MICRO THERAPEUTICS INC
10QSB, 1999-11-12
PHARMACEUTICAL PREPARATIONS
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<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549
                                   FORM 10-QSB

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        FOR THE QUARTERLY PERIOD ENDED September 30, 1999.

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________.

                          Commission file number 0-6523

                            MICRO THERAPEUTICS, INC.
        (Exact name of small business issuer as specified in its charter)

              Delaware                                  33-0569235
  (State or other jurisdiction           (I.R.S. Employer Identification Number)
of incorporation or organization)

                      2 Goodyear, Irvine, California 92618
                    (Address of principal executive offices)

                                 (949) 837-3700
                           (Issuer's telephone number)

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                          if changed since last report)

Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.

                                Yes [X]   No [ ]

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.

           Class                                 Outstanding at October 25, 1999
           -----                                 -------------------------------
Common Stock, $.001 par value                               7,847,025

Transitional small business disclosure format:  Yes [ ]   No [X]


                               Page 1 of 29 Pages
                            Exhibit Index on Page 28


<PAGE>   2
                            MICRO THERAPEUTICS, INC.
                              INDEX TO FORM 10-QSB


<TABLE>
<CAPTION>
                                                                                           Page
                                                                                          Number
<S>     <C>                                                                               <C>
PART I.  FINANCIAL INFORMATION

        Item 1. Financial Statements

                  Balance Sheet as of September 30, 1999 (unaudited)......................   3

                  Statements of Operations (unaudited) for the Three and Nine Months Ended
                      September 30, 1998 and 1999.........................................   4

                  Statements of Cash Flows (unaudited) for the Nine Months Ended
                      September 30, 1998 and 1999.........................................   5

                  Notes to Financial Statements...........................................  6-8

        Item 2. Management's Discussion and Analysis or Plan of Operation.................  9-25

PART II. OTHER INFORMATION

        Item 1. Legal Proceedings.........................................................   26

        Item 6. Exhibits and Reports on Form 8-K..........................................   26

SIGNATURES................................................................................   27
</TABLE>


                                       2
<PAGE>   3
                            MICRO THERAPEUTICS, INC.
                                  BALANCE SHEET
                               September 30, 1999
                                   (Unaudited)

                                  A S S E T S:

<TABLE>
<CAPTION>
                                                                                                            Pro Forma
Current assets:                                                                                              (Note 6)
                                                                                                           ------------
<S>                                                                                 <C>                    <C>
  Cash and cash equivalents                                                         $  8,937,424           $ 11,937,424
  Accounts receivable, net of allowance for doubtful accounts of $9,794             $  1,165,432              1,165,432
  Inventories, net of allowance for obsolescence of $119,491                        $  1,302,707              1,302,707
  Prepaid expenses and other current assets                                              435,308                435,308
                                                                                    ------------           ------------

             Total current assets                                                     11,840,871             14,840,871

Property and equipment, net of accumulated depreciation of $1,099,269               $  2,331,141              2,331,141
Patents and licenses, net of accumulated amortization of $152,761                      1,357,956              1,357,956
Other assets                                                                              60,543                 60,543
                                                                                    ------------           ------------

             Total assets                                                           $ 15,590,511           $ 18,590,511
                                                                                    ============           ============

                                     LIABILITIES AND STOCKHOLDERS' EQUITY:

Current liabilities:
  Accounts payable                                                                  $     97,692           $     97,692
  Accrued salaries and benefits                                                          687,318                687,318
  Accrued liabilities                                                                    515,411                515,411
  Deferred revenue                                                                       484,212                484,212
  Current portion of equipment line of credit                                             57,413                 57,413
                                                                                    ------------           ------------

             Total current liabilities                                                 1,842,046              1,842,046

Deferred revenue                                                                         800,000                800,000
Equipment line of credit                                                                  35,198                 35,198
Notes payable, net of unamortized discounts of $1,543,167                             10,456,833             10,456,833
                                                                                    ------------           ------------

             Total liabilities                                                        13,134,077             13,134,077
                                                                                    ------------           ------------

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;
    7,840,012 shares issued and outstanding  (8,090,012 shares pro forma)                  7,840                  8,090
  Additional paid-in capital                                                          40,252,965             43,252,715
  Unearned compensation                                                                   (9,156)                (9,156)
  Accumulated deficit                                                                (37,795,215)           (37,795,215)
                                                                                    ------------           ------------

             Total stockholders' equity                                                2,456,434              5,456,434
                                                                                    ------------           ------------

             Total liabilities and stockholders' equity                             $ 15,590,511           $ 18,590,511
                                                                                    ============           ============
</TABLE>


See notes to unaudited financial statements.


                                       3
<PAGE>   4
                            MICRO THERAPEUTICS, INC.
                            STATEMENTS OF OPERATIONS
            For The Three and Nine Months Ended September 30, 1999
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                        For the Three Months Ended            For the Nine Months Ended
                                                     -------------------------------       -------------------------------
                                                     September 30,      September 30,      September 30,      September 30,
                                                     ------------       ------------       ------------       ------------
                                                         1998               1999               1998               1999
                                                     ------------       ------------       ------------       ------------
<S>                                                  <C>                <C>                <C>                <C>
Net sales                                            $  1,452,998       $    917,892       $  3,397,374       $  2,811,151
Cost of sales                                             756,782            457,934          1,664,911          1,965,524
                                                     ------------       ------------       ------------       ------------

         Gross margin                                     696,216            459,958          1,732,463            845,627
                                                     ------------       ------------       ------------       ------------

Costs and expenses:
  Research and development                              1,300,445          2,089,410          3,751,314          5,699,470
  Selling, general and administrative                   1,569,940            993,561          4,399,248          3,729,769
                                                     ------------       ------------       ------------       ------------

         Total costs and expenses                       2,870,385          3,082,971          8,150,562          9,429,239
                                                     ------------       ------------       ------------       ------------

         Loss from operations                          (2,174,169)        (2,623,013)        (6,418,099)        (8,583,612)
                                                     ------------       ------------       ------------       ------------

Other income (expense):
  Interest income                                         134,597             80,302            388,418            376,104
  Interest expense                                       (202,863)          (211,615)          (432,741)        (2,575,824)
  Other expense, net                                         (913)                 -             (6,543)           (24,009)
                                                     ------------       ------------       ------------       ------------
                                                          (69,179)          (131,313)           (50,866)        (2,223,729)
                                                     ------------       ------------       ------------       ------------

         Loss before provision for income taxes        (2,243,348)        (2,754,326)        (6,468,965)       (10,807,341)

Provision for income taxes                                                                          800                800
                                                     ------------       ------------       ------------       ------------

         Net loss                                    ($ 2,243,348)      ($ 2,754,326)      ($ 6,469,765)      ($10,808,141)
                                                     ============       ============       ============       ============

Per share data :
    Net loss per share (basic and diluted)           ($      0.33)      ($      0.35)      ($      0.97)      ($      1.49)
                                                     ============       ============       ============       ============
    Weighted average shares outstanding                 6,700,000          7,808,000          6,686,000          7,236,000
                                                     ============       ============       ============       ============
</TABLE>


