<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-6523
[MICROTHERAPEUTICS, INC.]
(Name of Small Business Issuer in its charter)
DELAWARE 33-0569235
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2 GOODYEAR 92618
IRVINE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(949) 837-3700
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
(Title of
class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
Issuer's revenues for its most recent fiscal year were $4,249,381
As of March 1, 1999, the aggregate market value of the voting stock and
non-voting common equity held by non-affiliates, computed by reference to the
price at which common equity was sold on such date, was approximately
$26,629,568.
6,717,963 shares of Common Stock were outstanding at March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Information required under Items 9, 10 11 and 12 of Part III hereof are
incorporated by reference to portions of the registrant's definitive Proxy
Statement to be filed in connection with the solicitation of proxies for its
Annual Meeting of Stockholders to be held May 27, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
Index to Exhibits is on page 36.
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PART I
ITEM 1. BUSINESS
Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated in
California in 1993 and reincorporated in Delaware in 1996. The Company develops,
manufactures and markets minimally invasive medical devices for the diagnosis
and treatment of vascular disease. MTI focuses its efforts in two underserved
markets: (i) the treatment of neuro vascular disorders of the brain associated
with stroke; and (ii) the treatment of peripheral vascular disease, including
blood clot therapy in hemodialysis access grafts, arteries and veins. The
Company's objective is to provide physicians with new interventional treatment
alternatives which improve outcomes, reduce costs, shorten procedure times,
reduce drug usage and allow access to difficult-to-reach anatomical locations.
The Company currently markets more than seventy products for the treatment of
peripheral vascular disease and expects to introduce products to treat neuro
vascular disease during 1999.
The Company's products and products under development in the neuro
vascular market designed to address stroke include: (i) the EMBOLYX(TM) Liquid
Embolic System ("LES"), which combines a unique material and special purpose
access and delivery devices such as micro catheters, to treat aneurysms,
arteriovenous malformations ("AVMs") and hypervascular brain tumors; and (ii) a
range of guidewires, balloon catheters, guiding catheters and infusion micro
catheters incorporating shaft designs and innovative materials, which allow
access to the smallest, most remote blood vessels. The Company's products in the
peripheral vascular market, designed for less invasive treatment of blood clots,
include: (i) a broad offering of infusion catheters, micro catheters and
infusion wires; and (ii) the Cragg Thrombolytic Brush(TM) and the Castaneda Over
The Wire Brush(TM), designed for rapid interventional clot disruption and
dissolution through mechanical mixing of a thrombolytic drug with the clot.
BACKGROUND
Vascular disease is, by Company estimates, the leading cause of death in
the industrialized world. It may occur in any part of the body, and is generally
manifested as an occlusion or rupture in a vessel. The vascular disease market
consists of three segments, defined by anatomical location: cardiovascular
disease, or disease of the coronary arteries; neuro vascular disease, or disease
of the vessels in the brain; and peripheral vascular disease, or disease in
blood vessels throughout the rest of the body. MTI is focused on the two
segments it believes to be underserved: neuro vascular and peripheral vascular
disease.
Neuro Vascular Disease
The Company believes that the leading complication of neuro vascular
disease is stroke, the diminished blood flow to critical regions of the brain. A
significant need for effective stroke therapy exists because of the severity of
the disorder, its prevalence in society, the inadequacy of current therapies and
the high cost of treatment and care. Acute stroke is the third leading cause of
death in the United States and a major cause of long-term disability, with an
estimated annual cost of over $30 billion, according to Medical Data
International, Inc. ("MDI"). There are approximately 700,000 cases of stroke per
year in the United States, of which approximately 160,000 of the victims die as
a result of the event and another one-third become severely and permanently
disabled, according to the National Stroke Association. Over three million
people in the United States are stroke survivors and stroke is the leading cause
of disability among adults, according to an article published in Neurology. The
disabilities caused by stroke include paralysis, coma, impaired cognition,
reduced coordination, loss of visual acuity, loss of speech, loss of sensation
or a combination of these effects. Currently, no medical intervention exists
that can reverse the brain damage resulting from stroke.
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Strokes are typically caused either by blockages (vaso-occlusive stroke)
or ruptures (hemorrhagic stroke) of vessels within or leading to the brain.
According to MDI, vaso-occlusive strokes account for approximately 80% of all
strokes. According to the American Heart Association, the most common type of
vaso-occlusive stroke, thromboembolic stroke, is caused by the existence of a
blood clot, or thrombus, within an artery, blocking blood flow. These blood
clots can originate in the heart or a peripheral vascular site and travel into
the neuro vasculature. Another type of vaso-occlusive stroke, atherosclerotic
stroke, results from blockage of blood flow by plaque in a vessel. The majority
of atherosclerotic strokes result from blockage in the carotid artery in the
neck. According to MDI, the annual number of cases of thromboembolic and
atherosclerotic stroke in the United States is 168,000 and 272,000,
respectively. The balance of vaso-occlusive strokes are lacunar strokes, or
disease of the smallest vessels deep within the brain.
Hemorrhagic stroke is generally caused by the rupture of a blood vessel
in the brain resulting from a vascular defect such as an aneurysm or AVM.
According to MDI, there are approximately 140,000 cases of hemorrhagic stroke
per year in the United States.
An aneurysm is a balloon-shaped structure which forms at a weak point in
the vessel wall and fills with blood. Aneurysms typically grow over time and,
due to pressure placed on the wall of the aneurysm, are prone to rupture. Burst
aneurysms result in massive intracranial bleeding and often death. Patients with
unruptured aneurysms may experience symptoms such as blurred vision, headaches
or dizziness; however, the large majority of these patients are asymptomatic.
While 42,000 hemorrhagic stroke cases are related to ruptured intracranial
aneurysms, autopsy studies have suggested that unruptured aneurysms may occur in
approximately 2% to 5% of the general population in the United States, according
to the American Association of Neurological Surgeons. The Company believes that
with the development of new diagnostic and interventional technologies, the pool
of candidate patients may be expanded to include those with unruptured aneurysms
discovered in conjunction with other examinations.
In an AVM, the flow of blood between arteries and veins, which normally
occurs through capillary vessels, is shortcut by the development of a network of
larger vessels connecting directly from arteries to veins. The higher arterial
pressure communicating directly to the venous side makes these vessels highly
prone to rupture.
The Company believes that, while the interventional treatment of stroke
in the United States is estimated by MDI to be approximately 40,000 procedures
today, this market will grow significantly, driven by the development of
improved diagnostic, imaging and interventional technologies; conversion from
surgical to interventional procedures; the acceptance of preventive treatment of
unruptured aneurysms; the increasing number of trained interventional
neuroradiologists; the continued development of stroke centers; and the impact
of stroke public awareness programs.
Related to neuro vascular disease is the neurological dysfunction caused
by tumors in the brain. The tumor can cause compression in the brain tissue,
resulting in symptoms such as pain and neurological deficit. As discussed above,
the Company believes that the market for interventional therapeutic applications
such as embolization of those brain tumors that are hypervascular in nature will
grow significantly driven by the factors discussed in the preceding paragraph.
Peripheral Vascular Disease
Based on data from MDI, the Company believes that over eight million
people have been diagnosed with peripheral vascular disease in the United
States, of which an estimated one million are treated annually. Generally, these
patients suffer from degenerative atherosclerosis or blood clots, the same
process that produces coronary artery disease. For patients diagnosed with
peripheral vascular disease, there is currently no therapeutic regimen employed
to halt the degenerative process.
Vascular obstruction, and the resulting lack of blood flow, can lead to
skin discoloration, pain, ulceration, swelling or a change in blood chemistry,
and can result in the loss of limb and even death. These symptoms are most often
present in the legs and arms and may also develop in the neck and torso.
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Thrombosis, or the stagnation and clotting of blood, most often occurs
at locations in blood vessels where the flow of blood has become restricted.
This is most evident in vascular grafts, at the anastomosis, the site where the
artificial graft is joined to the native vessel. Blood clots may form at the
point of narrowing or may originate elsewhere in the cardiovascular system,
break off, travel downstream and lodge in a smaller peripheral vessel,
decreasing or completely blocking flow. Unless this condition is alleviated,
tissue ischemia and gangrene can occur.
According to MDI, thrombosis in peripheral arteries affects
approximately 500,000 people per year in the United States. Approximately
200,000 of these patients receive surgical or interventional treatment, as
estimated by the Company.
One common site for vascular obstruction is in hemodialysis access
grafts. Based on data from the Health Care Financing Administration, the Company
estimates that hemodialysis access grafts have been surgically implanted in over
183,000 kidney dialysis patients in the United States. These grafts are used as
the access site for dialysis needles which are inserted to withdraw and return
blood from a dialyzer, a procedure performed every 2-3 days for each patient.
These hemodialysis access grafts occlude over time and, according to an article
published in the Journal of Surgical Research, fail approximately every 5-10
months, requiring treatment.
Clotting of the deep veins in the lower extremities and torso is
commonly referred to as deep venous thrombosis ("DVT"). DVT and other venous
thrombosis associated with superficial veins are, according to an article
published in Cardiology Clinics, responsible for approximately 250,000
hospitalizations annually in the United States. Approximately 600,000 additional
cases result from long-term hospital stays, according to the American Medical
Association and an article published in American Family Physician. Currently,
the vast majority of treatment consists of oral medication and exercise.
However, there are a small number of patients receiving interventional treatment
consisting of catheter directed thrombolysis over several days, on an inpatient
basis. This is costly, but has been successful for acute cases of DVT. Surgical
removal of the obstruction is not considered to be a desirable treatment
alternative for DVT because of the potential injury to the vein.
The Company estimates that the interventional market of peripheral blood
clots in the United States is approximately 100,000 procedures per year, and
believes this market will grow significantly, driven by the conversion from
surgical to interventional procedures and the development of advanced
technologies that decrease overall procedure costs.
The Company believes that there are opportunities in the peripheral
vasculature for the interventional radiologist to utilize embolization
procedures to treat vascular malformations which occur in peripheral blood
vessels. Among the conditions the Company is considering for study are
peripheral AVMs, uterine fibroid tumors and liver tumors.
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PRODUCTS
The following table sets forth the Company's principal products and
products under development and their current status:
<TABLE>
<CAPTION>
PRODUCT LINE U.S. STATUS INTERNATIONAL STATUS
- ------------ ----------- --------------------
<S> <C> <C>
NEURO VASCULAR-STROKE THERAPY
EMBOLYX(TM) Liquid Embolic System Submissions expected, Submissions expected,
beginning 2000 beginning 1999
Micro Catheters
EASY RIDER(R) Micro Catheter Approved CE Mark
FLOW RIDER(TM) Flow Directed Catheter Approved CE Mark
Access and Delivery Products
SilverSpeed(TM) Hydrophilic Guidewire Approved CE Mark
Equinox(TM) Occlusion Balloon System 510(k) submitted 1999 Submission expected 1999
PERIPHERAL VASCULAR-BLOOD CLOT THERAPY
Infusion Catheters
Cragg-McNamara(TM) Valved Infusion
Catheter 30 models currently CE Mark
marketed
MicroMewi(R) Sidehole Infusion Catheter 5 models currently CE Mark
marketed
Mewi-5(TM) Sidehole Infusion Catheter 18 models currently CE Mark
marketed
Infusion Wires
ProStream(R) Sidehole Infusion Wire 8 models currently CE Mark
marketed
ProStream(R) Endhole Infusion Wire 2 models currently CE Mark
marketed
Mechanical Thrombolysis
Cragg Thrombolytic Brush(TM) 1 model currently marketed CE Mark
Castaneda Over The Wire Brush(TM) 2 models currently CE Mark
marketed
</TABLE>
NEURO VASCULAR--STROKE THERAPY PRODUCTS
EMBOLYX Liquid Embolic System
The Company's proprietary EMBOLYX Liquid Embolic System ("LES"),
currently under development, is designed for rapid and controlled embolization
of aneurysms, AVMs and hypervascular brain tumors. The EMBOLYX LES consists of
unique biomaterials and special purpose micro catheters. The micro catheters are
used to deliver the material, in liquid form, to small remote blood vessels in
the brain where it fills a vascular defect and transforms into a solid polymer
cast. The EMBOLYX LES offers a unique form, fill and seal approach to the
interventional treatment of aneurysms or AVMs associated with hemorrhagic
stroke, and of hypervascular tumors which can manifest mass effect symptoms
similar to those of a hemorrhagic stroke.
The conventional treatment of hemorrhagic stroke requires
highly-invasive neurosurgery, in which a portion of the skull is removed and
brain tissue is manipulated to gain access to the diseased vessel. This type of
surgery generally involves extensive blood loss and prolonged hospitalization.
Interventional treatment of certain aneurysms currently involves
advancing a micro catheter through the cerebral vasculature to the aneurysm
site. Tiny metal coils attached to a delivery wire are passed, one at a time,
through the catheter and into the aneurysm. The coil is then released from the
delivery wire, the wire is removed and the next coil is advanced through the
catheter. This process is repeated until approximately 30% of the volume of the
aneurysm is filled with coils. The presence of these coils in the aneurysm
disrupts blood flow, leading to the formation of thrombus in the spaces within
the coil mass. Numerous embolization coils are required to fill an aneurysm, a
procedure which generally takes two to three hours to complete, and not all
aneurysms are suited to this approach.
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Surgical treatment of AVMs includes both open neurosurgery and
radiosurgery. The Company estimates that 75% of AVM surgical procedures are
preceded by interventional embolization of the AVM. In the United States,
interventional AVM embolization, either as stand-alone treatment or as a bridge
to surgery, involves depositing polyvinyl alcohol ("PVA") particles, coils or
other embolic material into the AVM to reduce or stop blood flow. Embolization
with PVA particles is challenging due to the difficulty of placing the particles
into the proper location, the inability to visually confirm the placement of the
particles and the tendency for embolized vessels to reopen. Outside the United
States, the most widely used embolization technique for AVMs is the injection of
acrylic-based glues which have not been approved for use in the United States.
Glues have multiple drawbacks, such as lack of control in delivery and extreme
adhesion to all surfaces, including the delivery catheter.
Hypervascular brain tumors often present therapeutic challenges because
their vascularity leads to increased, and sometimes excessive, blood loss during
surgery and the need for blood transfusion. The tendency for hemorrhage during
surgery increases the risk of surgical morbidity and mortality, and makes
complete resection of a tumor more difficult. Accordingly, the Company believes
that embolization of such tumors, as a pre-operative therapy, has the potential
of reducing these inherent surgical risks through reduction of the tumor's
vascularity, and of enhancing surgical resection through tumor necrosis and
shrinkage. In the case of non-operable tumors, the Company believes that
palliative embolization can provide temporary symptomatic improvement such as
relief of pain and neural structural decompression with neurological
improvement. Embolization, pre-operative or palliative, is usually currently
performed with PVA particles. However, embolization with PVA particles is
subject to the challenges noted in the preceding paragraph.
In an EMBOLYX procedure, the micro catheter is positioned at the
embolization site and the material is delivered with a single injection. The
EMBOLYX material is visible under fluoroscopy and thus the interventionalist is
able to see and continuously monitor the penetration and location of the
material. When the vascular defect is completely filled with the polymer cast,
the delivery catheter is removed. Since the EMBOLYX material is nonadhesive, the
controlled injection and filling of the vascular defect can take place over a
30-second or longer period, whereas a glue injection and catheter withdrawal
must be done very quickly to avoid gluing the delivery catheter in place.
The Company has completed preclinical studies of EMBOLYX and has
initiated human clinical trials for certain applications of the EMBOLYX
technology. In 1998, the Company filed and received approval on an
Investigational Device Exemption ("IDE") to conduct multi-center human clinical
trials in the United States, pursuant to which the Company will seek to obtain
regulatory approval for market introduction of EMBOLYX in the treatment of
meningiomas, the most common form of hypervascular brain tumor. There can be no
assurance, however, that the Company will be successful in completing studies
under the IDE or in obtaining approval for market introduction. In Europe, human
clinical trials are being conducted at four sites using EMBOLYX in the treatment
of AVMs. The Company expects to file its submission for CE Mark certification
with respect to this application of EMBOLYX in 1999. There can be no assurance,
however, that the Company will be successful in obtaining such certification.
Access and Delivery Products
The Company is developing a line of products that will allow access to
and treatment in challenging and difficult-to-reach anatomical locations, such
as the remote, or distal, vessels in the brain. The Company anticipates that
this product line will include a family of micro catheters, guidewires, balloon
systems and guiding catheters, certain models of which will be delivery
components of the EMBOLYX LES and others which will be for general
interventional therapies.
Micro Catheters. The Company has developed a line of micro catheters
incorporating unique shaft designs and innovative materials which allow access
to small, remote vessels in the brain. These micro catheters may be used for
infusion of drugs to dissolve blood clots associated with thromboembolic stroke,
and to deliver the EMBOLYX liquid embolic material used to embolize AVMs,
aneurysms and hypervascular brain tumors.
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The conventional treatment for neuro vascular blood clots involves the
systemic delivery of thrombolytic drugs capable of dissolving the clot.
Interventional thrombolytic therapy for neuro vascular occlusions involves the
use of subselectively placed micro catheters to reach the site of the occlusion,
followed by the local infusion of thrombolytic drugs to dissolve the blood clot.
The Company believes that site-specific delivery of thrombolytic drugs may prove
to be more effective than traditional intravenous systemic administration by
requiring less drug, which may lead to reduced side effects such as bleeding in
other parts of the body.
Of the 168,000 patients who experience thromboembolic stroke each year,
the Company estimates that 150,000 of these patients could be treated by
interventional procedures with early intervention, patient selection and
improved micro catheters. The Company's EASY RIDER and FLOW RIDER micro
catheters may be used for infusion of thrombolytic drugs to dissolve blood
clots.
The Company has obtained 510(k) approval for its neuro micro catheters
and plans to introduce these products in 1999.
SilverSpeed Hydrophilic Guidewire. This guidewire is used to facilitate
introduction and placement of micro catheters, occlusion balloons and
angioplasty catheters. The construction of the guidewire allows for a flexible
end, with a gradual decrease in the stiffness toward the tip. The distal coil
segment is radiopaque platinum, which aids in fluoroscopic guidance for tip
positioning. The Company has obtained 510(k) approval for its first model of
this guidewire and plans to introduce it in 1999.
Equinox Occlusion Balloon System. This balloon system is designed for
use in blood vessels where temporary occlusion is desired. It provides a vessel
selective technique which is useful in selectively stopping or controlling blood
flow, and is capable of accessing small diameter vessels and tortuous anatomy.
Accordingly, it may be used to arrest blood flow to distal sites to allow for
embolization treatment of vascular abnormalities such as aneurysms. The Company
anticipates receiving regulatory approvals for the balloon system in 1999.
PERIPHERAL VASCULAR--BLOOD CLOT THERAPY PRODUCTS
Catheters and Infusion Wires
MTI has introduced to the market a broad offering of less invasive
interventional catheters, micro catheters and infusion wires capable of
efficient delivery of thrombolytic agents for the dissolution of blood clots.
MTI's current offering of Cragg-McNamara valved tip infusion catheters and
ProStream infusion wires represents advanced technology in thrombolytic therapy
for three peripheral vascular market subsegments: hemodialysis access grafts,
arteries and veins.
Surgical embolectomy is the most common procedure for removing blood
clots from the vascular system, including hemodialysis access grafts. In this
procedure, a surgical incision is made down to the occluded vessel, the vessel
is cut open and a balloon catheter is used to remove the clot through the
incision.
Vascular bypass surgery with native vessels or synthetic grafts is also
performed. In this procedure, either a native vessel, usually a vein surgically
harvested from the patient's leg, or an artificial graft is surgically connected
above and below the occlusion. Blood can then flow around the occlusion.
These surgical procedures require an operating room and attending staff,
anesthesia, intensive care and associated in-hospital recovery facilities and
supplies. If the surgery is performed on an occluded graft through which the
patient had been receiving hemodialysis, the dialysis therapy must be
discontinued at the site of the graft for approximately two weeks and an
alternate access site established for hemodialysis.
Thrombolysis, or the dissolving of blood clots, can be performed
interventionally, often on an outpatient basis, by delivering thrombolytic drugs
through an infusion catheter directly into the clot.
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Various techniques are used in these procedures including the
"pulse-spray" infusion technique where boluses of the drug are repeatedly hand
injected into the thrombus with high pressure syringes, and the "weep" infusion
technique where the drug is slowly infused into the clot over a longer period of
time. In coaxial infusion systems, a micro catheter or infusion wire is placed
through a larger catheter, and infusion is performed through both devices. This
technique allows simultaneous infusion into small, distal vessels and larger,
proximal vessels.
Treatment modalities for blood clots in veins are much more limited than
those for arteries. The most common treatment for DVT is oral
medication/exercise regimens. This treatment only stops the progression of the
clotting and does not remove the clot already present. Surgical embolectomy is
not considered to be a treatment alternative for DVT because of the potential
for injury to the valves and walls of the vein.
Recently, a number of high profile interventional radiology centers in
the United States have begun treating DVT with local infusion of thrombolytic
drugs at the site of the clot through sidehole infusion catheter and infusion
wire systems. The Company believes the interventional treatment of DVT with its
catheters and infusion wires may represent a significant opportunity to expand
the patient population for interventional therapy.
Of the more than 183,000 hemodialysis access graft treatments currently
performed each year in the United States, the Company estimates that one third
are treated interventionally. Of the 200,000 arterial blood clot treatments
currently performed each year in the United States, the Company estimates that
50,000 are interventional. The Company also estimates that an additional 5,000
vein procedures are performed interventionally each year in the United States
for a total of 100,000 interventional treatments for peripheral blood clots.
Cragg-McNamara Valved Tip Catheters. These catheters incorporate the
Company's Cragg MicroValve which allows a catheter to be advanced over a
guidewire, and when the wire is removed, the valve at the tip of the catheter
closes completely. This valve technology allows the use of the entire catheter
lumen for sidehole fluid delivery as compared to competitive products which
require a wire to be in place to occlude the catheter tip during sidehole
infusion.
Mewi-5 Sidehole Infusion Catheters. The Company's Mewi-5 catheters
provide sidehole infusion in the peripheral vasculature. These catheters can be
used alone or as the outer catheter of a coaxial infusion system.
MicroMewi Sidehole Micro Catheters. The Company's MicroMewi micro
catheters provide sidehole infusion in small, distal vessels of the peripheral
vasculature. These catheters incorporate a two-section design which adds
pushability to the proximal segment and flexibility to the distal end. The
MicroMewi can be used either alone or as the inner catheter of a coaxial
infusion system.
MicroPatency Endhole Micro Catheters. These endhole micro catheters
provide infusion in small, distal vessels of the peripheral vasculature. They
incorporate a two-section design which adds pushability to the proximal segment
and flexibility to the distal end. The MicroPatency endhole micro catheters can
be used alone or as the inner catheter of a coaxial infusion system.
