(b) any claim by any person under any provision of any federal or state
securities laws relating to any transaction, event, act or omission of or by
Guidant (including, without limitation, any tender offer); and
(c) any claim, action, suit, proceeding, demand, judgment, assessment,
cost and expense, including reasonable counsel fees, incident to any of the
foregoing; provided that the total indemnity shall not exceed Five Million
Dollars ($5,000,000).
Guidant shall reimburse the Company for any liabilities, damages,
deficiencies, claims, actions, suits, proceedings, demands, judgments,
assessments, costs and expenses to which this Section 14.2 relates only if a
claim for indemnification is made by the Company within the period ending at
December 31, 1998.
Section 14.3 Indemnification Procedure. A party seeking indemnification
(the "Indemnitee") shall use its best efforts to minimize any liabilities,
damages, deficiencies, claims, judgments, assessments, costs and expenses in
respect of which indemnity may be sought under this Agreement. The Indemnitee
shall give prompt written notice to the party from whom indemnification is
sought (the "Indemnitor") of the assertion of a
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<PAGE> 37
claim for indemnification, but in no event longer than (i) thirty (30) days
after service of process in the event litigation is commenced against the
Indemnitee by a third party, or (ii) sixty (60) days after the assertion of such
claim. No such notice of assertion of a claim shall satisfy the requirements of
this Section 14.3 unless it describes in reasonable detail and in good faith the
facts and circumstances upon which the asserted claim for indemnification is
based. If any action or proceeding shall be brought in connection with any
liability or claim to be indemnified hereunder, the Indemnitee shall provide the
Indemnitor twenty (20) calendar days to decide whether to defend such liability
or claim. During such period, the Indemnitee shall take all necessary steps to
protect the interests of itself and the Indemnitor, including the filing of any
necessary responsive pleadings, the seeking of emergency relief or other action
necessary to maintain the status quo, subject to reimbursement from the
Indemnitor of its expenses in doing so. The Indemnitor shall (with, if
necessary, reservation of rights) defend such action or proceeding at its
expense, using counsel selected by the insurance company insuring against any
such claim and undertaking to defend such claim, or by other counsel selected by
it and approved by the Indemnitee, which approval shall not be unreasonably
withheld or delayed. The Indemnitor shall keep the Indemnitee fully apprised at
all times of the status of the defense and shall consult with the Indemnitee
prior to the settlement of any indemnified matter. Indemnitee agrees to use
reasonable efforts to cooperate with Indemnitor in connection with its defense
of indemnifiable claims. In the event the Indemnitee has a claim or claims
against any third party growing out of or connected with the indemnified matter,
then upon receipt of indemnification, the Indemnitee shall fully assign to the
Indemnitor the entire claim or claims to the extent of the indemnification
actually paid by the Indemnitor and the Indemnitor shall thereupon be subrogated
with respect to such claim or claims of the Indemnitee.
Section 15. Miscellaneous.
Section 15.1 Powers and Rights Not Waived; Remedies Cumulative. No
delay or failure on the part of Guidant in the exercise of any power or right
shall operate as a waiver thereof; nor shall any single or partial exercise of
the same preclude any other or further exercise thereof, or the exercise of any
other power or right, and the rights and remedies of Guidant are cumulative to,
and are not exclusive of, any rights or remedies Guidant would otherwise have.
Section 15.2 Notice. Except as otherwise expressly provided herein, any
notice, consent or document required or permitted hereunder shall be given in
writing and it or any certificates or other documents delivered hereunder shall
be deemed effectively given or delivered (as the case may be) upon personal
delivery (professional courier permissible) or when mailed by receipted United
States certified mail delivery, or five (5) business days after deposit in the
United States mail. Such certificates, documents or notice may be personally
delivered to an authorized representative of the Company or Guidant (as the case
may be) at any address where such authorized representative is present and
otherwise shall be sent to the following address:
If to the Micro Therapeutics, Inc.
Company: 1062 Calle Negocio #F
San Clemente, CA 92673
Attention: George Wallace
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<PAGE> 38
Telecopy No.: (714) 361-0210
With a copy Stradling, Yocca, Carlson & Rauth
to: 660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Attention: Bruce Feuchter
Telecopy No.: (714) 725-4100
If to Guidant Corporation
Guidant: 3200 Lakeside Drive
Santa Clara, CA 95054
Attention: Greg S. Garfield
Telecopy No.: (408) 235-3987
and
Guidant Corporation
135 Constitution Drive
Menlo Park, CA 94025
Attention: Mary Bellack
Telecopy No.: (650) 617-5424
With a copy Pillsbury Madison & Sutro LLP
to: 2550 Hanover Street
Palo Alto, CA 94304
Attention: Katharine A. Martin
Telecopy No.: (650) 233-4545
Section 15.3 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the Company and its successors and assigns and
shall be binding upon and inure to the benefit of Guidant and its successors and
assigns; provided, however, that the Company shall not assign this Agreement or
any of its rights, duties or obligations hereunder without the prior written
consent of Guidant.
Section 15.4 Survival of Covenants and Representations. All covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this Agreement and
the Note and the exercise of the Option by the Company.
Section 15.5 Severability. Should any part of this Agreement for any
reason be declared invalid or unenforceable, such decision shall not affect the
validity or enforceability of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or unenforceable portion thereof eliminated and it is hereby declared
the intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
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<PAGE> 39
Section 15.6 Waiver of Conditions. If on the Closing Date, either party
hereto fails to fulfill each of the conditions specified in Section 9 hereof,
the other party may thereupon elect to be relieved of all further obligations
under this Agreement. Without limiting the foregoing, if the conditions
specified in Section 9 have not been fulfilled, the other party may waive
compliance by such party with any such condition to such extent as such party
may in its sole discretion determine. Nothing in this Section 15.6 shall operate
to relieve either party of any obligations hereunder or to waive any of the
other party's rights against such party.
Section 15.7 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
Section 15.8 Governing Law. This Agreement and the Note issued and sold
hereunder shall be governed by and construed in accordance with California law,
without regard to the conflict of laws provisions thereof.
Section 15.9 Captions. The descriptive headings of the various sections
or parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company and Guidant by their duly authorized
officers, have each caused this Agreement to be executed as of the date first
written above.
GUIDANT
GUIDANT CORPORATION
By Keith E. Brauer
--------------------------------------
Title Vice President
-----------------------------------
COMPANY
MICRO THERAPEUTICS, INC.
By /s/ GEORGE WALLACE
--------------------------------------
Title President and CEO
-----------------------------------
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<PAGE> 40
EXHIBIT A
FORM OF 5% CONVERTIBLE SUBORDINATED NOTE
MICRO THERAPEUTICS, INC.
5% Convertible Subordinated Note, due October 31, 2002
No. CSN-1 San Clemente, California
$5,000,000 November 17, 1997
Micro Therapeutics, Inc., a corporation duly organized and existing under
the laws of the State of Delaware (the "Company"), for value received, hereby
promises to pay to Guidant Corporation, an Indiana corporation ("Guidant"), or
its registered assigns (the "Holder"), the principal sum of Five Million Dollars
($5,000,000) on October 31, 2002 (the "Maturity"), and to pay interest (i) on
the unpaid principal balance thereof from the date of this Note at the rate of
five percent (5%) per annum, payable quarterly in arrears on January 31, April
30, July 31 and October 31 of each year (commencing January 31, 1998) until such
unpaid balance shall become due and payable (whether at Maturity, or by
declaration, acceleration or otherwise) and (ii) on each overdue payment of
principal or any overdue payment of interest, at a rate per annum equal to eight
percent (8%).
The interest and principal payments payable with respect to this Note, on
any Interest Payment Date, at Maturity or by declaration, acceleration or
otherwise, pursuant to the Note Agreement (as defined herein), shall be paid to
Guidant in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts. Such
interest and principal payments shall be made to Guidant in accordance with the
provisions of the Note Agreement.
This Note is the sole issue of a 5% Convertible Subordinated Note due
October 31, 2002 of the Company issued in an aggregate principal amount of Five
Million Dollars ($5,000,000) pursuant to the Convertible Subordinated Note
Agreement, dated November 17, 1997, by and between the Company and Guidant (the
"Note Agreement"). The Holder of this Note is entitled to the benefits of the
Note Agreement, and may enforce the Note Agreement and exercise the remedies
provided for thereby or otherwise available in respect thereof.
As provided in the Note Agreement, upon surrender of this Note for
registration of transfer, duly endorsed, or accompanied by a written instrument
of transfer duly executed by Guidant or Guidant's attorney duly authorized in
writing, a new Note or Notes for a like aggregate principal amount and otherwise
of similar tenor, will be issued to, and registered in the name of, the
transferee or transferees. Prior to due presentment for registration of
transfer, the Company may treat the person in whose name this Note is registered
as the Holder and owner hereof for the purpose of receiving payments and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
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<PAGE> 41
In the case of an Event of Default (as defined in the Note Agreement), the
principal of this Note in certain circumstances shall become due and payable and
in other circumstances may be declared and become due and payable in the manner
and with the effect provided in the Note Agreement.
This Note is subject to conversion into Common Stock pursuant to the terms
and conditions of the Note Agreement and conversion shall be evidenced by a
Notice of Conversion as attached hereto. This Note is not subject to prepayment
or redemption by the Company prior to its expressed Maturity.
