<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
________________.
Commission file number 0-6523
MICRO THERAPEUTICS, INC.
(exact name of small business issuer as specified in its charter)
Delaware 33-0569235
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2 Goodyear, Irvine, California 92618
(Address of principal executive offices)
(949) 837-3700
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at July 21, 1999
Common Stock, $.001 par value 7,786,386
Transitional small business disclosure format: Yes [ ] No [X]
Page 1 of 30 Pages
Exhibit Index on Page 27
<PAGE> 2
MICRO THERAPEUTICS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C>
Item 1. Financial Statements
Balance Sheet as of June 30, 1999 (unaudited)..............................3
Statements of Operations (unaudited) for the Three and Six Months
Ended June 30, 1998 and 1999...........................................4
Statements of Cash Flows (unaudited) for the Six Months Ended
June 30, 1998 and 1999.................................................5
Notes to Financial Statements............................................6-7
Item 2. Management's Discussion and Analysis or Plan of Operation.................8-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................25
Item 6. Exhibits and Reports on Form 8-K............................................25
SIGNATURES..................................................................................26
</TABLE>
2
<PAGE> 3
MICRO THERAPEUTICS, INC.
BALANCE SHEET
June 30, 1999
(UNAUDITED)
ASSETS:
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 4,638,849
Short term investments 4,999,277
Accounts receivable, net of allowance for doubtful accounts of $9,794 1,126,880
Inventories, net of allowance for obsolescence of $119,491 1,216,110
Prepaid expenses and other current assets 462,366
------------
Total current assets 12,443,482
Property and equipment, net of accumulated depreciation of $924,223 2,372,698
Patents and licenses, net of accumulated amortization of $136,279 1,308,852
Other assets 78,900
------------
Total assets $ 16,203,932
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 175,947
Accrued salaries and benefits 727,972
Accrued liabilities 431,632
Deferred revenue 535,005
Current portion of equipment line of credit 70,350
------------
Total current liabilities 1,940,906
Deferred revenue 825,000
Equipment line of credit 40,902
Notes payable, net of unamortized discounts of $1,222,314 8,777,686
------------
Total liabilities 11,584,494
------------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $0.001 par value, 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.001 par value, 20,000,000 shares authorized;
7,781,268 shares issued and outstanding 7,781
Additional paid-in capital 39,673,079
Unearned compensation (20,534)
Accumulated deficit (35,040,888)
------------
Total stockholders' equity 4,619,438
------------
Total liabilities and stockholders' equity $ 16,203,932
============
</TABLE>
See notes to unaudited financial statements.
3
<PAGE> 4
MICRO THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------ ------------------------------
June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 1,038,648 $ 1,080,506 $ 1,944,377 $ 1,893,259
Cost of sales 481,496 858,228 908,129 1,507,590
----------- ----------- ----------- -----------
Gross margin 557,152 222,278 1,036,248 385,669
----------- ----------- ----------- -----------
Costs and expenses:
Research and development 1,291,714 1,917,997 2,450,868 3,610,060
Selling, general and administrative 1,475,912 1,040,048 2,829,309 2,736,209
----------- ----------- ----------- -----------
Total costs and expenses 2,767,626 2,958,045 5,280,177 6,346,269
----------- ----------- ----------- -----------
Loss from operations (2,210,474) (2,735,767) (4,243,929) (5,960,600)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 117,561 126,121 253,821 295,802
Interest expense (122,259) (1,964,553) (229,878) (2,364,208)
Other expense, net (4,304) (1,345) (5,630) (24,008)
----------- ----------- ----------- -----------
(9,002) (1,839,777) 18,313 (2,092,414)
----------- ----------- ----------- -----------
Loss before provision for income taxes (2,219,476) (4,575,544) (4,225,616) (8,053,014)
Provision for income taxes 800 800
----------- ----------- ----------- -----------
Net loss $(2,219,476) $(4,575,544) $(4,226,416) $(8,053,814)
=========== =========== =========== ===========
Per share data:
Net loss per share (basic and diluted) $ (0.34) $ (0.64) $ (0.64) $ (1.16)
=========== =========== =========== ===========
Weighted average shares outstanding 6,622,000 7,162,000 6,580,000 6,945,000
=========== =========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
4
<PAGE> 5
MICRO THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,226,416) $ (8,053,814)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 185,597 329,374
Amortization of note payable discounts 77,238 238,307
Compensation related to stock options vesting 29,381 22,756
Loss on sale of equipment 2,864 21,260
Provision for doubtful accounts 734 (2,621)
Provision for inventory obsolescence 50,500 60,921
Debt conversion charge 1,651,585
Change in operating assets and liabilities:
Accounts receivable (79,411) (573,291)
Inventories (146,387) (445,390)
Prepaid expenses and other assets (88,638) (156,129)
Accounts payable 98,713 (577,744)
Accrued salaries and benefits (14,575) 405,826
Accrued liabilities 15,902 26,475
Deferred revenue (114,995)
------------ ------------
Net cash used in operating activities (4,094,498) (7,167,480)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments (8,895,569) (4,999,277)
Maturity of short-term investments 15,200,000 2,499,016
Additions to property and equipment (261,352) (809,674)
Additions to patents and licenses (255,370) (265,867)
Sale of equipment 10,600
Decrease in other assets 202 36,090
------------ ------------
Net cash provided by (used in) investing activities 5,787,911 (3,529,112)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 574,560 88,759
Proceeds from exercise of stock options 152,682 62,165
Borrowings on note payable 2,000,000
Repayments on equipment line of credit (30,695) (35,363)
------------ ------------
Net cash provided by financing activities 2,696,547 115,561
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,389,960 (10,581,031)
Cash and cash equivalents at beginning of year 5,175,687 15,219,880
------------ ------------
Cash and cash equivalents at end of period $ 9,565,647 $ 4,638,849
============ ============
Supplemental schedule of noncash activities:
Unearned compensation related to terminated employees $ 79,542 $ 22,756
Conversion of debt $ 8,245,892
</TABLE>
See notes to unaudited financial statements.
5
<PAGE> 6
MICRO THERAPEUTICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Description of the Company
Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated on June
11, 1993 in California and was reincorporated in Delaware in November 1996
to develop, manufacture and market minimally invasive medical devices for
diagnosis and treatment of neuro and peripheral vascular diseases.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information:
The financial statements included in this Form 10-QSB have been prepared
pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-QSB, are unaudited and do not contain all of
the information required by generally accepted accounting principles to be
included in a full set of financial statements. The financial statements in
the Company's 1998 Annual Report on Form 10-KSB include a summary of
significant accounting policies of the Company and should be read in
conjunction with this Form 10-QSB. In the opinion of management, all
material adjustments necessary to present fairly the results of operations
for such periods have been included. All such adjustments are of a normal
and recurring nature. The results of operations for any interim period are
not necessarily indicative of the results of operations for the entire year.
3. Net Loss Per Share
Net loss per share is calculated under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share," by dividing
net loss by the weighted average number of common shares issued and
outstanding during the period. Potential common shares, represented by
options and convertible debt, have been excluded from the calculations due
to their anti-dilutive effect. Basic and diluted loss per share are the same
for the periods presented.