ProStream Infusion Wires. The Company's infusion wires can be inserted
into blood vessels, and navigated to the site of an obstruction to allow the
infusion of fluids through the wire to the distal anatomy. These infusion wires
can also be passed through infusion catheters in a coaxial manner, to allow
simultaneous infusion at multiple sites.
MTI received 510(k) clearance of its Cragg-McNamara valved tip infusion
catheters in October 1994 and is currently marketing 30 models both domestically
and internationally. The Company received 510(k) clearance for the ProStream
sidehole infusion wires in January 1996 and is currently marketing eight models
in the United States and internationally. These products, together with MTI's
MicroPatency, Mewi- 5, and MicroMewi infusion catheter lines, are marketed in
the United States under a distribution agreement with Abbott Laboratories
("Abbott") and internationally through distributors. See "Business--Sales and
Marketing."
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Thrombolytic Brush
The Company believes that most treatments for blood clots in the
peripheral vasculature could be performed interventionally. However, in order
for interventional thrombolysis procedures to surpass surgical procedures as the
treatment of choice, three main issues need to be addressed, all of which have a
direct impact on procedure cost.
First, the length of time to achieve lysis of the clot must be
shortened. If a clot is relatively "fresh," that is, only several hours old or
less when treated, dissolution time is quick and the procedure can be completed
in a single session in the catheterization or special procedures lab. If,
however, the clot becomes more "organized" in the vessel, dissolution time
lengthens. In these circumstances, thrombolysis starts in the catheterization
lab and continues in a hospital room for 24-72 hours, making it an inpatient
procedure. The patient is then moved back to the lab a second time for
angiographic imaging to determine whether the infusion has been successful. Even
a single setting thrombolytic procedure on a fresh clot can require the
interventional radiologist to administer the drug for a considerable length of
time. Second, the dissolution of the clot must be complete. An established clot
is resistant to complete dissolution and any residual clot becomes a site for
repropagation of new clot. Third, drug cost must be reduced. The cost of drugs
for a long-term thrombolytic infusion lasting several days is thousands of
dollars.
In August 1997, MTI received approval of its 510(k) market notification
from the U.S. Food and Drug Administration ("FDA") and began an active sales
campaign for the Cragg Thrombolytic Brush in hemodialysis access grafts. This
product addresses the clinical issues that remain in standard thrombolysis. The
Cragg Thrombolytic Brush is designed for rapid interventional clot disruption
and dissolution through mechanical mixing of a thrombolytic drug with the blood
clot. In February 1998, the Company received approval of its 510(k) for the next
generation of the Thrombolytic Brush, called the Castaneda Over The Wire Brush,
which the Company believes will further improve vascular access and ease of use.
Future studies using this design may include clinical evaluation in other
applications, including native vessels and additional peripheral grafts.
SALES AND MARKETING
The primary users of the Company's products are interventional
radiologists and neuroradiologists. The Company estimates that approximately
2,000 hospitals in the United States perform interventional radiology procedures
and an estimated 500 institutions provide some neuro vascular and peripheral
vascular therapy.
Since inception, the Company's practice has been to establish and
maintain relationships with key interventional radiologists and
neuroradiologists. To achieve such relationships, the Company has had ten direct
sales representatives covering the United States. In August 1998, the Company
entered into a Distribution Agreement with Abbott, which requires that the
Company's sales force transition the Company's relationships with interventional
radiologists to Abbott. During the period since August 1998, the Company's sales
force in the United States has been reduced to six direct sales representatives.
As of the date of this report the Company's obligation to work on such a
transition with Abbott has ended and the Company expects to redirect the efforts
of its remaining direct sales force toward expanding the relationships it has
formed in the neuroradiology market place.
The distribution agreement with Abbott provides exclusive rights to
distribute the Company's peripheral blood clot therapy products in the U.S. and
Canada. The term of the agreement runs through the end of 2008. It may be
extended by mutual agreement, or by Abbott upon Abbott's attainment of forecast
sales levels, the determination of which is defined in the agreement, in any
three years within defined five-year periods in which the agreement is in force.
Abbott may terminate the agreement upon 180 days written notice, and the Company
may terminate the agreement if Abbott fails to attain the forecast sales levels
discussed above in at least three years within defined five-year periods in
which the agreement is in force, or if the parties reach an impasse in
determining such sales levels. The agreement is also terminable by the Company's
successor in the event of a change of control of the Company. In such event,
Abbott has the option to purchase the peripheral blood clot therapy line of
business at a mutually agreed-upon price, or the Company's successor may pay a
termination fee based upon Abbott's historical sales levels as defined in the
agreement. Sales to Abbott under this agreement accounted for 25% of total sales
for the year ended December 31, 1998, and the Company expects sales under this
agreement to provide the majority of the Company's revenues at least through
1999.
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The Company has established international distribution arrangements,
focused on the introduction and market penetration of peripheral vascular
products, in most parts of Europe, Scandinavia, Latin America, Australia and New
Zealand through a network of specialty medical device distributors.
On November 17, 1997, the Company entered into a distribution agreement
with Guidant Corporation ("Guidant"), which provides for European distribution
of the Company's neuro products, and, in August 1998, the agreement was expanded
to include future peripheral embolization products utilizing the EMBOLYX LES.
The distribution agreement has a five-year term, which will commence upon the
first commercial sale of such products, and may be canceled by the Company upon
a sale of substantially all of the Company's assets or change in control of the
Company. In such event, the cancellation penalty to be paid to the distributor
is the greater of $1 million or an amount based on the distributor's gross
profit, as defined in the distribution agreement.
On September 23, 1998, the Company entered into a distribution agreement
with Century Medical, Inc. ("Century"), that provides Century with exclusive
rights to distribute all of the Company's products in Japan. The initial term of
the agreement extends five years past the date on which the first regulatory
approval is obtained for an application using the EMBOLYX LES. The agreement may
be extended for additional five-year terms either automatically, unless
terminated for reasons described below, or by mutual agreement. The agreement
may be terminated by the Company if Century fails to achieve certain sales
levels, as defined in the agreement, in at least three of any five consecutive
years in which the agreement is in force, or if the parties reach an impasse in
defining such sales levels. The agreement is also terminable by the Company's
successor in the event of a change of control of the Company upon payment by the
Company's successor of a termination fee based on Century's historical gross
profit, as defined in the agreement.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 1997 and 1998, the Company's research
and development expenses amounted to $3,425,000 and $3,865,000, respectively.
The Company is directing its research efforts towards development of products
which expand the therapeutic alternatives available to interventional
radiologists and interventional neuroradiologists for treatment of vascular
disease.
The Company believes that the EMBOLYX LES has utility for a variety of
procedures throughout the vascular system, including embolization of AVM's,
hypervascular tumors and aneurysms in both neuro and peripheral applications.
The Company has successfully performed studies on representative animal models
in each of these areas. The neuro AVM and tumor applications are being tested in
the clinical setting, and the Company anticipates the neuro aneurysm program to
transition from the pre-clinical, animal setting to the human clinical setting
during 1999. In addition, the Company has filed patents related to certain
non-vascular applications of the EMBOLYX LES which have been cross-licensed to
entities in which the Company has a minority equity interest.
In 1998, the Company initiated several programs to design and develop
additional access and delivery devices, specifically, guidewires, balloon
systems and guiding catheters, both as part of the EMBOLYX LES program and as
general purpose devices.
All of these research efforts are at an early stage, and there can be no
assurance that any products will be successfully developed from them, receive
regulatory approvals, be capable of being manufactured cost-effectively, be
successfully introduced or receive market acceptance. See "Certain Factors That
May Affect the Company's Business and Future Results" for additional information
regarding risks generally applicable to development of new products.
During 1998, the Company was issued eight additional patents, increasing
the total patents issued to the Company to twenty-four. The majority of the
newly-issued patents related to neuro catheters, liquid embolic agents and
stents. The number of pending and in-process applications increased
commensurately during 1998.
The Company's research and development staff consists of nineteen
full-time engineers, technicians and regulatory personnel, and several clinical
and technical consultants, all of whom have substantial experience in medical
device development. The Company's product development process incorporates teams
organized around each of the Company's core technologies or product groups, with
each team having representatives from marketing, regulatory and clinical
affairs, manufacturing and finance. Consultants are utilized where additional
specialized expertise is required.
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MANUFACTURING
The Company manufactures its proprietary products in a controlled
environment setting at its facilities in Irvine, California, which it has
occupied since December 1998. Prior to that date, the Company's facilities were
located in San Clemente, California. The Company has implemented quality control
systems as part of its manufacturing process, which comply with U.S. Quality
System Regulations ("QSR") requirements. The Company has also been inspected by
the California Department of Health Services ("CDHS") and is registered with the
State of California to manufacture its medical devices. The Company believes
that it is in compliance with FDA QSR for medical devices. There can be no
assurance, however, that the Company will remain in compliance with QSR. Failure
to do so could have a material adverse effect on the Company's business,
operating results and financial condition.
The European Union has promulgated rules which require that medical
products receive the right to affix the CE Mark, an international symbol of
adherence to quality assurance standards. ISO 9001/EN 46001 certification is one
of the CE Mark certification requirements. In order to obtain the right to affix
the CE Mark to its products, the Company needs to obtain certification that its
processes meet the ISO 9001/EN 46001 quality standards and applicable medical
device directives promulgated by the European Union. Such certification has been
obtained by the Company with respect to its peripheral vascular blood clot
therapy products, micro catheters and guidewires, and, thus, the Company
currently has the right to affix the CE Mark to such products. However, this
certification is reviewed on an annual basis, and there can be no assurance that
such right to affix the CE Mark will be retained by the Company in the future.
In 1999, the Company anticipates obtaining certification with respect to its
balloon system, as well as certain applications of the 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.
The Company has developed the necessary capabilities for manufacturing,
assembling, packaging and testing the products it currently markets, and for
developing such processes with respect to products currently under development.
Certain of these capabilities involve proprietary know-how. An endhole infusion
wire and certain accessories are manufactured for the Company on an OEM basis;
all other fabrication and assembly operations are performed in the Company's
manufacturing facilities. The Company uses outside contractors for molding,
sterilization, and other common technologies. Vertical integration occurs as
necessary or appropriate to meet the Company's production, quality and
profitability objectives.
Raw materials are purchased from various qualified vendors, subjected to
stringent quality specifications and assembled by the Company into final
products. The Company routinely conducts quality audits of suppliers and has
adopted a vendor qualification program. Certain products are obtained by the
Company from single source suppliers. However, the Company believes that
alternative suppliers are available for its raw materials and other product
components and plans to qualify additional suppliers as sales volume warrants.
Although the Company intends to maintain sufficient levels of inventory to avoid
any material disruption resulting from increased manufacturing, there can be no
assurance that the Company will be able to manufacture and supply products to
meet potential demand.
COMPETITION
The medical device industry is characterized by rapidly evolving
technologies and significant competition. The Company expects competition in the
interventional radiology and interventional neuroradiology markets to increase
substantially. The Company believes that interventional procedures with products
like its own are substantially less costly than highly invasive surgical
procedures and may ultimately replace these procedures in certain applications.
In certain cases, the Company's products may be used in conjunction with
traditional surgical techniques.
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The Company competes primarily with other producers of catheter and wire
based products for interventional treatment of neuro vascular and peripheral
vascular disease. In neuro vascular interventional applications, the Target
Therapeutics division of Boston Scientific, Inc. is the market leader. The
Company expects to compete against Target Therapeutics and other entrants in the
neuro vascular interventional market including the Cordis, Inc. subsidiary of
Johnson & Johnson. In peripheral blood clot therapy applications the Company
competes with Arrow International, Inc., the MediTech and Target Therapeutics
divisions of Boston Scientific, Inc., Cook, Inc., and the AngioDynamics division
of E-Z-EM Corporation. All of these companies have significantly greater
financial, manufacturing, marketing, distribution and technical resources, name
recognition and experience than the Company. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than those developed by the Company or that would render
the Company's products obsolete or noncompetitive. Additionally, there can be no
assurance that the Company will be able to compete effectively against such
competitors based on its ability to manufacture, market and sell its products.
The length of time required for product development and regulatory
approval plays an important role in a company's competitive position.
Consequently, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development,
clinical evaluation and commercialization of new products. Product development
involves a high degree of risk and there can be no assurance that the Company's
research and development efforts will result in commercially successful
products.
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MEDICAL ADVISORY BOARD
The Company has a group of physicians which advises it on medical
matters in areas of the Company's business. The Company's Medical Advisory Board
(the "MAB") includes experts in vascular disease diagnosis and therapy in
interventional radiology and interventional neuroradiology. The Company
regularly consults with members of the MAB regarding the Company's research and
development, preclinical trials and clinical trials.
The Micro Therapeutics MAB is currently composed of the following
individuals:
Andrew H. Cragg, M.D. Director, Interventional Vascular Medicine,
Chairman of the MAB and a Fairview
Riverside Medical Center and
Clinical Founder of the Company Associate
Professor of Radiology, University of
Minnesota Hospitals
Flavio Castaneda, M.D. Clinical Associate Professor of Radiology
and Surgery, and Radiology Research
Director, University of Illinois College of
Medicine at Peoria
Bart Dolmatch, M.D. Section Head, Vascular and Interventional
Radiology, The Cleveland Clinic Foundation
Barry Katzen, M.D. Medical Director, Miami Vascular Institute,
and Clinical Professor of Radiology,
University of Miami School of Medicine
Thomas O. McNamara, M.D. Professor of Radiological Sciences, UCLA
School of Medicine, Vascular Interventional
Radiology Section, UCLA Medical Center for
the Health Sciences
Mark Mewissen, M.D. Associate Professor of Radiology, Director
of Vascular/Interventional Radiology,
Medical College of Wisconsin, Froedtert
Memorial Lutheran Hospital
John Perl II, M.D. Section of Neuroradiology, The Cleveland
Clinic Foundation
Cass Pinkerton, M.D. Senior Consultant, Interventional
Cardiology, Nasser, Smith & Pinkerton
Cardiology
Don F. Schomer, M.D. Assistant Professor of Radiology, The
University of Texas, M.D. Anderson Cancer
Center, Diagnostic Radiology
Donald Schwarten, M.D. Director of Interventional Radiology, St.
Vincent's Hospital
Tony Smith, M.D. Professor of Radiology and Director of
Interventional Neuro and Peripheral Vascular
Radiology, Duke University Medical Center
Sidney Wallace, M.D. Professor Emeritus, Deputy Division Head for
Research, Division of Diagnostic Imaging,
The University of Texas, M.D. Anderson
Cancer Center
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All MAB members have entered into consulting agreements with the
Company. These agreements generally provide that all inventions conceived by
such consultants in the course of rendering service to the Company are the
exclusive property of the Company. These agreements further provide that
performance of such agreements will not conflict with any individual
consultant's obligation to maintain the secrecy of confidential information of
any third parties and that all confidential information developed or made known
to such consultants by the Company during the course of such relationships with
the Company is to be kept confidential and not disclosed to third parties.
Except for Dr. Cragg, who receives compensation and holds a significant
number of shares of the Company's Common Stock, most MAB members have been
granted options to purchase shares of the Company's Common Stock for their
services and are reimbursed for reasonable expenses, but receive no other
compensation. All of the members of the MAB are employed by employers other than
the Company and may have commitments to, or consulting or advisory agreements
with, other entities, including potential competitors of the Company, that may
limit their availability to the Company. Although these advisors may contribute
significantly to the affairs of the Company, none, other than Dr. Cragg, is
expected to devote more than a small portion of his time to the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to aggressively protect its proprietary position
by, among other things, filing U.S. and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business. The Company's strategy includes extending the patent protection of
its licensed technology by filing procedure-specific method patents wherever
possible for the use of the Company's products in new clinical applications.
As of March 1, 1999, the Company held twenty-four issued U.S. patents,
one issued foreign patent and has twenty-nine U.S. and twenty-five foreign
patent applications pending. The Company's issued U.S. patents cover technology
underlying the LES (including both liquid embolic biomaterials as well as access
and delivery micro 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, coatings,
non-vascular liquid embolic products, infusion catheters, infusion wires, and
the Thrombolytic Brush.
Although the Company aggressively works to protect its technology, no
assurance can be given that any patents from pending patent applications or from
any future patent applications will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by the Company. Furthermore, there can be no
assurance that others have not developed or will not develop similar products,
duplicate any of the Company's products or design around the Company's patents.
In addition, others may hold or receive patents or file patent applications
which contain claims having a scope that covers products developed by the
Company.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and many
companies in the industry have employed intellectual property litigation to gain
a competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement litigation or an interference proceeding
declared by the U.S. Patent and Trademark Office ("PTO") to determine the
priority of inventions. The defense and prosecution of patent suits, PTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect the Company's trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others.
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Any litigation or interference proceedings involving the Company would
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
operating results and financial condition.
In addition to patents, the Company relies on trade secrets and
proprietary know-how to compete, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These
agreements generally provide that all confidential information developed or made
known to individuals by the Company during the course of the relationship with
the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
GOVERNMENT REGULATION
United States
The research, development, manufacture, labeling, distribution and
marketing of the Company's products are subject to extensive and rigorous
regulation by the FDA and, to varying degrees, by state and foreign regulatory
agencies. The Company's products are regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act (the "FDC
Act") and require clearance or approval by the FDA prior to commercialization.
In addition, significant changes or modifications to medical devices also are
subject to regulatory review and clearance or approval. Under the FDC Act, the
FDA regulates the research, clinical testing, manufacturing, safety, labeling,
storage, record keeping, advertising, distribution, sale and promotion of
medical devices in the United States. The testing for, and preparation and
subsequent review of, applications by the FDA and foreign regulatory authorities
is expensive, lengthy and uncertain. Noncompliance with applicable requirements
can result in, among other things, warning letters, proceedings to detain
imported products, fines, injunctions, civil and criminal penalties against the
Company, its officers and its employees, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals
and a recommendation by the FDA that the Company not be permitted to enter into
government contracts.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and efficacy. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to QSRs) and Class II devices are subject
to general and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval ("PMA") by the FDA to
ensure their safety and efficacy (for example, life-sustaining, life-supporting
and implantable devices, or new devices that have not been found substantially
equivalent to legally marketed Class I, Class II or pre-amendments Class III
devices).
The FDA also has the authority to require clinical testing of certain
medical devices as part of the clearance or approval process. If clinical
testing of a device is required and if the device presents a "significant risk,"
an IDE application must be approved prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA,
clinical trials may begin at a specific number of investigational sites with a
maximum number of patients, as approved by the agency. Sponsors of clinical
trials are permitted to sell those devices distributed in the course of the
study provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. The clinical trials must be conducted under
the auspices of investigational sites' institutional review boards pursuant to
FDA regulations.
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Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) submission or approval of a PMA application. If a medical device
manufacturer or distributor can establish, among other things, that a device is
"substantially equivalent" in intended use and technological characteristics to
a legally marketed Class I or Class II medical device, or to a pre-amendments
Class III medical device for which the FDA has not required a PMA, the
manufacturer or distributor may seek clearance from the FDA to market the device
by filing a 510(k). The 510(k) submission must establish to the satisfaction of
the FDA the claim of substantial equivalence to the predicate device. In recent
years, the FDA has been requiring a more rigorous demonstration of substantial
equivalence, including the requirement for IDE clinical trials.
Following submission of the 510(k), the manufacturer or distributor may
not place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information, including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA. Such a request for additional
information including clinical trials or a determination that the device is not
substantially equivalent would delay market introduction of the products that
are the subject of the 510(k). It generally takes four to twelve months from the
date of submission to obtain 510(k) clearance, although it may take longer, in
particular if clinical trials are required.
If the manufacturer or distributor cannot establish that a proposed
device is substantially equivalent to a legally marketed Class I or II predicate
device, or to a pre-amendments Class III medical device for which the FDA has
not required a PMA, the manufacturer or distributor must seek premarket approval
of the proposed device through submission of a PMA application. A PMA
application must be supported by extensive data, including laboratory,
preclinical and clinical trial data to prove the safety and efficacy of the
device, as well as extensive manufacturing information. If the FDA determines,
upon initial review, that a submitted PMA application is sufficiently complete
to permit substantive review, the FDA will accept the PMA application for
filing. FDA review of a PMA application generally takes approximately two years
or more from the date of acceptance for filing, but review times vary depending
upon FDA resources and workload demands and the complexity of PMA submissions.
There can be no assurance that the FDA will review and approve the PMA in a
timely manner, if at all. Failure to obtain PMA approvals could have a material
adverse effect on the Company's business, operating results and financial
condition. Additionally, as one of the conditions for approval, the FDA will
inspect the manufacturing establishment at which the subject device will be
manufactured to determine whether the quality control and manufacturing
procedures conform to QSRs. If granted, the PMA approval may include significant
limitations on the indicated uses for which a product may be marketed.
As of March 15, 1999, the Company had received nine 510(k) clearances
for certain therapeutic indications of its micro catheters, guidewires and
peripheral vascular blood clot therapy products, which cover over 70 products
offered for market. The Company has made modifications which affect a number of
its products covered under these 510(k) clearances, which modifications, the
Company believes, do not affect the safety and efficacy of the products and
thus, under FDA guidelines, do not require new 510(k) notices. There can be no
assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.
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The use of certain materials may require that the device be evaluated as
a drug rather than as a device, and thus the FDA's investigational new drug
("IND") and new drug application ("NDA") regulations would be applicable to the
clinical study and commercialization of the product. Otherwise the product will
be treated as a medical device. The steps required before a drug may be marketed
in the United States include preclinical and laboratory tests, the submission to
the FDA of an application for an IND which must become effective before clinical
trials may commence, adequate and well controlled clinical trials to establish
the safety and efficacy of the drug, the submission to the FDA of an NDA, and
FDA approval of the NDA prior to any commercial sale or shipment of the product.
In January 1996, the Company met with representatives of both the drug and
device divisions of the FDA to discuss their respective new product approval
requirements. Based on the information presented by the Company regarding the
material composition of the LES, the Company believes the LES would be regulated
as a device. There can be no assurance, however, that upon more detailed review
of the LES, the FDA will not at a later date determine that the LES should be
regulated as a drug. Such a change could significantly delay the commercial
availability of the LES and have a material adverse effect on the Company's
business, operating results and financial condition.
There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMA or NDA approvals to market its products for
the intended uses on a timely basis, if at all, and delays in receipt of or
failure to receive such approvals, the loss of previously received approvals, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the State of California
Department of Health Services ("CDHS") and to list its products with the FDA. As
such, the Company will be inspected by both the FDA and CDHS for compliance with
QSR and other applicable regulations. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner. The
Company has not yet been inspected by the FDA for QSR compliance. Pursuant to
the maintenance of the Company's California medical device manufacturing
license, the Company's new facility in Irvine, California was inspected by the
CDHS in January 1999. No significant inspection observations were received.
There can be no assurance, however, that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business.
The Company is required to provide information to the FDA on death or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. In addition, the FDA
strictly prohibits the marketing of approved devices for uses other than those
specifically cleared for marketing by the FDA. If the FDA believes that a
company is not in compliance with the law or regulations, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against a company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, operating
results and financial condition.
Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy generally prohibits the marketing of approved medical devices
for unapproved uses. The Company is also subject to regulation by the
Occupational Safety and Health Administration and by other government entities.
Regulations regarding the manufacture and sale of the Company's products
are subject to change. The Company cannot predict what impact, if any, such
changes might have on its business, operating results and financial condition.
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International
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing a
product in a foreign country may differ significantly from FDA requirements.
Some countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in more rapid product
clearance in certain countries than in others.
The Company or its distributors have received registrations and
approvals to market its peripheral vascular blood clot therapy products, and
certain of its neuro products, in most parts of Europe, Scandinavia, Latin
America, New Zealand and Australia.
The European Union has promulgated rules which require that medical
products receive the right to affix the CE Mark, an international symbol of
adherence to quality assurance standards. ISO 9001/EN 46001 certification is one
of the CE Mark certification requirements. In order to obtain the right to affix
the CE Mark to its products, the Company needs to obtain certification that its
processes meet the ISO 9001/EN 46001 quality standards and applicable medical
device directives promulgated by the European Union. Such certification has been
obtained by the Company with respect to its peripheral vascular blood clot
therapy products, micro catheters and guidewires, and, thus, the Company
currently has the right to affix the CE Mark to such products. However, this
certification is reviewed on an annual basis, and there can be no assurance that
such right to affix the CE Mark will be retained by the Company in the future.
In 1999, the Company anticipates obtaining certification with respect to its
balloon system, as well as certain applications of the 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.
Exports of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted without FDA export approval provided
certain requirements are met. Unapproved products subject to the PMA
requirements must receive prior FDA export approval unless they are approved for
use by any member country of the European Union and certain other countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa, in which case they can be exported to any country without prior FDA
approval. To obtain FDA export approval, when it is required, certain
requirements must be met and information must be provided to the FDA, including
documentation demonstrating that the product is approved for import into the
country to which it is to be exported and, in some instances, safety data from
animal or human studies. There can be no assurance that the Company will receive
FDA export approval when such approval is necessary, or that countries to which
the devices are to be exported will approve the devices for import. Failure of
the Company to receive import approval from foreign countries, or to obtain
Certificates for Products for Export, meet FDA's export requirements, or obtain
FDA export approval when required to do so, could have a material adverse effect
on the Company's business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, catheterization laboratories,
physicians and other healthcare providers that purchase medical devices
generally rely on third-party payors, such as private health insurance plans, to
reimburse all or part of the costs associated with the treatment of patients.
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The Company's success will depend upon, among other things, its
customer's ability to obtain satisfactory reimbursement from healthcare payors
for its products. Reimbursement in the United States for the Company's
peripheral blood clot therapy products is currently available under existing
procedure codes from most third-party payors, including most major private
health care insurance plans, Medicare and Medicaid. The Company believes that
procedures using its neuro vascular products may be reimbursed in the United
States under existing procedure codes should such products receive FDA clearance
or approval, of which there is no assurance. However, third-party reimbursement
for these products will be dependent upon decisions by individual health
maintenance organizations, private insurers and other payors, and there can be
no assurance that such procedure codes will remain available or that the
reimbursement under these codes will be adequate. Given the efforts to control
and decrease health care costs in recent years, there can be no assurance that
any reimbursement will be sufficient to permit the Company to achieve or
maintain profitability.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government-managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Large-scale market acceptance of the Company's
thrombolytic infusion and other products will depend on the availability and
level of reimbursement in international markets targeted by the Company. The
Company has been informed by its international distributors that its peripheral
blood clot therapy products have been approved for reimbursement in countries in
which the Company markets such products. The Company does not expect that
third-party reimbursement will be available internationally for use of its neuro
vascular products unless and until required regulatory approvals are obtained,
of which there is no assurance. Obtaining reimbursement approvals can require
12-18 months or longer. There can be no assurance that the Company will obtain
reimbursement in any country within a particular time, for a particular amount,
or at all. Failure to obtain such approvals could have a material adverse effect
on the Company's sales, business, operating results and financial condition.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of its products will be required to obtain
reimbursement. Availability of reimbursement will depend on the clinical
efficacy and cost of the Company's products. There can be no assurance that
reimbursement for the Company's products will be available in the United States
or in international markets under either government or private reimbursement
systems, or that physicians will support and advocate reimbursement for use of
the Company's systems for all uses intended by the Company. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products would have a material adverse effect
on the Company's business, operating results and financial condition.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves an inherent risk of exposure to product
liability claims. The risk of such claims has increased in light of a U.S.
Supreme Court decision in 1996 concluding that the FDA regulatory framework does
not necessarily preempt personal injury actions against medical device
manufacturers. Although the Company has not experienced any product liability
claims to date, there can be no assurance that the Company will be able to avoid
significant product liability claims and potential related adverse publicity.
The Company maintains product liability insurance with coverage limits of $10
million per occurrence and an annual aggregate maximum of $10 million, which the
Company believes is comparable to that maintained by other companies of similar
size serving similar markets. However, there can be no assurance that product
liability claims will not exceed such insurance coverage limits, which could
have a material adverse effect on the Company, or that such insurance will
continue to be available on commercially reasonable terms, or at all.
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CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE
ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS OF THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION ARE UNCERTAIN AND MAY BE IMPACTED BY
THE FOLLOWING FACTORS, AMONG OTHERS, WHICH MAY CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENT. BECAUSE
OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION, THE COMPANY'S PAST PERFORMANCE SHOULD NOT BE
CONSIDERED AN INDICATOR OF FUTURE PERFORMANCE AND INVESTORS SHOULD NOT USE
HISTORICAL RESULTS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.
Early Stage of Development. The Company has only recently commercially
introduced a number of products. Several of its key products are in the early
stage of development and the Liquid Embolic System ("LES") has only recently
entered full clinical trials. Commercialization of the Company's products will
depend on a number of factors, including the Company's ability to demonstrate
the safety and efficacy of such products in the clinical setting. There can be
no assurance that the Company's products will be safe and effective in clinical
trials or will ultimately be cleared for marketing by U.S. or foreign regulatory
authorities. Failure to develop safe and effective products, which are approved
for sale on a timely basis would have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Government
Regulation" and "--Products."
Uncertainty of Market Acceptance. Even if the Company is successful in
developing 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 LES and related neuro products
will require the Company to satisfactorily address the needs of potential
customers. The target customers for the Company's products are interventional
radiologists and interventional neuroradiologists. However, there can be no
assurance that acceptance of the Company's products by interventional
radiologists and interventional neuroradiologists will translate into sales. In
addition, no assurance can be given that the Company's market share for its
existing products will grow or that its products which have yet to be introduced
will be accepted in the market. If the Company is unable to gain market
acceptance of its current and future products, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Business--Products," "--Sales and Marketing" and "Management's Discussion and
Analysis or Plan of Operation."
Rapid Technological Change; New Product Development. The markets for the
Company's products are characterized by rapidly changing technologies and new
product introductions and enhancements. In addition to the risks associated with
market acceptance of the Company's products, the Company's success will depend
to a significant extent upon its ability to enhance and expand the utility of
its products and to develop and introduce innovative new products that gain
market acceptance. Moreover, the Company may encounter technical problems in
connection with its product development that could delay introduction of new
products or product enhancements. There can be no assurance that new
technologies, products or drug therapies developed by others will not reduce the
demand for the Company's products. The Company maintains research and
development programs to continually improve its product offerings, including
adding interventional devices. There can be no assurance however that such
efforts will be successful or that other companies will not develop and
commercialize products based on new technologies that are superior in either
performance or cost-effectiveness to the Company's products. See
"Business--Research and Development," "--Background" and "--Sales and
Marketing."
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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. See "Business--Competition."
Limited Operating History; Absence of Profitability. The Company was
incorporated in 1993. To date, the Company's business has generated limited
product sales. From its inception through December 31, 1998, the Company
incurred cumulative losses of approximately $27 million. The Company expects to
incur additional losses as it expands its research and development,
manufacturing and marketing efforts. No assurance can be given that the Company
will achieve significant sales of its products or that such sales will lead to
profitability. There can be no assurance that the Company will not encounter
substantial delays and unexpected expenses related to the introduction of its
current and future products, or the Company's research and development,
manufacturing and marketing efforts. Such delays or expenses could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Products" and "Management's Discussion and
Analysis or Plan of Operation."
Possible Need for Additional Funds; Uncertainty of Additional Financing.
The Company's operations to date have consumed substantial amounts of cash, and
the Company expects its capital and operating expenditures to increase. The
Company believes that its existing capital resources and anticipated cash flow
from planned operations, together with the net proceeds from (a) its initial
public offering, (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, and (d) a convertible subordinated note agreement and
distribution agreement with Century entered into in September 1998, and the
interest earned thereon, should be adequate to satisfy its capital requirements
into 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. Under the terms of a credit agreement with Century,
the Company may be entitled to borrow an additional $2 million should it achieve
a milestone, defined in the agreement, before September 30, 1999, however, there
is no assurance that the Company will be able to achieve this milestone, or,
should the Company achieve this milestone, that the resulting proceeds would
satisfy the Company's then-current working capital requirements. 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. See "Management's
Discussion and Analysis or Plan of Operation--Liquidity and Capital Resources"
and "Business."
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<PAGE> 22
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 March
1, 1999, the Company held twenty-four issued U.S. patents, one issued foreign
patent and has twenty-nine U.S. and twenty-five foreign patent applications
pending. The Company's issued U.S. patents cover technology underlying the 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, coatings, 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 one issued and
pending patent. One of the patents used by the Company is currently licensed by
the Company from Andrew Cragg, M.D. There can be no assurance that issued
patents will provide significant proprietary protection, that pending patents
will be issued, or that products incorporating the technology in issued patents
or pending applications will be free of challenge from competitors. There also
can be no assurance that patents belonging to competitors will not require the
Company to alter its technology and products, pay licensing fees or cease to
market or develop its current or future technology and products. The Company
also relies on trade secrets to protect its proprietary technology, and no
assurance can be given that others will not independently develop or otherwise
acquire equivalent technology or that the Company can maintain such technology
as trade secrets. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as the laws of the United
States. The failure of the Company to protect its intellectual property rights
could have a material adverse effect on its business, operating results and
financial condition. See "Business--Patents and Proprietary Rights."
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. There can
be no assurance that infringement, invalidity, right to use or ownership claims
by third parties will not be asserted against the Company in the future.
Although patent and intellectual property disputes in the medical device
industry have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, operating
results and financial condition. In addition, should the Company decide to
litigate such claims, such litigation could be expensive and time consuming,
could divert management's attention from other matters and could have a material
adverse effect on the Company's business, operating results and financial
condition, regardless of the outcome of the litigation.
Limited Marketing Experience; Lack of Distribution. The Company's
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. In August
1998, the Company executed a distribution agreement with Abbott to provide for
distribution of the Company's peripheral vascular 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 Guidant will be able to successfully
market the Company's products, that the Company will be able to successfully
transition marketing and sales responsibilities to Abbott, or that Abbott will
be successful in marketing 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 six 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. See "Business--Sales and Marketing."
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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. Such development and
commercialization requires the additional commitment of capital resources for
facilities, tooling and equipment and for leasehold improvements. The Company
expects that the expansion of its manufacturing capacity will be achieved
utilizing the increased space in its new leased facility, improved efficiencies,
automation and acquisition of additional tooling and equipment. Any delay or
inability in expanding the Company's manufacturing capacity, or obtaining the
commitment of such resources could materially adversely affect the Company's
manufacturing ability, business, operating results and financial condition. See
"Business--Sales and Marketing" and "--Manufacturing."
Government Regulation. The development, testing, manufacturing and
marketing of 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 LES 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 the LES, the Company believes
the LES would be regulated as a device. There can be no assurance, however, that
upon more detailed review of the LES, the FDA will not at a later date determine
that the LES should be regulated as a drug. Such a change could significantly
delay the commercial availability of the LES and have a material adverse effect
on the Company's business, operating results and financial condition. Delays in
receipt of, or failure to receive, regulatory approvals or clearances to market
such products, or loss of previously received approvals or clearances, would
materially adversely affect the marketing of such products and the Company's
business, operating results and financial condition.
In the European Union, the Company will be required to 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 and
guidewire, however, there can be no assurance that the Company will be able to
maintain such certifications. In 1999, the Company anticipates obtaining
certification with respect to its balloon system, as well as certain application
of the 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. 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.
23
<PAGE> 24
Commercial distribution and clinical trials in most foreign countries
also are subject to varying government regulations which may delay or restrict
marketing of the Company's products. Any inability or delay in obtaining
approvals would materially adversely affect the Company's business, operating
results and financial condition.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed Quality
System Requirements, which include development, testing, control and
documentation requirements. The Company's manufacturing processes also are
subject to stringent federal, state and local regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. Although the Company believes that it has complied in all material
respects with such laws and regulations, the Company is subject to periodic
inspection to ensure its compliance with such laws and regulations. There can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations, or
that the Company will not be required to cease operations in the event of its
continued failure to effect compliance. See "Business--Government Regulation."
Risk of Product Liability Claims. The nature of the Company's business
exposes it to risk from product liability claims. The risk of such claims has
increased in light of a U.S. Supreme Court decision in 1996 concluding that the
FDA regulatory framework does not necessarily preempt personal injury actions
against medical device manufacturers. The Company currently maintains product
liability insurance for its products, with limits of $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. See "Business--Product Liability and Insurance."
Dependence on Single Source Suppliers; Independent Contract
Manufacturers. The Company purchases certain components used in its products and
receives certain services with respect to its products from third parties. The
Company's dependence on third-party suppliers involves several risks, including
limited control over pricing, availability, quality and delivery schedules. Any
delays in delivery of such components or provision of such services or shortages
of such components could cause delays in the shipment of the Company's products,
which could cause the Company's business, operating results and financial
condition to be adversely affected. The Company's single-source components are
generally acquired pursuant to purchase orders placed in the ordinary course of
business, and the Company has no guaranteed supply arrangements with any of its
single-source suppliers. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could have a
material adverse effect on its business, operating results and financial
condition. There can be no assurance that the Company will not experience
quality control problems, supply shortages or price increases with respect to
one or more of these components in the future. The establishment of additional
or replacement suppliers for certain of these components may delay accessibility
of such components as the Company qualifies such suppliers. Any quality control
problems, interruptions in supply or component price increases with respect to
one or more components could have a material adverse effect on the Company's
business, operating results and financial condition.
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<PAGE> 25
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 the timing of the establishment of such capabilities or whether
such a transfer of function from third parties will be successfully completed.
See "Business--Manufacturing."
Dependence Upon Key Personnel. The Company is dependent to a significant
extent upon the contributions, experience and expertise of its founders, certain
members of its management team and key consultants. The Company maintains a
key-man life insurance policy in the amount of $1 million on the life of George
Wallace, the Company's President and Chief Executive Officer, however, there can
be no assurance that the Company's insurance is adequate. In addition, the
Company's success will depend upon its ability to attract and retain additional
highly qualified management, sales, technical, clinical and consulting
personnel. The loss of the services of any of such key personnel or the
inability to attract and retain such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) Of the Exchange Act."
Third-Party Reimbursement. In the United States, health care providers
such as hospitals and physicians that purchase medical devices generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic procedures. With the implementation of Medicare's Prospective Payment
System for hospital inpatient care (Diagnosis Related Groups or "DRGs") in the
1980s, public and private payors began to reimburse providers on a fixed payment
schedule for patients depending on the nature and severity of the illness. Many
tests and procedures that would have been performed under cost-plus
reimbursement formulas are subject to scrutiny and must be justified in terms of
their impact on patient outcomes. As a result, the incentives are now to conduct
only those tests that will optimize cost-effective care.
The Company could be materially adversely affected by changes in
reimbursement policies of governmental (both domestic and international) or
private healthcare payors to the extent any such changes affect reimbursement
for therapeutic or diagnostic procedures in which the Company's products are
used. Adverse changes in governmental and private third party payors' policies
toward reimbursement for such procedures would have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business--Third-Party Reimbursement."
Risks Associated with International Sales. To date, the Company has not
derived material amounts of revenue from international sales. The Company
believes that its future performance will be dependent in part upon its ability
to increase international sales. Although the perceived demand for certain
products may be lower outside the United States, the Company intends to continue
to expand its international operations and to enter additional international
markets, which will require significant management attention and financial
resources. There can be no assurance, however, that the Company will be able to
successfully expand its international sales. The Company's success in
international markets will depend on its ability to establish and maintain
agreements with suitable distributors, or establish a direct sales presence.
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<PAGE> 26
Furthermore, international sales in general are subject to inherent
risks, including unexpected changes in regulatory requirements, fluctuating
exchange rates, difficulties in staffing and managing foreign sales and support
operations, additional working capital requirements, customs, duties, tariff
regulations, export license requirements, political and economic instability,
potentially limited intellectual property protection and difficulties with
distributors. In addition, sales and distribution of the Company's products
outside the United States are subject to extensive foreign government
regulation. The Company has in the past avoided losses due to fluctuating
exchange rates associated with international sales by selling its products in
U.S. dollars; however, the Company expects to sell products in selected markets
in local currency and thus be subject to currency exchange risks in association
with such sales. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, operating results and financial
condition. See "Business--Government Regulation--International" and
"Management's Discussion and Analysis or Plan of Operation."
Large-scale market acceptance of the Company's products will depend on
the availability and level of reimbursement in international markets targeted by
the Company. Reimbursement systems in international markets vary significantly
by country, and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Obtaining reimbursement approvals in each country
can require 12-18 months or longer.
Anti-Takeover Provisions. The Company's Certificate of Incorporation
provides for 5,000,000 authorized shares of Preferred Stock, the rights,
preferences, qualifications, limitations and restrictions of which may be fixed
by the Board of Directors without any further vote or action by the
stockholders. In addition, the Company's stock option plans provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could materially adversely affect the price of the Company's Common
Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may materially adversely affect the market price of the Company's
Common Stock. In addition, the market price of the shares of Common Stock is
likely to be highly volatile. Factors such as fluctuations in the Company's
results of operations, failure of such results of operations to meet the
expectations of public market analysts and investors, timing and announcements
of technological innovations or new products by the Company or its competitors,
FDA and foreign regulatory actions, developments with respect to patents and
proprietary rights, timing and announcements of developments, including clinical
trials related to the Company's products, public concern as to the safety of
technology and products developed by the Company or others, changes in health
care policy in the United States and internationally, changes in stock market
analyst recommendations regarding the Company, the medical device industry
generally and general market conditions may have a material adverse effect on
the market price of the Common Stock. In addition, it is likely that during a
future quarterly period, the Company's results of operations will fail to meet
the expectations of stock market analysts and investors and, in such event, the
Company's stock price could be materially and adversely affected.
Risks Associated with Year 2000 Issue. In less than a year, 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.
26
<PAGE> 27
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 to date 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 $100,000. 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 formed an internal task force to undertake 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 manufacturer of the financial
system software currently utilized by the Company and from the manufacturers of
the enterprise resource planning software and the other software systems the
Company anticipates installing 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 by the fourth
quarter 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's plan is to install systems, as necessary, that are Year 2000
compliant. Also in connection with the move to the new facility, the Company has
taken steps to obtain 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.
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.
EMPLOYEES
At February 25, 1999, the Company had 123 employees, all of whom were
employed on a full-time basis.
ITEM 2. PROPERTIES
The Company recently moved into an approximately 43,000 square feet
facility which has all new tenant improvements and which is located within a
multi-tenant building in Irvine, California. The facility is subject to a lease
which expires in September 2003, with two three-year renewal options. The
Company believes that this space is adequate for its near-term needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 18, 1997, the Common Stock of Micro Therapeutics, Inc.
("MTI" or the "Company") has traded on the Nasdaq National Market under the
symbol "MTIX." The Company's Common Stock was not traded on the Nasdaq National
Market, or any other exchange, prior to that date.
High and low sales prices for the Company's Common Stock during the
years ended December 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Q1 1997 (February 18 through March 31) $9.1250 $6.0000
Q2 1997 (April 1 through June 30) 7.3125 4.0000
Q3 1997 (July 1 through September 30) 5.6250 2.5000
Q4 1997 (October 1 through December 31) 8.7500 4.0000
Q1 1998 (January 1 through March 31) 11.3750 6.2500
Q2 1998 (April 1 through June 30) 11.6875 8.5000
Q3 1998 (July 1 through September 30) 11.2500 5.6875
Q4 1998 (October 1 through December 31) $12.4375 $6.1250
</TABLE>
As of December 31, 1998, there were 58 stockholders of record of the
Company's Common Stock. The Company estimates that there are currently over 950
beneficial owners of its Common Stock. All Preferred Stock outstanding prior to
the Company's initial public offering ("IPO") of its Common Stock on February
14, 1997 was converted to Common Stock as a result of the IPO. Accordingly,
there is no Preferred Stock outstanding. The Company has not paid any dividends
on its Common Stock since its inception and does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future. It is
currently anticipated that earnings, if any, will be used to finance the
development and expansion of the Company's business.
RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company during the
past three years, involving sales of the Company's securities that were not
registered under the Securities Act of 1993 (the "Securities Act"):
(1) On November 17, 1997, the Company sold to Guidant a 5% Convertible
Subordinated Note, due October 31, 2002, in the aggregate principal amount of
$5,000,000. The principal balance of the note is convertible at any time at
Guidant's option, in $100,000 increments, into shares of the Company's Common
Stock at a conversion price of $10.25 per share, which conversion price is
subject to adjustment in certain instances.
(2) On May 12, 1998, the Company sold to Guidant (a) an 8% Promissory
Note, due October 31, 2002, in the aggregate principal amount of $2,000,000, and
(b) 47,637 shares of the Company's Common Stock in the aggregate amount of
$500,000.
(3) On August 12, 1998, the Company sold to Abbott a 5% Convertible
Subordinated Note, due August 19, 2003, in the aggregate principal amount of
$5,000,000. The principal balance of the note is convertible at any time at
Abbott's option, into shares of the Company's Common Stock at a conversion price
of $13.00 per share, which conversion price is subject to adjustment in certain
circumstances.
(4) On November 9, 1998, the Company sold to Abbott a 5% Convertible
Credit Facility Note, due November 9, 2003, in the aggregate principal amount of
$5,000,000. The principal balance of the note is convertible at the Company's
option, subject to certain restrictions, into shares of the Company's Common
Stock at a conversion price of $15.00 per share, which conversion price is
subject to adjustment in certain circumstances.
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<PAGE> 29
(5) On September 23, 1998 the Company sold to Century a 5% Convertible
Subordinated Note, due September 30, 2003, in the aggregate principal amount of
$3,000,000. The principal balance of the note is convertible at any time at
Century's option, into shares of the Company's Common Stock at a conversion
price of $15.00 per share, which conversion price is subject to adjustment in
certain circumstances.