See notes to unaudited financial statements


                                       4
<PAGE>   5
                            MICRO THERAPEUTICS, INC.
                            STATEMENTS OF CASH FLOWS
              For the Nine Months Ended September 30, 1998 and 1999
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                             1998               1999
                                                                         ------------       ------------
<S>                                                                      <C>                <C>
Cash flows from operating activities:
  Net loss                                                               ($ 6,469,765)      ($10,808,141)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization                                            295,078            520,902
     Amortization of note payable discounts                                   142,737            307,185
     Compensation related to stock options vesting                             55,757             34,134
     Loss on sale of equipment                                                  2,372             21,260
     Provision for doubtful accounts                                           10,929             (2,621)
     Provision for inventory obsolescence                                      30,397             60,921
     Debt conversion charge                                                                    1,651,585
     Change in operating assets and liabilities:
        Accounts receivable                                                  (408,851)          (611,843)
        Inventories                                                          (108,509)          (531,987)
        Prepaid expenses and other assets                                     (99,520)          (129,071)
        Accounts payable                                                      126,891           (655,999)
        Accrued salaries and benefits                                         305,511            405,826
        Accrued liabilities                                                  (209,648)            69,600
        Deferred revenue                                                      500,000           (190,788)
                                                                         ------------       ------------
               Net cash used in operating activities                       (5,826,621)        (9,859,037)
                                                                         ------------       ------------

Cash flows from investing activities:
  Purchase of short-term investments                                       (3,184,134)        (4,999,277)
  Maturity of short-term investments                                        9,488,567          7,498,293
  Additions to property and equipment                                        (666,860)          (943,163)
  Additions to patents and licenses                                          (384,459)          (331,453)
  Sale of equipment                                                                               10,600
  Change in other assets                                                      (58,994)            54,447
                                                                         ------------       ------------
               Net cash provided by investing activities                    5,194,120          1,289,447
                                                                         ------------       ------------

Cash flows from financing activities:
  Proceeds from issuance of common stock                                      574,561             88,759
  Proceeds from exercise of stock options                                     264,011            252,379
  Borrowings on notes payable                                              10,000,000          2,000,000
  Repayments on equipment line of credit                                      (46,878)           (54,004)
                                                                         ------------       ------------
               Net cash provided by financing activities                   10,791,694          2,287,134
                                                                         ------------       ------------
               Net increase (decrease) in cash and cash equivalents        10,159,193         (6,282,456)

Cash and cash equivalents at beginning of year                              5,175,688         15,219,880
                                                                         ------------       ------------
Cash and cash equivalents at end of period                               $ 15,334,881       $  8,937,424
                                                                         ============       ============

Supplemental schedule of noncash activities:
  Unearned compensation related to terminated employees                  $     79,542       $     34,134
  Conversion of notes payable to common stock                                               $  8,245,892

</TABLE>


See notes to unaudited financial statements.


                                       5
<PAGE>   6
                            MICRO THERAPEUTICS, INC.

                     NOTES TO UNAUDITED 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

    Unaudited Interim Financial Information:

    The financial statements included in this Form 10-QSB have been prepared
    pursuant to the rules of the Securities and Exchange Commission for
    quarterly reports on Form 10-QSB, are unaudited and do not contain all of
    the information required by generally accepted accounting principles to be
    included in a full set of financial statements. The financial statements in
    the Company's 1998 Annual Report on Form 10-KSB include a summary of
    significant accounting policies of the Company and should be read in
    conjunction with this Form 10-QSB. In the opinion of management, all
    material adjustments necessary to present fairly the results of operations
    for such periods have been included. All such adjustments are of a normal
    and recurring nature. The results of operations for any interim period are
    not necessarily indicative of the results of operations for the entire year.

3.  Net Loss Per Share

    Net loss per share is calculated under the provisions of Statement of
    Financial Accounting Standards No. 128, "Earnings per Share," by dividing
    net loss by the weighted average number of common shares issued and
    outstanding during the period. Potential common shares, represented by
    options 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.

4.  Segment Information

    During most of the three and nine month periods ended September 30, 1998 and
    1999, products related to the Company's Onyx(TM) Liquid Embolic System
    ("LES"(TM)), including related access and delivery products, were in various
    phases of research, development, clinical and regulatory processes.
    Accordingly, the majority of the Company's revenues in such periods were
    derived from its blood clot therapy products. Additional information with
    respect to net sales for such periods is as follows:


<TABLE>
<CAPTION>
                        Three Months Ended September 30           Nine Months Ended September 30
                        -------------------------------          -------------------------------
                           1998                 1999                1998                 1999
                        ----------           ----------          ----------           ----------
<S>                     <C>                  <C>                 <C>                  <C>
Blood clot therapy
     United States      $1,431,392           $  464,128          $3,336,003           $2,044,148
     International          21,606               53,267              61,371              169,964
                        ----------           ----------          ----------           ----------
                         1,452,998              517,395           3,397,374            2,214,112
                        ----------           ----------          ----------           ----------
Onyx LES
     United States                              155,987                                  249,092
     International                              233,930                                  296,860
                        ----------           ----------          ----------           ----------
                                 -              389,917                   -              545,952
                        ----------           ----------          ----------           ----------
Other
     United States                               10,280                                   49,607
     International                                  300                                    1,480
                        ----------           ----------          ----------           ----------
                                 -               10,580                   -               51,087
                        ----------           ----------          ----------           ----------

Net sales               $1,452,998           $  917,892          $3,397,374           $2,811,151
                        ==========           ==========          ==========           ==========
</TABLE>


                                       6
<PAGE>   7
    Due to the predominance of blood clot therapy net sales relative to Onyx LES
    and other net sales during the three and nine months ended September 30,
    1998 and 1999, information such as operating income (loss) and total assets
    was not used in such periods to evaluate segment performance.

    During the three and nine months ended September 30, 1999, Abbott
    Laboratories ("Abbott"), the exclusive distributor of the Company's
    peripheral blood clot therapy product line in the United States and Canada
    (Note 5), accounted for 50.6% and 72.7%, respectively, of the Company's
    sales. During the three months ended September 30, 1998, Abbott accounted
    for 21.6% of the Company's sales. No other customer accounted for 10% or
    more of the Company's sales during the three or nine months ended September
    30, 1999, or the three months ended September 30, 1998, and there were no
    customers who accounted for 10% or more of the Company's sales during the
    nine months ended September 30, 1998.