The indebtedness evidenced by this Note is, to the extent provided in the
Note Agreement, subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness (as defined in the Note Agreement), and this
Note is issued subject to the provisions of the Note Agreement with respect
thereto. Each Holder of this Note, by accepting the same, agrees to and shall be
bound by such provisions.
No reference herein to the Note Agreement and no provision of this Note or
of the Note Agreement shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed or to convert this Note as provided in the Note Agreement.
All terms used in this Note which are defined in the Note Agreement shall
have the meanings assigned to them in the Note Agreement.
This Note and the Note Agreement are governed by and construed in
accordance with the law of the State of California.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: November 17, 1997.
MICRO THERAPEUTICS, INC.
By
--------------------------------------
Attest:
- --------------------------------------
A-2
<PAGE> 42
NOTICE OF CONVERSION
The undersigned Holder of this Note hereby irrevocably exercises the option
to convert this Note, or portion hereof below designated (which is One Hundred
Thousand Dollars ($100,000) or an integral multiple thereof), into shares of
Common Stock in accordance with the terms of the Note Agreement, and directs
that the shares issuable and deliverable upon such conversion, together with any
check in payment for fractional shares and any Note representing any unconverted
principal amount hereof, be issued and delivered to the undersigned unless a
different name has been indicated below. If shares or the Note are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. Any amount required to be paid by
the undersigned on account of interest accompanies this Note.
Principal amount to be converted (if less than
all): $
---------
- --------------------------------------
Social Security or other
Taxpayer Identification Number
Dated:
-------------------
--------------------------------------
Signature
If shares or the Note are to be registered in the name of a Person other than
the Holder, please print such Person's name and address:
- --------------------------------------
Name
- --------------------------------------
Street Address
- --------------------------------------
City, State and Zip Code
A-3
<PAGE> 43
EXHIBIT B
FORM OF DISTRIBUTION AGREEMENT
B-1
<PAGE> 44
EXHIBIT C
FORM OF STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of ,
1998, by and between GUIDANT CORPORATION, an Indiana corporation ("Guidant") and
MICRO THERAPEUTICS, INC., a Delaware corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, Guidant has purchased from the Company, and the Company has sold
to Guidant, a certain 5% Convertible Subordinated Note, due October 31, 2002, in
the principal aggregate amount of Five Million Dollars ($5,000,000) (the "Note")
pursuant to the terms and conditions of that certain Convertible Subordinate
Note Agreement, dated as of November 17, 1997, by and between Guidant and the
Company (the "Note Agreement"); and
WHEREAS, pursuant to Section 8 of the Note Agreement and upon the
achievement of certain Milestones (as defined in the Note Agreement) and at the
Company's option, the Company and Guidant may enter into the Credit Agreement,
in the form attached as Exhibit D to the Note Agreement, which provides that
Guidant, as lender, shall loan to the Company, as borrower, an amount not to
exceed an aggregate of Two Million Dollars ($2,000,000); and
WHEREAS, pursuant to Section 7 of the Note Agreement and upon the
achievement of certain Milestones, the Company has been granted the option (the
"Option") to require Guidant to purchase up to Three Million Dollars
($3,000,000) worth of common stock, par value $0.001 per share (the "Common
Stock"), of the Company (the "Option Common Stock") pursuant to the Stock
Purchase Agreement in the form attached as Exhibit C to the Note Agreement; and
WHEREAS, the Company desires to exercise the Option pursuant to the notice
of exercise attached hereto as Annex A (the "Notice"); and
WHEREAS, the Company and Guidant desire to make certain representations,
warranties, covenants and agreements in connection with the purchase and sale of
the Common Stock and the exercise of the Option and desire to prescribe certain
conditions precedent to such purchase and sale and the exercise of the Option:
NOW, THEREFORE, in consideration of the promises and of the mutual
provisions, agreements and covenants contained herein, the Company and Guidant
hereby agree as follows:
1. Purchase and Sale of Common Stock.
1.1 Purchase and Sale. Upon the terms and conditions set forth in Section 0
of the Note Agreement and herein, Guidant agrees to purchase at the Closing (as
defined herein) and the Company agrees to sell and issue at the Closing
shares of the Common Stock pursuant to the Notice. The Option may be
exercised in one or two tranches as provided in Section 7 of the Note Agreement.
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<PAGE> 45
1.2 Consideration for the Common Stock. Subject to the terms and conditions
of Section 0 of the Note Agreement and this Agreement, and as full consideration
for the sale and delivery of the Common Stock to Guidant, Guidant has paid to
the Company, simultaneously with the execution and delivery of this Agreement,
the aggregate amount of _____ Dollars ($_____) (the "Purchase Price"). The price
of the Option Common Stock shall be as provided in Section 7.1 of the Note
Agreement.
1.3 Closing. The closing of the purchase and sale of the Common Stock
hereunder (the "Closing") shall take place at the offices of Pillsbury Madison &
Sutro LLP at 2550 Hanover Street, Palo Alto, California, at 10:00 a.m. on
___________, 1998, and has taken place simultaneously with the execution and
delivery of this Agreement on the date first set forth above (the "Closing
Date").
1.4 Delivery of Common Stock at Closing. At the Closing, the Company shall
deliver to Guidant a certificate or certificates representing that number of
shares of Common Stock as set forth in Section 1.1 hereof.
2. Representations and Warranties of the Company. The Company and its
Subsidiaries represent and warrant to Guidant as of the date hereof that the
representations and warranties as made by the Company in Section 3 of the Note
Agreement are true and correct in all material respects with the same effect as
though made on and as of the Closing Date. The representations and warranties as
made by the Company in Section 3 of the Note Agreement are incorporated by
reference in their entirety herein.
3. Representations and Warranties of Guidant. Guidant represents and
warrants to the Company as of the date hereof that the representations and
warranties as made by Guidant in Section 4 of the Note Agreement are true and
correct in all material respects with the same effect as though made on and as
of the Closing Date. The representations and warranties as made by Guidant in
Section 0 of the Note Agreement are incorporated by reference in their entirety
herein.
4. Covenants and Agreements of the Company. The Company has performed and
complied with all of the covenants and agreements of the Company in Section 5
and Section 6 of the Note Agreement and further covenants and agrees to perform
and comply with such provisions. The covenants and agreements of the Company in
Section 5 and Section 6 of the Note Agreement are incorporated by reference in
their entirety herein.
5. Conditions Precedent to the Obligations of Guidant. Each and every
obligation of Guidant under this Agreement to be performed on or before the
Closing shall be subject to the satisfaction, on or before the Closing, of each
of the following conditions precedent, except to the extent that Guidant shall
have waived in writing such satisfaction:
5.1 Representations and Warranties of the Company; Performance. Each of the
representations and warranties made by the Company in the Note Agreement and as
incorporated by reference herein shall be true and correct in all material
respects on the Closing Date with the same effect as though made on and as of
such date; and the Company shall have performed and
C-2
<PAGE> 46
complied with all agreements, covenants and conditions required by this
Agreement and the Note Agreement to be performed and complied with by the
Company on or prior to the Closing Date.
5.2 Performance of Obligations. The Company shall have performed all
obligations required to be performed by it under this Agreement prior to the
Closing Date, and Guidant shall have received a certificate signed by the Chief
Executive Officer of the Company to such effect.
5.3 No Material Adverse Change. There shall have been no changes in the
condition (financial or otherwise), business, prospects, employees, operations,
obligations or liabilities of the Company which, in the aggregate, have had or
may be reasonably expected to have a materially adverse effect on the financial
condition, business, or operations of the Company on a consolidated basis.
5.4 Achievement of Milestones. The Company shall have achieved at least one
or both of the Milestones, as the case may be (as such term is defined in
Section 7.3 of the Note Agreement). The Company shall provide Guidant with
written documentation, satisfactory to Guidant, that each of the Milestones
has been satisfied, as applicable.
5.5 Stock Certificates. The Company shall deliver at Closing a stock
certificate or stock certificates representing that number of shares of Common
Stock to be purchased hereunder pursuant to Section 1 hereof. All such shares of
Common Stock shall be validly issued, fully paid and nonassessable.
6. Conditions Precedent to the Obligations of the Company. Each and every
obligation of the Company under this Agreement to be performed on or before the
Closing Date shall be subject to the satisfaction, on or before the Closing
Date, of each of the following conditions precedent, except to the extent that
the Company shall have waived in writing such satisfaction:
6.1 Representations and Warranties of Guidant; Performance. Each of the
representations and warranties made by Guidant in the Note Agreement and as
incorporated by reference herein shall be true and correct in all material
respects on the Closing Date with the same effect as though made on and as of
such date (except as disclosed to Guidant pursuant to a disclosure letter); and
Guidant shall have performed and complied with all agreements, covenants and
conditions required by this Agreement and the Note Agreement to be performed and
complied with by Guidant on or prior to the Closing Date.
6.2 Performance of Obligations of Guidant. Guidant shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Closing Date.
6.3 Payment. Guidant shall have tendered to the Company payment for the
Common Stock pursuant to Section 1.2 hereof.