4. Segment Information
During the three and six months ended June 30, 1998 and 1999, products
related to the Company's Onyx(TM) Liquid Embolic System ("LES"(TM)),
including related access and delivery products, were in various phases of
research, development, clinical and regulatory processes. Accordingly, the
Company's revenues in such periods were derived substantially from its blood
clot therapy products. Additional information with respect to net sales for
such periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------- ---------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Blood clot therapy
United States $1,017,941 $ 852,324 $1,904,611 $1,583,745
International 20,707 95,286 39,766 116,697
---------- ---------- ---------- ----------
1,038,648 947,610 1,944,377 1,700,442
---------- ---------- ---------- ----------
Onyx LES
United States 54,705 73,030
International 39,835 57,545
---------- ---------- ---------- ----------
-- 94,540 -- 130,575
---------- ---------- ---------- ----------
Other
United States 31,896 55,782
International 6,460 6,460
---------- ---------- ---------- ----------
-- 38,356 -- 62,242
---------- ---------- ---------- ----------
Net sales $1,038,648 $1,080,506 $1,944,377 $1,893,259
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
Due to the predominance of blood clot therapy net sales relative to Onyx LES
and other net sales during the three and six months ended June 30, 1998 and
1999, information such as operating income (loss) and total assets was not
used in such periods to evaluate segment performance.
During the three and six months ended June 30, 1999, Abbott Laboratories
("Abbott"), the exclusive distributor of the Company's peripheral blood clot
therapy product line in the United States and Canada (Note 5), accounted for
79% and 83%, respectively, of the Company's sales. No other customer
accounted for 10% or more of the Company's sales during the three or six
months ended June 30, 1999, and there were no customers who accounted for
10% or more of the Company's sales during the three or six months ended June
30, 1998.
5. Distribution Agreement With Abbott
In August 1998, the Company entered into a ten-year distribution agreement
with Abbott that provides Abbott with exclusive rights to distribute the
Company's peripheral blood clot therapy products in the U.S. and Canada. The
distribution agreement required the Company to commit the resources of its
sales representatives for the first six months of the agreement to the
transition of the distribution function to Abbott. This six-month period
terminated on March 31, 1999. In April 1999, Abbott agreed to make an
additional $500,000 payment to the Company solely as consideration for the
continued resource commitment of the Company's sales representatives to the
transition of distribution to Abbott through June 30, 1999. This additional
payment, which is reflected as a reduction of selling expenses in the
accompanying 1999 statements of operations, was received by the Company in
July 1999, and, accordingly, is included in accounts receivable in the
accompanying balance sheet.
6. Debt Conversion
In August 1998, the Company and Abbott entered into convertible subordinated
note, credit and security agreements, under which Abbott provided the
Company with (a) $5 million, in exchange for a subordinated note, due August
2003, convertible at Abbott's option into shares of the Company's Common
Stock at a conversion rate of $13.00 per share, and (b) a $5 million credit
facility, under which the Company borrowed the entire amount available in
November 1998. The amount borrowed under the credit facility, due in
November 2003, was convertible over the five-year life of the underlying
note at the Company's option, subject to certain restrictions, into shares
of the Company's Common Stock at a conversion rate of $15.00 per share. Both
notes had a stated interest rate of 5% per annum, which the Company
determined was lower than interest rates typically associated with similar
debt instruments. Accordingly, the Company recorded discounts aggregating
$1,948,656 upon execution of the note agreements, resulting in an imputed
interest rate over the terms of both notes of 10%.
In May 1999, Abbott and the Company consummated a modification of the
agreements described above. Under the terms of the modification, Abbott
converted $4 million face value of the notes into shares of the Company's
common stock at a conversion rate equal to 125% of the average closing price
of such stock for the five days ended April 30, 1999 (amounting to a
conversion rate of $8.65 per share), and converted the remaining $6 million
face value of such notes into shares of the Company's common stock at a rate
of $12 per share. As required by generally accepted accounting principles,
the Company, in May 1999, recognized a non-recurring, non-cash charge to
debt conversion expense, amounting to $1,651,585, representing the aggregate
fair market value of the incremental shares issued as a result of the
modified conversion rates.
The Company and Abbott also entered into an agreement that provides the
Company an option to require Abbott to purchase up to $3 million of the
Company's common stock at a price of $12 per share. This option became
exercisable on July 29, 1999, and is effective for ninety days thereafter.
To date, the Company has not exercised this option.
7
<PAGE> 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Financial Statements and the
related Notes thereto included elsewhere in this Quarterly Report on Form
10-QSB. This Quarterly Report on Form 10-QSB contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under "Certain Factors That May Affect the Company's Business
and Future Results."
OVERVIEW
Since its inception in June 1993, the Company has been primarily engaged in the
design, development and marketing of minimally invasive devices for treatment of
vascular disease. The Company has a limited history of operations and has
experienced significant operating losses since inception. Operating losses are
expected to continue at least into fiscal 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, and the Castaneda Over The Wire Brush which received FDA approval in
February 1998. In August 1998, the Company entered into a distribution agreement
with Abbott which provides for distribution of such products by Abbott in the
United States and Canada. The Company expects sales, under the distribution
agreement with Abbott, of the products mentioned above, and similar products, to
provide the majority of the Company's revenues at least into fiscal 2000. The
Company currently sells such products outside the United States and Canada
through a limited number of distributors, however, revenues under these
arrangements have not been significant to date.
In November 1997, the Company signed an agreement with Guidant Corporation
("Guidant") to distribute the Company's neuro products in Europe and, in August
1998, that agreement was expanded to include distribution in Europe of the
Company's peripheral embolization products. To date, no significant revenues
have been received under the Guidant arrangement, nor are such revenues expected
until applications of the Company's Onyx(TM) Liquid Embolic System ("LES" (TM))
(formerly marketed as the EMBOLYX(TM) Liquid Embolic System) receive CE Mark
certification, and market training and product launch activities are
substantially underway. In April 1999, the Company obtained CE Mark approval for
the peripheral embolization application of the Onyx LES, and the Company is in
the process of accumulating additional clinical data with respect to this
application before commencing market training activities. In July 1999, the
Company received CE Mark approval for the treatment of arteriovenous
malformations ("AVMs") in the brain using the Onyx LES and, accordingly, the
Company initiated market training activities in July 1999. The Company expects
that product launch activities with respect to the brain AVM application will
commence in the third quarter of 1999. Additional CE Mark certifications of the
Onyx LES are subject to the successful completion of clinical trials, and,
accordingly, the Company does not expect that such certifications will be
received before the fourth quarter of 1999.
In September 1998, the Company entered into a distribution agreement with
Century Medical, Inc. ("Century") which provides for distribution of all the
Company's products by Century in Japan. Revenues are not expected to be derived
from sales in Japan until the Company's products receive regulatory approval in
Japan, the first of which occurred in May 1999. Accordingly, the Company has not
realized significant revenues to date from sales in Japan.
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.