5.  Distribution Agreement With Abbott

    In August 1998, the Company entered into a ten-year distribution agreement
    with Abbott that provides Abbott with exclusive rights to distribute the
    Company's peripheral blood clot therapy products in the U.S. and Canada. The
    distribution agreement required the Company to commit the resources of its
    sales representatives for the first six months of the agreement to the
    transition of the distribution function to Abbott. This six-month period
    terminated on March 31, 1999. In April 1999 and August 1999, Abbott
    committed to make additional quarterly $500,000 payments to the Company
    solely as consideration for the continued resource commitment of the
    Company's sales representatives to the transition of distribution to Abbott
    during each of the quarters ended June 30, 1999 and September 30, 1999.
    These additional committed payments by Abbott are reflected as a reduction
    of selling expenses in the accompanying 1999 statements of operations. The
    payment related to the quarter ended September 30, 1999 is included in
    accounts receivable in the accompanying balance sheet.

6.  Transactions With Convertible Note Holders

    Abbott Laboratories

    In August 1998, the Company and Abbott entered into convertible subordinated
    note, credit and security agreements, under which Abbott provided the
    Company with (a) $5 million, in exchange for a subordinated note, due August
    2003, convertible at Abbott's option into shares of the Company's Common
    Stock at a conversion rate of $13.00 per share, and (b) a $5 million credit
    facility, under which the Company borrowed the entire amount available in
    November 1998. The amount borrowed under the credit facility, due in
    November 2003, was convertible over the five-year life of the underlying
    note at the Company's option, subject to certain restrictions, into shares
    of the Company's Common Stock at a conversion rate of $15.00 per share. Both
    notes had a stated interest rate of 5% per annum, which the Company
    determined was lower than interest rates typically associated with similar
    debt instruments. Accordingly, the Company recorded discounts aggregating
    $1,948,656 upon execution of the note agreements, resulting in an imputed
    interest rate over the terms of both notes of 10%.

    In April 1999, Abbott and the Company agreed to a modification, and, in May
    1999, the parties consummated such modification, of the agreements described
    above. Under the terms of the modification, Abbott converted $4 million face
    value of the notes into shares of the Company's common stock at a conversion
    rate equal to 125% of the average closing price of such stock for the five
    days ended April 30, 1999 (amounting to a conversion rate of $8.65 per
    share), and converted the remaining $6 million face value of such notes into
    shares of the Company's common stock at a rate of $12 per share. As required
    by generally accepted accounting principles, the Company, in May 1999,
    recognized a non-recurring, non-cash charge, included in interest expense,
    amounting to $1,651,585, representing the aggregate fair market value of the
    incremental shares issued as a result of the modified conversion rates.


                                       7
<PAGE>   8
    Concurrently in April 1999, Abbott and the Company entered into an agreement
    that provided the Company an option to require Abbott to purchase up to $3
    million of the Company's common stock at a price of $12 per share. In
    October 1999, the Company exercised such option for the entire $3 million of
    proceeds and, accordingly, issued 250,000 shares of its common stock to
    Abbott upon the Company's receipt of the proceeds in November 1999. The pro
    forma information presented in the accompanying balance sheet reflects the
    exercise of the option as if it had taken place on September 30, 1999.

    Century Medical, Inc.

    In September 1998, the Company and Century Medical, Inc. ("Century") entered
    into convertible subordinated note and credit agreements, under which
    Century provided the Company with (a) $3 million, in exchange for a
    subordinated note, due September 2003, convertible at the Company's option,
    subject to certain restrictions, into shares of the Company's Common Stock
    at a conversion rate of $15.00 per share, and (b) a $2 million credit
    facility. The availability of the credit facility commenced in April 1999,
    upon the Company obtaining its first CE Mark in Europe for an
    Onyx(TM)-related application. In September 1999 the Company borrowed the
    entire $2 million available under the credit facility in exchange for a note
    (the "Credit Facility Note") which is repayable five years from the date of
    the agreement and is convertible over the five-year life of the Credit
    Facility Note at the Company's option, subject to certain restrictions, into
    shares of the Company's Common Stock at a conversion rate of approximately
    $16.35. The Credit Facility Note has a stated interest rate of 5% per annum,
    which the Company has determined is lower than interest rates typically
    associated with similar debt instruments. Accordingly, the Company recorded
    a discount of $389,731 upon issuing the Credit Facility Note, resulting in
    an imputed interest rate over the term of the note of 10%. The discount,
    amortization of which had not yet commenced as of September 30, 1999, is
    presented net of the principal amount of the Credit Facility Note in the
    accompanying consolidated balance sheet. Interest payments are due
    quarterly, in arrears.


                                       8
<PAGE>   9
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 Quarterly Report on Form
10-QSB. This Quarterly Report on Form 10-QSB contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under "Certain Factors That May Affect the Company's Business
and Future Results."

OVERVIEW

Since its inception in June 1993, the Company 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 2001 as the Company expends
substantial resources to fund research and development, clinical trials,
regulatory approvals, and 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, and the Castaneda Over The Wire Brush which received FDA approval in
February 1998. In August 1998, the Company entered into a distribution agreement
with Abbott which provides for distribution of such products by Abbott in the
United States and Canada. The Company expects sales, under the distribution
agreement with Abbott, of the products mentioned above, and similar products, to
provide the majority of the Company's revenues at least into fiscal 2000. The
Company currently sells such products outside the United States and Canada
through a limited number of distributors, however, revenues under these
arrangements have not been significant to date.

In November 1997, the Company signed an agreement with Guidant Corporation
("Guidant") to distribute the Company's neuro products in Europe and, in August
1998, that agreement was expanded to include distribution in Europe of the
Company's peripheral embolization products. Until September 1999, no significant
revenues had been received under the Guidant arrangement. Revenues under the
Guidant arrangement are dependent upon the receipt by Company of CE Mark
certification for applications of the Company's Onyx(TM) Liquid Embolic System
("LES" (TM)) (formerly marketed as the EMBOLYX(TM) Liquid Embolic System), and
market training and product launch activities are substantially underway. In
April 1999, the Company obtained CE Mark approval for the peripheral
embolization application of the Onyx LES, and the Company is in the process of
accumulating additional clinical data with respect to this application before
commencing market training activities. In July 1999, the Company received CE
Mark approval for the treatment of arteriovenous malformations ("AVMs") in the
brain using the Onyx LES and, accordingly, the Company initiated market training
activities in July 1999, which activities are currently underway. Product launch
activities with respect to the brain AVM application commenced in September 1999
and the Company expects such activities to continue during the fourth quarter of
1999. Additional CE Mark certifications of the Onyx LES are subject to the
successful completion of clinical trials, and, accordingly, the Company does not
expect that such certifications will be received before late in the fourth
quarter of 1999.

In September 1998, the Company entered into a distribution agreement with
Century Medical, Inc. ("Century") which provides for distribution of all the
Company's products by Century in Japan. Significant revenues are not expected to
be derived from sales in Japan until the Company's products receive regulatory
approval in Japan, the first of which occurred in May 1999 with respect to
peripheral blood clot therapy products, and in September 1999 with respect to
certain access and delivery products. Accordingly, the Company has not realized
significant revenues to date from sales in Japan.


                                       9
<PAGE>   10
The Company's products are currently manufactured by the Company at its facility
in Irvine, California. Certain accessories are manufactured and processes are
performed by contract manufacturers.