Exemption from the registration requirements of the Securities Act for
the sales of the securities described above was claimed under Section 4(2) of
the Securities Act, among others, on the basis that such transactions did not
involve any public offering and the purchasers were sophisticated with access to
the kind of information registration would provide. No underwriting or broker's
commissions were paid in connection with the foregoing transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Annual
Report on Form 10-KSB. This Annual Report on Form 10-KSB contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Business - Certain Factors That
May Affect the Company's Business and Future Results."
OVERVIEW
Since its inception in June 1993, MTI has been primarily engaged in the
design, development and marketing of minimally invasive devices for treatment of
vascular disease. The Company has a limited history of operations and has
experienced significant operating losses since inception. Operating losses are
expected to continue at least into fiscal 2000 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, which received FDA approval in August 1997 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 of the products mentioned above, and similar
products, to provide the majority of the Company's revenues at least through
1999.
The Company currently sells its peripheral vascular products in Europe
through a limited number of distributors. In September 1998, the Company entered
into a distribution agreement with 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 the Company expects to occur in
early 1999. In November 1997, the Company signed an agreement with 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. To date, no revenues have been received under
the Guidant arrangement and no significant such revenues are expected until
applications of the Company's EMBOLYX Liquid Embolic System receive CE Mark
certification. The Company does not expect that the first such certification
will be received before mid-1999.
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.
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<PAGE> 30
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 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 Fiscal Years Ended December 31, 1997 and December 31, 1998
Net sales for the year ended December 31, 1998 increased 57% to
$4,249,381 as compared to $2,714,047 for 1997. While almost all the Company's
peripheral vascular therapy product lines experienced increases in sales from
1997 to 1998, the largest such increase was attributable to sales of the Cragg
Thrombolytic Brush and the Castaneda Over The Wire Brush, which were introduced
in August 1997 and February 1998, respectively. A portion of third-quarter 1998
sales, and a substantial portion of fourth quarter 1998 sales were made to
Abbott under the terms of an exclusive distribution agreement with Abbott
entered into August 1998, discussed below, which resulted in lower average
selling prices per unit relative to all of 1997, during which sales were made
directly by MTI to end-user customers. Sales to Abbott under this agreement
accounted for 25% of total sales for the year ended December 31, 1998.
International sales represented 3% of total sales for each of the years ended
December 31, 1998 and 1997.
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 will receive an
initial purchase price payment from Abbott, as provided in the agreement. Abbott
will provide additional purchase price payments to the Company based upon
Abbott's net sales, as defined in the agreement. The Company anticipates unit
volume and sales related to its U.S. peripheral vascular products to increase
under the agreement with Abbott, however, there can be no assurance as to such
increases occurring. The Company could experience a decrease in sales for some
period during the initial year of the distribution agreement due to (a)
transition issues that may occur in transferring the distribution function to
Abbott, (b) lower unit prices the Company will receive from Abbott under the
agreement, relative to the unit prices the Company has been obtaining from
end-user customers, and (c) a lag in the timing of revenue recognition with
respect to the additional purchase price payments to be received from Abbott
based upon Abbott's sales, relative to the time at which product was originally
shipped by the Company to Abbott. This decrease could exist until such time as
the expected increase in unit volume, should it occur, combined with the
aforementioned additional purchase price payments, offsets the effect of the
factors discussed above.
Cost of sales increased to $2,363,110 for the year ended December 31,
1998 from $1,948,188 for 1997, and decreased, as a percentage of sales, from 72%
in 1997 to 56% in 1998. The dollar increase is attributable to the increase in
sales volume. The decrease in the cost of sales percentage is due to the
beneficial aspects of the increase in sales volume, and to increased
efficiencies achieved in manufacturing, which allowed the Company to redeploy
certain individuals to research and development functions starting primarily in
the fourth quarter of 1997. The Company expects that products covered by the
distribution agreement with Abbott will reflect higher cost of sales as a
percentage of sales, relative to such percentages experienced by the Company
prior to entering into the agreement with Abbott, due to the lower unit prices
the Company will receive and the lag in the timing of revenue recognition with
respect to the additional purchase price payments to be received from Abbott
based upon Abbott's sales, both as discussed above.
30
<PAGE> 31
Research and development expenses, including regulatory and clinical
expenses, increased 19% from $4,273,656 for 1997 to $5,080,214 for 1998. This
increase was primarily attributable to increases in the number of employees
resulting from the aforementioned redeployment of personnel, the hiring of
additional personnel in connection with Company's increased research and
development activities, related relocation and recruiting expenses, increased
expenditures related to development of neuro vascular products and a research
grant. The Company expects to continue to increase research and development
costs for such activities as clinical trials of EMBOLYX and other applications
in the neuro and peripheral areas.
Selling, general and administrative expenses increased 46% from
$4,263,790 in 1997 to $6,212,103 in 1998. This increase was primarily
attributable to sales incentives related to increased revenues, the mid-1997
addition of an Executive Vice President of Marketing and Sales, marketing
studies commissioned by the Company, expenses related to the Company's public
reporting responsibilities, costs related to a contemplated transaction that was
not pursued to finalization, additional employees and related compensation,
relocation and recruiting expenses, and increases in other expenses that were
commensurate with the increased activity level of the Company. The closure of
the Company's European office in the fourth quarter of 1997 resulted in expenses
aggregating $275,000 that were incurred and recognized in 1997, that did not
recur in 1998.
Facility moving costs incurred in the fourth quarter of 1998 amounted to
$292,248 and related to the Company's move to its new facility in Irvine,
California. Such amount included direct costs, as well as accruals for such
items as the write-off of leasehold improvements and the remaining rental
payments related to the former facility.
Other income declined from $529,273 in 1997 to a net expense of $207,326
in 1998, due to the interest expense related to the notes payable that
originated in the fourth quarter of 1997, and the second and third quarters of
1998, and to the inclusion of non-recurring income in 1997 of $167,000, related
to the sale of common stock of a privately held company in which the Company had
held a minority interest. It is expected that interest expense, net of interest
income, will increase due to the continuing interest expense to be incurred on
notes payable, as discussed above, and to the expected decreases in cash, cash
equivalents and short term investments as such resources are utilized in
operations.
As a result of the items discussed above, the Company incurred a net
loss of $9.9 million for the year ended December 31, 1998 compared to $7.2
million for 1997.
Comparison of Fiscal Years Ended December 31, 1996 and December 31, 1997
Net sales for the year ended December 31, 1997 increased to $2.7 million
from $1.4 million for the year ended December 31, 1996. The increase was the
result of growth in sales of its peripheral infusion product lines and the
introduction in 1997 of the Cragg Thrombolytic Brush. International sales
represented 4% and 3% of the total sales for the years ended December 31, 1996
and 1997, respectively.
Cost of sales increased to $1.9 million for the year ended December 31,
1997 from $1.6 million for the year ended December 31, 1996. This increase was
primarily attributable to the increase in sales. Cost of goods sold as a
percentage of sales was 72% in 1997 and 118% in 1996. This improvement reflected
the effects of a larger volume of sales over which overhead could be spread and
the implementation of improved manufacturing processes, which allowed the
Company to re-deploy certain individuals to research and development functions
primarily in the fourth quarter of 1997.
Research and development expenses, which include regulatory and clinical
expenses, increased to $4.3 million for the year ended December 31, 1997 from
$2.4 million for the year ended December 31, 1996. The increase was primarily
attributable to the establishment of new research and development programs, the
attendant increase in personnel related to such programs and increased
expenditures related to development of the Liquid Embolic System ("LES").
Selling, general and administrative expenses increased to $4.3 million
for the year ended December 31, 1997 from $3.1 million for the year ended
December 31, 1996. This increase was primarily attributable to the increased
sales volume and the related increase in sales and marketing personnel,
development of marketing programs and materials in support of new product
introductions and increased costs as a result of becoming a publicly-held
entity.
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<PAGE> 32
Net interest and other income, net, increased to $529,000 for the year
ended December 31, 1997 from $172,000 for the year ended December 31, 1996. This
difference was attributable to higher average cash balances in 1997 arising from
the proceeds received from the Company's initial public offering in February
1997, and the note agreement with Guidant in November 1997. In addition, the
Company recognized non-recurring income of $167,000 from the sale of a privately
held company in which the Company held a minority interest.
As a result of the items discussed above, the Company had a net loss of
$7.2 million for the year ended December 31, 1997 compared to $5.6 million for
the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $27 million at
December 31, 1998. 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 have a stated interest rate of 5% per annum. For
financial statement reporting purposes, this rate has been adjusted to reflect
an imputed market rate of interest as of the date of each of the notes. 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. Upon shipment of product by the
Company to Abbott, the Company will receive an initial purchase price payment
from Abbott as provided in the agreement. Abbott will provide additional
purchase price payments to the Company based upon Abbott's net sales, as defined
in the agreement.
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
facility commences at such time that the Company obtains a CE Mark in Europe for
an EMBOLYX-related application and expires on September 30, 1999. Amounts
borrowed under the facility are repayable five years from the date of the
agreement and are 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 1.5 times the then market price,
as defined in the agreements, of the Company's Common Stock. Both notes have a
stated interest rate of 5% per annum. This rate, with respect to the note
outstanding as of December 31, 1998, for financial statement reporting purposes,
has been adjusted to reflect an imputed market rate of interest as of the date
of note. The rate of the note underlying the credit facility will be similarly
adjusted in future periods, as necessary, in the event that amounts are borrowed
under such credit facility. Under the terms of the distribution agreement,
Century made a $500,000 advance payment to the Company on September 30, 1998,
which amount is to be applied against Century's first future purchase orders for
the Company's peripheral blood clot therapy products. The Company has recorded
this payment as deferred revenue and will recognize 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 Company's EMBOLYX Liquid Embolic System, 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
EMBOLYX-related product.
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<PAGE> 33
As of December 31, 1998, the Company had cash, cash equivalents and
short-term investments of $17.7 million. Cash used in the Company's operations
for the year ended December 31, 1998 was approximately $7.5 million, reflecting
the loss from operations, as well as increases in accounts receivable,
inventories, and prepaid expenses and other current assets, net of increases in
accounts payable, accrued liabilities and deferred revenue. The increase in
accounts receivable is attributable primarily to the timing of receipt of the
additional purchase price payments from Abbott in conformity with the
distribution agreement. Inventory levels increased commensurate with the
increase in the sales volume during the period. The increase in deferred revenue
is due to the receipt of the $1 million marketing payment from Abbott, and the
$500,000 advance payment from Century, discussed above. All other increases were
commensurate with the Company's higher operating levels during 1998 relative to
1997. Cash provided by investing activities for the year ended December 31, 1998
was $1.7 million, primarily reflecting the maturity of short-term investments,
net of expenditures for property and equipment (primarily leasehold improvements
for the Company's new facility, machinery, equipment and tooling related to
certain processes previously performed by contractors that the Company
anticipates performing in its new facility, and the license and installation of
a new enterprise resource planning software system and related hardware), and on
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 December 31, 1998. Cash provided by financing
activities was approximately $15.9 million which was primarily attributable to
the proceeds obtained from the issuance of the subordinated convertible notes to
Abbott and Century, and to the proceeds obtained from the issuance of a note and
sale of stock to Guidant.
The Company plans to finance its capital and operational needs
principally from its existing capital resources at December 31, 1998 and the
proceeds from the credit facility with Century, should the Company satisfy the
conditions regarding the availability of such funds. There can be no assurance,
however, that such conditions can be satisfied within the required time frame.
The Company believes current resources will be sufficient to fund its
operations into 2000. However, the Company's future liquidity and capital
requirements will depend upon numerous factors, including results under the
distribution agreements with 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, including requirements for sales and marketing growth.
IMPACT OF THE YEAR 2000 ISSUE
In less than a year, 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 $100,000. 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.
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The Company has formed an internal task force to undertake 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 manufacturer of the financial
system software currently utilized by the Company and from the manufacturers of
the enterprise resource planning software and the other software systems the
Company anticipates installing 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 by the fourth
quarter 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's plan is to install systems, as necessary, that are Year 2000
compliant. Also in connection with the move to the new facility, the Company has
taken steps to obtain 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.
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this Item begin on
Page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
<PAGE> 35
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required hereunder is incorporated by reference from the
information contained in the sections entitled "Directors," "Other Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for its 1999 Annual Meeting of the
Stockholders to be held on May 27, 1999 to be filed with the Securities and
Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from the
information contained in the sections entitled "Compensation of Executive
Officers," "Option Matters," "Employment and Severance Agreements" and
"Directors Fees" in the Company's definitive Proxy Statement for its 1999 Annual
Meeting of the Stockholders to be held on May 27, 1999 to be filed with the
Securities and Exchange Commission.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from the
information contained in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for its 1999 Annual Meeting of the Stockholders to be held on May 27, 1999 to be
filed with the Securities and Exchange Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from the
information contained in the section entitled entitled "Certain Relationships
and Related Transactions" in the Company's definitive Proxy Statement for its
1999 Annual Meeting of the Stockholders to be held on May 27, 1999 to be filed
with the Securities and Exchange Commission.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits:
See Index to Exhibits on Page 36 of this Annual Report on Form 10-KSB.
(b) Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report, and none were required.
35
<PAGE> 36
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
2.1 Agreement and Plan of Merger between the Company and Micro
Therapeutics, Inc., a California corporation, effective November
6, 1996.(1)
3.1 Certificate of Incorporation of the Company, as currently in
effect.(2)
3.2 Bylaws of the Company, as currently in effect.(1)
4.1 Warrant Agreement dated December 20, 1995 between the Company
and Comdisco, Inc.(1)
4.2 Warrant Agreement dated May 21, 1996 between the Company and
Comdisco, Inc.(1)
10.1 Form of Directors' and Officers' Indemnification Agreement.(1)
10.2 License Agreement dated June 1, 1993 between the Company and
Andrew Cragg.(1)
10.3 Consulting Agreement dated October 1, 1996 between the Company
and Andrew Cragg.(1)
10.4 Industrial Real Estate Lease dated June 10, 1998 between the
Company and New Goodyear, LTD., a California Limited
Partnership.
10.5 Amended and Restated Investors Rights Agreement dated February
9, 1995, among the Company, the Investors named therein and the
Common Holders named therein, as amended on May 17, 1996 and
June 27, 1996.(1)
10.6 1993 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan.(1), (3)
10.7 1996 Stock Incentive Plan, as amended.(1), (3)
10.8 Employee Stock Purchase Plan, as amended.(1), (3)
10.9 Equipment Leasing Line of Credit dated December 20, 1995 between
the Company and ComDisco Ventures, as amended on May 21,
1996.(1)
10.10 Convertible Subordinated Note Agreement dated November 17, 1997,
between the Company and Guidant Corporation. (Incorporated by
reference to Exhibit 10.11 of the Company's Form 10-KSB as filed
with the Securities and Exchange Commission on March 31, 1998)
10.11 Distribution Agreement dated November 17, 1997, between the
Company and Guidant Corporation. (Incorporated by reference to
Exhibit 10.12 of the Company's Form 10-KSB as filed with the
Securities and Exchange Commission on March 31, 1998) (4)
10.12 First Amendment to Distribution Agreement dated August 17, 1998
between the Company and Guidant Corporation.
10.13 Convertible Subordinated Note Agreement dated August 12, 1998,
between the Company and Abbott Laboratories. (Incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K as filed
with the Securities and Exchange Commission on August 12, 1998)
10.14 5% Convertible Note dated August 19, 1998, between the Company
and Abbott Laboratories. (Incorporated by reference to Exhibit
10.2 of the Company's Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1998)
36
<PAGE> 37
10.15 Exclusive Distribution Agreement dated August 12, 1998, between
the Company and Abbott Laboratories. (Incorporated by reference
to Exhibit 10.3 of the Company's Form 8-K as filed with the
Securities and Exchange Commission on August 12, 1998) (4)
10.16 First Amendment to Exclusive Distribution Agreement dated
November 16, 1998 by and between the Company and Abbott
Laboratories.
10.17 Credit Agreement dated August 12, 1998, between the Company and
Abbott Laboratories. (Incorporated by reference to Exhibit 10.4
of the Company's Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1998)
10.18 Security Agreement dated August 12, 1998, between the Company
and Abbott Laboratories. (Incorporated by reference to Exhibit
10.5 of the Company's Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1998)
10.19 Convertible Subordinated Note Agreement dated September 23,
1998, between the Company and Century Medical, Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's Form
8-K as filed with the Securities and Exchange Commission on
November 3, 1998)
10.20 5% Convertible Note dated September 30, 1998, between the
Company and Century Medical, Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Form 8-K as filed with the
Securities and Exchange Commission on November 3, 1998)
10.21 Distribution Agreement dated September 23, 1998, between the
Company and Century Medical, Inc. (Incorporated by reference to
Exhibit 10.3 of the Company's Form 8-K as filed with the
Securities and Exchange Commission on November 3, 1998) (4)
10.22 Credit Agreement dated September 23, 1998, between the Company
and Century Medical, Inc. (Incorporated by reference to Exhibit
10.4 of the Company's Form 8-K as filed with the Securities and
Exchange Commission on November 3, 1998)
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (see signature page S-1).
27.1 Financial Data Schedule for the year ended December 31, 1998.
(1) Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form SB-2, No. 333-17345.
(2) Incorporated by reference to Exhibit number 3.4 of the Company's
Registration Statement on Form SB-2, No. 333-17345.
(3) These exhibits are identified as management contracts or
compensatory plans or arrangements of the Company pursuant to
item 13(a) of Form 10-KSB.
(4) Portions of this Exhibit are omitted and were filed separately
with the Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under Rule 406 of
the Securities Act of 1933.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Irvine,
State of California, on March 29, 1999.
MICRO THERAPEUTICS, INC.
Dated: March 29, 1999 By: /s/ GEORGE WALLACE
George Wallace
President, Chief Executive
Officer and Director
We, the undersigned directors and officers of Micro Therapeutics, Inc.,
do hereby constitute and appoint George Wallace and Harold A. Hurwitz our true
and lawful attorneys and agents, with full powers of substitution to do any and
all acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents may deem necessary
or advisable to enable said corporation to comply with the Securities Exchange
Act of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-KSB, including specifically but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments hereto; and we do hereby ratify and confirm all that said
attorneys and agents, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ GEORGE WALLACE President, Chief Executive March 29, 1999
George Wallace Officer and Director
(Principal Executive Officer)
/s/ HAROLD A. HURWITZ Chief Financial Officer March 29, 1999
Harold A. Hurwitz (Principal Financial and
Principal Accounting Officer)
/s/ H. DUBOSE MONTGOMERY Chairman and Director March 29, 1999
H. DuBose Montgomery
/s/ WENDE HUTTON Director March 29, 1999
Wende Hutton
/s/ DICK ALLEN Director March 29, 1999
Dick Allen
/s/ KIM BLICKENSTAFF Director March 29, 1999
Kim Blickenstaff
</TABLE>
S-1
<PAGE> 39
MICRO THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................................. F-2
Consolidated Balance Sheet At December 31, 1998.................................... F-3
Consolidated Statements Of Operations For The Years Ended December 31,
1997 And 1998.................................................................... F-4
Consolidated Statements Of Stockholders' Equity For The Years Ended
December 31, 1997 And 1998....................................................... F-5
Consolidated Statements Of Cash Flows For The Years Ended December 31,
1997 And 1998.................................................................... F-6
Notes To Consolidated Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Micro Therapeutics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Micro
Therapeutics, Inc. at December 31, 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Newport Beach, California
February 17, 1999
F-2
<PAGE> 41
MICRO THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
A S S E T S:
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 15,219,880
Short-term investments 2,499,015
Accounts receivable, net 550,969
Inventories, net 831,641
Prepaid expenses and other current assets 306,237
------------
Total current assets 19,407,742
Property and equipment, net 1,889,665
Patents and licenses, net of accumulated amortization of $101,686 1,077,578
Other assets 114,990
------------
Total assets $ 22,489,975
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 753,691
Accrued salaries and benefits 322,146
Accrued liabilities 405,157
Deferred revenue 600,000
Current portion of equipment line of credit 73,317
------------
Total current liabilities 2,154,311
Deferred revenue 875,000
Equipment line of credit 73,298
Notes payable, net 16,785,271
------------
Total liabilities 19,887,880
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; --
no shares issued or outstanding
Common stock, $0.001 par value, 20,000,000 shares authorized;
6,717,719 shares issued and outstanding 6,718
Additional paid-in capital 29,625,741
Unearned compensation (43,290)
Accumulated deficit (26,987,074)
------------
Total stockholders' equity 2,602,095
------------
Total liabilities and stockholders' equity $ 22,489,975
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 42
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net sales $ 2,714,047 $ 4,249,381
Cost of sales 1,948,188 2,363,110
----------- ------------
Gross margin 765,859 1,886,271
Costs and expenses:
General and administrative 1,447,558 2,416,748
Research and development 3,425,019 3,864,982
Regulatory/quality assurance 848,637 1,215,232
Marketing and sales 2,816,232 3,795,355
Facility moving costs -- 292,248
----------- ------------
Total costs and expenses 8,537,446 11,584,565
----------- ------------
Loss from operations (7,771,587) (9,698,294)
----------- ------------
Other income (expense):
Interest income 451,309 607,057
Interest expense (81,540) (806,469)
Other expense, net (7,952) (7,914)
Gain on sale of investment 167,456 --
----------- ------------
529,273 (207,326)
----------- ------------
Loss before provision for income taxes (7,242,314) (9,905,620)
Provision for income taxes 800 800
----------- ------------
Net loss ($7,243,114) ($9,906,420)
=========== ============
Per share data :
Net loss ($7,243,114) ($9,906,420)
=========== ============
Net loss per share (basic and diluted) ($1.27) ($1.49)
=========== ============
Weighted average shares outstanding 5,715,396 6,642,558
=========== ============
Pro Forma:
Net loss per share (basic and diluted) ($1.17)
===========
Weighted average shares outstanding 6,190,486
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 43
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 3,612,664 $3,613 894,235 $ 894
Issuance of common stock
(net of costs of $1,531,050) -- -- 1,840,000 1,840
Conversion of preferred shares into
common stock (3,612,664) (3,613) 3,612,664 3,613
Compensation related to stock options
vesting -- -- -- --
Unearned compensation related to
terminated employees -- -- -- --
Common stock issued under employee
stock purchase plan -- -- 31,198 31
Exercise of stock options -- -- 127,098 127
Imputed discount on convertible note payable -- -- -- --
Net loss -- -- -- --
--------- -------- ---------- ------
Balances at December 31, 1997 6,505,195 6,505
Issuance of common stock for cash -- -- 47,637 48
Compensation related to stock options vesting -- -- -- --
Unearned compensation related to
terminated employees -- -- -- --
Common stock issued under employee
stock purchase plan -- -- 22,458 23
Exercise of stock options -- -- 140,286 140
Common stock grant -- -- 2,143 2
Imputed discount on convertible notes payable -- -- -- --
Net loss -- -- -- --
--------- -------- ---------- ------
Balances at December 31, 1998 -- -- 6,717,719 $6,718
========= ======== ========== ======
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN UNEARNED ACCUMULATED STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT EQUITY
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 $15,651,615 ($376,218) ($9,837,540) $5,442,364
Issuance of common stock (net of
costs of $1,531,050) 9,507,112 -- -- 9,508,952
Conversion of preferred shares into
common stock -- -- -- --
Compensation related to stock options
vesting -- 108,898 -- 108,898
Unearned compensation related to
terminated employees (92,351) 92,351 -- --
Common stock issued under employee
stock purchase plan 139,190 -- -- 139,221
Exercise of stock options 59,494 -- -- 59,621
Imputed discount on convertible note
payable 974,328 -- -- 974,328
Net loss -- -- (7,243,114) (7,243,114)
----------- --------- ----------- -----------
Balances at December 31, 1997 26,239,388 (174,969) (17,080,654) 8,990,270
Issuance of common stock for cash 499,952 500,000
Compensation related to stock options
vesting -- 52,137 -- 52,137
Unearned compensation related to
terminated employees (79,542) 79,542 -- --
Common stock issued under employee
stock purchase plan 150,722 -- -- 150,745
Exercise of stock options 266,970 -- -- 267,110
Common stock grant 14,998 -- -- 15,000
Imputed discount on convertible notes
payable 2,533,253 -- -- 2,533,253
Net loss -- -- (9,906,420) (9,906,420)
----------- --------- ------------ -----------
Balances at December 31, 1998 $29,625,741 ($43,290) ($26,987,074) $ 2,602,095
=========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 44
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($7,243,114) ($9,906,420)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 367,292 488,902
Amortization of note payable discounts 22,584 270,268
Compensation related to stock options vesting 108,898 52,137
Common stock grant -- 15,000
Gain on sale of investment (167,456) --
Loss on sale of equipment 14 1,947
Change in operating assets and liabilities:
Accounts receivable (155,985) (151,148)
Inventories (187,049) (212,970)
Prepaid expenses and other assets (70,106) (217,400)
Accounts payable (41,037) 462,939
Accrued salaries and benefits 104,838 16,383
Accrued liabilities 176,561 239,101
Deferred revenue -- 1,475,000
----------- -----------
Net cash used in operating activities (7,084,560) (7,466,261)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (15,278,316) (5,683,149)
Maturity of short-term investments 8,973,883 9,488,567
Additions to property and equipment (264,408) (1,732,102)
Additions to patents and licenses (406,848) (424,274)
Sale of equipment 750 7,200
Sale of investment 170,000 --
----------- -----------
Net cash (used in) provided by investing
activities (6,804,939) 1,656,242
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 11,179,223 650,745
Costs of equity issuances (1,302,334) --
Proceeds from exercise of stock options 59,621 267,110
Borrowings on convertible notes and credit facility 5,000,000 15,000,000
Borrowings on equipment line of credit 25,341 --
Repayments on equipment line of credit (53,812) (63,643)
------------ -----------
Net cash provided by financing activities 14,908,039 15,854,212
----------- -----------
Net increase in cash and cash equivalents 1,018,540 10,044,193
Cash and cash equivalents at beginning of year 4,157,147 5,175,687
----------- -----------
Cash and cash equivalents at end of year $ 5,175,687 $15,219,880
=========== ===========
Supplemental cash flow disclosures:
Cash paid during the year for interest $ 29,095 $ 380,231
=========== ===========
Cash paid during the year for income taxes $ 800 $ 800
=========== ===========
Supplemental schedule of noncash activities:
Unearned compensation related to terminated employees $ 92,351 $ 79,542
=========== ===========
Conversion of preferred stock to common stock $ 3,613 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 45
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY:
Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated on
June 11, 1993 in California and was reincorporated in Delaware in
November 1996 to develop, manufacture and market minimally invasive
medical devices for diagnosis and treatment of neuro and peripheral
vascular diseases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its former majority-owned subsidiary for the
applicable period of control (see Note 18). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash Equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
The carrying amount of cash and cash equivalents approximates market
value.