8
<PAGE> 9
Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, actions relating
to regulatory and reimbursement matters, the extent to which the Company's
products gain market acceptance, the rate at which the Company, and third-party
distributors, as applicable, establish their domestic and international sales
and distribution networks, the progress of clinical trials, and the introduction
of competitive products for diagnosis and treatment of neuro and peripheral
vascular disease. The Company's limited operating history makes accurate
prediction of future operating results difficult or impossible. Although the
Company has experienced sales growth in certain recent periods, there can be no
assurance that, in the future, the Company will sustain sales growth or gain
profitability on a quarterly or annual basis or that its growth will be
consistent with predictions made by securities analysts.
The Company currently manufactures product for stock and ships product shortly
after the receipt of orders, and anticipates that it will do so in the future.
Accordingly, the Company has not developed a significant backlog and does not
anticipate that it will develop a significant backlog in the near term.
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended June 30, 1998 and 1999
Net sales for the quarter ended June 30, 1999 increased 4% to $1,080,506 as
compared to $1,038,648 for the corresponding period in 1998. A substantial
portion of the sales in the 1999 quarter were made to Abbott under the terms of
the exclusive distribution agreement with Abbott entered into in August 1998,
discussed below, which resulted in lower average selling prices per unit
relative to the corresponding quarter in 1998, during which sales were made
directly by the Company to end-user customers. In addition, sales during the
second quarter of 1999 were adversely affected by manufacturing issues, being
addressed by Abbott, related to its thrombolytic drug, Abbokinase(R), (urokinase
for injection). The issues surrounding Abbott's ability to supply Abbokinase to
the blood clot therapy market correspondingly affected sales of the Company's
blood clot therapy products. Sales to Abbott under this agreement accounted for
79% of total sales for the quarter ended June 30, 1999. International sales
represented 13% of total sales for the quarter ended June 30, 1999 and 2% of
total sales for the quarter ended June 30, 1998.
Net sales for the six months ended June 30, 1999 decreased 3% to $1,893,259 in
1999 from $1,944,377 in the corresponding period of 1998. This decrease was
attributable, in part, to the substantial portion of sales in the first six
months of 1999 that were made to Abbott, resulting in lower average selling
prices per unit relative to the corresponding period in 1998, during which sales
were made directly by the Company to end-user customers. In addition, the issues
related to Abbott's thrombolytic drug, Abbokinase, affected the Company's sales,
as discussed above. Sales to Abbott during the six months ended June 30, 1999
accounted for 84% of total sales for the period. International sales represented
10% of total sales for the six months ended June 30, 1999 and 2% for the six
months ended June 30, 1998.
On August 12, 1998, the Company entered into a ten-year distribution agreement
with Abbott that provides Abbott with exclusive rights to distribute the
Company's peripheral blood clot therapy products in the U.S. and Canada. Upon
shipment of product by the Company to Abbott, the Company receives an initial
purchase price payment from Abbott, as provided in the agreement. Abbott
provides additional purchase price payments to the Company based upon Abbott's
net sales, as defined in the agreement. The Company 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 receives from Abbott under the agreement, relative
to the unit prices the Company obtained directly from end-user customers, and
(c) a lag in the timing of revenue recognition with respect to the additional
purchase price payments 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.
9
<PAGE> 10
Cost of sales increased to $858,228 for the quarter ended June 30, 1999 from
$481,496 for the corresponding quarter of 1998, and increased, as a percentage
of sales, from 46% in the second quarter of 1998 to 79% in the corresponding
quarter of 1999. The dollar increase is attributable primarily to the increase
in unit sales volume. The increase in the cost of sales percentage was due to
unpredictable sales volume occasioned by the issues surrounding Abbokinase, the
lower unit prices the Company receives from Abbott 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, all as discussed above. Cost of
sales increased from $908,129 for the six months ended June 30, 1998 to
$1,507,590 for the corresponding period in 1999. Cost of sales as a percentage
of sales amounted to 47% for the first six months of 1998, and 80% for the first
six months of 1999. Both the dollar and percentage increases are attributable to
the same factors discussed above with respect to the quarters also ended June
30, 1999 and 1998. The Company expects that products covered by the distribution
agreement with Abbott will continue to 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 considerations
regarding unit prices and timing of the additional purchase price payments,
previously discussed.
Research and development expenses, including regulatory and clinical expenses,
increased 48% from $1,291,714 for the second quarter of 1998 to $1,917,997 for
the corresponding quarter of 1999. For the six months ended June 30 1999, such
costs increased 47%, from $2,450,868 for the six months ended June 30, 1998 to
$3,610,060 for the corresponding period in 1999. These increases were primarily
attributable to a higher level of personnel associated with the Company's
increased research and development activities, including increased expenditures
related to development of the Onyx LES, related clinical trials, market training
and development of access and delivery products. The Company expects to continue
to increase research and development costs for such activities as discussed
above.
Selling, general and administrative expenses decreased 30% from $1,475,912 for
the second quarter of 1998 to $1,040,048 for the corresponding quarter of 1999.
Such expenses for the six months ended June 30, 1999 decreased 3% to $2,736,209,
from $2,829,309 for the corresponding period in 1998. These decreases were
primarily attributable to a payment from Abbott, received by the Company in July
1999, as consideration for the continued resource commitment of the Company's
sales representatives during the second quarter of 1999 to the transition of
distribution to Abbott. Before consideration of such payment, selling, general
and administrative costs increased from 1998 to 1999, due to the elevated
activity level of the Company and the related increases in infrastructure. The
Company expects to maintain or increase the level of its infrastructure and,
accordingly, the level of selling, general and administrative expense,
commensurate with expected increases in sales. However, there is no assurance
that such sales increases will occur.
Interest and other income declined from a net expense of $9,002 for the second
quarter of 1998 to a net expense of $1,839,777 for the corresponding quarter of
1999. Similarly, interest and other income declined from $18,313 for the six
months ended June 30, 1998, to a net expense of $2,092,414 for the corresponding
period in 1999. These changes were due to (a) interest expense related to notes
payable that were issued to Guidant, Abbott and Century at various times during
the second, third and fourth quarters of 1998, and (b) a non-recurring, non-cash
charge, amounting to $1,651,585, related to the early debt conversion by Abbott.
The Company expects that interest expense, net of interest income, will be lower
during the second half of 1999, relative to the corresponding period in 1998,
due to the effects of the aforementioned conversion of debt. In subsequent
quarters, however, it is expected that the effects of continuing decreases in
cash, cash equivalents and short term investments, as such resources are
utilized in operations, will result in increases to net interest expense.
As a result of the items discussed above, the Company incurred a net loss of
$4,575,544 and $8,053,814 for the quarter and six months ended June 30, 1999,
respectively, compared to $2,219,476 and $4,226,416 for the corresponding
respective periods in 1998.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly exceeded its
sales, resulting in an accumulated deficit of $35 million at June 30, 1999. To
fund its operations, the Company raised approximately $15.3 million from the
private placement of equity securities, and completed an initial public offering
in February 1997 of 1,840,000 shares of Common Stock, raising net proceeds of
approximately $10 million. Additionally, in November 1997, the Company received
$5 million from Guidant under terms of a convertible note agreement. In April
1998, the Company achieved a milestone set forth in the agreement with Guidant,
and elected, under the terms of the agreement, to have Guidant loan the Company
$2 million and purchase from it $500,000 of the Company's common stock at
approximately $10.50 per share, the proceeds from which were received in May
1998.