7. Miscellaneous.
7.1 Notices. Except as otherwise expressly provided herein, any notice,
consent or
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<PAGE> 47
document required or permitted hereunder shall be given in writing and it or any
certificates or other documents delivered hereunder shall be deemed effectively
given or delivered (as the case may be) upon personal delivery (professional
courier permissible) or when mailed by receipted United States certified mail
delivery, or five (5) business days after deposit in the United States mail.
Such certificates, documents or notice may be personally delivered to an
authorized representative of the Company or Guidant (as the case may be) at any
address where such authorized representative is present and otherwise shall be
sent to the following address:
If to the Micro Therapeutics, Inc.
Company: 1062 Calle Negocio #F
San Clemente, CA 92673
Attention: George Wallace
Telecopy No.: (714) 361-0210
With a copy Stradling, Yocca, Carlson & Rauth
to: 660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Attention: Bruce Feuchter
Telecopy No.: (714) 725-4100
If to Guidant Corporation
Guidant: 3200 Lakeside Drive
Santa Clara, CA 95054
Attention: Greg S. Garfield
Telecopy No.: (408) 235-3987
and
Guidant Corporation
135 Constitution Drive
Menlo Park, CA 94025
Attention: Mary Bellack
Telecopy No.: (650) 617-5424
With a copy Pillsbury Madison & Sutro LLP
to: 2550 Hanover Street
Palo Alto, CA 94304
Attention: Katharine A. Martin
Telecopy No.: (650) 233-4545
Section 7.2 Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of
Guidant and its successors and assigns; provided, however, that the Company
shall not assign this Agreement or any of its rights, duties or obligations
hereunder without the prior written consent of Guidant.
Section 7.3 Survival of Covenants and Representations. All covenants,
representations
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<PAGE> 48
and warranties made by the Company herein and in any certificates delivered
pursuant hereto, whether or not in connection with the Closing Date, shall
survive the closing and the delivery of this Agreement and the Note and the
exercise of the Options by the Company.
Section 7.4 Severability. Should any part of this Agreement for any reason
be declared invalid or unenforceable, such decision shall not affect the
validity or enforceability of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or unenforceable portion thereof eliminated and it is hereby declared
the intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
Section 7.5 Waiver of Conditions. If on the Closing Date, either party
hereto fails to fulfill each of the conditions specified in Section 0 hereof,
the other party may thereupon elect to be relieved of all further obligations
under this Agreement. Without limiting the foregoing, if the conditions
specified in Section 0 have not been fulfilled, the other party may waive
compliance by such party with any such condition to such extent as such party
may in its sole discretion determine. Nothing in this Section 0 shall operate to
relieve either party of any obligations hereunder or to waive any of the other
party's rights against such party.
Section 7.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
Section 7.7 Governing Law. This Agreement and the Note issued and sold
hereunder shall be governed by and construed in accordance with California law,
without regard to the conflict of laws provisions thereof.
C-5
<PAGE> 49
Section 7.8 Captions. The descriptive headings of the various sections or
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company and Guidant, individually or by their duly
authorized officers, have each caused this Agreement to be executed as of the
date first written above.
COMPANY
MICRO THERAPEUTICS, INC.
By
------------------------------------
Title
---------------------------------
GUIDANT
GUIDANT CORPORATION
By
------------------------------------
Title
---------------------------------
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<PAGE> 50
ANNEX A
NOTICE OF EXERCISE
To: GUIDANT CORPORATION
3200 Lakeside Drive
Santa Clara, CA 95054
Attn: Greg S. Garfield
Telecopy No.: (408) 235-3987
Micro Therapeutics, Inc. hereby irrevocably exercises the option (the
"Option") to require Guidant Corporation to purchase up to Dollars
($ ) worth of Common Stock of Micro Therapeutics, Inc. in accordance with
the Note Agreement and the Stock Purchase Agreement, or portion hereof below
designated (which is Five Hundred Thousand Dollars ($500,000) or an integral
multiple thereof), and directs that Guidant Corporation purchase such shares. No
fractional shares shall be issued. Micro Therapeutics, Inc. agrees that the
shares of Common Stock shall be issued and delivered to Guidant Corporation.
Amount to be Exercised: $
Dated: , 1998
------------------------------------
Signature
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<PAGE> 51
EXHIBIT D
FORM OF CREDIT AGREEMENT
THIS EXHIBIT DOES NOT HAVE AUTO REFERENCING THIS CREDIT AGREEMENT (this
"Agreement"), dated as of , 1998, by and between GUIDANT CORPORATION,
an Indiana corporation ("Guidant"), as lender, and MICRO THERAPEUTICS, INC., a
Delaware corporation (the "Company"), as borrower,
W I T N E S S E T H:
WHEREAS, Guidant has purchased from the Company, and the Company has sold
to Guidant, a certain 5% Convertible Subordinated Note, due October 31, 2002, in
the principal aggregate amount of Five Million Dollars ($5,000,000) (the "Note")
pursuant to the terms and conditions of that certain Convertible Subordinate
Note Agreement, dated as of November 17, 1997, by and between Guidant and the
Company (the "Note Agreement"); and
WHEREAS, pursuant to Section 7 of the Note Agreement and upon the
achievement of certain Milestones, the Company has been granted the option to
require Guidant to purchase up to Three Million Dollars ($3,000,000) worth of
common stock, par value $0.001 per share, of the Company pursuant to the Stock
Purchase Agreement in the form attached as Exhibit C to the Note Agreement; and
WHEREAS, pursuant to Section 8 of the Note Agreement and upon the
achievement of certain Milestones (as defined in the Note Agreement) and at the
Company's option, the Company and Guidant may enter into the Credit Agreement,
in the form attached as Exhibit D to the Note Agreement, which provides that
Guidant, as lender, shall loan to the Company, as borrower, an amount not to
exceed an aggregate of Two Million Dollars ($2,000,000); and
WHEREAS, the Company desires to obtain from Guidant, a loan (the "Loan")
not to exceed in the aggregate Two Million Dollars ($2,000,000):
NOW, THEREFORE, in consideration of the promises and of the mutual
provisions, agreements and covenants contained herein, the Company and Guidant
hereby agree as follows:
Section 1. Definitions. In addition to any terms defined elsewhere in this
Agreement, the following terms have the meanings indicated for purposes of this
Agreement (such definitions being equally applicable to the singular and plural
forms of the defined term):
"Acceleration" means that the Loan (i) shall not have been paid at the
Maturity Date, or (ii) shall have become due and payable prior to its stated
maturity pursuant to Section 6.2 hereof.
"Disbursement Date" means any date on or prior to December 31, 1998 on
which a disbursement of the Loan is made. Each Disbursement Date shall be on the
date designated in a written notice from the Company to Guidant; provided,
however, that (a) Guidant shall not be required to make any disbursement if the
conditions hereto and the Note Agreement are not
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satisfied, and (b) Guidant shall in no event be required to make any
disbursement after December 31, 1998.
"Maturity" means any date on which the Loan or any portion thereof becomes
due and payable, whether as stated or by virtue of mandatory prepayment, by
acceleration or otherwise.
"Maturity Date" means October 31, 2002.
"Obligations" means all loans, advances, debts, liabilities, obligations,
covenants and duties owing to Guidant by the Company, of any kind or nature,
present or future, whether or not evidenced by any note, guaranty or other
instrument, arising under this Agreement.
Each accounting term not defined herein and each accounting term partly
defined herein to the extent not defined shall have the meaning given to it
under GAAP.
Section 2. Loan.
2.1 Procedure for Loan. Subject to all of the terms and conditions of this
Agreement and the Note Agreement, Guidant agrees to make the Loan to the Company
in the amount of up to Two Million Dollars ($2,000,000) to be governed by the
terms and conditions of, and repaid in accordance with, this Agreement and the
Note Agreement. The Company shall provide Guidant with at least fifteen (15)
business days' written notice of a requested disbursement. Disbursement amounts
shall be in multiples of Five Hundred Thousand Dollars ($500,000). Subject to
the satisfaction of the terms and conditions set forth in the Agreement and the
Note Agreement, Guidant shall disburse up to Two Million Dollars ($2,000,000) to
the Company at the Company's request upon the achievement of one of the
Milestones (as defined in Section 7.3 of the Note Agreement). In the event that
the full amount of the Loan is not dispersed to the Company upon the achievement
of one of the Milestones, Guidant shall disburse the remainder of the Loan
amount to the Company, at the Company's request, upon the achievement of the
second of the Milestones. In no event shall Guidant be obligated to disburse to
the Company more than Two Million Dollars ($2,000,000) in the aggregate
hereunder. Amounts repaid with respect to the Loan (whether repaid when due or
prepaid) may not be reborrowed by the Company.
2.2 Interest.
(a) Interest. The Loan shall bear interest from the date of disbursement on
the unpaid principal amount thereof until the earlier of an Event of Default or
the date upon which such amount shall become due and payable (whether upon
Maturity, by Acceleration or otherwise) at a rate per annum equal to eight
percent (8%).
(b) Accrual and Computation of Interest. Interest shall accrue daily
and shall be computed for the actual number of days elapsed.
2.3 Maximum Interest Rate. Nothing in this Agreement shall require the
Company to pay interest at a rate exceeding the maximum amount permitted by
applicable law to be charged by Guidant.