Short-Term Investments:
The Company's short-term investments consist primarily of funds invested
in money market instruments and commercial paper which have maximum
maturities of six months. The Company classifies its investments as held
to maturity. The carrying amount of these investments is at cost plus
accrued interest which approximates market value. All short-term
investments are held in the Company's name and under the custody of one
financial institution.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Property And Equipment:
Property and equipment are carried at cost less accumulated depreciation
and amortization. Maintenance and repairs are expensed as incurred while
renewals or betterments are capitalized. Upon sale or disposition of
assets, any gain or loss is included in the consolidated statement of
operations. Capital leases are recorded at the fair market value of the
leased asset. The leased assets are amortized on a straight-line basis
over their economic useful lives.
The cost of property and equipment is generally depreciated using the
straight-line method over the estimated useful lives of the respective
assets, which are generally not greater than five years. Leasehold
improvements are amortized over the lesser of the estimated useful lives
of the assets or the related lease terms.
F-7
<PAGE> 46
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Patents and Licenses:
Costs incurred to obtain patents and licenses are capitalized. All
amounts assigned to these patents and licenses are amortized on a
straight-line basis over an estimated five-year useful life from date of
issue or acquisition. The Company continually evaluates the amortization
period and carrying basis of patents and licenses to determine whether
later events and circumstances warrant a revised estimated useful life
or reduction in value.
Research and Development:
Research and development costs are expensed as incurred.
Revenue Recognition:
Sales and related cost of sales are generally recognized upon shipment
of products. Certain of the Company's agreements with distributors of
its products provide for additional payments to the Company based on
sales of the Company's product by the distributor. Such additional
payments are recognized as revenue by the Company upon the sale of the
related product by the distributor (Note 15).
The Company's products are generally under warranty against defects in
material and workmanship for a period of one year.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes:
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition
of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Net Loss Per Share:
Net loss per share is calculated under the provisions of SFAS No. 128,
"Earnings per Share," (which the Company adopted in the fourth quarter
of 1997) by dividing net loss by the weighted average number of common
shares issued and outstanding during the period. For the 1997 pro forma
calculation, such weighted average includes common shares that were
issued upon conversion of all outstanding shares of the Company's
Preferred Stock, in connection with the Company's initial public
offering of its Common Stock in February 1997 (Note 9), as if such
conversion had taken place at the beginning of the earliest period
presented. Potential common shares, represented by options, warrants and
convertible debt, have been excluded from the calculations due to their
anti-dilutive effect. Basic and diluted loss per share are the same for
the periods presented.
F-8
<PAGE> 47
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stock-Based Compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair
value based method of accounting for an employee stock option. Fair
value of the stock option is determined considering factors such as the
exercise price, the expected life of the option, the current price of
the underlying stock and its volatility, expected dividends on the
stock, and the risk-free interest rate for the expected term of the
option. Under the fair value based method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized
over the service period. Pro forma disclosures for entities that elect
to continue to measure compensation cost under the intrinsic method
provided by Accounting Principles Board Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December
15, 1994.
Segment Information:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 supercedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise,"
replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS No.
131 also requires disclosures about products, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosures of
segment information (Note 17).
3. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 168,730
Cash equivalents 15,051,150
-----------
$15,219,880
===========
</TABLE>
Cash equivalents consist of commercial paper and deposits in a money
market account.
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and work-in-process $536,472
Finished goods 353,739
--------
890,211
Reserve for obsolescence (58,570)
--------
$831,641
========
</TABLE>
F-9
<PAGE> 48
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $ 959,961
Tooling 105,124
Furniture and fixtures 166,666
Construction-in-progress 1,316,938
----------
2,548,689
Less, Accumulated depreciation and amortization (659,024)
==========
$1,889,665
==========
</TABLE>
At December 31, 1998, certain machinery, equipment, furniture and
fixtures, with an aggregate original cost of $288,517 and accumulated
amortization of $214,796, are recorded under a capital lease.
Depreciation and amortization expense for the years ended December 31,
1997 and 1998 were $334,064 and $439,659, respectively.
6. EQUIPMENT LINE OF CREDIT:
The Company had an equipment line of credit to finance qualified
equipment purchases at an implicit interest rate of 14.23%. Outstanding
amounts are collateralized by the assets financed. The amount
outstanding is due in monthly installments over 48 months which began in
June 1997. A total of $146,615 was outstanding under this equipment line
of credit as of December 31, 1998.
In connection with this equipment line of credit, the Company issued two
sets of warrants to the lessor to purchase shares of the Company's
preferred stock, which converted, upon the conversion of all outstanding
shares of preferred stock in connection with the Company's initial
public offering (Note 9), into warrants to purchase an aggregate of
13,683 shares of the Company's Common Stock at prices ranging from $4.23
to $6.46 per share. Such warrants expire in 2005 and 2006.
Future minimum payments under the equipment line of credit are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999 $ 85,516
2000 70,987
2001 5,146
--------
161,649
Less, amount representing interest (15,034)
--------
$146,615
========
</TABLE>
F-10
<PAGE> 49
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. NOTES PAYABLE:
In November 1997, the Company and Guidant Corporation ("Guidant")
entered into a convertible subordinated note agreement under which the
Company borrowed $5 million. The principal amount of the note is due in
October 2002, unless accelerated for certain events such as the
termination of the distribution agreement between the Company and
Guidant (Note 15), and is convertible, at any time, at Guidant's option,
into shares of the Company's Common Stock at a conversion price of
$10.25 per share. The 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 on the note of $974,328 upon execution of the
agreement, resulting in an imputed interest rate over the term of the
note of 10%. Such discount had an unamortized balance of $793,360 at
December 31, 1998, and is presented net of the principal amount of the
note in the accompanying consolidated balance sheet. Interest payments
are due quarterly, in arrears.
In April 1998, the Company achieved a milestone set forth in the
agreement and elected, under the terms of the agreement, to have Guidant
loan the Company $2 million and purchase $500,000 of the Company's
Common Stock at approximately $10.50 per share. The proceeds were
received in May 1998. The loan is due in October 2002 and bears an
interest rate of 8% per annum.
In August 1998, the Company and Abbott Laboratories ("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 is due in November 2003 and is
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 have 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 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%. Such
discounts had an aggregate unamortized balance of $1,859,658 at December
31, 1998, which is presented net of the principal amounts of the notes
in the accompanying consolidated balance sheet. Interest payments are
due quarterly, in arrears. The notes are collateralized by the
trademarks, patents and other intellectual property related to the
products covered by the distribution agreement between the Company and
Abbott (Note 15).
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 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
facility commences at such time that the Company obtains a CE Mark in
Europe for an EMBOLYX(TM)-related application and expires on September
30, 1999. Amounts borrowed under the facility are repayable five years
from the date of the agreement and are 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 1.5 times the then market price, as defined in the agreements,
of the Company's Common Stock. Both notes have 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 $584,597 upon execution of the note
agreement, resulting in an imputed interest rate over the term of the
note of 10%. Such discount had an unamortized balance of $561,711 at
December 31, 1998, and is presented net of the principal amount of the
note in the accompanying consolidated balance sheet. Interest payments
are due quarterly, in arrears. The rate of the note underlying the
credit facility will be similarly adjusted in future periods, as
necessary, in the event that amounts are borrowed under such credit
facility.
F-11
<PAGE> 50
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The agreements with Guidant, Abbott and Century each provide for certain
operational conditions with which the Company must comply, and a right
of first offer to allow a pro rata participation in the issuance by the
Company of any "new security," as defined in the respective agreements.
The agreement with Guidant allows it visitation rights at meetings of
the Company's Board of Directors. Each of the note holders described
herein may either convert the principal amount of the note or declare
the note to be immediately due and payable upon notification of an
impending sale of substantially all of the Company's assets or a change
of control of the Company.
Future maturities of principal with respect to the notes payable
described above, and a reconciliation to the carrying amount of notes
payable at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2002 $ 7,000,000
2003 13,000,000
-----------
Total future maturities 20,000,000
Unamortized discount (3,214,729)
-----------
Notes payable $16,785,271
===========
</TABLE>
Guidant, Abbott and Century each entered into distribution agreements
with the Company concurrent with the the execution of their respective
convertible note agreements described above. The distribution agreements
are described in Note 15.
8. PREFERRED STOCK:
Effective upon the closing of the Company's initial public offering of
its Common Stock in February 1997 (Note 9), all 3,612,664 issued and
outstanding shares of the Company's Preferred Stock were converted into
shares of the Company's Common Stock on a share-for-share basis.
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences and privileges without stockholder approval. At
December 31, 1998, no shares of Preferred Stock were issued or
outstanding.
9. INITIAL PUBLIC OFFERING:
In February 1997, the Company completed an initial public offering (the
"IPO") of 1,600,000 shares of its Common Stock at $6.00 per share. In
March 1997, the underwriters of the IPO exercised their over allotment
options and purchased 240,000 shares of the Company's Common Stock.
Aggregate proceeds, net of offering costs of $1,531,050, were
$9,508,952. In connection with the IPO, all then outstanding shares of
convertible preferred stock were converted to 3,612,664 shares of common
stock (Note 8).
10. COMMON STOCK PLANS:
1993 Stock Option Plan:
The 1993 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan (the "1993 Plan") provides for the direct
sale of shares and the grant of options to purchase shares of the
Company's Common Stock to employees, officers, consultants and
directors.
F-12
<PAGE> 51
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The 1993 Plan includes nonqualified stock options ("NSOs") and incentive
stock options ("ISOs"). The option price for the ISOs and NSOs shall not
be less than the fair market value of the shares of the Company's Common
Stock on the date of the grant. For ISOs, the exercise price per share
may not be less than 110% of the fair market value of a share of Common
Stock on the grant date for any individual possessing more than 10% of
the total outstanding Common Stock of the Company. The Board of
Directors has the authority to determine the time or times at which
options become exercisable, which generally occurs over a four-year
period. Options expire within a period of not more than ten years from
the date of grant. Options expire generally ninety days after
termination of employment.
The 1993 Plan provides for the issuance of up to 650,000 shares of
common stock. A summary of the option activity under the 1993 Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
INCENTIVE NONQUALIFIED TOTAL PER SHARE
--------- ------------ ----- ---------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 447,036 181,571 628,607 $1.22
Granted -- -- -- --
Exercised (99,575) (27,521) (127,096) $0.47
Canceled (77,835) (15,439) (93,274) $1.33
-------- -------- --------
Balances at December 31, 1997 269,626 138,611 408,237 $1.46
Granted -- -- -- --
Exercised (86,184) (20,669) (106,853) $0.74
Canceled (42,692) -- (42,692) $2.31
-------- -------- --------
Balances at December 31, 1998 140,750 117,942 258,692 $1.85
======== ======== ========
Exercisable at December 31, 1997 143,494 118,632 262,126 $1.02
======== ======== ========
Exercisable at December 31, 1998 101,349 113,982 215,331 $1.51
======== ======== ========
</TABLE>
Additional information with respect to outstanding options as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
RANGE OF PER WEIGHTED WEIGHTED AVERAGE
SHARE NUMBER OF AVERAGE NUMBER OF PER SHARE
EXERCISE PRICES OPTIONS REMAINING YEARS OPTIONS EXERCISE PRICES
- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
$0.46 174,042 6 160,218 $0.46
$1.54-$4.62 25,650 8 20,539 $3.18
$5.38 59,000 8 34,574 $5.38
</TABLE>
The difference between the exercise price and the fair market value at
the date of grant of certain options granted from the 1993 Plan prior to
the Company's initial public offering is accounted for as unearned
compensation and is being amortized to expense over the related vesting
period. During the years ended December 31, 1997 and 1998, amortized
compensation expense was $108,898 and $52,137, respectively.
F-13
<PAGE> 52
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1996 Stock Incentive Plan:
The 1996 Stock Incentive Plan (the "1996 Plan") provides for options to
purchase shares of the Company's Common Stock and restricted Common
Stock grants. The 1996 Plan includes NSOs and ISOs and may include
grants to directors, officers, employees and consultants of the Company,
except that incentive stock options may not be granted to non-employee
directors or consultants. In addition, the 1996 Plan provides that each
non-employee director of the Company be granted an option consisting of
8,000 shares of Common Stock, which option shall vest and become
exercisable at the rate of 25% immediately and 25% on the anniversary of
such director's initial election during the three-year period following
the grant date. Such directors shall also automatically be granted
options for an additional 2,000 shares each year thereafter, subject to
an aggregate stock ownership limitation of 1% of outstanding shares and
options as defined in the 1996 Plan. Options, other than those granted
to the non-employee directors as described above, generally vest over a
four-year period. Options expire within a period of not more than ten
years from the date of grant. Options expire generally 30 days after
termination of employment.
The 1996 Plan provides for the issuance of up to 1,100,000 shares of
Common Stock. A summary of the option activity under the 1996 Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
INCENTIVE NONQUALIFIED TOTAL PER SHARE
--------- ------------ ----- ---------
<S> <C> <C> <C> <C>
Balances, at January 1, 1997 106,600 1,300 107,900 $ 5.61
Granted 341,450 42,000 383,450 $ 5.43
Exercised -- -- -- --
Canceled (30,920) -- (30,920) $ 5.33
-------- -------- --------
Balances at December 31, 1997 417,130 43,300 460,430 $ 5.48
Granted 426,460 131,340 557,800 $ 9.69
Exercised (31,769) (1,664) (33,433) $ 5.63
Canceled (63,057) -- (63,057) $ 6.25
-------- -------- --------
Balances at December 31, 1998 748,764 172,976 921,740 $ 7.97
======== ======== ========
Exercisable at December 31, 1997 38,303 8,881 47,184 $ 5.48
======== ======== ========
Exercisable at December 31, 1998 133,787 26,162 159,949 $ 6.05
======== ======== ========
</TABLE>
Additional information with respect to outstanding options as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
RANGE OF PER WEIGHTED WEIGHTED AVERAGE
SHARE NUMBER OF AVERAGE NUMBER OF PER SHARE
EXERCISE PRICES OPTIONS REMAINING YEARS OPTIONS EXERCISE PRICES
- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
$4.75-$6.50 372,740 8 131,942 $5.44
$7.88-$10.81 549,000 10 28,007 $8.93
</TABLE>
In 1998, the Company granted to a consultant 2,143 shares of common
stock under the 1996 Plan and recorded compensation expense of $15,000,
representing the fair market value of the stock at the date of grant.
F-14
<PAGE> 53
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Employee Stock Purchase Plan:
The Employee Stock Purchase Plan (the "Purchase Plan") covers an
aggregate of 150,000 shares of Common Stock and commenced on the
effective date of the Company's initial public offering (Note 9). The
Purchase Plan permits an eligible employee to purchase Common Stock
through payroll deductions not to exceed 20% of the employee's
compensation. An employee's participation is limited also if such
participation results in the employee (a) owning any class of the
Company's stock or holding options to purchase stock that together
result in the employee possessing 5% or more of the total voting power
of all classes of stockholders, (b) having the right to purchase,
through any of the Company's stock purchase plans, more than either
2,500 shares or $25,000 of fair market value of the Company's Common
Stock in any given year, or (c) otherwise having the right on the last
day of any offering period (described below) to purchase in excess of
2,500 shares. The price of the Common Stock purchased under the Purchase
Plan is 85% of the lower of the fair market value of the Common Stock at
the beginning of the six-month offering period (January 1 or July 1) or
on the applicable purchase date (June 30 or December 31). Employees may
end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of
employment. Unless terminated earlier by the Company, the Purchase Plan
will terminate in 2007, on the tenth anniversary of the Company's
initial public offering (Note 9). During 1997 and 1998, purchases by
employees under the Purchase Plan resulted in the issuance of 31,198 and
22,458 shares of Common Stock, respectively, and in proceeds to the
Company of $139,221 and $150,745, respectively.
Pro Forma Effect of Stock-Based Compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost been determined on the fair value at the grant
dates for awards under those plans consistent with the method
promulgated by SFAS No. 123, the Company's net loss and loss per share
would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Net loss:
As reported ($7,243,114) ($ 9,906,420)
=========== ============
Pro forma for SFAS No. 123 ($7,514,628) ($10,633,743)
=========== ============
Loss per share (basic and diluted):
As reported ($1.27) ($1.49)
====== ======
Pro forma for SFAS No. 123 ($1.31) ($1.60)
====== ======
Pro forma loss per share (basic and diluted):
As reported ($1.17)
======
Pro forma for SFAS No. 123 ($1.21)
======
</TABLE>
The fair value of each option grant preceding the Company's initial
public offering (Note 9) was estimated on the date of the grant using
the minimum value method. Such value was computed as the difference
between the current stock price less the present value, at that date, of
the exercise price for a stock that does not pay dividends. The fair
value of each option grant subsequent to the Company's initial public
offering was estimated on the date of the grant using the Black-Scholes
option-pricing model. The assumptions used for the years ended December
31, 1997 and 1998 were as follows: the average risk-free interest rate
was 6.06% and 5.11%, respectively; generally the exercise price is equal
to the fair market value of the underlying Common Stock at the grant
date after consideration of any related unearned compensation recorded
in the financial statements; the expected life of the option is the term
to expiration, generally 4 years; expected volatility was 55% and 61%,
respectively; the weighted average grant date fair value of options was
$5.47 and $9.67, respectively; and the Common Stock is expected to pay
no dividends.