Concurrent with the execution of the distribution agreement with Abbott in
August 1998, the Company and Abbott entered into convertible subordinated note,
credit and security agreements, under which Abbott provided the Company with (a)
$5 million, in exchange for a five-year subordinated note, convertible at
Abbott's option into shares of the Company's Common Stock at a conversion rate
of $13.00 per share, and (b) a $5 million credit facility, available for one
year from the date of the agreement and repayable five years from the date of
the agreement, with amounts borrowed under the facility convertible over the
five-year life of the underlying note at the Company's option, subject to
certain restrictions, into shares of the Company's Common Stock at a conversion
rate of $15.00 per share. In October 1998, the Company elected to borrow the
entire $5 million under this facility, the proceeds of which were received in
November 1998. Both notes had a stated interest rate of 5% per annum. For
financial statement reporting purposes, this rate was adjusted to reflect an
imputed market rate of interest as of the date of each of the notes. In May
1999, Abbott and the Company consummated a modification of the agreements
described above. Under the terms of the modification, Abbott converted $4
million face value of the notes into shares of the Company's Common Stock at a
conversion rate equal to 125% of the average closing price of such stock for the
five days ended April 30, 1999 (amounting to a conversion rate of $8.65 per
share), and converted the remaining $6 million face value of such notes into
shares of the Company's common stock at a rate of $12 per share.
The Company and Abbott also entered into an agreement that provides the Company
an option to require Abbott to purchase up to $3 million of the Company's common
stock at a price of $12 per share. This option became exercisable on July 29,
1999, and is effective for ninety days thereafter. To date, the Company has not
exercised this option.
In October 1998, under the terms of the distribution agreement, Abbott furnished
the Company with a non-refundable $1 million marketing payment upon Abbott's
first commercial sale of product. For financial statement purposes, this payment
is being amortized into income on a straight-line basis over the initial term of
the agreement which continues through 2008.
The distribution agreement required the Company to commit the resources of its
sales representatives in the United States and Canada for the first six months
of the agreement to the transition of the distribution function to Abbott. This
six-month period terminated on March 31, 1999. In April 1999, Abbott agreed to
make a $500,000 payment to the Company solely as consideration for the continued
resource commitment of the Company's sales representatives to the transition of
distribution to Abbott through June 30, 1999. The Company received this payment
from Abbott in July 1999.
Upon shipment of product by the Company to Abbott, the Company receives an
initial purchase price payment from Abbott as provided in the agreement. Abbott
provides additional purchase price payments to the Company based upon Abbott's
net sales, as defined in the agreement.
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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 commenced upon the Company's achievement of a milestone in April 1999,
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 June 30, 1999, for
financial statement reporting purposes, has been adjusted to reflect an imputed
market rate of interest as of the date of the 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 being applied
against Century's purchase orders for the Company's peripheral blood clot
therapy products. The Company recorded this payment as deferred revenue and
recognizes sales revenue from such amount as the Company makes shipments to
Century under such purchase orders. Upon achievement of the first regulatory
approval in Japan for an application of the Onyx LES, Century, under the terms
of the distribution agreement, will make a $1 million advance payment to the
Company, which amount is to be applied against Century's first future purchase
orders for Onyx-related product.
As of June 30, 1999, the Company had cash, cash equivalents and short-term
investments of approximately $9.6 million. Cash used in the Company's operations
for the six months ended June 30, 1999 was approximately $7.2 million,
reflecting the loss from operations, increases in inventories, receivables, and
prepaid expenses, and decreases in accounts payable and deferred revenue, net of
an increase in accrued liabilities. The increase in inventory reflects the
anticipation of additional orders from Abbott, and initial orders from Guidant
and Century, pending regulatory approvals. The increase in receivables consists
primarily of the $500,000 payment from Abbott, received by the Company in July
1999, related to the continued resource commitment of the Company's sales
representatives through June 30, 1999, as previously discussed. Cash used by
investing activities for the six months ended June 30, 1999 was approximately
$3.5 million and primarily reflected the purchase of short-term investments, net
of maturities, expenditures for property and equipment (primarily leasehold
improvements for the Company's new facility, furniture and fixtures, and the
license and installation of a new information systems and related hardware), and
for intellectual property. While continued investments will be made for property
and equipment, the components of which are described above (as regards the
Company's compliance with issues related to the Year 2000, see "Impact of The
Year 2000 Issue," below), and for intellectual property, the Company has no
significant capital commitments as of June 30, 1999. Cash provided by financing
activities was approximately $116,000, consisting of proceeds received by the
Company from issuances of common stock under the Company's Employee Stock
Purchase Plan, and from the exercise by employees, directors and consultants of
stock options, net of repayments by the Company on its equipment line of credit.
The Company plans to finance its capital and operational needs principally from
(a) its existing capital resources at June 30, 1999, including the receipt in
July 1999 of the $500,000 payment from Abbott as consideration for the continued
resource commitment of the Company's sales representatives through June 30,
1999, and (b) proceeds from the credit facility with Century and from the
Company's option to require Abbott to purchase additional shares of the
Company's common stock, should the Company elect to draw upon the credit
facility and exercise the option.
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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 Guidant, Abbott and Century, and similar future agreements,
should any be entered into, progress of the Company's clinical research and
product development programs, the receipt of and the time required to obtain
regulatory clearances and approvals, and the resources the Company devotes to
developing, manufacturing and marketing its products. The Company's capital
requirements will also depend on the demands created by its operational and
development programs.
IMPACT OF THE YEAR 2000 ISSUE
In less than six months, companies may face a potentially serious problem if
information systems, software applications and operational programs written in
the past do not properly recognize calendar dates beginning in the Year 2000
(the "Year 2000 issue"). This problem could affect both information technology
("IT") systems (for example, computer hardware and software) and non-IT systems
(for example, systems or machines with embedded microcontrollers) with the
result being the possible malfunctioning or non-functioning of such systems.
The Company's products do not contain IT or non-IT system components. Moreover,
the Company's assessment of the Year 2000 issue indicates that its manufacturing
processes are not significantly dependent on systems that would be affected by
the Year 2000 issue. Accordingly, the Company estimates that the level of
incremental expenditures it has incurred solely to bring the Company into
compliance with respect to the Year 2000 issue has not exceeded $50,000, and
that future such expenditures would not exceed $50,000. These amounts exclude
planned expenditures in connection with the installation of an enterprise
resources planning system and other software systems which expenditures the
Company would have incurred irrespective of the Year 2000 issue.
The Company has an internal task force that undertakes such activities as
creating awareness within the Company of the Year 2000 issue, assessing the
Company's IT and non-IT systems' compliance with respect to the Year 2000 issue,
implementing remedial action to address non-compliance and establishing controls
for ongoing compliance. As regards IT systems, the Company has obtained written
representations from the manufacturers of the enterprise resource planning
software and the other software systems the Company installed during the first
half of 1999. Based on such written representations, the Company believes that
such software will not be affected by the Year 2000 issue, and the Company
believes that its existing information systems equipment, primarily composed of
personal computers, will be minimally impacted by the Year 2000 issue, as the
Company intends to replace the majority of those systems which may be affected
by this problem 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 has installed, as necessary, systems 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. To date, no specific risks have been identified from
communication requested and received by the Company from its vendors and service
providers.