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2.4 Repayment.
(a) Interest Payments. On the last day of each calendar quarter commencing
with the calendar quarter of the first Disbursement Date until the Maturity
Date, and on the Maturity Date, the Company shall pay Guidant all interest then
accrued.
(b) Loan Payment. The Company shall repay the entire outstanding principal
amount of the Loan in full on the Maturity Date.
(c) Optional Prepayment. The Company may at any time prepay the entire
outstanding principal amount of the Loan or any portion thereof without penalty.
2.5 Post-Maturity Interest. After the earlier of an Event of Default or
Maturity (whether by Acceleration or otherwise) of the Loan, the Loan shall bear
interest, payable on demand, at a rate per annum equal to ten percent (10%),
subject to Section 2.3 hereof.
2.6 Note. The Loan made by Guidant pursuant hereto shall be evidenced by a
promissory note (the "Promissory Note") of the Company in the form of Annex A
hereto, payable to the order of Guidant on the Maturity Date in the principal
amount of up to Two Million Dollars ($2,000,000) or any integral multiple
thereof in accordance with Section 2.1 hereof. The Company hereby authorizes
Guidant to indicate upon a schedule attached to the Promissory Note all
disbursements made by Guidant pursuant to this Agreement and all payments of
principal and interest thereon. Absent manifest error, such notations shall be
presumptive as to the aggregate unpaid principal amount of the Loan, and
interest due thereon, but the failure by Guidant to make such notations or the
inaccuracy or incompleteness of any such notations shall not affect the
obligations of the Company hereunder or under the Promissory Note.
2.7 Payments by the Company. All payments (including prepayments) to be
made by the Company shall be made without set-off or counterclaim and shall be
made to Guidant by wire transfer in United States dollars and in immediately
available funds to Guidant's offices pursuant to Section 7.1 hereof no later
than 12:00 noon, Pacific time, of the business day on which payment is due. Any
payment which is received by Guidant later than 12:00 noon, Pacific time, shall
be deemed to have been received on the immediately succeeding business day.
Whenever any payment hereunder shall be stated to be due on a day other than a
business day, such payment shall be made on the next succeeding business day,
and such extension of time shall in such case be included in the computation of
interest.
Section 3. Conditions Precedent.
3.1 Disbursements. The obligation of Guidant to make each disbursement of
the Loan shall be subject to the prior or contemporaneous satisfaction of each
of the following conditions:
(a) Authorizations. Guidant shall have received such instruments or
documents as Guidant may reasonably request relating to the existence and good
standing of the Company or the authority for execution, delivery and performance
of this Agreement, dated and in full force
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<PAGE> 54
and effect on the Disbursement Date;
(b) Milestones. The Company shall have achieved at least one or both of the
Milestones, as the case may be (as such term is defined in Section 0 of the Note
Agreement). The Company shall have provided Guidant with written documentation,
satisfactory to Guidant, that each of the Milestones has been satisfied, as
applicable.
(c) No Existing Default. No Event of Default or event which, upon the lapse
of time or the giving of notice or both, would constitute an Event of Default
(an "Incipient Default") shall exist on the Disbursement Date;
(d) Representations and Warranties Correct. Each of the representations and
warranties made by the Company in the Note Agreement and as incorporated by
reference herein shall be true and correct in all material respects on the
Closing Date with the same effect as though made on and as of such date; and the
Company shall have performed and complied with all agreements, covenants and
conditions required by this Agreement and the Note Agreement to be performed and
complied with by the Company on or prior to the Disbursement Date; and
(e) Other Agreements. The Distribution Agreement and the Note Agreement
shall be in full force and effect, and the Company shall not be in breach or
default of any material covenant, condition or other provision thereof beyond
the applicable grace period, if any, specified therein.
4. Representations and Warranties of the Company. The Company and its
Subsidiaries represent and warrant to Guidant as of the date hereof that the
representations and warranties as made by the Company in Section 3 of the Note
Agreement are true and correct in all material respects with the same effect as
though made on and as of the Disbursement Date. The representations and
warranties as made by the Company in Section 3 of the Note Agreement are
incorporated by reference in their entirety herein.
5. Covenants and Agreements of the Company. The Company has performed and
complied with all of the covenants and agreements of the Company in Section 5
and Section 6 of the Note Agreement further covenants and agrees to perform and
comply with such provisions. The covenants and agreements of the Company in
Section 5 and Section 6 of the Note Agreement are incorporated by reference in
their entirety herein.
Section 6. Events of Default.
6.1 Events of Default. The Events of Default referenced in Section 9 of the
Note Agreement are incorporated by reference in their entirety herein.
6.2 Termination of Commitment and Acceleration. If any Event of Default
described in Section 6.1 hereof shall occur, Guidant shall have no obligation to
make disbursements hereunder and may declare all Obligations to be due and
payable, whereupon all Obligations shall immediately become due and payable, all
as so declared by Guidant and without presentment, demand, protest or other
notice of any kind. Any such declaration made pursuant to this Section 6.2 may
be rescinded by Guidant.
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6.3 Other Remedies. If any Event of Default shall occur and be continuing,
Guidant shall have, in addition to the remedies set forth in Section 6.2 hereof,
all other remedies otherwise available at law.
Section 7. Miscellaneous.
7.1 Notices. Except as otherwise expressly provided herein, any notice,
consent or document required or permitted hereunder shall be given in writing
and it or any certificates or other documents delivered hereunder shall be
deemed effectively given or delivered (as the case may be) upon personal
delivery (professional courier permissible) or when mailed by receipted United
States certified mail delivery, or five (5) business days after deposit in the
United States mail. Such certificates, documents or notice may be personally
delivered to an authorized representative of the Company or Guidant (as the case
may be) at any address where such authorized representative is present and
otherwise shall be sent to the following address:
If to the Micro Therapeutics, Inc.
Company: 1062 Calle Negocio #F
San Clemente, CA 92673
Attention: George Wallace
Telecopy No.: (714) 361-0210
With a copy Stradling, Yocca, Carlson & Rauth
to: 660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Attention: Bruce Feuchter
Telecopy No.: (714) 725-4100
If to Guidant Corporation
Guidant: 3200 Lakeside Drive
Santa Clara, CA 95054
Attention: Greg S. Garfield
Telecopy No.: (408) 235-3987
and
Guidant Corporation
135 Constitution Drive
Menlo Park, CA 94025
Attention: Mary Bellack
Telecopy No.: (650) 617-5424
With a copy Pillsbury Madison & Sutro LLP
to: 2550 Hanover Street
Palo Alto, CA 94304
Attention: Katharine A. Martin
Telecopy No.: (650) 233-4545
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Section 7.2 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the Company and its successors and assigns and shall
be binding upon and inure to the benefit of Guidant and its successors and
assigns; provided, however, that the Company shall not assign this Agreement or
any of its rights, duties or obligations hereunder without the prior written
consent of Guidant.
Section 7.3 Survival of Covenants and Representations. All covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not in connection with the
Disbursement Date, shall survive the closing and the delivery of this Agreement
and the Promissory Note.
Section 7.4 Severability. Should any part of this Agreement for any reason
be declared invalid or unenforceable, such decision shall not affect the
validity or enforceability of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or unenforceable portion thereof eliminated and it is hereby declared
the intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
Section 7.5 Waiver of Conditions. If on the Closing Date, either party
hereto fails to fulfill each of the conditions specified in Section 3 hereof,
the other party may thereupon elect to be relieved of all further obligations
under this Agreement. Without limiting the foregoing, if the conditions
specified in Section 3 hereof have not been fulfilled, the other party may waive
compliance by such party with any such condition to such extent as such party
may in its sole discretion deter mine. Nothing in this Section 0 shall operate
to relieve either party of any obligations hereunder or to waive any of the
other party's rights against such party.
Section 7.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
Section 7.7 Governing Law. This Agreement and the Note issued and sold
hereunder shall be governed by and construed in accordance with California law,
without regard to the conflict of laws provisions thereof.
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Section 7.8 Captions. The descriptive headings of the various sections or
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
GUIDANT
GUIDANT CORPORATION
By
------------------------------------
Title
---------------------------------
COMPANY
MICRO THERAPEUTICS, INC.
By
------------------------------------
Title
---------------------------------
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<PAGE> 58
ANNEX A
PROMISSORY NOTE
[up to $2,000,000] San Clemente, California
[Date]
On or before October 31, 2002, Micro Therapeutics, Inc. (the "Company"),
for value received, promises to pay to the order of Guidant Corporation
("Guidant"), as payee, at 3200 Lakeside Drive, Santa Clara, California 95054,
the principal sum of [up to Two Million Dollars ($2,000,000)] plus interest
added to such principal sum or, if less, the aggregate unpaid principal amount
of all disbursements of the Loan made by Guidant to the undersigned pursuant to
the Credit Agreement (as defined herein) plus interest added to such principal
amount, as shown in the records of Guidant.
The unpaid principal amount hereof from time to time outstanding shall bear
interest from the first Disbursement Date (as defined in the Credit Agreement)
at a rate per annum equal to eight percent (8%). Upon the occurrence and during
the continuation of an Event of Default (as defined in the Credit Agreement),
the outstanding principal amount of the Loan shall, to the extent permitted by
applicable law, bear interest at a rate equal to ten percent (10%) per annum.