F-15
<PAGE> 54
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. NET LOSS PER SHARE:
Reconciliations of net loss and shares used in the calculations of net
loss per share are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31, 1997
-----------------------
NET LOSS SHARES NET LOSS
(NUMERATOR) (DENOMINATOR) PER SHARE
----------- ------------- ---------
<S> <C> <C> <C>
Loss available to common stockholders ($7,243,144)
Pro forma weighted average shares
outstanding, giving effect to the
conversion of Preferred Stock as
of the beginning of the period
(Note 2) 6,190,486
----------- -----------
Pro forma net loss per share
(basic and diluted) (7,243,114) 6,190,486 ($1.17)
Reduction of weighted average shares
outstanding, to give effect to the
conversion of Preferred Stock as of
the effective date of the IPO
(Notes 2 and 9) (475,090) (0.10)
----------- ----------- ------
Net loss per share
(basic and diluted) ($7,243,114) 5,715,396 ($1.27)
=========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31, 1997
-----------------------
NET LOSS SHARES NET LOSS
(NUMERATOR) (DENOMINATOR) PER SHARE
----------- ------------- ---------
<S> <C> <C> <C>
Loss available to common stockholders ($9,906,420)
Weighted average shares outstanding 6,642,558
----------- -----------
Net loss per share
(basic and diluted) ($9,906,420) 6,642,558 ($1.49)
=========== =========== ======
</TABLE>
12. INCOME TAXES:
The following table presents the current and deferred income tax
provision for federal and state income taxes:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Current:
Federal -- --
State $800 $800
---- ----
800 800
Deferred:
Federal -- --
State -- --
---- ----
$800 $800
==== ====
</TABLE>
F-16
<PAGE> 55
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences which give rise to the deferred
tax provision (benefit) consist of:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Capitalized research and development costs ($1,362,263) ($1,617,396)
Capitalized inventory costs 65,001 (41,660)
Intangibles (9,752) 6,235
Property and equipment (83,387) 19,448
Accrued expenses (89,851) 36,210
Stock options (37,749) 79,173
Tax credit carryforwards (163,384) (422,431)
Net operating loss carryforwards (1,168,476) (2,041,487)
Deferred revenue -- (417,690)
Other -- (88,679)
Valuation allowance 2,849,861 4,488,277
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The provision (benefit) for income taxes differs from the amount that
would result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Statutory regular federal income tax rate (34.00%) (34.00%)
Meals and entertainment 0.10 0.23
State taxes 0.01 0.01
Tax credit carryforwards (1.06) (1.81)
Change in valuation allowance 35.44 34.79
Other, net (0.48) 0.79
------- ------
Effective tax rate 0.01% 0.01%
======= ======
</TABLE>
The components of the net deferred tax asset at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Capitalized research and development costs $ 3,456,491
Capitalized inventory costs 59,727
Intangibles 4,090
Property and equipment 96,734
Accrued expenses 95,856
State taxes 272
Tax credit carryforwards 930,452
Net operating loss carryforwards 6,430,946
Deferred revenue 417,690
Other 88,679
Valuation allowance (11,580,937)
-----------
Net deferred tax asset $ --
===========
</TABLE>
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such
assets. Management periodically evaluates the recoverability of the
deferred tax assets. At such time as it is determined that it is more
likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
F-17
<PAGE> 56
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31, 1998, the Company had net operating loss carryforwards
for federal and state purposes of approximately $17,003,000 and
$7,354,000, respectively. The net operating loss carryforwards begin
expiring in 2008 and 1999, respectively. The Company also has research
and experimentation credit carryforwards for federal and state purposes
of approximately $524,000 and $363,000, respectively. The research and
experimentation credits begin to expire in 2009 for federal purposes and
carry forward indefinitely for state purposes. The Company has a
manufacturer's investment credit for state purposes of approximately
$45,000. The manufacturer's investment credit will begin to expire in
2007.
The utilization of net operating loss and credit carryforwards may be
limited under the provisions of Internal Revenue Code Section 382 and
similar state provisions.
13. COMMITMENTS AND CONTINGENCIES:
On June 10, 1998, the Company entered into a five-year operating lease
for office, research and manufacturing space in a facility located in
Irvine, California, with two three-year renewal options. The lease
provides for minimum annual increases in rent based on a cost of living
index. For financial statement reporting purposes, such minimum
increases have been included in calculating the total minimum cost of
the lease, which cost will be allocated on a straight-line basis over
the initial term of the lease. This allocation has resulted in deferred
rent as of December 31, 1998, amounting to $7,110, which is included in
accrued liabilities in the accompanying consolidated balance sheet.
As of December 31, 1998, the future noncancelable minimum lease
commitments are as follows:
YEARS ENDING
DECEMBER 31:
------------
1999 $ 463,209
2000 477,114
2001 491,428
2002 506,171
2003 $ 388,106
Rent expense for the years ended December 31, 1997 and 1998, which
consisted primarily of rent related to the Company's former facility in
San Clemente, California, was $206,442 and $366,272, respectively. The
Company received $4,454 and $3,625 of rental sublease income for the
years ended December 31, 1997 and 1998, respectively.
14. RELATED PARTY TRANSACTIONS:
In June 1993, the Company acquired from a stockholder an exclusive
worldwide license to manufacture, market and sell devices utilizing
certain catheter technology developed by the stockholder/licensor. As
consideration for the license, the Company is obligated to pay the
stockholder/licensor royalties at the rate of 1-1/2% of the net revenues
from products developed utilizing the patented technology for a period
of ten years from the first commercial sale of such products and a
royalty of 1% of net revenue on any product that bears the name of the
consultant (for as long as it bears the name). Commercial sale of these
products commenced in November 1995. Royalty expense under these license
agreements totaled $20,541 and $21,445 for the years ended December 31,
1997 and 1998, respectively.
In November 1994, the Company licensed technology from a consultant for
which the Company pays a royalty of 1% of net sales on any product that
bears the name of the consultant. Royalty expense under this agreement
was $17,614 and $18,709 in 1997 and 1998, respectively.
F-18
<PAGE> 57
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In October 1996, the Company licensed technology from a consultant for
which a royalty of 1% of net sales of a specified product will be paid
until October 8, 1999 and thereafter as long as the product continues to
use a derivative of the consultant's name. Royalty expense under this
agreement was $1,415 and $3,980 in 1997 and 1998, respectively.
In March 1998, the Company licensed technology from a consultant for
which the Company pays a royalty of 1% of net sales on any product that
bears the name of the consultant for a period of ten years. Royalty
expense under this agreement was $9,477 in 1998.
15. DISTRIBUTION AGREEMENTS:
Concurrent with the execution of their respective convertible note
agreements described in Note 7, Guidant, Abbott and Century each entered
into distribution agreements with the Company.
The distribution agreement with Guidant provides rights for exclusive
European distribution of the Company's neuro products. In August 1998,
the agreement was expanded to provide for the European distribution by
Guidant of the Company's peripheral embolization products. The agreement
has a five-year term, which will commence upon the first commercial sale
of products covered under the agreement, and may be canceled by the
Company upon a sale of substantially all the Company's assets or change
in control of the Company. In such event, the cancellation penalty to be
paid to Guidant is the greater of $1 million or an amount based on
Guidant's gross profit, as defined in the agreement.
The distribution agreement with Abbott provides exclusive rights to
distribute the Company's peripheral blood clot therapy products in the
U.S. and Canada. The initial term of the agreement is through 2008. It
may be extended by mutual agreement, or by Abbott upon Abbott's
attainment of forecast sales levels, the determination of which is
defined in the agreement, in any three years within defined five-year
periods in which the agreement is in force. Abbott may terminate the
agreement upon 180 days written notice, and the Company may terminate
the agreement if Abbott fails to attain the forecast sales levels
discussed above in at least three years within defined five-year periods
in which the agreement is in force, or if the parties reach an impasse
in determining such sales levels. The agreement is also terminable by
the Company's successor in the event of a change of control of the
Company. In such event, Abbott has the option to purchase the peripheral
blood clot therapy line of business at a mutually agreed-upon price, or
the Company's successor may pay a termination fee based upon Abbott's
historical sales levels as defined in the agreement.
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. This payment was
recorded as deferred revenue by the Company, and is being amortized on a
straight-line basis into income over the initial term of the
distribution agreement.
Upon shipment of product by the Company to Abbott, the Company receives
an initial purchase price payment from Abbott as provided in the
agreement, which is recorded as revenue by the Company upon shipment to
Abbott. Additional purchase price payments are made by Abbott to the
Company based upon Abbott's net sales, as defined in the agreement. Such
additional purchase price payments are recorded as revenue by the
Company upon Abbott's sale of the related product.
F-19
<PAGE> 58
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The distribution agreement with Century provides exclusive rights to
distribute all of the Company's products in Japan. The initial term of
the agreement extends five years past the date on which the first
regulatory approval is obtained for an application using the Company's
proprietary EMBOLYX Liquid Embolic System. The agreement may be extended
for additional five-year terms either automatically, unless terminated
for reasons described below, or by mutual agreement. The agreement may
be terminated by the Company if Century fails to achieve certain sales
levels, the determination of which is defined in the agreement, in at
least three of any five consecutive years in which the agreement is in
force, or if the parties reach an impasse in determining such sales
levels. The agreement is also terminable by the Company's successor in
the event of a change of control of the Company upon payment by the
Company's successor of a termination fee based on Century's historical
gross profit, as defined in the agreement.
Under the terms of the distribution agreement, Century made a $500,000
advance payment to the Company on September 30, 1998, which amount is to
be applied against Century's first future purchase orders for the
Company's peripheral blood clot therapy products. The Company has
recorded this payment as deferred revenue and will recognize sales
revenue from such amount as the Company makes shipments to Century under
such purchase orders. Under the terms of the distribution agreement,
upon achievement of the first regulatory approval in Japan for an
application of the EMBOLYX Liquid Embolic System, Century will make a $1
million advance payment to the Company, which amount is to be applied
against Century's first future purchase orders for EMBOLYX-related
product.
16. CONCENTRATIONS OF CREDIT RISK:
At December 31, 1998, the Company had approximately $15,365,000 of cash
and cash equivalents that were in excess of the federally-insured limit
of $100,000 per bank. Additionally, the Company had approximately
$2,499,000 invested in commercial paper having maximum maturities of six
months. All such investments are in the custody of one bank.
Prior to October 1, 1998, the effective date of the Company's
distribution agreement with Abbott (Note 15), the Company's customers in
the United States were primarily hospitals. Subsequent to that date,
Abbott became the Company's primary customer in the United States and
accounted for 86% of the Company's accounts receivable at December 31,
1998. In foreign countries, distributors are the Company's primary
customers.
F-20
<PAGE> 59
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. SEGMENT INFORMATION:
In 1997 and 1998, the Company's neuro vascular products were in various
phases of research, development, clinical and regulatory processes.
Accordingly, the Company's revenues in such years were derived
substantially from its peripheral vascular products. Additional
information with respect to revenues for 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---- ----
<S> <C> <C>
Peripheral vascular
United States $2,624,979 $4,078,076
International 89,068 86,226
---------- ----------
Total peripheral vascular revenues 2,714,047 4,164,302
---------- ----------
Neuro vascular
United States -- 51,874
International -- 33,205
---------- ----------
Total neuro vascular revenues -- 85,079
---------- ----------
Total revenues $2,714,047 $4,249,381
========== ==========
</TABLE>
Due to the predominance of peripheral vascular revenues relative to
neuro vascular revenues in 1997 and 1998, information such as operating
income (loss) and total assets was not used in such years to evaluate
segment performance.
In 1998, Abbott (Note 15) accounted for 25% of the Company's sales. No
other customer accounted for 10% or more of the Company's sales in 1998,
and there were no customers who accounted for 10% or more of the
Company's sales in 1997.
18. LICENSING TRANSACTIONS:
On November 17, 1997, the Company licensed its proprietary EMBOLYX
technology to its then-new subsidiary, Genyx Medical, Inc., ("Genyx") in
connection with non-vascular applications for gynecological and
urological procedures. Genyx licensed back to the Company the right to
develop, manufacture and market any product which incorporates or uses
the Genyx modified EMBOLYX technology outside of the applications
licensed to Genyx. As consideration for the license agreement and for
certain commitments described below, Genyx issued 850,000 shares of its
common stock to the Company, which constituted 85% of its then
outstanding shares, and entered into a royalty arrangement whereby Genyx
compensates the Company based on net revenues derived from sale of
licensed products by Genyx. Start-up costs of Genyx amounted to $30,784
in 1997 and were recorded by the Company as research and development
expense.
On March 12, 1998, Genyx entered into a $3 million equity financing
agreement. As a result of this financing, the Company's ownership in
Genyx was reduced from 85% to 27%. Because the Company's carrying value
of its investment in Genyx is $0 and the Company has no obligation to
fund Genyx's operations, the Company is currently not required by
generally accepted accounting principles to recognize its equity share
of Genyx losses for the period from March 12, 1998 through December 31,
1998. Expenditures related to Genyx for the period from January 1, 1998
to March 12, 1998 had been recorded by the Company as research and
development expenses, and amounted to $33,916.
F-21
<PAGE> 60
MICRO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In July 1998, the Company licensed its proprietary EMBOLYX technology to
a newly-formed company (the "licensee"). The licensee was formed for the
purpose of developing non-vascular applications using EMBOLYX in the
gastrointestinal tract. The license agreement provides for a license
back to the Company under which it has the right to develop, manufacture
and market any product which incorporates or uses EMBOLYX technology
modified by the licensee outside of the applications licensed to it. As
consideration, the licensee issued 2,000,000 shares of its common stock
to the Company, which constituted 33% of its then outstanding shares,
and entered into a royalty arrangement whereby the licensee will
compensate the Company based on net revenues derived from sale of
licensed products by the licensee. Because the Company's carrying value
of its investment in the licensee is $0 and the Company has no
obligation to fund the licensee's operations, the Company is not
required by generally accepted accounting principles to recognize its
equity share of the licensee's losses.
F-22
<PAGE> 61
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
2.1 Agreement and Plan of Merger between the Company and Micro
Therapeutics, Inc., a California corporation, effective November
6, 1996.(1)
3.1 Certificate of Incorporation of the Company, as currently in
effect.(2)
3.2 Bylaws of the Company, as currently in effect.(1)
4.1 Warrant Agreement dated December 20, 1995 between the Company
and Comdisco, Inc.(1)
4.2 Warrant Agreement dated May 21, 1996 between the Company and
Comdisco, Inc.(1)
10.1 Form of Directors' and Officers' Indemnification Agreement.(1)
10.2 License Agreement dated June 1, 1993 between the Company and
Andrew Cragg.(1)
10.3 Consulting Agreement dated October 1, 1996 between the Company
and Andrew Cragg.(1)
10.4 Industrial Real Estate Lease dated June 10, 1998 between the
Company and New Goodyear, LTD., a California Limited
Partnership.
10.5 Amended and Restated Investors Rights Agreement dated February
9, 1995, among the Company, the Investors named therein and the
Common Holders named therein, as amended on May 17, 1996 and
June 27, 1996.(1)
10.6 1993 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan.(1), (3)
10.7 1996 Stock Incentive Plan, as amended.(1), (3)
10.8 Employee Stock Purchase Plan, as amended.(1), (3)
10.9 Equipment Leasing Line of Credit dated December 20, 1995 between
the Company and ComDisco Ventures, as amended on May 21,
1996.(1)
10.10 Convertible Subordinated Note Agreement dated November 17, 1997,
between the Company and Guidant Corporation. (Incorporated by
reference to Exhibit 10.11 of the Company's Form 10-KSB as filed
with the Securities and Exchange Commission on March 31, 1998)
10.11 Distribution Agreement dated November 17, 1997, between the
Company and Guidant Corporation. (Incorporated by reference to
Exhibit 10.12 of the Company's Form 10-KSB as filed with the
Securities and Exchange Commission on March 31, 1998) (4)
10.12 First Amendment to Distribution Agreement dated August 17, 1998
between the Company and Guidant Corporation.
10.13 Convertible Subordinated Note Agreement dated August 12, 1998,
between the Company and Abbott Laboratories. (Incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K as filed
with the Securities and Exchange Commission on August 12, 1998)
10.14 5% Convertible Note dated August 19, 1998, between the Company
and Abbott Laboratories. (Incorporated by reference to Exhibit
10.2 of the Company's Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1998)
<PAGE> 62
10.15 Exclusive Distribution Agreement dated August 12, 1998, between
the Company and Abbott Laboratories. (Incorporated by reference
to Exhibit 10.3 of the Company's Form 8-K as filed with the
Securities and Exchange Commission on August 12, 1998) (4)
10.16 First Amendment to Exclusive Distribution Agreement dated
November 16, 1998 by and between the Company and Abbott
Laboratories.
10.17 Credit Agreement dated August 12, 1998, between the Company and
Abbott Laboratories. (Incorporated by reference to Exhibit 10.4
of the Company's Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1998)
10.18 Security Agreement dated August 12, 1998, between the Company
and Abbott Laboratories. (Incorporated by reference to Exhibit
10.5 of the Company's Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1998)
10.19 Convertible Subordinated Note Agreement dated September 23,
1998, between the Company and Century Medical, Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's Form
8-K as filed with the Securities and Exchange Commission on
November 3, 1998)
10.20 5% Convertible Note dated September 30, 1998, between the
Company and Century Medical, Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Form 8-K as filed with the
Securities and Exchange Commission on November 3, 1998)
10.21 Distribution Agreement dated September 23, 1998, between the
Company and Century Medical, Inc. (Incorporated by reference to
Exhibit 10.3 of the Company's Form 8-K as filed with the
Securities and Exchange Commission on November 3, 1998) (4)
10.22 Credit Agreement dated September 23, 1998, between the Company
and Century Medical, Inc. (Incorporated by reference to Exhibit
10.4 of the Company's Form 8-K as filed with the Securities and
Exchange Commission on November 3, 1998)
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (see signature page S-1).
27.1 Financial Data Schedule for the year ended December 31, 1998.
(1) Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form SB-2, No. 333-17345.
(2) Incorporated by reference to Exhibit number 3.4 of the Company's
Registration Statement on Form SB-2, No. 333-17345.
(3) These exhibits are identified as management contracts or
compensatory plans or arrangements of the Company pursuant to
item 13(a) of Form 10-KSB.
(4) Portions of this Exhibit are omitted and were filed separately
with the Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under Rule 406 of
the Securities Act of 1933.
<PAGE> 1
Exhibit 10.4
INDUSTRIAL REAL ESTATE LEASE
(MULTI-TENANT FACILITY)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
SECTION 1.01. DATE OF LEASE: June 10, 1998
SECTION 1.02. LANDLORD (INCLUDE LEGAL ENTITY): New Goodyear, LTD., a
California Limited Partnership
Address of Landlord: 9061 SANTA MONICA BLVD., LOS ANGELES, CA 90069
SECTION 1.03. TENANT (INCLUDE LEGAL ENTITY): Micro Therapeutics, Inc., a
Delaware Corporation, also known as MTI
Address of Tenant: 2 Goodyear, Irvine, California
SECTION 1.04. PROPERTY: The Property is part of Landlord's multi-tenant
real property development known as 2 Goodyear, Irvine, California (APN #:
591-014-01) and described or depicted in Exhibit "A" (the "Project"). The
Project includes the land, the buildings and all other improvements located on
the land, and the common areas described in Paragraph 4.05(a). The Property is
an approximate 43,538 square foot portion of the Project commonly known as 2
Goodyear, Unit A (See attached Exhibit "B")
SECTION 1.05. LEASE TERM: 5 years 0 months beginning on October 1, 1998
or such other date as is specified in this Lease, and ending on September 30,
2003
SECTION 1.06. PERMITTED USES: (See Article Five) General offices,
manufacturing and distribution of medical devices and other related lawful uses.
SECTION 1.07. TENANT'S GUARANTOR: (If none, so state) None
SECTION 1.08. BROKERS: (See Article Fourteen) (If none, so state)
Landlord's Broker: Voit Commercial, Trent Walker
Tenant's Broker: Grubb & Ellis Company, Gary S. Allen
SECTION 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) Under Separate Agreement
SECTION 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $38,313.14
SECTION 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05)159
SECTION 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: Thirty Eight Thousand Three Hundred Thirteen and 14/100
Dollars ($38,313.14) per month for the first twelve (12) months, as provided in
Section 3.01, and shall be increased on the first day of the 13th, 25th, 37th,
and 49th month(s) after the Commencement Date as provided in Section 3.02.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04);
(iv) Tenant's Initial Pro Rata Share of Common Area Expenses 62.20% (See Section
4.05); (v) Impounds for Insurance Premiums and Property Taxes (See Section
4.08); (vi) Maintenance, Repairs and Alterations (See Article Six).
SECTION 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) FIFTY percent (50%) of the Profit (the "Landlord's Share").
SECTION 1.14. RIDERS: The following Riders are attached to and made a
part of this Lease: (If none, so state) Rider No. 1; Option to Extend; Exhibit
"A" Site Plan; Exhibit "B" Tenant Space, Exhibit "C" Tenant Improvement Plan;
Exhibit "D" Approved Hazardous Materials; Exhibit "E" Encumbrances.
1
<PAGE> 2
ARTICLE TWO: LEASE TERM
SECTION 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
SECTION 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non- delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If Landlord does not deliver possession of the Property to Tenant within
sixty (60) days after the Commencement Date, Tenant may elect to cancel this
Lease by giving written notice to Landlord within ten (10) days after the sixty
(60)-day period ends. If Tenant gives such notice, the Lease shall be canceled
and neither Landlord nor Tenant shall have any further obligations to the other.
If Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
SECTION 2.03. EARLY OCCUPANCY. Landlord shall deliver the Premises upon
execution of the lease. If Tenant occupies the Property prior to the
Commencement Date, Tenant's occupancy of the Property shall be subject to all of
the provisions of this Lease. Early occupancy of the Property shall not advance
the expiration date of this Lease. Tenant shall pay utilities charges only for
the early occupancy period.
SECTION 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all rent loss which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
SECTION 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
SECTION 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased
on each date (the "Rental Adjustment Date") stated in Paragraph 1.12(a) above in
accordance with the increase in the United States Department of Labor, Bureau of
Labor Statistics, Consumer Price Index for U.S. City Average, All Urban
Consumers (all items Los Angeles-Riverside-Orange County on the basis of
1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately
before each Rental Adjustment Date shall be increased by the percentage that the
Index has increased from the date (the "Comparison Date") on which payment of
the Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase between
those two Indices, and the new Base Rent.
2
<PAGE> 3
In no event shall the new Base Rent for each Rental Adjustment date be less than
three percent (3%) or more than six percent (6%) of the Base Rent in effect on
the day immediately preceding the Rental Adjustment Date.
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs of arbitration
shall be borne equally by Landlord and Tenant.
SECTION 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord
a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security Deposit
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security Deposit. Landlord shall not be required
to keep the Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to an
amount which bears the same relationship to the adjusted Based Rent as the
initial Security Deposit bore to the initial Base Rent.
SECTION 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
SECTION 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
SECTION 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on
the Property (including any fees, taxes or assessments against, or as a result
of, any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10)-day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent.
3
<PAGE> 4
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
reassessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income ,gift, franchise, inheritance or
estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord for
such personal property taxes.
SECTION 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
SECTION 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord and property manager as an additional insured under such
policy. The initial amount of such insurance shall be One Million Dollars
($1,000,000) per occurrence and shall be subject to periodic increase based upon
inflation, increased liability awards, recommendation of Landlord's professional
insurance advisers and other relevant factors. The liability insurance obtained
by Tenant under this Paragraph 4.04(a) shall (i) be primary and
non-contributing; (ii) contain cross-liability endorsements; and (iii) insure
Landlord against Tenant's performance under Section 5.05, if the matters giving
rise to the indemnity under Section 5.05 result from the negligence of Tenant.
The amount and coverage of such insurance shall not limit Tenant's liability nor
relieve Tenant of any other obligation under this Lease. Landlord and property
manager may also obtain comprehensive public liability insurance in an amount
and with coverage determined by Landlord insuring Landlord against liability
arising out of ownership, operation, use or occupancy of the Property. The
policy obtained by Landlord and property manager shall not be contributory and
shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property after Landlord has attempted in a
good faith and reasonable manner, to cause such Lender not to require such
insurance. Otherwise, Landlord shall have no right to obtain Earthquake
Insurance. In no event shall Tenant be responsible for any deductible on
Earthquake Insurance.