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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.
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CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS OF THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION ARE UNCERTAIN AND MAY BE IMPACTED BY THE
FOLLOWING FACTORS, AMONG OTHERS, WHICH MAY CAUSE THE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. BECAUSE OF
THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION, THE COMPANY'S PAST PERFORMANCE SHOULD NOT BE
CONSIDERED AN INDICATOR OF FUTURE PERFORMANCE AND INVESTORS SHOULD NOT USE
HISTORICAL RESULTS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.
Early Stage of Development. The Company has only recently commercially
introduced a number of products. Several of its key products, principally
relating to the Onyx LES, are in the early stage of development and, in some
cases, either have not entered full clinical trials or have only recently done
so. Successful commercialization of the Company's products will depend on a
number of factors, including the Company's ability to demonstrate the safety and
efficacy of such products in the clinical setting. There can be no assurance
that the Company's products will be safe and effective in clinical trials or
will ultimately be cleared for marketing by U.S. or foreign regulatory
authorities. Failure to develop safe and effective products, which are approved
for sale on a timely basis would have a material adverse effect on the Company's
business, operating results and financial condition.
Uncertainty of Market Acceptance. Even if the Company is successful in
developing additional safe and effective products that have received marketing
clearance, there can be no assurance that the Company's new products will gain
market acceptance. Acceptance of the Company's Onyx LES will require the Company
to satisfactorily address the needs of potential customers. The target customers
for the Company's products are interventional radiologists and interventional
neuroradiologists. However, there can be no assurance that acceptance of the
Company's products by interventional radiologists and interventional
neuroradiologists will translate into sales. In addition, no assurance can be
given that the Company's market share for its existing products will grow or
that its products which have yet to be introduced will be accepted in the
market. If the Company is unable to gain market acceptance of its current and
future products, the Company's business, operating results and financial
condition would be materially adversely affected.
Rapid Technological Change; New Product Development. The markets for the
Company's products are characterized by rapidly changing technologies and new
product introductions and enhancements. In addition to the risks associated with
market acceptance of the Company's products, the Company's success will depend
to a significant extent upon its ability to enhance and expand the utility of
its products and to develop and introduce innovative new products that gain
market acceptance. Moreover, the Company may encounter technical problems in
connection with its product development that could delay introduction of new
products or product enhancements. There can be no assurance that new
technologies, products or drug therapies developed by others will not reduce the
demand for the Company's products. The Company maintains research and
development programs to continually improve its product offerings, including
adding interventional devices. There can be no assurance however that such
efforts will be successful or that other companies will not develop and
commercialize products based on new technologies that are superior in either
performance or cost-effectiveness to the Company's products.
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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.
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 June 30, 1999, the Company incurred
cumulative losses of approximately $35 million. The Company expects to incur
additional losses as it expands its research and development, manufacturing and
marketing efforts. No assurance can be given that the Company will achieve
significant sales of its products or that such sales will lead to profitability.
There can be no assurance that the Company will not encounter substantial delays
and unexpected expenses related to the introduction of its current and future
products, or the Company's research and development, manufacturing and marketing
efforts. Such delays or expenses could have a material adverse effect on the
Company's business, operating results and financial condition.
Possible Need for Additional Funds; Uncertainty of Additional Financing. The
Company's operations to date have consumed substantial amounts of cash, and the
Company expects 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) earlier financings,
(b) a convertible subordinated note agreement with Guidant entered into in
November 1997, including $2.5 million received by the Company from Guidant in
exchange for debt and common stock upon the achievement of a milestone defined
in the agreement with Guidant, (c) a convertible subordinated note agreement,
credit agreement and distribution agreement with Abbott entered into in August
1998, (d) a convertible subordinated note agreement and distribution agreement
with Century entered into in September 1998, (e) additional capital under the
terms of a credit agreement with Century and an agreement with Abbott, both of
which are described below, should the Company elect to receive proceeds under
either or both of those agreements, and (f) the interest earned on cash, cash
equivalent and short-term investment balances, 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 is entitled to
borrow an additional $2 million based on the achievement of a milestone defined
in the agreement. To date, the Company has not drawn funds under the credit
agreement.
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The distribution agreement with Abbott required the Company to commit the
resources of its sales representatives for the first six months of the agreement
to the transition of the distribution function to Abbott. This six-month period
terminated on March 31, 1999. In April 1999, Abbott agreed to make a $500,000
payment to the Company solely as consideration for the continued resource
commitment of the Company's sales representatives to the transition of
distribution to Abbott through June 30, 1999. The Company received this payment
from Abbott in July 1999. In addition, the Company and Abbott entered into an
agreement that provides the Company an option to require Abbott to purchase up
to $3 million of the Company's common stock at a price of $12 per share. Such
option became exercisable on July 29, 1999, and will remain in effect for ninety
days thereafter. To date, the Company has not exercised this option.
There is no assurance, however, that, should the Company draw funds under the
credit agreement with Century and should the Company elect to exercise its
option to require Abbott to purchase additional shares of the Company's common
stock, 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.
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 August 1,
1999, the Company held twenty-six issued U.S. patents, one issued foreign patent
and has forty-six U.S. and thirty-six foreign patent applications pending. The
Company's issued U.S. patents cover technology underlying the Onyx LES
(including both liquid embolic implantables as well as access and delivery
catheters), carotid and intra-cerebral stents, coatings, the Cragg MicroValve,
infusion wires, and the Cragg Thrombolytic Brush. The expiration dates of these
patents range from 2009 to 2015. The pending claims cover additional aspects of
liquid embolic material, access and microcatheter delivery devices, carotid and
intra-cerebral stent technologies, non-vascular liquid embolic products,
infusion catheters, infusion wires, and the Thrombolytic Brush. Each product
area the Company is pursuing is covered by at least two issued patents and, in
most instances, three pending patents. One of the patents used by the Company is
currently licensed by the Company from Andrew Cragg, M.D. There can be no
assurance that issued patents will provide significant proprietary protection,
that pending patents will be issued, or that products incorporating the
technology in issued patents or pending applications will be free of challenge
from competitors. There also can be no assurance that patents belonging to
competitors will not require the Company to alter its technology and products,
pay licensing fees or cease to market or develop its current or future
technology and products. The Company also relies on trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire equivalent technology or that the
Company can maintain such technology as trade secrets. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States. The failure of the Company to
protect its intellectual property rights could have a material adverse effect on
its business, operating results and financial condition.
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The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. There can be no
assurance that infringement, invalidity, right to use or ownership claims by
third parties will not be asserted against the Company in the future. Although
patent and intellectual property disputes in the medical device industry have
often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms or at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, should the Company decide to litigate such claims, such litigation
could be expensive and time consuming, could divert management's attention from
other matters and could have a material adverse effect on the Company's
business, operating results and financial condition, regardless of the outcome
of the litigation.