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, and third-party
distributors, as applicable, establish their domestic and international sales
and distribution networks, 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 certain recent periods, there can be no
assurance that, in the future, the Company will sustain sales growth or gain
profitability on a quarterly or annual basis or that its growth will be
consistent with predictions made by securities analysts.

The Company currently manufactures 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 significant backlog in the near term.

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 1998 and 1999

Net sales for the quarter ended September 30, 1999 decreased 37% to $917,892 as
compared to $1,452,998 for the corresponding period in 1998. A substantial
portion of the sales in the 1999 quarter were made to Abbott under the terms of
the exclusive distribution agreement with Abbott entered into in August 1998,
discussed below, which resulted in lower average selling prices per unit
relative to the corresponding quarter in 1998, during which sales were made
directly by the Company to end-user customers. In addition, sales in the third
quarter of 1998 included an initial stocking order from Abbott of approximately
$320,000. Also, sales during the third quarter of 1999 were adversely affected
by manufacturing issues, being addressed by Abbott, related to its thrombolytic
drug, Abbokinase(R), (urokinase for injection). The issues surrounding Abbott's
ability to supply Abbokinase to the blood clot therapy market correspondingly
affected sales of the Company's blood clot therapy products. Sales to Abbott
under this agreement accounted for 51% of total sales for the quarter ended
September 30, 1999. International sales represented 31% of total sales for the
quarter ended September 30, 1999 and 1% of total sales for the quarter ended
September 30, 1998.

Net sales for the nine months ended September 30, 1999 decreased 17% to
$2,811,151 in 1999 from $3,397,374 in the corresponding period of 1998. This
decrease was attributable, in part, to the substantial portion of sales in the
first nine months of 1999 that were made to Abbott, resulting in lower average
selling prices per unit relative to the corresponding period in 1998, during
which sales were made directly by the Company to end-user customers. In
addition, the issues related to Abbott's thrombolytic drug, Abbokinase, affected
the Company's sales, as discussed above. Sales to Abbott during the nine months
ended September 30, 1999 accounted for 73% of total sales for the period.
International sales represented 17% of total sales for the nine months ended
September 30, 1999 and 2% for the nine months ended September 30, 1998.

On August 12, 1998, the Company entered into a ten-year distribution agreement
with Abbott that provides Abbott with exclusive rights to distribute the
Company's peripheral blood clot therapy products in the U.S. and Canada. Upon
shipment of product by the Company to Abbott, the Company receives an initial
purchase price payment from Abbott, as provided in the agreement. Abbott
provides additional purchase price payments to the Company based upon Abbott's
net sales, as defined in the agreement. The Company recognizes as sales the
initial purchase price upon shipment of product to Abbott. The Company
recognizes the additional purchase price upon Abbott's reporting of sales to its
customers.


                                       10
<PAGE>   11
Cost of sales decreased to $457,934 for the quarter ended September 30, 1999
from $756,782 for the corresponding quarter of 1998, and decreased, as a
percentage of sales, from 52% in the third quarter of 1998 to 50% in the
corresponding quarter of 1999. The dollar decrease is attributable primarily to
a decrease in unit sales volume. The decrease in the cost of sales percentage
was due to the net effects of three factors: (a) the lower unit prices the
Company receives from Abbott, as discussed above, (b) the greater proportion of
sales for the third quarter of 1999 represented by the additional purchase price
payments received from Abbott based upon Abbott's sales, as described above, and
(c) the commencement of shipments during the third quarter of 1999 of the
Company's neuro vascular products, which bear a relatively lower cost of sales
percentage than the peripheral blood clot therapy products that comprised
substantially all of the Company's sales in the corresponding quarter of 1998.
Cost of sales increased from $1,664,911 for the nine months ended September 30,
1998 to $1,965,524 for the corresponding period in 1999 due primarily to an
increase in unit sales volume. Cost of sales as a percentage of sales amounted
to 49% for the first nine months of 1998, and 70% for the first nine months of
1999. This increase is attributable primarily to the lower unit prices the
Company receives from Abbott, as discussed above .

Research and development expenses, including regulatory and clinical expenses,
increased 61% from $1,300,445 for the third quarter of 1998 to $2,089,410 for
the corresponding quarter of 1999. For the nine months ended September 30 1999,
such costs increased 52%, from $3,751,314 for the nine months ended September
30, 1998 to $5,699,470 for the corresponding period in 1999. These increases
were primarily attributable to a higher level of personnel associated with the
Company's increased research and development activities, including increased
expenditures related to development of the Onyx LES, related clinical trials,
market training and development of access and delivery products. The Company
expects to continue to increase research and development costs for such
activities as discussed above.

Selling, general and administrative expenses decreased 37% from $1,569,940 for
the third quarter of 1998 to $993,561 for the corresponding quarter of 1999.
Such expenses for the nine months ended September 30, 1999 decreased 15% to
$3,729,769, from $4,399,249 for the corresponding period in 1998. These
decreases were primarily attributable to two $500,000 commitments from Abbott as
consideration for the continued resource commitment of the Company's sales
representatives during the second and third quarters of 1999 to the transition
of distribution to Abbott. The decrease for the third quarter of 1999, relative
to the corresponding period of 1998, is due also to the implementation by the
Company of certain cost control initiatives in the third quarter of 1999. Before
consideration of the payments from Abbott described above, selling, general and
administrative costs decreased 5% from the third quarter of 1998 to the
corresponding quarter of 1999 due primarily to the cost control initiatives
discussed above. Selling, general and administrative expenses for the nine
months ended September 30, 1998 and 1999, before consideration of the payments
from Abbott described above, increased 8%, due to the elevated activity level of
the Company and the related increases in infrastructure, net of the effects of
the cost control initiatives implemented by the Company in 1999 as discussed
above.

Net interest and other expense increased from $69,179 for the third quarter of
1998 to $131,313 for the corresponding quarter of 1999. Such increase was due
primarily to the interest expense related to the note payable that was issued to
Century at the end of the third quarter of 1998 that was outstanding during the
entire corresponding period in 1999. Net interest and other expense increased
from $50,866 for the nine months ended September 30, 1998, to $2,223,729 for the
corresponding period in 1999. This increase was due to (a) interest expense
related to notes payable that were issued to Abbott and Century during the third
and fourth quarters of 1998 that, in the case of Abbott, were outstanding
through May 1999, and, in the case of Century, were outstanding during the
entire nine-month period in 1999, and (b) a non-recurring, non-cash charge,
amounting to $1,651,585, related to the early debt conversion by Abbott in May
1999.

As a result of the items discussed above, the Company incurred a net loss of
$2,754,326 and $10,808,141 for the quarter and nine months ended September 30,
1999, respectively, compared to $2,243,348 and $6,469,765 for the corresponding
respective periods in 1998.