4
<PAGE> 5
Landlord shall not obtain insurance for Tenant's fixtures or equipment or
building improvements installed by Tenant on the Property. During the Lease
Term, Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus estimated
real property taxes and insurance premiums. Tenant shall be liable for the
payment of any deductible amount under Landlord's or Tenant's insurance policies
maintained pursuant to this Section 4.04, in an amount not to exceed Ten
Thousand Dollars ($10,000.00). Tenant shall not do or permit anything to be done
which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). For insurance policies maintained by Landlord which cover improvements
on the entire Project, Tenant shall pay Tenant's prorated share of the premiums,
in accordance with the formula in Paragraph 4.05(e) for determining Tenant's
share of Common Area costs. If insurance policies maintained by Landlord cover
improvements on real property other than the Project, Landlord shall deliver to
Tenant a statement of the premium applicable to the Property showing in
reasonable detail how Tenant's share of the premium was computed. If the Lease
Term expires before the expiration of an insurance policy maintained by
Landlord, Tenant shall be liable for Tenant's prorated share of the insurance
premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy
of any policy of insurance which Tenant is required to maintain under this
Section 4.04. At least fifteen (15) days prior to the expiration of any such
policy, Tenant shall deliver to Landlord a renewal of such policy. As an
alternative to providing a policy of insurance, Tenant shall have the right to
provide Landlord a certificate of insurance, executed by an authorized officer
of the insurance company, showing that the insurance which Tenant is required to
maintain under this Section 4.04 is in full force and effect and containing such
other information which Landlord reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to
any cancellation or adverse modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal
to Landlord required under this Lease within the prescribed time period
or if any such policy is canceled or modified during the Lease Term
without Landlord's consent, Landlord may obtain such insurance, in which
case Tenant shall reimburse Landlord for the cost of such insurance
within fifteen (15) days after receipt of a statement that indicates the
cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" or A-12 or better, as
set forth in the most current issue of "Best Key Rating Guide". Landlord
and Tenant acknowledge the insurance markets are rapidly changing and
that insurance in the form and amounts described in this Section 4.04
may not be available in the future. Tenant acknowledges that the
insurance described in this Section 4.04 is for the primary benefit of
Landlord. If at any time during the Lease Term, Tenant is unable to
maintain the insurance required under the Lease, Tenant shall
nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of
business, as that coverage may change from time to time. Landlord makes
no representation as to the adequacy of such insurance to protect
Landlord's or Tenant's interests. Therefore, Tenant shall obtain any
such additional property or liability insurance which Tenant deems
necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its property
or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. Upon obtaining the
required policies of insurance, Landlord and Tenant shall give notice to
the insurance carriers of this mutual waiver of subrogation.
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SECTION 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to Tenant.
Such activities and changes are permitted if they do not materially affect
Tenant's use of or access to the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in the Common Areas as, in
Landlord's judgment, are desirable to improve the Project. Tenant shall not
interfere with the rights of Landlord, other tenants or any other person
entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant in
Section 1.11 of the Lease without paying any additional rent. Tenant's parking
shall not be reserved and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. Tenant shall not cause large trucks
or other large vehicles to be parked within the Project or on the adjacent
public streets. Temporary parking of large delivery vehicles in the Project may
be permitted by the rules and regulations established by Landlord. Vehicles
shall be parked only in striped parking spaces and not In driveways, loading
areas or other locations not specifically designated for parking. Handicapped
spaces shall only be used by those legally permitted to use them. If Tenant
parks more vehicles in the parking area than the number set forth in Section
1.11 of this Lease, such conduct shall be a material breach of this Lease. In
addition to Landlord's other remedies under the Lease, Tenant shall pay a daily
charge determined by Landlord for each such additional vehicle. See Rider No 1,
section 23 for additional provisions.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common
Areas in good order, condition and repair and shall operate the Project, as a
first-class industrial/commercial real property development. Tenant shall pay
Tenant's pro rata share (as determined below) of all costs incurred by Landlord
for the operation and maintenance of the Common Areas. Common Area costs
include, but are not limited to, costs and expenses for the following: gardening
and landscaping; utilities, water and sewage charges; maintenance of signs
(other than tenants' signs); premiums for liability, property damage, fire and
other types of casualty insurance on the Common Areas and worker's compensation
insurance; all property taxes and assessments levied on or attributable to the
Common Areas and all Common Area improvements; all personal property taxes
levied on or attributable to personal property used in connection with the
Common Areas; straight-line depreciation on personal property owned by Landlord
which is consumed in the operation or maintenance of the Common Areas; rental or
lease payments paid by Landlord for rented or leased personal property used in
the operation or maintenance of the Common Areas; fees for required licenses and
permits; repairing, resurfacing, repaving, maintaining, painting, lighting,
cleaning, refuse removal, security and similar items; reserves for roof
replacement and exterior painting and other appropriate reserves; and a
reasonable allowance to Landlord for Landlord's supervision of the Common Areas
(tenant's pro rata share of which shall not exceed three percent (3%) of the
Tenant's Base Rents for the Project for the calendar year). Landlord may cause
any or all of such services to be provided by third parties and the cost of such
services shall be included in Common Area costs. Common Area costs shall not
include depreciation of real property which forms part of the Common Areas.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro
rata share of all Common Area costs (prorated for any fractional month) upon
written notice from Landlord that such costs are due and payable, and in any
event prior to delinquency. Tenant's pro rata share shall be calculated by
dividing the square foot area of the Property, as set forth in Section 1.04 of
the Lease, by the aggregate square foot area of the Project which is leased or
held for lease by tenants, as of the date on which the computation is made.
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Tenant's initial pro rata share is set out in Paragraph 1.12(b). Any changes in
the Common Area costs and/or the aggregate area of the Project leased or held
for lease during the Lease Term shall be effective on the first day of the month
after such change occurs. Landlord may, at Landlord's election, estimate in
advance and charge to Tenant as Common Area costs, all real property taxes for
which Tenant is liable under Section 4.02 of the Lease, all insurance premiums
for which Tenant is liable under Section 4.04 of the Lease, all maintenance and
repair costs for which Tenant is liable under Section 6.04 of the Lease, and all
other Common Area costs payable by Tenant hereunder. At Landlord's election,
such statements of estimated Common Area costs shall be delivered monthly,
quarterly or at any other periodic intervals to be designated by Landlord.
Landlord may adjust such estimates at any time based upon Landlord's experience
and reasonable anticipation of costs. Such adjustments shall be effective as of
the next rent payment date after notice to Tenant. Within sixty (60) days after
the end of each calendar year of the Lease Term, Landlord shall deliver to
Tenant a statement prepared in accordance with generally accepted accounting
principles setting forth, in reasonable detail, the Common Area costs paid or
incurred by Landlord during the preceding calendar year and Tenant's pro rata
share. Upon receipt of such statement, there shall be an adjustment between
Landlord and Tenant, with payment to or credit given by Landlord (as the case
may be) so that Landlord shall receive the entire amount of Tenant's share of
such costs and expenses for such period.
SECTION 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the over due amount. The parties agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment.
SECTION 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law.
SECTION 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than once in any consecutive twelve (12)-month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay any deficiency of funds in the impound account to
Landlord upon written request. If Tenant defaults under this Lease, Landlord may
apply any funds in the impound account to any obligation then due under this
Lease.
ARTICLE FIVE: USE OF PROPERTY
SECTION 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
SECTION 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the Project, or which constitutes a nuisance or waste.
Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
SECTION 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous
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materials" or "toxic substances" now or subsequently regulated under any
applicable federal, state or local laws or regulations, including without
limitation petroleum-based products, paints, solvents, lead, cyanide, DDT,
printing inks, acids, pesticides, ammonia compounds and other chemical products,
asbestos, PCBs and similar compounds, and including any different products and
materials which are subsequently found to have adverse effects on the
environment or the health and safety of persons. Tenant shall not cause or
permit any Hazardous Material to be generated, produced, brought upon, used,
stored, treated or disposed of in or about the Property by Tenant, its agents,
employees, contractors, sub-lessees or invitees without the prior written
consent of Landlord, excepting those Hazardous Material items listed in Exhibit
D. Landlord shall be entitled to take into account such other factors or facts
as Landlord may reasonably determine to be relevant in determining whether to
grant or withhold consent to Tenant's proposed activity with respect to
Hazardous Material. In no event, however, shall Landlord be required to consent
to the installation or use of any storage tanks on the Property.
SECTION 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent, except as provided in
section 15 of Rider #1. Tenant shall not conduct or permit any auctions or
sheriff's sales at the Property.
SECTION 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting from
the presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's negligence or
willful misconduct. As used in this Section, the term "Tenant" shall include
Tenant's employees, agents contractors and invitees, if applicable.
SECTION 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant 24 hours prior notice of such entry, except in the case of an emergency.
Landlord may place customary "For Sale" or "For Lease" signs on the Property.
SECTION 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND
ALTERATIONS
SECTION 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
SECTION 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning
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or lighting fixtures or any other cause; (c) conditions arising in or about the
Property or upon other portions of the Project, or from other sources or places;
or (d) any act or omission of any other tenant of the Project. Landlord shall
not be liable for any such damage or injury even though the cause of or the
means of repairing such damage or injury are not accessible to Tenant. The
provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's gross negligence or willful misconduct.
SECTION 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Landlord shall keep the following in good order,
condition and repair: the foundations, exterior walls and roof and other
structural elements of the Property (including painting the exterior surface of
the exterior walls of the Property not more often than once every five (5)
years, if necessary) and all components of electrical, mechanical, plumbing,
heating and air conditioning systems and facilities located in the Property
which are concealed or used in common by tenants of the Project. However,
Landlord shall not be obligated to maintain or repair windows, doors, plate
glass or the interior surfaces of exterior walls. Landlord shall make repairs
under this Section 6.03 within a reasonable time after receipt of written notice
from Tenant of the need for such repairs. If any portion of the Property or any
system or equipment in the Property which Landlord is obligated to repair cannot
be fully repaired or restored, Landlord shall promptly replace such portion of
the Property or system or equipment in the Property, regardless of whether the
benefit of such replacement extends beyond the Lease Term; but if the benefit or
useful life of such replacement extends beyond the Lease Term (as such term may
be extended by exercise of any options), the useful life of such replacement
shall be prorated over the remaining portion of the Lease Term (as extended),
and Tenant shall be liable only for that portion of the cost which is applicable
to the Lease Term (as extended).
(b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease. Tenant waives the benefit of any statute in effect now or in
the future which might give Tenant the right to make repairs at Landlord's
expense or to terminate this Lease due to Landlord's failure to keep the
Property in good order, condition and repair.
SECTION 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all
non-structural interior portions of the Property (including, systems and
equipment) in good order, condition and repair (including interior repainting
and refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the Property
or system or equipment in the Property, regardless of whether the benefit of
such replacement extends beyond the Lease Term; but if the benefit or useful
life of such replacement extends beyond the Lease Term (as such term may be
extended by exercise of any options), the useful life of such replacement shall
be prorated over the remaining portion of the Lease Term (as extended), and
Tenant shall be liable only for that portion of the cost which is applicable to
the Lease Term (as extended). Tenant shall maintain a preventive maintenance
contract providing for the regular inspection and maintenance of the heating and
air conditioning system by a licensed heating and air conditioning contractor,
unless Landlord maintains such equipment under Section 6.03 above. If any part
of the Property or the Project is damaged by any act or omission of Tenant,
Tenant shall pay Landlord the cost of repairing or replacing such damaged
property, whether or not Landlord would otherwise be obligated to pay the cost
of maintaining or repairing such property. It is the intention of Landlord and
Tenant that at all times Tenant shall maintain the portions of the Property
which Tenant is obligated to maintain in an attractive, first-class and fully
operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs reasonably incurred in performing such
maintenance or repair immediately upon demand.
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SECTION 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceed Ten Thousand Dollars ($10,000) in cost
cumulatively over the Lease Term and which are not visible from the outside of
any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request, unless the Landlord requires removal at the
time Landlord grants consent, all improvements will remain in the Premises. If
consent is not required, Tenant has the right to request Landlord determine the
removal requirements at such time as Tenant submits a written request to
Landlord. NOTE: All initial Tenant Improvements as identified on the attached
Exhibit C, shall remain in the Property upon Termination. All alterations,
additions, and improvements shall be done in a good and workmanlike manner, in
conformity with all applicable laws and regulations, and by a contractor
approved by Landlord. Upon completion of any such work, Tenant shall provide
Landlord with "as built" plans, copies of all construction contracts, and proof
of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property, regardless
of whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
SECTION 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear, casualty damage
and condemnation, that Tenant was not otherwise obligated to remedy under any
provision of this Lease. However, Tenant shall not be obligated to repair any
damage which Landlord is required to repair under Section 6.03 or under Article
Seven (Damage or Destruction). In addition, Landlord may require Tenant to
remove any alterations, additions or improvements made without Landlord's
consent or pursuant to Section 6.05 (a) prior to the expiration of the Lease and
to restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
SECTION 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies, not to exceed
$10,000, and, if the damage was due to an act
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or omission of Tenant, or Tenant's employees, agents, contractors or invitees,
the difference between the actual cost of repair and any insurance proceeds
received by Landlord. If Landlord elects to terminate the Lease, Tenant may
elect to continue this Lease in full force and effect, in which case Tenant
shall repair any damage to the Property and any building in which the Property
is located. Tenant shall pay the cost of such repairs, except that upon
satisfactory completion of such repairs, Landlord shall deliver to Tenant any
insurance proceeds received by Landlord for the damage repaired by Tenant.
Tenant shall give Landlord written notice of such election within ten (10) days
after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
SECTION 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
SECTION 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. Except for such possible
reduction in Rent, and except for damages caused by the gross negligence or
intentional misconduct of Landlord or its agents, employees and contractors
Tenant shall not be entitled to any compensation, reduction, or reimbursement
from Landlord as a result of any damage, destruction, repair, or restoration of
or to the Property.
SECTION 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building or 20% of
the parking area in which the Property is located, or which is located on the
Property, is taken, either Landlord or Tenant may terminate this Lease as of the
date the condemning authority takes title or possession, by delivering written
notice to the other within ten (10) days after receipt of written notice of such
taking (or in the absence of such notice, within ten (10) days after the
condemning authority takes title or possession). If neither Landlord nor Tenant
terminates this Lease, this Lease shall remain in effect as to the portion of
the Property not taken, except that the Base Rent and Additional Rent shall be
reduced in proportion to the reduction in the floor area of the Property. Any
Condemnation award or payment shall be distributed in the following order: (a)
first, to any ground lessor, mortgagee or beneficiary under a deed of trust
encumbering the Property, the amount of its interest in the Property; (b)
second, to Tenant, only the amount of any award specifically designated for loss
of or damage to Tenant's trade fixtures or removable personal property; and (c)
third, to Landlord, the remainder of such award, whether as compensation for
reduction in the value of the leasehold, the taking of the fee, or otherwise. If
this Lease is
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not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
SECTION 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent.
SECTION 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant or to any person or
entity who acquires all or substantially all of Tenant's assets ("Tenant's
Affiliate"), provided that the acquirer has the same or greater net worth as
Tenant as of the date of this Lease. In such case, any Tenant's Affiliate shall
assume in writing all of Tenant's obligations under this Lease.
SECTION 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee, without
notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
SECTION 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
SECTION 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord deems relevant. Landlord shall have the right to
withhold consent, if reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or subtenant and the proposed
use of the Property; (ii) the net worth and financial reputation of the proposed
assignee or subtenant; (iii) Tenant's compliance with all of its obligations
under the Lease; and (iv) such other factors as Landlord may reasonably deem
relevant. If Landlord objects to a proposed assignment solely because of the net
worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign), all or a portion of the Property to the
proposed transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the
Lease the Landlord's Share (stated in Section 1.13) of the Profit
(defined below) on such transaction as and when received by Tenant,
unless Landlord gives written notice to Tenant and the assignee or
subtenant that Landlord's Share shall be paid by the assignee or
subtenant to Landlord directly. The "Profit" means (A) all amounts paid
to Tenant for such assignment or sublease (as opposed to for other
Tenant assets),
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including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration paid for
the assignment or sublease, including fees under any collateral
agreements, less (B) costs and expenses directly incurred by Tenant in
connection with the execution and performance of such assignment or
sublease for real estate broker's commissions reasonable ,legal fees not
to exceed $2,000.00 and costs of renovation or construction of tenant
improvements required under such assignment or sublease. Tenant is
entitled to recover such costs and expenses before Tenant is obligated
to pay the Landlord's Share to Landlord. The Profit in the case of a
sublease of less than all the Property is the rent allocable to the
subleased space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying
all amounts to be paid from any assignment or sublease of the Property
within thirty (30) days after the transaction documentation is signed,
and Landlord may inspect Tenant's books and records to verify the
accuracy of such statement. On written request, Tenant shall promptly
furnish to Landlord copies of all the transaction documentation, all of
which shall be certified by Tenant to be complete, true and correct.
Landlord's receipt of Landlord's Share shall not be a consent to any
further assignment or subletting. The breach of Tenant's obligation
under this Paragraph 9.05(b) shall be a material default of the Lease.
SECTION 9.06. NO MERGER. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all sub-tenancies or succeed to the interest of Tenant as
sub-landlord under any or all sub-tenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
SECTION 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
SECTION 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge for a period of 5
days after written notice from Landlord which 5 day notice shall satisfy all
statutory notice requirements;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
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SECTION 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which Tenant would have paid
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and Recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
SECTION 10.04.
SECTION 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
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SECTION 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
SECTION 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may
reasonably require, provided that Tenant's obligations under this Lease shall
not be increased in any material way (the performance of ministerial acts shall
not be deemed material), and Tenant shall not be deprived of its rights under
this Lease. Tenant's right to quiet possession of the Property during the Lease
Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
SECTION 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
SECTION 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
SECTION 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not been
canceled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; (iv) that Landlord is
not in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other representations or information with respect to
Tenant or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver such
statement to Landlord within ten (10) days after Landlord's request. Landlord
may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)-day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the terms
and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been canceled or
terminated except as otherwise represented by Landlord; (iii) that not more than
one month's Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts.
SECTION 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements regularly prepared by Tenant (or any assignee or sub-tenant) to
verify the net worth of Tenant or any assignee, subtenant, or guarantor of
Tenant. In addition, Tenant shall deliver to any lender designated by Landlord
any financial statements required by such lender to facilitate the financing or
refinancing of the Property. Tenant represents and warrants to Landlord that
each such financial statement is a true and accurate statement as
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of the date of such statement. All financial statements shall be confidential
and shall be used only for the purposes set forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
SECTION 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Except to the extent Landlord is found liable in such claim or action, Tenant
shall also indemnify Landlord against and hold Landlord harmless from all costs,
expenses, demands and liability Landlord may incur if Landlord becomes or is
made a party to any claim or action (a) instituted by Tenant against any third
party, or by any third party against Tenant, or by or against any person holding
any interest under or using the Property by license of or agreement with Tenant;
(b) for foreclosure of any lien for labor or material furnished to or for Tenant
or such other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Except to the
extent Landlord is found liable in such claim or action, Tenant shall defend
Landlord against any such claim or action at Tenant's expense with counsel
reasonably acceptable to Landlord or, at Landlord's election, Tenant shall
reimburse Landlord for any legal fees or costs Landlord incurs in any such claim
or action.
SECTION 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent. Landlord agrees to place a cap on said reasonable attorney's
fees at $2,500.00 per occurrence, unless Tenant's request is of such a nature to
substantially exceed $2,500.00 in reasonable attorney's fees; at which time
Tenant shall be given prior notice of estimated costs, and the right to proceed
or withdraw such request. Any Attorney's fees incurred as a result of a breach
of any term or condition contained within this Lease shall not be subject to any
cap.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
SECTION 13.01. NON-DISCRIMINATION. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
SECTION 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30)-day
period and thereafter diligently pursued to completion.
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(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
SECTION 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
SECTION 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents' employees and, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
SECTION 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
SECTION 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above. Notices to Landlord
shall be delivered to the address specified in Section 1.02 above. All notices
shall be effective upon delivery. Either party may change its notice address
upon written notice to the other party.
SECTION 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
SECTION 13.08. NO RECORDATION. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
SECTION 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights of interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
SECTION 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
SECTION 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
SECTION 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes,
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strikes, fire, flood or other casualty, shortages of labor or material,
government regulation or restriction and weather conditions.
SECTION 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
SECTION 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
SECTION 14.01. BROKER'S FEE. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any party other than Landlord's Broker
SECTION 14.02. PROTECTION OF BROKERS. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
SECTION 14.03. AGENCY DISCLOSURE; NO OTHER BROKERS. Landlord and Tenant
each warrant that they have dealt with no other real estate broker(s) in
connection with this transaction except: VOIT COMMERCIAL., who represents
Landlord and Grubb & Ellis, who represents Tenant.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
18
<PAGE> 19
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders which
are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on _______________, 19 _____ NEW GOODYEAR LTD,
a California limited partnership
By:
------------------------------
Its:
------------------------------
"TENANT"
Signed on _________________, 19 _____ MICRO THERAPEUTICS, INC.,
A Delaware Corporation
By:
------------------------------
Executive Officer George Wallace
Its: President & Chief Executive Officer
------------------------------
By:
-----------------------------
Harold A. Hurwitz
Its: Chief Financial Officer
-----------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS(R),
INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
19
<PAGE> 20
EXHIBIT "A" - SITE PLAN
(to be attached)
20
<PAGE> 21
EXHIBIT "B" - FLOOR PLAN
(to be attached)
21
<PAGE> 22
EXHIBIT "C" - TENANT IMPROVEMENTS
(to be attached)
22
<PAGE> 23
EXHIBIT "D" - APPROVED HAZARDOUS MATERIALS
1. Standard office and household cleaning products
2. The materials listed on pages 1-4 attached hereto. In no event shall Tenant
store quantities of more than one (1) quart of any materials or chemicals
listed, excepting 70% isopropyl alcohol which is used to clean work surfaces
and components.
23
<PAGE> 24
EXHIBIT "E" - ENCUMBRANCES
(to be attached)
24
<PAGE> 25
OPTION TO EXTEND TERM LEASE RIDER
This Rider is attached to and made part of that certain Lease (the "Lease")
dated June 10, 1998 between, New Goodyear LTD as Landlord, and Micro
Therapeutics, Inc. as Tenant, covering the Property commonly known as 2 Goodyear
at Irvine California, (the "Property"). The terms used herein shall have the
same definitions as set forth in the Lease. The provisions of this Rider shall
supersede any inconsistent or conflicting provisions of the Lease.
A. OPTION(S) TO EXTEND TERM.
1. GRANT OF OPTION.
Landlord hereby grants to Tenant two (2) option(s) (the "Option(s)") to
extend the Lease Term for additional term(s) of three (3) years each
(the "Extension(s)"), on the same terms and conditions as set forth in
the Lease, but at an increased rent as set forth below. Each Option
shall be exercised only by written notice delivered to Landlord at least
one hundred twenty (120) days before the expiration of the Lease Term or
the preceding Extension of the Lease Term, respectively. If Tenant fails
to deliver Landlord written notice of exercise of an Option within the
prescribed time period, such Option and any succeeding Options shall
lapse, and there shall be no further right to extend the Lease Term.