Limited Marketing Experience; Lack of Distribution. The Company's experience in
working with third-party distributors is limited. In November 1997, the Company
executed a distribution agreement with Guidant to provide for the distribution
of the Company's neuro vascular product in Europe, and, in August 1998, the
Company and Guidant agreed to expand this distribution agreement to provide for
the distribution of the Company's peripheral embolization applications of the
Onyx LES. In August 1998, the Company executed a distribution agreement with
Abbott to provide for distribution of the Company's peripheral vascular blood
clot therapy products in the United States and Canada, and in September 1998,
the Company executed a distribution agreement with Century to provide for
distribution of all the Company's products in Japan. There can be no assurance,
however, that 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.
Limited Manufacturing Experience. The Company's experience in manufacturing its
products is relatively limited. The Company has found it necessary to expand its
manufacturing capacity in connection with the continued development and
commercialization of its products, and may find it necessary to expand its
manufacturing capacity in the future. Such development and commercialization
requires the additional commitment of capital resources for facilities, tooling
and equipment and for leasehold improvements. The Company expects that such
expansion of its manufacturing capacity would be achieved utilizing the
increased space in its new leased facility, improved efficiencies, automation
and acquisition of additional tooling and equipment. There is no assurance,
however, that the Company would be able to obtain the commitment of necessary
additional capital resources for expansion of its manufacturing capacity, or
that such an expansion, should it occur, would result in improved efficiencies.
Any delay or inability in expanding the Company's manufacturing capacity,
including obtaining the commitment of necessary capital resources, could
materially adversely affect the Company's manufacturing ability, business,
operating results and financial condition.
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Government Regulation. The development, testing, manufacturing and marketing of
the Company's products in the United States are regulated by the U.S. Food and
Drug Administration ("FDA") as well as various state agencies. The FDA requires
governmental clearance of such products before they are marketed. The process of
obtaining FDA and other required regulatory clearances is lengthy, expensive and
uncertain. Moreover, regulatory clearance, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulatory requirements can result in, among other
things, warning letters, fines, suspensions of approvals, product seizures,
injunctions, recalls of products, operating restrictions and criminal
prosecutions. The restriction, suspension or revocation of regulatory approvals
or any other failure to comply with regulatory approvals or requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations. The offer and sale of the Company's current products
required the submission of information to the FDA in the form of a 510(k)
pre-market notification to substantiate label claims and to demonstrate
"substantial equivalence" to a legally marketed Class I or II medical device or
a pre-amendments Class III medical device for which the FDA has not called for
premarket approvals ("PMAs"). Although the Company has received FDA clearance
for many of these products, there can be no assurance that the Company will be
able to obtain the necessary regulatory clearance for the manufacture and
marketing of enhancements to its existing products or future products either in
the United States or in foreign markets on a timely basis or at all. The Company
has made modifications which affect substantially all of its products covered
under 510(k) clearances, which modifications, the Company believes, do not
affect the safety or efficacy of the products and thus, under FDA guidelines, do
not require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or would not require the
Company to submit a new 510(k) notice for any of the changes made to a device.
If the FDA requires the Company to submit a new 510(k) notice for any device
modification, the Company may be prohibited from marketing the modified device
until the 510(k) notice is cleared by the FDA. Commercialization of the
Company's Onyx LES likely will require submission of a PMA application to the
FDA, which generally involves a substantially longer and less certain review
process than that of a 510(k) pre-market notification. In either event, such
approvals or clearances may require human clinical testing prior to any action
on such products by the FDA. Based on the information presented by the Company
regarding the material composition of Onyx, the Company believes the Onyx LES
would be regulated as a device. There can be no assurance, however, that upon
more detailed review of the Onyx LES, the FDA will not at a later date determine
that the Onyx LES should be regulated as a drug. Such a change could
significantly delay the commercial availability of the Onyx LES and have a
material adverse effect on the Company's business, operating results and
financial condition. Delays in receipt of, or failure to receive, regulatory
approvals or clearances to market such products, or loss of previously received
approvals or clearances, would materially adversely affect the marketing of such
products and the Company's business, operating results and financial condition.
In the European Union, the Company will be required to maintain the
certifications it has obtained which are necessary to affix the CE Mark to the
applicable products, and to obtain additional such certifications with respect
to affixing the CE Mark to new products, in order to sell its products in member
countries of the European Union. The Company has received CE Mark certifications
with respect to its peripheral blood clot therapy products, micro catheters,
guidewire, balloon system, and the peripheral vascular and brain AVM
embolization applications of the Onyx LES, the first Onyx LES applications to
receive the CE Mark. The Company anticipates obtaining certifications with
respect to certain additional application of the Onyx LES upon successful
completion of required clinical studies. However, there can be no assurance that
such clinical studies will be successfully completed or that such certifications
will be obtained. Moreover, there can be no assurance that the Company will be
able to maintain its existing certifications. In addition, federal, state, local
and international government regulations regarding the manufacture and sale of
health care products and diagnostic devices are subject to future change and
additional regulations may be adopted which may materially adversely affect the
Company's business, operating results and financial condition.
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Commercial distribution and clinical trials in most foreign countries also are
subject to varying government regulations which may delay or restrict marketing
of the Company's products. Any inability or delay in obtaining approvals would
materially adversely affect the Company's business, operating results and
financial condition.
Manufacturers of medical devices for marketing in the United States are required
to adhere to applicable regulations setting forth detailed Quality System
Requirements, which include development, testing, control and documentation
requirements. The Company's manufacturing processes also are subject to
stringent federal, state and local regulations governing the use, generation,
manufacture, storage, handling and disposal of certain materials and wastes.
Although the Company believes that it has complied in all material respects with
such laws and regulations, the Company is subject to periodic inspection to
ensure its compliance with such laws and regulations. There can be no assurance
that the Company will not be required to incur significant costs in the future
in complying with manufacturing and environmental regulations, or that the
Company will not be required to cease operations in the event of its continued
failure to effect compliance.
Risk of Product Liability Claims. The nature of the Company's business exposes
it to risk from product liability claims. The risk of such claims has increased
in light of a U.S. Supreme Court decision in 1996 concluding that the FDA
regulatory framework does not necessarily preempt personal injury actions
against medical device manufacturers. The Company currently maintains product
liability insurance for its products, with limits of $10 million per occurrence
and an annual aggregate maximum of $10 million. However, there can be no
assurance that the Company's insurance will be adequate to cover future product
liability claims, or that the Company will be successful in maintaining adequate
product liability insurance at acceptable rates. Any losses that the Company may
suffer from any liability claims, and the effect that any product liability
litigation may have upon the reputation and marketability of the Company's
products, may divert management's attention from other matters and may have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Single Source Suppliers; Independent Contract Manufacturers. The
Company purchases certain components used in its products and receives certain
services with respect to its products from third parties. The Company's
dependence on third-party suppliers involves several risks, including limited
control over pricing, availability, quality and delivery schedules. Any delays
in delivery of such components or provision of such services or shortages of
such components could cause delays in the shipment of the Company's products,
which could cause the Company's business, operating results and financial
condition to be adversely affected. The Company's single-source components are
generally acquired pursuant to purchase orders placed in the ordinary course of
business, and the Company has no guaranteed supply arrangements with any of its
single-source suppliers. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could have a
material adverse effect on its business, operating results and financial
condition. There can be no assurance that the Company will not experience
quality control problems, supply shortages or price increases with respect to
one or more of these components in the future. The establishment of additional
or replacement suppliers for certain of these components may delay accessibility
of such components as the Company qualifies such suppliers. Any quality control
problems, interruptions in supply or component price increases with respect to
one or more components could have a material adverse effect on the Company's
business, operating results and financial condition.