                                       11
<PAGE>   12
LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company's cash expenditures have significantly exceeded its
sales, resulting in an accumulated deficit of approximately $38 million at
September 30, 1999. To fund its operations, the Company raised approximately
$15.3 million from the private placement of equity securities, and completed an
initial public offering in February 1997 of 1,840,000 shares of Common Stock,
raising net proceeds of approximately $10 million. Additionally, in November
1997, the Company received $5 million from Guidant under terms of a convertible
note agreement. In April 1998, the Company achieved a milestone set forth in the
agreement with Guidant, and elected, under the terms of the agreement, to have
Guidant loan the Company $2 million and purchase from it $500,000 of the
Company's common stock at approximately $10.50 per share, the proceeds from
which were received in May 1998.

Concurrent with the execution of the distribution agreement with Abbott in
August 1998, the Company and Abbott entered into convertible subordinated note,
credit and security agreements, under which Abbott provided the Company with (a)
$5 million, in exchange for a five-year subordinated note, convertible at
Abbott's option into shares of the Company's Common Stock at a conversion rate
of $13.00 per share, and (b) a $5 million credit facility, available for one
year from the date of the agreement and repayable five years from the date of
the agreement, with amounts borrowed under the facility convertible over the
five-year life of the underlying note at the Company's option, subject to
certain restrictions, into shares of the Company's Common Stock at a conversion
rate of $15.00 per share. In October 1998, the Company elected to borrow the
entire $5 million under this facility, the proceeds of which were received in
November 1998. Both notes had a stated interest rate of 5% per annum. For
financial statement reporting purposes, this rate was adjusted to reflect an
imputed market rate of interest as of the date of each of the notes.

In April 1999, Abbott and the Company agreed to a modification, and, in May
1999, the parties consummated such modification, of the agreements described
above. Under the terms of the modification, Abbott converted $4 million face
value of the notes into shares of the Company's Common Stock at a conversion
rate equal to 125% of the average closing price of such stock for the five days
ended April 30, 1999 (amounting to a conversion rate of $8.65 per share), and
converted the remaining $6 million face value of such notes into shares of the
Company's common stock at a rate of $12 per share.

Concurrently in April 1999, Abbott and the Company entered into an agreement
that provided the Company an option to require Abbott to purchase up to $3
million of the Company's common stock at a price of $12 per share. In October
1999, the Company exercised such option for the entire $3 million of proceeds
and, accordingly, issued 250,000 shares of its common stock to Abbott upon the
Company's receipt of the proceeds in November 1999.

In October 1998, under the terms of the distribution agreement, Abbott furnished
the Company with a non-refundable $1 million marketing payment upon Abbott's
first commercial sale of product. For financial statement purposes, this payment
is being amortized into income on a straight-line basis over the initial term of
the agreement which continues through 2008.

The distribution agreement required the Company to commit the resources of its
sales representatives in the United States and Canada for the first six months
of the agreement to the transition of the distribution function to Abbott. This
six-month period terminated on March 31, 1999. In April 1999 and August 1999,
Abbott agreed to make additional quarterly $500,000 payments to the Company
solely as consideration for the continued resource commitment of the Company's
sales representatives to the transition of distribution to Abbott during each of
the quarters ended June 30, 1999 and September 30, 1999.

Upon shipment of product by the Company to Abbott, the Company receives an
initial purchase price payment from Abbott as provided in the agreement. Abbott
provides additional purchase price payments to the Company based upon Abbott's
net sales, as defined in the agreement.


                                       12
<PAGE>   13
Concurrent with the execution of the distribution agreement with Century in
September 1998, the Company and Century entered into convertible subordinated
note and credit agreements, under which Century provided the Company with (a) $3
million, in exchange for a five-year subordinated note, convertible at Century's
option into shares of the Company's common stock at a conversion rate of $15.00
per share, and (b) a $2 million credit facility. The availability of the credit
facility commenced in April 1999, upon the Company obtaining its first CE Mark
in Europe for an Onyx-related application. In September 1999 the Company
borrowed the entire $2 million available under the credit facility in exchange
for a note which is repayable five years from the date of the agreement and is
convertible over the five-year life of the note at the Company's option, subject
to certain restrictions, into shares of the Company's Common Stock at a
conversion rate of approximately $16.35. Both notes have a stated interest rate
of 5% per annum. This rate, for financial statement reporting purposes, has been
adjusted to reflect an imputed market rate of interest as of the dates of the
notes.

Under the terms of the distribution agreement, Century made a $500,000 advance
payment to the Company on September 30, 1998, which amount is being applied
against Century's purchase orders for the Company's products. The Company
recorded this payment as deferred revenue and recognizes sales revenue from such
amount as the Company makes shipments to Century under such purchase orders.
Upon achievement of the first regulatory approval in Japan for an application of
the Onyx LES, Century, under the terms of the distribution agreement, will make
a $1 million advance payment to the Company, which amount is to be applied
against Century's first future purchase orders for Onyx-related product.

As of September 30, 1999, the Company had cash and cash equivalents of
approximately $8.9 million. Cash used in the Company's operations for the nine
months ended September 30, 1999 was approximately $9.9 million, reflecting the
loss from operations, increases in inventories, receivables, and prepaid
expenses, and decreases in accounts payable and deferred revenue, net of an
increase in accrued liabilities. The increase in inventory reflects the
anticipation of additional orders from Abbott, and initial orders from Guidant
and Century, pending regulatory approvals. The increase in receivables consists
primarily of the $500,000 committed payment from Abbott related to the continued
resource commitment of the Company's sales representatives through September 30,
1999, as previously discussed. Cash provided by investing activities for the
nine months ended September 30, 1999 was approximately $1.3 million and
primarily reflected the maturity of short-term investments, net of purchases,
expenditures for property and equipment (primarily leasehold improvements for
the Company's new facility, furniture and fixtures, and the license and
installation of a new information systems and related hardware), and for
intellectual property. While continued investments will be made for property and
equipment, the components of which are described above (as regards the Company's
compliance with issues related to the Year 2000, see "Impact of The Year 2000
Issue," below), and for intellectual property, the Company has no significant
capital commitments as of September 30, 1999. Cash provided by financing
activities was approximately $2.3 million, consisting of proceeds received by
the Company from its borrowing under the credit agreement with Century,
discussed above, issuances of common stock under the Company's Employee Stock
Purchase Plan and from the exercise by employees, directors and consultants of
stock options, net of repayments by the Company on its equipment line of credit.

The Company plans to finance its capital and operational needs principally from
(a) its existing capital resources at September 30, 1999, (b) the $500,000
payment to be received from Abbott as consideration for the continued resource
commitment of the Company's sales representatives through September 30, 1999,
and (c) the receipt in November 1999 of the $3 million proceeds from the
Company's exercise of its option requiring Abbott to purchase additional shares
of the Company's common stock.

The Company believes current resources will be sufficient to fund its operations
through 2000. However, the Company's future liquidity and capital requirements
will depend upon numerous factors, including results under the distribution
agreements with Guidant, Abbott and Century, and similar future agreements,
should any be entered into, progress of the Company's clinical research and
product development programs, the receipt of and the time required to obtain
regulatory clearances and approvals, and the resources the Company devotes to
developing, manufacturing and marketing its products. The Company's capital
requirements will also depend on the demands created by its operational and
development programs.