Each Option shall be exercisable by Tenant on the express conditions
that (a) at the time of the exercise, and at all time prior to the
commencement of such Extension, Tenant shall not be in default under any
of the provisions of the Lease beyond all applicable cure periods and
(b) Tenant has not been ten (10) or more days late in the payment of
rent more than a total of two (2) times during the proceeding 24th month
period.
2. PERSONAL OPTIONS.
The Option(s) are personal to the Tenant named in Section 1.03 of the
Lease or any Tenant's Affiliate described in Section 9.02 of the Lease.
If Tenant subleases any portion of the Property or assigns or otherwise
transfers any interest under the Lease to any entity other than a Tenant
Affiliate prior to the exercise of an Option (whether with or without
Landlord's consent), such Option and any succeeding Options shall lapse.
If Tenant subleases any portion of the Property or assigns or otherwise
transfers any interest of Tenant under the Lease to any entity other
than a Tenant Affiliate after the exercise of an Option but prior to the
commencement of the respective Extension (whether with or without
Landlord's consent), such Option and any succeeding Options shall lapse
and the Lease Term shall expire as if such Option were not exercised. If
Tenant subleases any portion of the Property or assigns or otherwise
transfers any interest of Tenant under the Lease in accordance with
Article 9 of the Lease after the exercise of an Option and after the
commencement of the Extension related to such Option, then the term of
the Lease shall expire upon the expiration of the Extension during which
such sublease or transfer occurred and only the succeeding Options shall
lapse.
B. CALCULATION OF RENT.
The Base Rent during the Extension(s)shall be determined by one or a
combination of the following methods (INDICATE METHOD UPON EXECUTION OF
THE LEASE):
[X] 1. COST OF LIVING ADJUSTMENT (SECTION 2 , BELOW)
Rental Adjustment Date(s): The first day of the 1st, 13th and
25th month(s) of the first and second (see Section 3.02 of the
Lease) Extension(s) of the Lease Term.
------------------------------- --------------------------
------------------------------- --------------------------
------------------------------- --------------------------
------------------------------- --------------------------
<PAGE> 26
2. COST OF LIVING ADJUSTMENT.
The Base Rent shall be increased on the dates specified in Section B.1,
above (the "Rental Adjustment Date(s)") by reference to the Index
defined in Section 3.02 of the Lease or the substitute index described
in Paragraph 3.02(b) of the Lease, as follows: The Base Rent in effect
immediately prior to the applicable Rental Adjustment Date (the
"Comparison Base Rent") shall be increased by the percentage (subject to
the limitations described in Section 3.02 (a)) that the Index has
increased from the month in which the payment of the Comparison Base
Rent commenced through the month in which the applicable Rental
Adjustment Date occurs. In no event shall the Base Rent be reduced by
reason of such computation.
<PAGE> 27
RIDER N0. 1
THIS RIDER NO. 1 ("RIDER NO. 1") is dated for the reference purposes as June 10,
1998 and is made between New Goodyear LTD, a California Limited Partnership
("LANDLORD") and Micro Therapeutics, Inc., a Delaware Corporation, also known as
MTI ("TENANT") to be a part of that certain Industrial Real Estate Lease
(Multi-Tenant Net Form) of even date herewith between Landlord and Tenant (the
"LEASE") concerning a portion of the Property more commonly known as 2 Goodyear
at Irvine California ( the "PROPERTY"). Landlord and Tenant agree that the Lease
is hereby modified and supplemented as follows:
1. CONDITION OF PROPERTY:
Section 6.01 (Existing Conditions) of the Lease shall be amended by
adding the following after the last sentence of Section 6.01:
Subject to paragraphs 24 & 25 of this Rider No. 1 (i) Property is being
leased in an "AS IS" condition with all faults, including any code
violations, and (ii) Tenant has made and is relying solely on its own
investigation of operative or proposed governmental laws and regulations
(including, but not limited to, zoning, environmental, and land use laws
and regulations) to which the Property is or may be subject, and (iii)
Tenant shall rely solely upon its own investigation of the physical and
environmental conditions of the Property, including subsurface
conditions.
"Landlord warrants that the mechanical, electrical, plumbing, lighting
and HVAC systems will be in good working condition at the time Tenant
occupies the Property and until December 1, 1998"
2. TENANT IMPROVEMENTS:
Landlord will provide an allowance of One Hundred Fifty Thousand and
00/100 dollars ($150,000.00) for Tenant's use in the construction of
Tenant Improvements, subject to Landlord's reasonable approval of
proposed Tenant Improvements in accordance with the Attached Exhibit C.
Tenant shall be responsible for all plans, permits and construction. The
allowance shall be funded on a construction draw basis; pro rata in the
proportion that Landlord's Tenant Improvement allowance relates to the
total Tenant Improvement contract cost. The final draw shall occur upon
Tenant's notification to Landlord that Tenant Improvements are completed
per city approved plans and specifications, signed off by the city
building inspector.
In addition to providing the allowance, Landlord will agree to paint the
exterior of the building and re-surface and re-stripe the parking lot
areas, at its sole cost, prior to the Commencement Date.
3. CLEAN ROOM:
Tenant shall be permitted to install a "Clean Room" in the Property,
subject to Landlord's reasonable approval. Tenant shall be permitted to
utilize all or a portion of the Tenant Improvement Allowance for the
design, permitting and construction of the Clean Room. The Clean Room,
including all mechanical equipment required to make it function shall,
subject to Landlord's written approval, become Landlord's property at
expiration of the lease or upon vacancy of the Tenant.
All as built plans reflecting the current configuration of the space
will be provided at Landlord's cost.
MTI shall have the option to hire a licensed contractor and/or
subcontractors of their choosing to complete their Clean Room and
related improvements. Tenant shall be responsible for the implementation
and management of all Tenant Improvement construction. Tenant shall
indemnify Landlord against any labor and material liens.
4. EARLY ACCESS:
Upon execution of the lease, Tenant shall have early access to the Property for
purposes of construction of its Tenant Improvements and installing fixtures and
equipment. The early access period is subject to compliance with any applicable
Orange County or City of Irvine occupancy codes. Tenant shall remain responsible
for utilities expenses during the early access period. The early access period
will terminate and the Commencement Date shall occur on October 1, 1998,
irrespective of the status of the tenant improvements.
5.
<PAGE> 28
6. RIGHT OF FIRST OFFER:
As long as Tenant is not then in default under any of the provisions of
this Lease beyond all applicable cure periods, Tenant shall have an
ongoing the Right of First Offer on any adjacent space in the Project
during the Lease Term, as extended. All space taken under the terms of
Right of First Offer shall be at identical terms and conditions, (at the
time the right is exercised) to those of the base Lease, excepting
Tenant Improvement Allowance and early access. Tenant shall indicate
Tenant's intent to exercise its Right of First Offer within five (5)
days of the date Landlord provides written notice to Tenant, which
notice shall not be given earlier than 6 months prior to space being
available. The Right of First Offer is personal to the Tenant or any
subsidiary or Tenant affiliate.
7.
8. HAZARDOUS MATERIALS:
Section 6.01 (Existing Conditions) shall be amended by adding the
following after the last sentence of Section 6.01:
If, subsequent to the date Tenant accepts possession of the Property, it
is determined that there are any asbestos-containing materials or other
Hazardous Materials that were located in, on or under the Property prior
to Landlord's delivery of the Property to Tenant, and such materials
were not installed by Tenant or any affiliate of Tenant (or any party
acting under Tenant) and such materials are required by applicable law,
by Landlord, or by Landlord's lender to be removed, encapsulated or
otherwise treated ("Remediated"), Landlord, at Landlord's expense, shall
as soon as practicable after notice thereof from Tenant, Remediate said
materials.
9. MULTIPLE DEFAULTS:
If Tenant is in default under this Lease beyond all applicable cure
periods more than one (1) time within any twelve-month period,
irrespective of whether or not such default is cured, then, without
limiting Landlord's other rights and remedies provided for in this Lease
or at law or equity, the Security Deposit shall automatically be
increased by two (2) times the original Security Deposit.
10. AMERICANS WITH DISABILITIES ACT:
Tenant has been advised that Tenant may be subjected to the Americans
with Disabilities Act (the "ADA"), a Federal Law codified at 42 USC
Section 12101 et seq. and Tenant covenants and warrants that Tenant will
comply with all ADA requirements. Among other requirements of the ADA
that could apply to the property, Title III of the ADA requires a Tenant
of "public services" to provide accommodations for hearing, vision and
speech impaired persons. The regulations under Title III of the ADA are
codified at 28 CFR Part 36. Notwithstanding the preceeding language,
Landlord shall be responsible for the cost of any and all ADA compliance
requirements relating to the exterior of the Property, unless a change
in use by Tenant is the cause of additional ADA compliance.
11. COMMON AREA SECTION 4.05(e) (TENANT'S SHARE AND PAYMENT) OF THE LEASE
SHALL BE AMENDED BY ADDING THE FOLLOWING AFTER THE LAST SENTENCE OF
SECTION 4.05(e):
"Common Area Costs shall also include property management (Tenant's
pro-rata share of which will be limited to 3% of the Base Rent), roof
repairs and maintenance, HVAC repairs and maintenance, exterior wall
repair and any other service required to keep the Property in good
order, condition and repair."
12. INSURANCE POLICIES. SECTION 4.04(a) (LIABILITY INSURANCE) OF THE LEASE
SHALL BE AMENDED BY ADDING THE FOLLOWING AFTER THE LAST SENTENCE OF
SECTION 4.04(a):
<PAGE> 29
The Landlord reserves the right to limit the deductible amount, if any,
for bodily/personal injury and/or property damage liability to an amount
no greater than $10,000 per occurrence. The Tenant is fully responsible
for payment of any deductible regardless of its amount (up to $10,000
per occurrence).
13. RULES AND REGULATIONS:
a) Parking or storage of vehicles overnight is prohibited, except
delivery vehicles in Tenant truck wells.
b) Absolutely no parking at any time in any areas designated as "No
Parking" or "Fire Lane" or in any truck dock or ramp position not
a part of the Property.
c) Absolutely no parking of trailers, boats or any other vehicles
or equipment.
d) Absolutely no maintenance is to be performed on any trucks,
automobiles, trailers or other equipment other than tire changes
and safety checks.
e) Unusual expenses created by the washing of vehicles will result
in special assessment to Tenant for water and/or physical repair
of the Property.
f) Absolutely no outside storage is allowed, including but not
limited to pallets, equipment, work in progress, or raw
materials.
g) Tenant shall not do or permit anything to be done which is a
nuisance or interferes with any other tenant in the Project
14. SURRENDER OF PROPERTY:
Upon termination of the Lease, Tenant shall remove all of its Personal
Property and trade fixtures. If Tenant fails to remove its personal
property and fixtures upon the termination of this Lease, the same shall
be deemed abandoned and shall become the property of the Landlord.
15. SIGNAGE:
Tenant shall have the right to install signage, at its sole cost, on the
building subject to the City of Irvine regulations and Irvine Spectrum
CC&R's. Tenant shall remove signage upon vacancy and restore the
building surface to which the signage is affixed to its original
condition.
16. MECHANIC'S LIEN:
Should any mechanics or other lien be filed against the Property or any
part thereof by reason of Tenant's acts or omissions or because of a
claim against Tenant, Tenant shall cause the same to be canceled and
discharged of record by bond or otherwise with ten (10) days of Tenant's
receipt of notice by Landlord.
17. FINANCIAL STRENGTH:
Tenant covenants and warrants that as of the Commencement Date of the
Lease, Tenant has the financial strength and assets to meet all of its
obligations under the terms and conditions of the Lease. Tenant
covenants and warrants, at the time of Lease signature, that neither
Tenant nor any Tenant affiliate (other than Genyx Medical Inc or Enteric
Medical Technologies, Inc.)is : 1) in default under any terms and
conditions of any other lease for real property, 2) in default for any
monetary obligation, 3) in foreclosure on any real property, or 4) under
the protection of any bankruptcy codes.
18. HOLD HARMLESS:
Landlord hereby agrees to hold Tenant harmless from any injury to
Landlord's employees, agents and invitees, except to the extent caused
by or arising in connection with the use of the Property by Tenant or
its employees, agents or invitees, Tenant's breach of this Lease, or any
negligent or willful misconduct by Tenant or any of Tenant's employees,
agents, or invitees.
19. BINDING FORCE:
Submission of this Rider is not an offer to lease or amend the Lease.
This Rider shall become binding upon Landlord and Tenant only when this
Rider is fully executed and delivered by Landlord. In the event Landlord
does not execute and deliver the Rider, then the Rider shall be void and
of no force or effect.
20. RATIFICATION OF LEASE:
<PAGE> 30
The terms of the Lease are amended to reflect the changes set forth
above. In all other respects the terms of the Lease shall be in full
force and effect. In the event of any conflict between this Rider No. 1
and the Lease, the terms of this Rider No. 1 shall be deemed
controlling.
21. CAPITALIZED TERMS:
Except as otherwise expressly provided herein, the capitalized terms and
phrases in this Rider No. 1 shall have the same meanings as are given
such terms in the Lease.
22. AUTHORITY:
If Tenant is a corporation, trust or general or limited partnership,
each individual executing this Rider No. 1 on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Rider No. 1 on behalf of said entity.
23. Truck Parking and Designated Parking:
Notwithstanding any contrary provisions within section 4.05 ( c ), and
provided that Tenant is not in violation of either City of Irvine
regulations or the provisions of the CC&R's affecting the Property,
Tenant may park two (2) company owned delivery vehicles within the
Project.
Landlord will permit Tenant to designate up to 14 parking spaces,
proximate to Tenants entry, as either reserved or visitor spaces by
indicating such on the curb face. Curb face identification shall be
removed by Tenant upon vacancy of the Project. Tenant acknowledges that
Landlord has no obligation to enforce Tenant's exclusive use of the
designated spaces.
24. Limitations on Tenant's Liability.
Tenant shall not have any responsibility or liability for (i) existing
violations of any federal, state, or local law relating to the Property
or the Project as of the date Tenant takes possession of the Property,
including, but not limited to, violations of any law relating to
Hazardous Materials ("Hazardous Materials Laws"), building codes, and,
with respect only to the exterior portions of the Property, the
Americans with Disabilities Act of 1990, 42 U.S.C. Sections 12101 et
seq. and 47 U.S.C. Sections 225 et seq. as amended from time to time,
and any similar or successor federal, state, or local laws
(collectively, the "ADA") (the ADA, Hazardous Materials Laws, building
codes and all of the other foregoing federal, state and local laws shall
be collectively referred to as "Applicable Laws"), (ii) any Hazardous
Materials present in, on, under or about any part of the Property or
Project as of the date Tenant takes possession of the Property or that
are brought into, onto, about, or under any part of the Project (other
than the Property) by anyone other than Tenant or Tenant's agents,
employees, invitees or contractors, or (iii) without limiting the
generality of subparts (i) and (ii) above, the cleanup, remediation, or
removal of any Hazardous Materials present in, on, under or about any
part of the Property or Project as of the date Tenant takes possession
of the Property or that are brought into, onto, about, or under any part
of the Project (other than the Property) by anyone other than Tenant or
Tenant's agents, employees, invitees or contractors.
25. Certain Representations and Warranties of Landlord.
Notwithstanding anything in this Lease to the contrary, Landlord
represents and warrants to Tenant, as of the date hereof and as of the
date Tenant's initial tenant improvements are completed, that (i) there
are no liens, encumbrances, leases, mortgages, deeds of trust or other
encumbrances against Landlord's right, title or interest in or to the
Property or Project other than as set forth on Schedule E attached
hereto, and (ii) to Landlord's knowledge, there are no Hazardous
Materials located in, on, under or about any part of the Property or
Project.
26. Landlord's Indemnity.
<PAGE> 31
Landlord shall defend (with counsel reasonably acceptable to Tenant),
indemnify and hold harmless Tenant and is officers, directors,
shareholders, subsidiaries, employees, agents and representatives from
and against any and all claims, third-party claims, actions, lawsuits
(including, but not limited to, claims, actions and lawsuits brought by
the government or third parties), losses, harm, costs (including, but
not limited to, court costs, costs of appeal, and cleanup, removal and
remediation costs associated with any Hazardous Materials) liabilities,
contribution claims, damages and expenses including, but not limited to,
attorneys' fees and court costs, arising, whether before or after the
expiration or earlier termination of this Lease, out of or in connection
with the gross negligence or intentional misconduct of Landlord or its
employees, contractors or agents.
27. Damage and Destruction.
Subject to Article Seven of this Lease, but, notwithstanding anything in
this Lease to the contrary, if, within four months from receipt of
building permits, Landlord does not substantially complete all repairs
required by Article Seven of this Lease and deliver possession of the
Property to Tenant in accordance with this Lease, then Tenant may
terminate this Lease by giving Landlord written notice within thirty
(30) days after said four month period, which termination shall be
effective upon delivery of such notice. Subject to Article Seven of this
Lease. Landlord shall proceed diligently and in good faith to obtain all
required building permits and to repair the Property and Project.
28. Tenant's Performance Rights.
If Landlord fails to perform any of its obligations under this Lease, including
but not limited to Landlord's repair and maintenance obligations, within the
applicable cure period, and such failure to perform (a) poses an immediate
threat to persons or property in the interior of the Property or otherwise has a
material, adverse impact on the operations or property of Tenant in the interior
of the Property, and (b) continues for a period of more than fifteen (15) days
after Landlord's receipt a Final Notice (as defined below), then Tenant shall
have the right (but not the obligation) to perform such Landlord obligations
sufficiently to eliminate such immediate threat or other material, adverse
impact and to bill Landlord for the reasonable, out-of-pocket cost thereof,
which Landlord shall pay to Tenant within fifteen (15) days of receipt of
Tenant's bill and supporting documentation therefor. As used herein, "Final
Notice" shall mean a written notice given by Tenant to Landlord after the lapse
of all applicable cure periods, which notice must, in order to be effective. (i)
identify with specificity the obligations that Landlord has failed to perform,
and (ii) state with specificity the immediate threat to persons or property, or
other material, adverse impact on the operations or property of Tenant that is
caused by such failure by Landlord, and (iii) state Tenant's intention to
perform such obligation(s), at Landlord's expense pursuant to this Section 28,
if Landlord shall fail to do so within fifteen (15) days, and (iv) state with
specificity the actions that Tenant intends to take, and the estimated cost
thereof.
LANDLORD: TENANT:
NEW GOODYEAR LTD, MICRO THERAPEUTICS, INC.,
A CALIFORNIA LIMITED PARTNERSHIP A DELAWARE CORPORATION
By: By:
----------------------------- ---------------------------------
George Wallace
Its: Title: President and Chief Executive
----------------------------- Officer
By:
----------------------------------
Harold A. Hurwitz
Title: Chief Financial Officer
Date: Date:
--------------------------- ---------------------------------
<PAGE> 1
EXHIBIT 10.12
FIRST AMENDMENT TO DISTRIBUTION AGREEMENT
This First Amendment to Distribution Agreement (this "Amendment") is
made and entered into as of August 17, 1998 (the "Effective Date") by and
between GUIDANT CORPORATION, an Indiana corporation and its Affiliates
("Guidant") having a place of business at 135 Constitution Drive, Menlo Park,
California 94025 and MICRO THERAPEUTICS, INC., a Delaware corporation ("MTI"),
having a place of business at 1062-F Calle Negocio, San Clemente, California
92673.
R E C I T A L S
A. Guidant and MTI have entered into a Distribution Agreement effective
as of November 17, 1997 (the "Distribution Agreement") in which MTI appointed
Guidant as its exclusive distributor of the Products within the Territory for
use by Customers in the Field.
B. All capitalized terms used in this Amendment that are not defined in
this Amendment shall have the meaning as defined in the Distribution Agreement.
C. The parties wish to expand the coverage of the exclusive distribution
rights of Guidant.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth below, the parties agree as follows:
1. The Distribution Agreement is hereby amended at Section 1.9 in which
existing Section 1.9 is deleted and replaced in full as follows:
"Field" means devices and methods of use directed toward
diagnosis, treatment or prevention of disease in the neck and
head, not including stenting of carotid stenosis, and devices and
methods of use of LES directed towards any vascular use or
application.
2. Except as expressly amended herein, the Distribution Agreement shall
continue in full force and effect.
3. This Amendment shall be governed by all the terms and conditions of
the Distribution Agreement. In the event of any conflict between the terms of
the Distribution Agreement and the terms of this Amendment, the terms of this
Amendment will control.
<PAGE> 2
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the Effective Date.
MICRO THERAPEUTICS, INC.
By:
George Wallace,
President and Chief Executive Officer
GUIDANT CORPORATION
By:
Title:
2
<PAGE> 1
EXHIBIT 10.16
FIRST AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT
This FIRST AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT (the
"Amendment"), is entered into as of November 16, 1998, by and between Abbott
Laboratories, an Illinois corporation, on and behalf of itself and its
Affiliates (Collectively, "Abbott") and Micro Therapeutics, Inc., a Delaware
corporation ("MTI").
RECITALS
A. Abbott and MTI entered into an Exclusive Distribution Agreement dated
August 12, 1998 pursuant to which Abbott agreed to act as an exclusive
independent distributor of MTI's Products within the Territory (the
"Distribution Agreement").
B. Abbott and MTI have agreed to amend certain of the provisions
contained in the Distribution Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and subject to and on
the terms and conditions herein set forth, the parties hereto agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms
in this Amendment shall have the respective meanings ascribed to them in the
Distribution Agreement.
2. DISPOSITION OF INVENTORY. Paragraph 14.5.2 shall be deleted and
replaced in its entirety with the following paragraph:
Upon any termination of this Agreement, Abbott may sell all or
any part of its remaining inventory of the Products to Customers or upon
mutual agreement between Abbott and MTI, MTI may agree to repurchase all
or any part of Abbott's remaining inventory of the Products (excluding
discontinued and demonstration units). The price for such inventory
shall be the Cost paid by Abbott to MTI for such Products, plus Abbott's
shipping and handling costs.
3. NO OTHER CHANGES. Except as amended by this Amendment, the
Distribution Agreement shall remain in full force and effect as originally
stated.
<PAGE> 2
IN WITNESS WHEREOF, this First Amendment to Exclusive Distribution
Agreement has been signed on behalf of each of the parties hereto as of the date
first written above.
ABBOTT LABORATORIES
By: _______________________________
Its: _______________________________
MICRO THERAPEUTICS, INC.
By: _______________________________
Its: _______________________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Micro Therapeutics, Inc. on Forms S-8 (File No. 333-23361 and File No.
333-23367) for the Employee Stock Purchase Plan, and for the 1993 Incentive
Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan and
1996 Stock Incentive Plan of our report dated February 17, 1999 on our audits of
the consolidated financial statements of Micro Therapeutics, Inc. as of December
31, 1998 and for the years ended December 31, 1998 and 1997, which report is
included in this 1998 Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
Newport Beach, California
March 26, 1999
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS IN FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
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0
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