20
<PAGE> 21
The Company relies on independent contract manufacturers for the manufacture and
assembly of certain of its products and components. Reliance on independent
contract manufacturers involves several risks, including the potential
inadequacy of capacity, the unavailability of or interruptions in access to
certain process technologies and reduced control over product quality, delivery
schedules, manufacturing yields and costs. Such manufacturers have possession of
and at times title to molds for certain manufactured components of the Company's
products. Shortages of raw materials, production capacity constraints or delays
by the Company's contract manufacturers could negatively affect the Company's
ability to meet its production obligations and result in increased prices for
affected parts. Any such reduction, constraint or delay may result in delays in
shipments of the Company's products or increases in the prices of components,
either of which could have a material adverse effect on the Company's business,
operating results and financial condition. The Company does not have supply
agreements with all of its current contract manufacturers and often utilizes
purchase orders which are subject to supplier acceptance. The unanticipated loss
of any of the Company's contract manufacturers could cause delays in the
Company's ability to deliver product while the Company identifies and qualifies
a replacement manufacturer. There can be no assurance that current or future
independent contract manufacturers will be able to meet the Company's
requirements for manufactured products. Such an event would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company, having completed its move to its new facility in
December 1998, has taken steps to reduce the volume of outside manufacturing and
processing, and to establish on-site capabilities. There can be no assurance,
however, as to whether such a transfer of function from third parties will be
successfully completed.
Dependence Upon Key Personnel. The Company is dependent to a significant extent
upon the contributions, experience and expertise of its founders, certain
members of its management team and key consultants. The Company maintains a
key-man life insurance policy in the amount of $1 million on the life of George
Wallace, the Company's President and Chief Executive Officer, however, there can
be no assurance that the Company's insurance is adequate. In addition, the
Company's success will depend upon its ability to attract and retain additional
highly qualified management, sales, technical, clinical and consulting
personnel. The loss of the services of any of such key personnel or the
inability to attract and retain such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
Third-Party Reimbursement. In the United States, health care providers such as
hospitals and physicians that purchase medical devices generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic procedures. With the implementation of Medicare's Prospective Payment
System for hospital inpatient care (Diagnosis Related Groups or "DRGs") in the
1980s, public and private payors began to reimburse providers on a fixed payment
schedule for patients depending on the nature and severity of the illness. Many
tests and procedures that would have been performed under cost-plus
reimbursement formulas are subject to scrutiny and must be justified in terms of
their impact on patient outcomes. As a result, the incentives are now to conduct
only those tests that will optimize cost-effective care.
The Company could be materially adversely affected by changes in reimbursement
policies of governmental (both domestic and international) or private healthcare
payors to the extent any such changes affect reimbursement for therapeutic or
diagnostic procedures in which the Company's products are used. Adverse changes
in governmental and private third party payors' policies toward reimbursement
for such procedures would have a material adverse effect on the Company's
business, operating results and financial condition.
Risks Associated with International Sales. To date, the 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.
21
<PAGE> 22
Furthermore, international sales in general are subject to inherent risks,
including unexpected changes in regulatory requirements, fluctuating exchange
rates, difficulties in staffing and managing foreign sales and support
operations, additional working capital requirements, customs, duties, tariff
regulations, export license requirements, political and economic instability,
potentially limited intellectual property protection and difficulties with
distributors. In addition, sales and distribution of the Company's products
outside the United States are subject to extensive foreign government
regulation. The Company has in the past avoided losses due to fluctuating
exchange rates associated with international sales by selling its products in
U.S. dollars; however, the Company expects to sell products in selected markets
in local currency and thus be subject to currency exchange risks in association
with such sales. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, operating results and financial
condition.
Large-scale market acceptance of the Company's products will depend on the
availability and level of reimbursement in international markets targeted by the
Company. Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Obtaining reimbursement approvals in each country
can require 12-18 months or longer.
Anti-Takeover Provisions. The Company's Certificate of Incorporation provides
for 5,000,000 authorized shares of Preferred Stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the Board
of Directors without any further vote or action by the stockholders. Moreover,
in May 1999, the Company adopted a stockholders rights plan which enables
stockholders, under certain conditions, to purchase additional shares of the
Company's Common Stock at a discount upon the acquisition of, or an announcement
of a tender offer to acquire, 20% or more of the Company's then-outstanding
Common Stock. In addition, the Company's stock option plans provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could materially adversely affect the price of the Company's Common
Stock.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may materially adversely affect the market price of the Company's Common Stock.
In addition, the market price of the shares of Common Stock is likely to be
highly volatile. Factors such as fluctuations in the Company's results of
operations, failure of such results of operations to meet the expectations of
public market analysts and investors, timing and announcements of technological
innovations or new products by the Company or its competitors, FDA and foreign
regulatory actions, developments with respect to patents and proprietary rights,
timing and announcements of developments, including clinical trials related to
the Company's products, public concern as to the safety of technology and
products developed by the Company or others, changes in health care policy in
the United States and internationally, changes in stock market analyst
recommendations regarding the Company, the medical device industry generally and
general market conditions may have a material adverse effect on the market price
of the Common Stock. In addition, it is likely that during a future quarterly
period, the Company's results of operations will fail to meet the expectations
of stock market analysts and investors and, in such event, the Company's stock
price could be materially and adversely affected.
22
<PAGE> 23
In April 1999, the Company was notified by The Nasdaq-Amex Group ("Nasdaq")
that it did not meet the requirements for the Company's Common Stock to continue
to be listed on the Nasdaq National Market. The Company held discussions with
the holders of its convertible debt, submitted for Nasdaq's consideration a
proposal and definitive plan for compliance, and, in May 1999, consummated
agreements with Abbott resulting in the conversion of $10 million of notes held
by Abbott into shares of the Company's Common Stock, and providing the Company
with an option, effective July 29, 1999 and continuing in effect for ninety days
thereafter, to require Abbott to purchase up to $3 million of the Company's
Common Stock in support of such plan. Nasdaq has informed the Company that it
considers the Company's actions to be sufficient so as to support continued
listing of the Company's Common Stock on the Nasdaq National Market presently.
There is no assurance, however, that the Company will be able to remain in
compliance with the Nasdaq National Market continued listing requirements.
Should Nasdaq determine in the future that such continued listing is not
supported, the Company's stock price could be materially and adversely affected.
Risks Associated with Year 2000 Issue. In less than six months, companies may
face a potentially serious problem if information systems, software applications
and operational programs written in the past do not properly recognize calendar
dates beginning in the Year 2000 (the "Year 2000 issue"). This problem could
affect both information technology ("IT") systems (for example, computer
hardware and software) and non-IT systems (for example, systems or machines with
embedded microcontrollers) with the result being the possible malfunctioning or
non-functioning of such systems.