                                       13
<PAGE>   14
IMPACT OF THE YEAR 2000 ISSUE

In less than three months, companies may face a potentially serious problem if
information systems, software applications and operational programs written in
the past do not properly recognize calendar dates beginning in the Year 2000
(the "Year 2000 issue"). This problem could affect both information technology
("IT") systems (for example, computer hardware and software) and non-IT systems
(for example, systems or machines with embedded microcontrollers) with the
result being the possible malfunctioning or non-functioning of such systems.

The Company's products do not contain IT or non-IT system components. Moreover,
the Company's assessment of the Year 2000 issue indicates that its manufacturing
processes are not significantly dependent on systems that would be affected by
the Year 2000 issue. Accordingly, the Company estimates that the level of
incremental expenditures it has incurred solely to bring the Company into
compliance with respect to the Year 2000 issue has not exceeded $50,000, and
that future such expenditures would not exceed $25,000. These amounts exclude
planned expenditures in connection with the installation of an enterprise
resources planning system and other software systems which expenditures the
Company would have incurred irrespective of the Year 2000 issue.

The Company has an internal task force that undertakes such activities as
creating awareness within the Company of the Year 2000 issue, assessing the
Company's IT and non-IT systems' compliance with respect to the Year 2000 issue,
implementing remedial action to address non-compliance and establishing controls
for ongoing compliance. As regards IT systems, the Company has obtained written
representations from the manufacturers of the enterprise resource planning
software and the other software systems the Company installed during the first
half of 1999. Based on such written representations, the Company believes that
such software will not be affected by the Year 2000 issue, and 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 which may be affected
by this problem before the end of 1999 due to technological obsolescence. With
respect to non-IT systems, the Company, having completed its move to its new
facility in December 1998, has taken steps to reduce the volume of outside
manufacturing and processing, and to establish on-site capabilities. In this
transition, the Company has installed, as necessary, systems that are Year 2000
compliant. Also in connection with the move to the new facility, the Company has
obtained written representations as to compliance with the Year 2000
requirements from manufacturers of systems that are installed in the facility.
In addition, the Company has initiated communications with its suppliers and
service providers to assess such parties' status with respect to the Year 2000
issue, and the Company has established policies regarding internal approval for
it to transact business with current and future suppliers and service providers
that is predicated, in part, on such parties' compliance with Year 2000
requirements. To date, no specific risks have been identified from communication
requested and received by the Company from its vendors and service providers.


                                       14
<PAGE>   15
There is no assurance, however, that the Company will be successful in
completing any of the activities described above. In certain instances where the
Company is unable to mitigate the adverse effects of noncompliance, the Company
may attempt to identify additional or replacement suppliers or service
providers, or may attempt to accelerate purchasing of material or manufacturing
of product prior to the beginning of the Year 2000. There is no assurance,
however, that these measures could be successfully undertaken, or that, even if
undertaken, they would be effective in mitigating the problem. Accordingly, the
inability of the Company to achieve full compliance with respect to the Year
2000 issue, or otherwise mitigate the effects of instances of noncompliance,
could result in delays or interruptions in obtaining materials and services,
conducting such operations as manufacturing and processing sales orders and
payments, and performing normal business activities, each of which could have a
material adverse effect on the Company's financial position and results of
operations.


                                       15
<PAGE>   16
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS

THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS OF THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION ARE UNCERTAIN AND MAY BE IMPACTED BY THE
FOLLOWING FACTORS, AMONG OTHERS, WHICH MAY CAUSE THE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. 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, principally
relating to the Onyx LES, are in the early stage of development and, in some
cases, either have not entered full clinical trials or have only recently done
so. Successful 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.

Uncertainty of Market Acceptance. Even if the Company is successful in
developing additional safe and effective products that have received marketing
clearance, there can be no assurance that the Company's new products will gain
market acceptance. Acceptance of the Company's Onyx LES will require the Company
to satisfactorily address the needs of potential customers. The target customers
for the Company's products are interventional radiologists and interventional
neuroradiologists. However, there can be no assurance that acceptance of the
Company's products by interventional radiologists and interventional
neuroradiologists will translate into sales. In addition, no assurance can be
given that the Company's market share for its existing products will grow or
that its products which have yet to be introduced will be accepted in the
market. If the Company is unable to gain market acceptance of its current and
future products, the Company's business, operating results and financial
condition would be materially adversely affected.

Rapid Technological Change; New Product Development. The markets for the
Company's products are characterized by rapidly changing technologies and new
product introductions and enhancements. In addition to the risks associated with
market acceptance of the Company's products, the Company's success will depend
to a significant extent upon its ability to enhance and expand the utility of
its products and to develop and introduce innovative new products that gain
market acceptance. Moreover, the Company may encounter technical problems in
connection with its product development that could delay introduction of new
products or product enhancements. There can be no assurance that new
technologies, products or drug therapies developed by others will not reduce the
demand for the Company's products. The Company maintains research and
development programs to continually improve its product offerings, including
adding 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.


                                       16
<PAGE>   17
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 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 regulatory
clearance or approval of such products. Such delays could have a material
adverse effect on the Company's business, operating results and financial
condition.

Limited Operating History; Absence of Profitability. The Company was
incorporated in 1993. To date, the Company's business has generated limited
product sales. From its inception through September 30, 1999, the Company
incurred cumulative losses of approximately $38 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.

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 that this condition will continue at least through 2000. The
Company believes that its existing capital resources and anticipated cash flow
from planned operations, together with the net proceeds from (a) earlier
financings, (b) a convertible subordinated note agreement with Guidant entered
into in November 1997, including $2.5 million received by the Company from
Guidant in exchange for debt and common stock upon the achievement of a
milestone defined in the agreement with Guidant, (c) a convertible subordinated
note agreement, credit agreement and distribution agreement with Abbott entered
into in August 1998, (d) a convertible subordinated note agreement, credit
agreement and distribution agreement with Century entered into in September
1998, (e) additional capital under the terms of agreements with Abbott,
described below, and (f) the interest earned on cash, cash equivalent and
short-term investment balances, should be adequate to satisfy its capital
requirements through 2000. 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.


                                       17
<PAGE>   18
The distribution agreement with Abbott required the Company to commit the
resources of its sales representatives for the first six months of the agreement
to the transition of the distribution function to Abbott. This six-month period
terminated on March 31, 1999. In April and November 1999, Abbott committed to
make $500,000 payments to the Company solely as consideration for the continued
resource commitment of the Company's sales representatives to the transition of
distribution to Abbott during each of the quarters ended June 30, 1999 and
September 30, 1999. In addition, the Company and Abbott entered into an
agreement that provided the Company an option to require Abbott to purchase up
to $3 million of the Company's common stock at a price of $12 per share. The
Company exercised such option for the full $3 million in October 1999, which
amount the Company received in November 1999.