Interest on the Loan shall be payable in arrears on the last business day of
each calendar quarter, commencing with the quarter in which the first
Disbursement Date occurs and ending on the Maturity Date (as defined in the
Credit Agreement).
Payments of both principal and interest shall be made in immediately
available funds in lawful money of the United States of America.
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This Promissory Note evidences indebtedness incurred under, and is subject
to the terms and provisions of that certain Credit Agreement, dated as of
, 1998, by and between Guidant and the Company (the "Credit
Agreement"), to which Credit Agreement reference is hereby made for a statement
of said terms and provisions, including those under which this Promissory Note
may be paid prior to its due date or under which its due date may be
accelerated. Capitalized terms used in this Promissory Note and not otherwise
defined shall have the meaning set forth in the Credit Agreement.
This Promissory Note and the Credit Agreement are governed by and construed
in accordance with the laws of the State of California.
MICRO THERAPEUTICS, INC.
By
---------------------------------------
Title
------------------------------------
Address: 1062 Calle Negocio #F
San Clemente, CA 92673
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<PAGE> 1
[*] CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED UPON A REQUEST FOR
CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
EXHIBIT 10.12
DISTRIBUTION AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of November 17,
1997 (the "Effective Date"), by and between GUIDANT CORPORATION, an Indiana
corporation, and its Affiliates ("Guidant"), having a place of business at 135
Constitution Drive, Menlo Park, California 94025, and MICRO THERAPEUTICS, INC.,
a Delaware corporation ("MTI"), having a place of business at 1062-F Calle
Negocio, San Clemente, California 92673.
RECITALS
A. MTI is engaged in the business of developing the Products (as defined
below), and Guidant is in the business of developing, manufacturing and
distributing medical devices; and
B. The parties desire that Guidant invest in MTI, the details of which
investment are fully described and governed by that certain Convertible
Subordinated Note Agreement of even date herewith; and
C. In consideration for such investment, the parties desire that Guidant
act as an exclusive independent distributor of the Products within the Territory
within the Field (as defined below) under the terms and conditions of this
Agreement;
N o w, T h e r e f o r e, in consideration of the mutual promises and
covenants set forth below, the parties agree as follows:
1. DEFINITIONS.
1.2 "Affiliate" means any company or entity that controls, is controlled
by or is under common control with, a party to this Agreement.
1.3 "Approval Date" means the date on which the CE Marking under the EU
Medical Devices Directive (the "CE Mark") is obtained for LES.
1.4 "Change of Control Event" means any sale of all or substantially all
of a party's assets or stock or a change in ownership or control of a party,
whether by merger or otherwise.
1.5 "Confidential Information" includes, but is not limited to, trade
secrets, discoveries, ideas, concepts, know-how, techniques, designs,
specifications, drawings, diagrams, data, business activities and operations,
customer lists, reports, studies and other technical and business information.
1.6 "Cost" means the price paid by Guidant to MTI for each Product
purchased under this Agreement.
1.7 "Customer" means a person or entity, and its wholly-owned
subsidiaries and affiliates who purchase Products.
1.8 "Effective Date" means the date first set forth above.
1.9 "Field " means devices and methods of use directed toward diagnosis,
treatment or prevention of disease in the neck and head, not including stenting
of carotid stenosis.
1.10 "First Commercial Sale" will not include any sales to a third party
in connection with any clinical trials or regulatory or safety testing.
1.11 "LES" means MTI's Liquid Embolic System that includes an embolic
agent and delivery system.
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<PAGE> 2
1.12 "Margin" means Net Sales minus the Cost of the Product sold.
1.13 "Net Sales" means the gross amounts recorded by Guidant on the
accrual method minus reasonable reserves for bad debt consistent with generally
accepted accounting principles consistently applied by Guidant for sales of, and
in connection with Guidant's purchase, transportation and importation of, the
Products, less any discounts, rebates and credit for returned goods and
cancellations, and less all freight charges, insurance and other costs of
shipping and handling, taxes, duties and the like, all to the extent that any of
the foregoing may be recorded or incurred by Guidant in connection with the
Products under this Agreement. The aforementioned shall be converted to United
States dollars each month, using Guidant's standard practice to determine Net
Sales.
1.14 "Peripheral Product" means each of MTI's devices or technology
other than Products, currently or hereafter developed or otherwise acquired by
MTI, that has application principally in the peripheral vasculature. Such
products include peripheral infusion products and thrombectomy devices.
1.15 "Product" means each of MTI's devices or technology, currently or
hereafter developed or otherwise acquired by MTI, that has any application in
the Field, including but not limited to LES, stent system for carotid and
intracranial aneurysms, neuro microcatheters and any improvements, enhancements
or line extensions thereto.
1.16 "Territory" means the territory identified on Exhibit A of this
Agreement.
2. APPOINTMENT OF GUIDANT.
2.1 Appointment. MTI hereby appoints Guidant as the exclusive
distributor of the Products within the Territory (other than by MTI for clinical
or regulatory purposes) for use by Customers in the Field. During the term of
this Agreement, MTI will not appoint or authorize any other distributor or sales
representative to make sales of all or any part of the Products within the
Territory in the Field nor will MTI sell any Product to any entity that it knows
or has reason to know will sell the Product in the Territory in the Field,
without Guidant's prior written permission. Guidant shall be entitled to use
subdistributors and agents of its own choosing in distributing the Products.
Guidant shall have the right during the term of this Agreement to represent to
the public that it is an authorized independent distributor of the Products
within the Territory.
2.2 Independent Contractor. Guidant is and at all times shall be an
independent contractor in all matters relating to this Agreement. Guidant and
its employees are not agents of MTI for any purposes and have no power or
authority to bind or commit MTI in any way.
3. GUIDANT'S DUTIES. Guidant shall use reasonable commercial efforts to
introduce, promote the sale of, solicit and obtain orders for Products from
Customers in accordance with the terms of this Agreement. In particular, Guidant
agrees as follows:
3.1 Personnel. Within ninety (90) days after the Approval Date, Guidant
shall provide a minimum of [*] ([*]) sales personnel for the Territory to assist
in the marketing and sale of the Products. Such personnel may include a sales
manager and may, at Guidant's sole option and discretion, market and sell other
products in addition to the Products; provided, however, that such personnel may
not sell any solvent-based liquid embolic products of MTI's competitors.
3.2 Forecast. Guidant shall prepare and submit to MTI on or before the
date that is three (3) months before the Approval Date and on or before the
first day of each calendar quarter during the term of this Agreement a
non-binding, rolling six (6) month sales forecast by Product, anticipated
quantity and estimated delivery date, which will include a provision for
maintaining a reasonable inventory of Products to service Customers. All
forecasts and estimates are provided by Guidant to MTI for planning purposes
only.
3.3 No Minimum Purchase Requirements. Nothing herein shall be construed
to obligate Guidant to purchase any minimum quantity of any of the Products, it
being agreed by the parties that such an obligation would be impossible to
reasonably determine since the Products are being developed and are not yet
tested, approved or otherwise commercially available.
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<PAGE> 3
3.4 Compliance with Laws. Subject to Section 4 below, Guidant will, at
all times, have all necessary legal permits and licenses required by any
governmental unit or agency and will comply with all applicable international,
national, state, regional and local laws and regulations, in performing its
duties hereunder and in any of its dealings with respect to the Products as an
independent distributor, except where the failure to obtain such permits or
licenses or failure to comply will not have a material adverse effect on
Guidant's ability to market and sell the Products.
4. MTI'S DUTIES. MTI will use reasonable commercial efforts to develop
for commercialization those Products currently under development and to create
new Products for commercialization in the Field.
4.1 Responsibility for Regulatory and Safety Testing Requirements and
for Obtaining Required Approvals and Registrations.
4.1.1 Regulatory and Safety Testing Requirements. MTI will be
considered to be the finished device manufacturer for the Products, and
will be responsible for compliance with all regulatory and safety
testing requirements in the Territory. MTI agrees to provide Guidant
with the data and results from clinical trials with respect to each of
the Products.
4.1.2 Regulatory Approvals and Registrations. MTI shall use its
best efforts to obtain all regulatory approvals for the Products in the
Territory, including, at a minimum, the CE Mark for each Product and any
additional country-specific approvals.
4.1.3 Quality System Compliance. MTI will be solely responsible
for quality system compliance affecting the Products, including, at a
minimum, ISO certification and compliance with FDA Quality System
Regulations. During the term of this Agreement, Guidant will manage the
complaint files associated with the Products in the Territory and
provide copies of those complaint files to MTI.
4.1.4 Post-Market Surveillance. Guidant will be responsible for
any reportable events, such as patient death or injury, associated with
the Products to the European authorities, and MTI will be solely
responsible for any reportable events associated with the Products to
the United States authorities; provided, however, that to the extent
required by applicable law each party may report such events to the
applicable authorities. Guidant will notify MTI of any such event within
two (2) days after Guidant learns of such event. Each party agrees to
provide the other party with any assistance required in connection with
such activities, including without limitation access to the Product
files.