The Company's products do not contain IT or non-IT system components. Moreover,
the Company's assessment of the Year 2000 issue indicates that its manufacturing
processes are not significantly dependent on systems that would be affected by
the Year 2000 issue. Accordingly, the Company estimates that the level of
incremental expenditures it has incurred solely to bring the Company into
compliance with respect to the Year 2000 issue has not exceeded $50,000, and
that future such expenditures would not exceed $50,000. These amounts exclude
planned expenditures in connection with the installation of an enterprise
resources planning system and other software systems which expenditures the
Company would have incurred irrespective of the Year 2000 issue.
The Company has an internal task force that undertakes such activities as
creating awareness within the Company of the Year 2000 issue, assessing the
Company's IT and non-IT systems' compliance with respect to the Year 2000 issue,
implementing remedial action to address non-compliance and establishing controls
for ongoing compliance. As regards IT systems, the Company has obtained written
representations from the manufacturers of the enterprise resource planning
software and the other software systems the Company installed during the first
half of 1999. Based on such written representations, the Company believes that
such software will not be affected by the Year 2000 issue, and the Company
believes that its existing information systems equipment, primarily composed of
personal computers, will be minimally impacted by the Year 2000 issue, as the
Company intends to replace the majority of those systems which may be affected
by this problem 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 has installed, as necessary, systems 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. To date, no specific risks have been identified from
communication requested and received by the Company from its vendors and service
providers.
23
<PAGE> 24
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.
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 27, 1999. Of the
6,792,458 shares of the Company's common stock issued and outstanding
and entitled to vote at the meeting, there were present at the meeting,
in person or by proxy, the holders of 6,415,742 common shares,
representing 94% of the total number of shares entitled to vote at the
meeting. This percentage represents a quorum. Four proposals were
presented and voted on at the stockholders' meeting.
Proposal One: Each of the five nominees to the Board of Directors was
elected for a one-year term by the stockholders. The directors elected
were: George Wallace, Dick Allen, H. DuBose Montgomery, Kim Blickenstaff
and Wende Hutton. The voting results were the same with respect to each
of the individuals listed above and were as follows: For, 6,349,347;
Withheld, 66,395.
Proposal Two: The stockholders approved an amendment to the Company's
Employee Stock Purchase Plan to increase the shares subject thereto to a
total 200,000 shares. The voting results were: For, 5,177,654; Against,
25,585; Abstain, 1,000; Broker Non-Vote, 1,211,503.
Proposal Three: The stockholders approved an amendment to the Company's
1996 Stock Incentive Plan to increase the shares subject thereto to a
total 2,000,000 shares. The voting results were: For, 5,100,580;
Against, 101,309; Abstain, 2,350; Broker Non-Vote, 1,211,503.
Proposal Four: The appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for the fiscal year ending December
31, 1999 was ratified. The voting results were: For, 6,412,917; Against,
500; Abstain, 2,325.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Index to Exhibits on Page 27 of this Quarterly Report on Form
10-QSB.
(b) REPORTS ON FORM 8-K
On June 2, 1999, the Company filed a Form 8-K with respect to the
execution of an Amendment to the Convertible Subordinated Note
Agreement and Credit Agreement and a Termination of Credit Agreement
and Security Agreement with Abbott, pursuant to Abbott's conversion
of a $5 million Convertible Subordinated Note and a $5 million
Convertible Credit Facility Note into shares of the Company's Common
Stock.
On June 4, 1999, the Company filed a Form 8-K with respect to the
Company's adoption of a Stockholder Rights Plan.
No other reports on Form 8-K were filed, or required to be filed, by
the Company during the quarterly period ended June 30, 1999.
25
<PAGE> 26
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICRO THERAPEUTICS, INC.
Date: August 11, 1999 By: /s/ Harold A. Hurwitz
---------------------
Harold A. Hurwitz
Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
10.1 Amendment to Convertible Subordinated Note Agreement and Credit
Agreement dated May 21, 1999 between the Company and Abbott (1)
10.2 Termination of Credit Agreement and Security Agreement dated May 21,
1999 between the Company and Abbott (2)
10.3 Notice of Conversion of First Note, dated May 21, 1999, executed by (3)
Abbott
10.4 Notice of Conversion of Second Note, dated May 21, 1999, executed by the (4)
Company
10.5 Stockholder Rights Plan (5)
10.6 Second Amendment to Distribution Agreement dated July 23, 1999 between
the Company and Guidant 28
27.1 Financial Data Schedule - Six Months Ended June 30, 1999 30
</TABLE>
(1) Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
dated June 2, 1999
(2) Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K
dated June 2, 1999
(3) Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K
dated June 2, 1999
(4) Incorporated by reference to Exhibit 10.4 of the Company's Form 8-K
dated June 2, 1999
(5) Incorporated by reference to Exhibit 1 of the Company's Form 8-A dated
June 3, 1999
27
<PAGE> 1
EXHIBIT 10.6
SECOND AMENDMENT TO DISTRIBUTION AGREEMENT
This Second Amendment to Distribution Agreement (this "Amendment") is
made and entered into as of July 23, 1999 (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 2 Goodyear, Irvine, California 92718.
R E C I T A L S
A. Guidant and MTI have entered into a Distribution Agreement effective
as of November 17, 1997, as amended, (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 Guidant and MTI have agreed to amend certain of the provisions
contained in the Distribution 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 13.5.2 shall be deleted and
replaced in its entirety with the following paragraph:
Upon termination of this Agreement by Guidant, Guidant may
sell all or any part of its remaining inventory of the Products to
Customers or upon mutual agreement between Guidant and MTI, MTI may
agree to repurchase all or any part of Guidant's remaining inventory of
the Products (excluding discontinued and demonstration units). The price
for such inventory shall be the Cost paid by Guidant to MTI for such
Products, plus Guidant'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 and as amended by the First Amendment to Distribution Agreement.
4. CONFLICTS. 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.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the Effective Date.
<PAGE> 2
MICRO THERAPEUTICS, INC.
By: /s/ George Wallace
--------------------------------------
George Wallace,
President and Chief Executive Officer
GUIDANT CORPORATION
By: /s/ Nicky Spaulding
--------------------------------------
Title: Vice President Business Development
-----------------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS IN FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,639
<SECURITIES> 4,999
<RECEIVABLES> 1,137
<ALLOWANCES> (10)
<INVENTORY> 1,216
<CURRENT-ASSETS> 12,443
<PP&E> 3,297
<DEPRECIATION> (924)
<TOTAL-ASSETS> 16,204
<CURRENT-LIABILITIES> 1,941
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 4,612
<TOTAL-LIABILITY-AND-EQUITY> 16,204
<SALES> 1,893
<TOTAL-REVENUES> 1,893
<CGS> 1,508
<TOTAL-COSTS> 6,346
<OTHER-EXPENSES> (272)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,364
<INCOME-PRETAX> (8,053)
<INCOME-TAX> 1
<INCOME-CONTINUING> (8,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,054)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