Other than under the terms of the agreements mentioned above, the Company
currently has no other committed external sources of funds. Should existing
resources be insufficient to fund the Company's activities, the Company will
seek to raise additional funds through public or private financing. There can be
no assurance that additional financing will be available or, if available, that
it will be available on acceptable terms. If additional funds are raised by
issuing equity securities, further dilution to then-existing stockholders may
result. If adequate funds are not available, the Company's business, operating
results and financial condition may be materially adversely affected.

Dependence on Patents and Proprietary Technology. The success of the Company
will depend, in part, on its ability to obtain and maintain patent protection
for its products, to preserve its trade secrets and to operate without
infringing the proprietary rights of others. The patent position of a medical
device company may involve complex legal and factual issues. As of November 1,
1999, the Company held twenty-six issued U.S. patents, one issued foreign patent
and has forty-seven U.S. and thirty-six foreign patent applications pending. The
Company's issued U.S. patents cover technology underlying the Onyx LES
(including both liquid embolic implantables as well as access and delivery
catheters), carotid and intra-cerebral stents, coatings, the Cragg MicroValve,
infusion wires, and the Cragg Thrombolytic Brush. The expiration dates of these
patents range from 2009 to 2015. The pending claims cover additional aspects of
liquid embolic material, access and microcatheter delivery devices, carotid and
intra-cerebral stent technologies, non-vascular liquid embolic products,
infusion catheters, infusion wires, and the Thrombolytic Brush. Each product
area the Company is pursuing is covered by at least two issued patents and, in
most instances, three pending patents. 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.


                                       18
<PAGE>   19
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 experience in
working with third-party distributors is limited. In November 1997, the Company
executed a distribution agreement with Guidant to provide for the distribution
of the Company's neuro vascular product in Europe, and, in August 1998, the
Company and Guidant agreed to expand this distribution agreement to provide for
the distribution of the Company's peripheral embolization applications of the
Onyx LES. In August 1998, the Company executed a distribution agreement with
Abbott to provide for distribution of the Company's peripheral vascular blood
clot therapy products in the United States and Canada, and in September 1998,
the Company executed a distribution agreement with Century to provide for
distribution of all the Company's products in Japan. There can be no assurance,
however, that either Guidant or Abbott will be able to successfully market the
Company's products. Also, there can be no assurance that Century will be
successful in assisting the Company in obtaining necessary regulatory approvals
in Japan, or, if such approvals are obtained, that Century would be successful
in marketing the Company's products. The Company's sales force consists of five
people in the United States, all of whom have been with the Company for a
limited time. There is competition for sales personnel experienced in
interventional medical device sales, and 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 continue to 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 such as
Guidant, Abbott and Century. Other than the agreements with Guidant, Abbott and
Century, there can be no assurance that the Company will be able to enter into
distribution agreements on acceptable terms or at all. Also, there can be no
assurance that such agreements will be successful in developing the Company's
marketing capabilities or that the Company will be able to successfully develop
a direct sales force. Such failure could have a material adverse effect on the
Company's business, operating results and financial condition.

Limited Manufacturing Experience. The Company's experience in manufacturing its
products is relatively limited. The Company has found it necessary to expand its
manufacturing capacity in connection with the continued development and
commercialization of its products, and may find it necessary to expand its
manufacturing capacity in the future. Such development and commercialization
requires the additional commitment of capital resources for facilities, tooling
and equipment and for leasehold improvements. The Company expects that such
expansion of its manufacturing capacity would be achieved utilizing the
increased space in its new leased facility, improved efficiencies, automation
and acquisition of additional tooling and equipment. There is no assurance,
however, that the Company would be able to obtain the commitment of necessary
additional capital resources for expansion of its manufacturing capacity, or
that such an expansion, should it occur, would result in improved efficiencies.
Any delay or inability in expanding the Company's manufacturing capacity,
including obtaining the commitment of necessary capital resources, could
materially adversely affect the Company's manufacturing ability, business,
operating results and financial condition.


                                       19
<PAGE>   20
Government Regulation. The development, testing, manufacturing and marketing of
the Company'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 pre-amendments 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 510(k) clearances, which modifications, the Company believes, do not
affect the safety or efficacy of the products and thus, under FDA guidelines, do
not require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or would not require the
Company to submit a new 510(k) notice for any of the changes made to a device.
If the FDA requires the Company to submit a new 510(k) notice for any device
modification, the Company may be prohibited from marketing the modified device
until the 510(k) notice is cleared by the FDA. Commercialization of the
Company's Onyx LES likely will 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 Onyx, the Company believes the Onyx LES
would be regulated as a device. There can be no assurance, however, that upon
more detailed review of the Onyx LES, the FDA will not at a later date determine
that the Onyx LES should be regulated as a drug. Such a change could
significantly delay the commercial availability of the Onyx 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 it has obtained which are necessary to affix the CE Mark to the
applicable products, and to obtain additional such certifications with respect
to affixing the CE Mark to new products, in order to sell its products in member
countries of the European Union. The Company has received CE Mark certifications
with respect to its peripheral blood clot therapy products, micro catheters,
guidewire, balloon system, and the peripheral vascular and brain AVM
embolization applications of the Onyx LES, the first Onyx LES applications to
receive the CE Mark. The Company anticipates obtaining certifications with
respect to certain additional application of the Onyx LES upon successful
completion of required clinical studies. However, there can be no assurance that
such clinical studies will be successfully completed or that such certifications
will be obtained. Moreover, there can be no assurance that the Company will be
able to maintain its existing certifications. 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.


                                       20
<PAGE>   21
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.

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 $10 million per occurrence
and an annual aggregate maximum of $10 million. However, 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.

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.


                                       21
<PAGE>   22
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 does not have supply
agreements with all of its current contract manufacturers and often 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. The Company, having completed its move to its new facility in
December 1998, has taken steps to reduce the volume of outside manufacturing and
processing, and to establish on-site capabilities. There can be no assurance,
however, as to whether such a transfer of function from third parties will be
successfully completed.

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. The loss of the services of any of such key personnel or the
inability to attract and retain such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.

Third-Party Reimbursement. In the United States, health care providers such as
hospitals and physicians that purchase medical devices generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic procedures. With the implementation of Medicare's Prospective Payment
System for hospital inpatient care (Diagnosis Related Groups or "DRGs") in the
1980s, public and private payors began to reimburse providers on a fixed payment
schedule for patients depending on the nature and severity of the illness. Many
tests and procedures that would have been performed under cost-plus
reimbursement formulas are subject to scrutiny and must be justified in terms of
their impact on patient outcomes. As a result, the incentives are now to conduct
only those tests that will optimize cost-effective care.

The Company could be materially adversely affected by changes in reimbursement
policies of governmental (both domestic and international) or private healthcare
payors to the extent any such changes affect reimbursement for therapeutic or
diagnostic procedures in which the Company's products are used. Adverse changes
in governmental and private third party payors' policies toward reimbursement
for such procedures would have a material adverse effect on the Company's
business, operating results and financial condition.