4.1.5 Assistance by Guidant. Upon MTI's request, Guidant may
provide regulatory and clinical trial services to assist MTI in its
regulatory and safety testing required in the Territory. The scope of,
and Guidant's fees for, such services will be negotiated in good faith
by the parties and governed by the terms and conditions of a written
agreement executed by both parties.
4.1.6 Reimbursement. MTI shall use its best efforts to obtain
reimbursement from governmental agencies, third-party payors, or other
parties from whom reimbursement may be sought in connection with sales
of the Products.
4.2 Literature. Upon Guidant's reasonable request, MTI shall furnish
Guidant, without charge (except as otherwise agreed), with reasonable quantities
of technical, advertising and selling information and literature in English
concerning the Products which Guidant may incorporate or include with its own
marketing materials and information relating to the Products. Guidant shall have
the right to develop and distribute its own marketing materials, brochures and
other information regarding the Products in connection with its sales and
distribution activities under this Agreement.
4.3 Marketing Support. To assist in marketing the Products in the
Territory, each party shall, as applicable:
4.3.1 provide the other party with any information reasonably
requested by the other party for the purpose of complying with
governmental requirements.
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<PAGE> 4
4.3.2 provide the other party with information on marketing and
promotional plans for the Products as well as copies of marketing,
advertising, sales and promotional literature concerning the Products,
if any; and
4.3.3 provide the other party with certificates of free sale,
trademark authorizations and any other documents which the other party
may reasonably request to satisfy the requirements of the laws of the
various jurisdictions within the Territory and of any competent
authority.
4.4 Sales and Training. MTI shall provide initial training of Guidant's
personnel in the use of the Products, upon Guidant's reasonable request. Guidant
will pay the cost of any travel and lodging for its personnel attending any such
training, and MTI will pay the cost of the trainers and materials.
4.5 Trade Shows. For trade shows and congresses of international
stature, MTI agrees to assist Guidant, subject to mutual written agreement of
the parties, with the promotion of the Products. Such assistance may include
sharing of costs, provision of personnel and materials as well as joint
exhibits.
4.6 Changed Product. MTI shall provide Guidant with at least ninety (90)
days prior written notice of any change in the processes, materials, equipment,
inspection, testing, manufacturing location and the like of which it has
knowledge that may have any effect on the Products or their uses.
4.7 Insurance. MTI shall at all times during the term of this Agreement
maintain product liability insurance covering the products with minimum annual
limits of Two Million Dollars ($2,000,000) per occurrence and Two Million
Dollars ($2,000,000) in the aggregate. MTI shall maintain such insurance for a
minimum of five (5) years after termination of this Agreement. Within thirty
(30) days of the Effective Date, MTI shall deliver to Guidant a certificate of
insurance evidencing such insurance and stating that the policy will not be
canceled or modified without at least thirty (30) days prior written notice to
Guidant.
4.8 Non-Revenue Units. During the term of this Agreement, MTI agrees to
provide Guidant with a reasonable amount of the Products, at no charge, as
requested by Guidant, for sales presentations and medical meeting demonstrations
or presentations and for testing purposes.
4.9 Peripheral Distribution. MTI agrees that, for a period of three (3)
months commencing with the Effective Date of this Agreement ("Restricted
Period"), MTI will not enter into an agreement with a third party for
distribution of the Peripheral Products. After the Restricted Period, MTI may
enter into such an agreement with a third party for the distribution of the
Peripheral Products, provided that any such agreement must provide that, upon
any Change of Control Event with respect to MTI, MTI may (a) terminate such
agreement without liability upon such Change of Control Event and (b) assign the
agreement to MTI's successor or the acquiring entity.
5. TRADEMARKS AND LABELING.
5.1 Trademark License. MTI hereby grants to Guidant an exclusive,
royalty-free license to use the trademarks, trade names and logos used by MTI to
identify the Products (the "Trademarks") solely in the course of Guidant's
advertisement, promotion, distribution and sale of the Products in the Field and
in the Territory. Guidant's use of the Trademarks will be in accordance with
MTI's policies that are provided to Guidant in writing from time to time.
Guidant agrees to display the Trademarks on the Products distributed under this
Agreement. Use of the Trademarks on the Products shall not give Guidant any
proprietary rights in the Trademarks.
5.2 Ownership. Guidant acknowledges that, subject only to the license
granted herein to Guidant, MTI owns and retains all proprietary rights in all of
its Trademarks.
5.3 No Continuing Rights. Upon termination of this Agreement, Guidant
will cease all further display, advertising and use of all Trademarks except in
connection with the sale of Products in inventory as provided in Section 13.4
below.
5.4 Labeling of Products. Guidant shall have the right to label the
Products distributed under this Agreement in order to add its name and
trademark, and in accordance with applicable regulations.
-4-
<PAGE> 5
6. ORDER PLACEMENT.
6.1 Price. The Cost to Guidant for each Product purchased by Guidant
under this Agreement shall be an amount equal to [*] percent ([*]) of the Net
Sales price for such Product. The Cost shall be calculated after conversion of
amounts received in foreign currency to United States dollars, as provided in
Section 1.13.
6.2 Purchase Orders and Acknowledgements.
6.2.1 Purchase Orders. All purchases of the Products by Guidant
shall be made by written purchase order specifying by Product type the
quantity, price, requested delivery schedule, delivery location, and
shipping instructions. All purchases of the Products by Guidant from MTI
during the term of this Agreement shall be subject to the terms and
conditions of this Agreement, and any additional or different terms and
conditions in a purchase order or confirmation form which conflicts with
this Agreement, shall be of no force and effect, unless the parties
specifically agree in writing to the terms and conditions which conflict
with this Agreement.
6.2.2 Acceptance of Orders. All orders and modifications to
orders are subject to acceptance by MTI; provided, however, that MTI
agrees to accept all purchase orders by Guidant for the Products as long
as such orders are consistent with Guidant's forecasts of its expected
orders of the Products (as described in Section 3.2 above). MTI shall
use commercially reasonable efforts to fulfill all other orders by
Guidant for the Products in the Territory. If MTI believes that it will
not be able to satisfy Guidant's orders for the Products, it shall
promptly notify Guidant, specifying the reasons for the delay and its
expected duration.
6.3 Title and Delivery of Products.
6.3.1 All Products shall be delivered FOB MTI's manufacturing
facility to the carrier designated by Guidant. If no such designation is
made by Guidant, MTI shall select the most cost-effective carrier, given
the time constraints known to MTI. MTI's title and the risk of loss to
the Products shall pass to Guidant upon delivery of the Products to the
carrier.
6.3.2 Guidant shall pay all taxes (including, without
limitation, sales, value-added and similar taxes) payable with respect
to the sale and purchase of Products under this Agreement, except for
taxes based on MTI's income.
6.3.3 All Products shall be suitably packed for shipment and
marked for shipment to Guidant's European facilities designated in the
purchase order. Guidant agrees to undertake all import formalities
required to import the Products into the Territory, and to pay all
custom duties, freight, insurance and other shipping expenses, as well
as any special packing expense.
6.3.4 MTI may make partial shipments against Guidant's purchase
orders upon mutual agreement of the parties.
6.4 Cancellation/Reschedules.
6.4.1 Guidant may reschedule each order once and no such
reschedule will exceed forty-five (45) days from the originally
scheduled ship date. MTI will work with Guidant on a case by case basis
to resolve issues related to market changes and potential impact on
orders placed with MTI.
6.4.2 Guidant may cancel all or any portion of an order or
change the scope of an order at any time prior to fifteen (15) days
before the scheduled ship date. Thereafter, Guidant may do so only with
MTI's written approval.
6.5 Recalls. The parties will give prompt notice of any contemplated
recall of the Products to the other party. The parties shall give each other
full cooperation throughout the recall process whether such recall is voluntary
or otherwise and shall comply in full with applicable legal and governmental
requirements.
-5-
<PAGE> 6
7. PAYMENT AND RECORDS.
7.1 Payment Terms. Guidant shall pay to MTI within forty-five (45) days
of the receipt of invoice an estimated amount mutually agreed by the parties for
the Cost specified in Section 6.1 above for each Product delivered during that
month. All payments shall be made in United States dollars. Guidant may
distribute as clinical samples up to seven percent (7%) of the total number of
Products provided to Guidant under this Agreement. Such samples will be included
in any reconciliation as Net Sales at the price (if any) for such samples or at
zero dollars if the sample were distributed by Guidant free of charge.
7.2 Quarterly Reconciliation. At the end of each calendar quarter,
Guidant shall reconcile the estimated payments made to MTI under Section 7.1
above with the actual Cost for the Products purchased during such calendar
quarter and shall provide a report to MTI of such reconciliation within thirty
(30) days after the end of such quarter. If the reconciliation reveals that
Guidant owes MTI additional amounts, Guidant shall remit payment of such amount
with its report. If the reconciliation reveals that Guidant has overpaid in its
estimated payment, MTI shall reimburse Guidant within ten (10) days of receipt
of the report.
7.3 Records. No more frequently than once in any twelve (12) month
period during the term of this Agreement, upon MTI's request and at its expense,
Guidant shall allow an independent auditor mutually agreed upon by the parties
to examine Guidant's books and records relating to the distribution and sale of
the Products for the purpose of verifying the payment made by Guidant pursuant
to this Section 7. If, as a result of such examination, an underpayment or
overpayment is found, the applicable party will rectify the underpayment or
overpayment within thirty (30) days; provided that if such examination shows an
underpayment by Guidant of more than seven percent (7%), then Guidant shall pay
the cost of such audit. The audit shall take place during Guidant's normal
business hours, at a location to be designated by Guidant, may not disrupt the
operation of Guidant's business, shall be completed within five (5) working days
and shall not cover a period more than two (2) years back from the date of the
audit. Scheduling of the audit shall be subject to mutual agreement of the
parties.
8. RETURNS.
8.1 Guidant may return for a refund any Product that does not meet MTI's
warranty as set forth in Section 10 of this Agreement. MTI will issue a return
material authorization ("RMA") number for such defective Product upon Guidant's
request. At MTI's expense, Guidant shall return any such defective Product to
MTI with documentation referencing the applicable RMA number. MTI shall submit
such refund and reimbursement of the return shipment cost to Guidant within
forty-five (45) days of receiving the defective Product.
8.2 Each Product delivered under this Agreement must have, upon
Guidant's receipt of such Product, a minimum remaining shelf life of
three-fourths (3/4) of the Product's approved shelf life. At MTI's expense,
Guidant may return for a refund or replacement, at Guidant's option, any Product
that does not meet this requirement. MTI shall submit such refund and
reimbursement for shipping costs or replacement Product to Guidant within
forty-five (45) days of receiving the returned Product. The parties understand
that the Products are currently under development and, as such, do not yet have
an approved shelf life. MTI will use all commercially practicable efforts to
obtain shelf life approval of at least eighteen (18) months for each of the
Products.
9. CONFIDENTIAL INFORMATION.
9.1 Identification of Confidential Information. Confidential Information
provided by the disclosing party and entitled to protection under this Agreement
shall be identified as such by appropriate markings on any documents exchanged.
If the disclosing party provides information other than in written form, such
information shall be considered Confidential Information only if the information
by its nature would reasonably be considered of a confidential nature or if the
receiving party, due to the context in which the information was disclosed,
should have reasonably known it to be confidential, and the disclosing party
gives written notice within ten (10) days of disclosure that such information is
to remain confidential or the disclosing party had previously confirmed in
writing that such information was confidential.
9.2 Protection of Confidential Information. Each party acknowledges that
the other party claims its Confidential Information as a special, valuable and
unique asset. During the term of this Agreement and for three
-6-
<PAGE> 7
(3) years thereafter, for itself and on behalf of its officers, directors,
agents, and employees, each party agrees to the following:
9.2.1 Receiving party will not disclose the Confidential
Information to any third party or disclose to an employee unless such
third party or employee has a need to know the Confidential Information
in order to enable the disclosing party to exercise its rights or
perform its obligations under this Agreement. Receiving party will use
the Confidential Information only for the purposes of exercising its
rights or fulfilling its obligations under this Agreement and will not
otherwise use it for its own benefit. In no event shall the receiving
party use less than the same degree of care to protect the Confidential
Information as it would employ with respect to its own information of
like importance which it does not desire to have published or
disseminated;
9.2.2 If the receiving party faces legal action or is subject to
legal proceedings requiring disclosure of Confidential Information,
then, prior to disclosing any such Confidential Information, the
receiving party shall promptly notify the disclosing party and, upon the
disclosing party's request, shall cooperate with the disclosing party in
contesting such request.
9.3 Return of Confidential Information. All information furnished under
this Agreement shall remain the property of the disclosing party and shall be
returned to it or destroyed or purged promptly at its request upon termination
of this Agreement; provided, however, that Guidant may retain Confidential
Information of MTI as reasonably necessary for Guidant to be able to complete
the sale of Products on order or in inventory at the time of termination and to
support Products already sold by Guidant under this Agreement. All documents,
memoranda, notes and other tangible embodiments whatsoever prepared by the
receiving party based on or which includes Confidential Information shall be
destroyed to the extent necessary to remove all such Confidential Information
upon the disclosing party's request, except that one copy of such information
that may be retained in the legal files of the receiving party. All destruction
under this Section 9.3 shall be certified in writing to the disclosing party by
an authorized officer of the receiving party.
9.4 Residual Information. Either party shall be free to use for any
purpose (including, but not limited to, use in the development, manufacture,
marketing and maintenance of its own products and services) the Residuals
resulting from access to or work with Confidential Information of the other
party, provided that the party maintains the confidentiality of the Confidential
Information as provided herein. The term "Residuals" shall mean information in
non-tangible form that may be inadvertently retained by persons who have had
rightful access to the Confidential Information, including the ideas, concepts,
know-how or techniques contained therein. Notwithstanding the provisions of this
Section 9.4, during the term of this Agreement, neither party may avoid its
obligations toward a particular item of the Confidential Information merely by
having a person commit such item to memory so as to reduce it to a non-tangible
form. Further, this Section 9.4 does not provide to either party a license to
use any patented, trademarked or copyrighted material of the other party.
9.5 Limitations. The confidentiality obligations in this Section 9 shall
not apply to disclosed information which the receiving party can prove:
receiving party knows at the time of disclosure, free of any obligation to keep
it confidential, as evidenced by written records; is or becomes generally
publicly known through authorized disclosure, receiving party independently
developed without the use of any Confidential Information as evidenced by
written records; or receiving party rightfully obtains from a third party who
has the right to transfer or disclose it.
9.6 Public Announcements. Notwithstanding anything to the contrary
contained in this Agreement, neither party may initiate any public announcement
concerning the subject matter of this Agreement or the related Convertible
Subordinated Note Agreement without the prior written approval of the other
party; provided, however, that this Section 9.6 shall not be construed to limit
Guidant's ability to market the Products as it deems necessary or appropriate.
Each party consents to the issuance of the joint press release attached hereto
as Exhibit B.
10. WARRANTY. MTI warrants that each Product to be delivered hereunder
shall be free of defects and shall conform to MTI's specifications for such
Product, at the time of delivery and for a one (1) year period thereafter. The
one (1) year warranty period shall be extended to Guidant's customers, but will
not exceed the approved shelf-
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<PAGE> 8
life of the Product. MTI warrants that the Products do not, at the time of sale
to Guidant, infringe the proprietary rights of any third party.
11. INDEMNIFICATION.
11.1 Indemnification. Subject to Section 11.3 below, MTI agrees, at its
own expense, to defend Guidant against an "Indemnified Claim," as defined in
Section 11.2 below, and to hold Guidant harmless and indemnify Guidant from any
loss, expense, liability and/or settlement (including attorneys' fees) resulting
from an Indemnified Claim.
11.2 Indemnified Claim. For purposes of this Agreement, an "Indemnified
Claim" shall mean: (i) any claim asserting that the Products or any part thereof
infringes any third party patent, trade secret, trademark, copyright or other
proprietary right; (ii) any claim arising from or related to a material failure
of MTI to comply with its warranties under this Agreement; and (iii) any claim
asserting that the Products caused injury, or death to a person or damage to
property.
11.3 Limitations. MTI's obligation to indemnify Guidant is contingent
upon Guidant (i) promptly notifying MTI of such claim and (ii) cooperating with
MTI in the defense thereof, of which MTI will have control at MTI's expense.
Notwithstanding the above, Guidant shall have the right but not the obligation,
at Guidant's expense, to participate in any such defense.
11.4 Infringements. If a claim of infringement is made with respect to a
Product, then MTI at its option shall (i) obtain for Guidant the right to
continue to market and distribute the Product, (ii) replace the Product with a
functionally-equivalent noninfringing Product, or (iii) modify said Product so
that it become noninfringing, so long as the functionality of the Product is not
adversely affected. If MTI is unable to do any of the foregoing, it shall grant
Guidant a full refund for all affected Products and accept return of them.
12. LIMITATION OF LIABILITY. EXCEPT FOR THE INDEMNIFICATION OBLIGATIONS
UNDER SECTION 11, NEITHER PARTY SHALL, BY REASON OF THE TERMINATION OF THIS
AGREEMENT OR OTHERWISE, BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL,
SPECIAL, INCIDENTAL, OR OTHER DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF
PROFIT) WHETHER OR NOT ADVISED TO THE POSSIBILITY OF SUCH DAMAGES.
13. TERM AND TERMINATION.
13.1 Term and Renewal. This Agreement is effective as of the Effective
Date and shall continue for a period of [*] ([*]) years from the date of the
First Commercial Sale (the "Term"), unless terminated earlier pursuant to this
Section 13, or extended pursuant to this Section 13.1 or Section 14.5. During
the term of this Agreement, the parties may negotiate and mutually agree to
extend the term of this Agreement, whether for renewal periods or for a fixed
period. If the parties fail to agree to such extension within twelve (12) months
prior to the end of the Term, then this Agreement shall terminate at the end of
the Term.
13.2 Termination by Guidant. Guidant may terminate this Agreement at any
time upon ninety (90) days written notice to MTI.