Risks Associated with International Sales. To date, the majority of the
Company's sales have not been derived 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.


                                       22
<PAGE>   23
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.

Large-scale market acceptance of the Company's products will depend on the
availability and level of reimbursement in international markets targeted by the
Company. Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Obtaining reimbursement approvals in each country
can require 12-18 months or longer.

Anti-Takeover Provisions. The Company's Certificate of Incorporation provides
for 5,000,000 authorized shares of Preferred Stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the Board
of Directors without any further vote or action by the stockholders. Moreover,
in May 1999, the Company adopted a stockholders rights plan which enables
stockholders, under certain conditions, to purchase additional shares of the
Company's Common Stock at a discount upon the acquisition of, or an announcement
of a tender offer to acquire, 20% or more of the Company's then-outstanding
Common Stock. 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.


                                       23
<PAGE>   24
In April 1999, the Company was notified by The Nasdaq-Amex Group ("Nasdaq") that
it did not meet the requirements for the Company's Common Stock to continue to
be listed on the Nasdaq National Market. The Company held discussions with the
holders of its convertible debt, submitted for Nasdaq's consideration a proposal
and definitive plan for compliance, and, in May 1999, consummated agreements
with Abbott resulting in the conversion of $10 million of notes held by Abbott
into shares of the Company's Common Stock, and providing the Company with an
option that required Abbott to purchase up to $3 million of the Company's Common
Stock in support of such plan. Nasdaq informed the Company that it considered
the Company's actions to be sufficient so as to support continued listing of the
Company's Common Stock on the Nasdaq National Market. There is no assurance,
however, that the Company will be able to remain in compliance with the Nasdaq
National Market continued listing requirements. Should Nasdaq determine in the
future that such continued listing is not supported, the Company's stock price
could be materially and adversely affected.

Risks Associated with Year 2000 Issue. In less than three months, companies may
face a potentially serious problem if information systems, software applications
and operational programs written in the past do not properly recognize calendar
dates beginning in the Year 2000 (the "Year 2000 issue"). This problem could
affect both information technology ("IT") systems (for example, computer
hardware and software) and non-IT systems (for example, systems or machines with
embedded microcontrollers) with the result being the possible malfunctioning or
non-functioning of such systems.

The Company's products do not contain IT or non-IT system components. Moreover,
the Company's assessment of the Year 2000 issue indicates that its manufacturing
processes are not significantly dependent on systems that would be affected by
the Year 2000 issue. Accordingly, the Company estimates that the level of
incremental expenditures it has incurred solely to bring the Company into
compliance with respect to the Year 2000 issue has not exceeded $50,000, and
that future such expenditures would not exceed $25,000. These amounts exclude
planned expenditures in connection with the installation of an enterprise
resources planning system and other software systems which expenditures the
Company would have incurred irrespective of the Year 2000 issue.

The Company has an internal task force that undertakes such activities as
creating awareness within the Company of the Year 2000 issue, assessing the
Company's IT and non-IT systems' compliance with respect to the Year 2000 issue,
implementing remedial action to address non-compliance and establishing controls
for ongoing compliance. As regards IT systems, the Company has obtained written
representations from the manufacturers of the enterprise resource planning
software and the other software systems the Company installed during the first
half of 1999. Based on such written representations, the Company believes that
such software will not be affected by the Year 2000 issue, and 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 which may be affected
by this problem before the end of 1999 due to technological obsolescence. With
respect to non-IT systems, the Company, having completed its move to its new
facility in December 1998, has taken steps to reduce the volume of outside
manufacturing and processing, and to establish on-site capabilities. In this
transition, the Company has installed, as necessary, systems that are Year 2000
compliant. Also in connection with the move to the new facility, the Company has
obtained written representations as to compliance with the Year 2000
requirements from manufacturers of systems that are installed in the facility.
In addition, the Company has initiated communications with its suppliers and
service providers to assess such parties' status with respect to the Year 2000
issue, and the Company has established policies regarding internal approval for
it to transact business with current and future suppliers and service providers
that is predicated, in part, on such parties' compliance with Year 2000
requirements. To date, no specific risks have been identified from communication
requested and received by the Company from its vendors and service providers.


                                       24
<PAGE>   25
There is no assurance, however, that the Company will be successful in
completing any of the activities described above. In certain instances where the
Company is unable to mitigate the adverse effects of noncompliance, the Company
may attempt to identify additional or replacement suppliers or service
providers, or may attempt to accelerate purchasing of material or manufacturing
of product prior to the beginning of the Year 2000. There is no assurance,
however, that these measures could be successfully undertaken, or that, even if
undertaken, they would be effective in mitigating the problem. Accordingly, the
inability of the Company to achieve full compliance with respect to the Year
2000 issue, or otherwise mitigate the effects of instances of noncompliance,
could result in delays or interruptions in obtaining materials and services,
conducting such operations as manufacturing and processing sales orders and
payments, and performing normal business activities, each of which could have a
material adverse effect on the Company's financial position and results of
operations.


                                       25
<PAGE>   26
PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceeding.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)EXHIBITS

           See Index to Exhibits on Page 28 of this Quarterly Report on Form
10-QSB.

        (b)REPORTS ON FORM 8-K

           No reports on Form 8-K were filed, or required to be filed, by the
           Company during the quarterly period ended September 30, 1999.


                                       26
<PAGE>   27
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                            MICRO THERAPEUTICS, INC.

Date:  November 12, 1999               By:  /s/ Harold A. Hurwitz
                                            ------------------------------------
                                            Harold A. Hurwitz
                                            Chief Financial Officer


                                       27
<PAGE>   28
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit                                                                        Page
Number                                    Description                         Number
- -------                                   -----------                         ------
<S>         <C>
 27.1       Financial Data Schedule - Nine Months Ended September 30, 1999      29
</TABLE>





<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS IN FORM 10-QSB FOR THE NINE MONTHS ENDED
SEPTEMBER 30,1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-QSB.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                           8,937
<SECURITIES>                                         0
<RECEIVABLES>                                    1,175
<ALLOWANCES>                                      (10)
<INVENTORY>                                      1,303
<CURRENT-ASSETS>                                11,841
<PP&E>                                           3,430
<DEPRECIATION>                                 (1,099)
<TOTAL-ASSETS>                                  15,591
<CURRENT-LIABILITIES>                            1,842
<BONDS>                                              0
                                0
                                          0
<COMMON>                                             8
<OTHER-SE>                                       2,449
<TOTAL-LIABILITY-AND-EQUITY>                    15,591
<SALES>                                          2,811
<TOTAL-REVENUES>                                 2,811
<CGS>                                            1,966
<TOTAL-COSTS>                                    9,429
<OTHER-EXPENSES>                                 (352)
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               2,576
<INCOME-PRETAX>                               (10,807)
<INCOME-TAX>                                         1
<INCOME-CONTINUING>                           (10,808)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (10,808)
<EPS-BASIC>                                    ($1.49)
<EPS-DILUTED>                                  ($1.49)


</TABLE>


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