13.3 Termination by MTI.
13.3.1 If Guidant fails to maintain a minimum of [*] ([*]) sales
personnel in the Territory during any thirty-day period after the
Approval Date, Guidant shall have ninety (90) days from receipt of
written notice from MTI to cure the breach. After the ninety-day cure
period, if Guidant remains in breach by having fewer than [*] ([*])
sales personnel in the Territory, MTI may terminate this Agreement upon
written notice to Guidant.
13.3.2 MTI may terminate this Agreement for a Change of Control
Event affecting MTI only upon at least ninety (90) days prior written
notice to Guidant and upon payment of a termination fee to Guidant,
calculated as follows: (i) if, as of the date of termination, there
remains two years or more in the Term of this Agreement, then the
termination fee shall be [*] percent ([*]) of Guidant's Margin for
the
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<PAGE> 9
remainder of the Term, based on the Net Sales for the then-most recent
twelve (12) months period; and (ii) if, as of the date of termination,
there remains less than two years in the Term, then the termination fee
shall be [*] ([*]) times Guidant's Margin during the twelve (12) months
preceding the date of termination. Notwithstanding the foregoing, in no
event shall the termination fee under this Section 13.3.2 be less than
[*] United States Dollars (US $[*]).
13.4 Immediate Termination For Cause. Except as provided in Section
13.3.1 above, a party may terminate this Agreement by giving the other party
thirty (30) days' written notice of such termination if the other party
materially breaches or defaults in any of the material terms or conditions of
this Agreement and fails to cure such breach or default within thirty (30) days
of receiving notice thereof.
13.5 The Effect of Termination.
13.5.1 Upon any termination of this Agreement by MTI, Guidant
will be entitled to have delivered the Products ordered prior to
termination.
13.5.2 Upon any termination of this Agreement, Guidant may, at
its option, either sell all or any part of its remaining inventory of
the Products to Customers or sell to MTI all or any part of Guidant's
inventory of the Products (excluding discontinued and demonstration
units). MTI agrees to repurchase all of the Products that Guidant
decides to sell to MTI. Guidant must exercise the right to resell within
sixty (60) days after termination of this Agreement. The price for such
inventory shall be the Cost paid by Guidant to MTI for such Products
plus Guidant's shipping and handling costs.
13.5.3 Sections 1, 4.7, 6.5, 9, 10, 11, 12, 13.5 and 14 shall
survive any termination of this Agreement.
14. GENERAL PROVISIONS.
14.1 No Waiver. The failure of either party to enforce at any time or
for any period any of the provisions of this Agreement shall not be construed to
be waiver of those provisions or of the right of that party thereafter to
enforce each and every provision hereof.
14.2 Assignment. Except as otherwise provided herein, this Agreement
shall not be assignable by either party without the prior written consent of the
other party. Any attempted assignment not otherwise permitted herein shall be
void. The provisions hereof shall be binding upon and inure to the benefit of
the parties, their successors and permitted assigns.
14.3 Notices. Any notice, report or statement to either party required
or permitted under this Agreement shall be in writing and shall be sent by
certified mail, return receipt requested, postage prepaid, or by facsimile
transmission with confirmation sent by certified mail as above, or by courier,
such as Federal Express, DHL or the like, with confirmation of receipt by
signature requested, directed to the other party at its mailing address set
forth below, or to such other mailing address as the party may from time to time
designate by prior notice in accordance herewith. Any such notice, report or
statement sent in accordance with this Section 14.3 shall be deemed duly given
upon dispatch, subject to proof of receipt.
14.4 Governing Law. This Agreement (and any other documents referred to
herein) shall be construed in accordance with the laws of the State of
California without reference to choice of law principles, as to all matters,
including, but not limited to, matters of validity, construction, effect or
performance. The exclusive venue and jurisdiction for resolution of disputes
hereunder shall be the courts located in Santa Clara County, California, or, if
applicable, the Federal Courts in the Northern District of California. The
United Nations' Convention on the Contracts for the International Sale of Goods
shall not apply to this Agreement.
14.5 Force Majeure. The parties shall not be liable for any delay or
failure of obligations under this Agreement, in whole or in part, for any causes
beyond the reasonable control of the parties, including, but not limited to,
acts of God, war, riot, civil disturbances, strikes, lockouts or other labor
disputes, accident of transportation or other force majeure. If MTI is unable to
supply to Guidant any of the Products for any period of time, then MTI shall
immediately notify Guidant of such inability, stating the reasons therefor and
the estimated time of the delay. In
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<PAGE> 10
such event, and upon Guidant's consent, the term of this Agreement shall be
extended for a period equal to the period of time in which MTI is unable to
supply Products to Guidant.
14.6 Titles of Sections. The title of the various sections of this
Agreement are used for convenience of reference only and are not intended to and
shall not in any way enlarge or diminish the rights or obligations of the
parties or affect the meaning or construction of this document.
14.7 Investigation; Joint Preparation. Each party acknowledges that it
has had adequate opportunity to make whatever investigation or inquiry it deems
necessary or desirable in connection with the subject matter of this Agreement
prior to the execution hereof. Each party further acknowledges that it has read
and understands each provision of this Agreement. This Agreement has been
prepared jointly by the parties and shall not be strictly construed against
either party, it being agreed that each party has had an opportunity to consult
with counsel of its own choosing regarding the terms and conditions of this
Agreement.
14.8 Binding Effect. This Agreement shall be binding upon and inure to
the benefits of the parties hereto and, and their respective successor and
permitted assigns.
14.9 Integration/Modification/Entire Agreement. This Agreement, together
with the attached Exhibits and the Convertible Subordinated Note Agreement, sets
forth the entire agreement and understanding between the parties as to the
subject matter hereof, and supersedes, integrates and merges all prior
discussions, correspondence, negotiations, understandings or agreements. In the
event of any conflict between the terms of this Agreement and the Convertible
Subordinated Note Agreement, the terms of the Convertible Subordinated Note
Agreement will prevail. This Agreement may not be altered, amended, modified or
otherwise changed in any way except by a written instrument, which specifically
identifies the intended alteration, amendment, modification or other change,
clearly expresses the intention to so change this Agreement, and is signed by an
authorized representative of each of the parties.
14.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which when executed shall be deemed an original, and all
of which together shall constitute one and the same instrument.
14.11 Severability. If any provision, or portion thereof, of this
Agreement shall be held to be invalid, illegal, void or otherwise unenforceable,
such provision, or portion thereof, shall be amended to achieve as nearly as
possible the same economic effect as the original provision to the fullest
extent permitted by applicable law, and the validity, legality and
enforceability of the remainder of the Agreement will remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the Effective Date.
MICRO THERAPEUTICS, INC. GUIDANT CORPORATION
- ------------------------------------- ---------------------------------------
BY /s/ GEORGE WALLACE BY /s/ KEITH E. BRAUER
----------------------------------- -------------------------------------
TITLE President, TITLE Vice President, Finance and
-------------------------------- ----------------------------------
Chief Executive Officer Chief Financial Officer
-------------------------------- ----------------------------------
Address 1062-F Calle Negocio Address 135 Constitution Drive
------------------------------ --------------------------------
San Clemente, California 92673 Menlo Park, California 94025
- ------------------------------------- ---------------------------------------
Telephone 714-361-0616 Telephone
---------------------------- ------------------------------
Fax Number 714-361-0210 Fax Number 408-235-3987
--------------------------- -----------------------------
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<PAGE> 11
EXHIBIT A
TERRITORY
The following European countries: Austria, Belgium, Czech Republic,
France, Germany, Italy, Luxembourg, the Netherlands, Poland, Portugal, Spain,
Switzerland and the United Kingdom.
-11-
<PAGE> 12
EXHIBIT B
JOINT PRESS RELEASE
[TO BE DETERMINED]
-12-
<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 18, 1998, except for
the second paragraph of Note 18, as to which the date is March 12, 1988 on our
audits of the consolidated financial statements of Micro Therapeutics, Inc. as
of December 31, 1997 and for the years ended December 31, 1996 and 1997, which
report is included in this 1997 Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
/s/ COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENTS OF OPERATIONS IN FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,176
<SECURITIES> 6,304
<RECEIVABLES> 400
<ALLOWANCES> 0
<INVENTORY> 619
<CURRENT-ASSETS> 12,632
<PP&E> 1,149
<DEPRECIATION> 542
<TOTAL-ASSETS> 14,011
<CURRENT-LIABILITIES> 826
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 8,984
<TOTAL-LIABILITY-AND-EQUITY> 14,011
<SALES> 2,714
<TOTAL-REVENUES> 2,714
<CGS> 1,948
<TOTAL-COSTS> 8,537
<OTHER-EXPENSES> (611)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> (7,242)
<INCOME-TAX> 1
<INCOME-CONTINUING> (7,243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,243)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENTS OF OPERATIONS IN FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 1996 - EPS RESTATED IN COMPLIANCE WITH FAS NO. 128 AND SAB NO. 98 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<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> 290
<TOTAL-ASSETS> 6,240
<CURRENT-LIABILITIES> 610
<BONDS> 0
0
4
<COMMON> 1
<OTHER-SE> 5,437
<TOTAL-LIABILITY-AND-EQUITY> 6,240
<SALES> 1,388
<TOTAL-REVENUES> 1,388
<CGS> 1,633
<TOTAL-COSTS> 5,540
<OTHER-EXPENSES> (188)
<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> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
