ITEM 2. PROPERTIES
The Company currently leases an approximately 27,000 square foot manufacturing, laboratory and administrative facility in Boston, Massachusetts. The Company also owns an approximately 80,000 square foot, state-of-the-art plant located in Biot, France, and leases an 11,500 square foot warehousing facility in Deluth, Georgia to house the United States operations, sales and marketing activities of the NMT Neurosciences division.
The Company's principal executive offices are located at 27 Wormwood Street, Boston, Massachusetts 02210, and its telephone number is (617) 737-0930.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In March 1999, the Company filed a patent infringement suit in the U.S. District Court for Massachusetts against AGA Medical Corp. ("AGA"), claiming that AGA's Amplatzer Septal Occlusion device violates U.S. Patent No. 5,108,420, which is licensed exclusively to the Company. The Company is seeking to prevent further infringement of its patent as well as monetary damages. In April 1999, AGA served its Answer and Counterclaims denying liability and alleging that the Company has engaged in false or misleading advertising and in unfair or deceptive business practices. AGA's counterclaims seek an injunction and an unspecified amount of damages. In May 1999, the Company answered AGA's counterclaims denying liability. The case is currently in the early states of discovery.
In papers dated November 24, 1999 Elekta AB (publ) filed a request for arbitration in the London Court of International Arbitration ("LCIA") alleging that the Company breached its payment obligation under the Sale and Purchase Agreement between the parties dated May 8, 1998 pursuant to which the Company purchased certain assets from Elekta. Elekta seeks approximately $1.6 million in damages. On January 14, 2000, the Company filed its response with the LCIA in which the Company denied Elekta's claims and indicated that it would assert a counterclaim for approximately $2.5 million for Elekta's breach of the same contract. On February 17, 2000 an arbitrator was appointed, and a Statement of the Case was sent to the LCIA by Elekta on March 23, 2000. The parties are currently in the pleadings stage.
On January 21, 2000, a personal injury suit was filed in the Supreme Court of the State of New York, County of New York by Martin B. Levi, et. al. against Johnson & Johnson, Inc., et. al., including a subsidiary of the Company, claiming damages from placement of a defective Palmaz-Schatz coronary stent during a cardiac catherization procedure. Plaintiffs seek damages in excess of $31 million. The Company has requested that plaintiffs dismiss the Company's subsidiary from the action on the basis that the subsidiary never manufactured and/or distributed the stent product.
Other than as described above, the Company has no material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1999.
EXECUTIVE OFFICERS OF THE COMPANY - ---------------------------------
The executive officers of the Company and their ages as of April 11, 2000 are as follows:
C. LEONARD GORDON was appointed Acting President and Chief Executive Officer of NMT in April 2000. Mr. Gordon, a co-founder of the Company, served as the Company's Chief Executive Officer and President, from August 1990 to January 1996 and as Chairman of the Board from January 1996 until January 1998. Mr. Gordon has served as a director of the Company since its inception in 1986. Mr. Gordon has been engaged in venture capital enterprises for more than 10 years, particularly in the field of new medical technologies and devices. He was co-founder and Chief Executive Office of (i) Oxigene, Inc. a publicly-traded company engaged in the design and development of drugs and (ii) Biofield Corp., a publicly-traded medical device company that has developed a breast cancer detection system. Mr. Gordon served as Chairman of the Board and Chief Executive Officer of Immunotherapy, Inc., a privately-held biotechnology company and as President and Chief Executive Officer of Vacold LLC, a developmental biotechnology company.
DAVID A. CHAZANOVITZ has served as President, NMT Neurosciences Division since July 1998. From January 1996 to July 1998, Mr. Chazanovitz served as President of NMT's Septal Repair Division. Prior to joining the Company, Mr. Chazanovitz served as President and Chief Executive Officer of InnerVentions from April 1995 until January 1996. Mr. Chazanovitz was employed by Bard from 1979 to 1995 in various positions including President of the USCI Angiography Division, Bard Electrophysiology Division and Bard Ventures Division where he was a founder. During his last two and one-half years at Bard, Mr. Chazanovitz had overall responsibility for the septal defect repair program.
WILLIAM J. KNIGHT has served as Vice President of Finance and Administration and Chief Financial Officer since September 1998. From August 1996 until September 1998, Mr. Knight held the position of Vice President Administration and Chief Financial Officer of Zoll Medical Corporation, a medical device manufacturer. From September 1989 to February 1996, Mr. Knight was Vice President, Corporate Controller of Analytical Technology, Inc., a manufacturer of scientific instrumentation, which was acquired by ThermoElectron Corporation in December 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Prices and Recent Sales of Unregistered Securities
The Company's Common Stock is quoted on the Nasdaq National Market System under the symbol NMTI. There were approximately 100 stockholders of record of the Company's Common Stock on April 7, 2000. The following table lists for the periods indicated the high and low bid prices for the Company's Common Stock.
During the fiscal year ended December 31, 1999, the Company issued the following unregistered securities:
In April 1999, the Company issued a warrant to purchase 25,000 shares of Common Stock at an exercise price of $3.41 per share, to a noteholder of the Company. The warrants may be exercised at any time and from time to time until February 14, 2001. The warrant contains weighted-average anti-dilution price protection. These securities were offered and issued in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.
Dividend Policy - ---------------
The Company did not declare or pay any cash dividends on shares of its Common Stock during the fiscal years ended December 31, 1998 and December 31, 1999 and does not anticipate declaring or paying cash dividends in the foreseeable future. The Company expects that any earnings which it may realize will be retained for use in its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data. The following selected consolidated financial data are derived from the Company's Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing elsewhere in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements based on our current expectations, assumptions, estimates and projections about the Company and our industry. These forward-looking statements are usually accompanied by words such as "believes," "anticipates," "plans," "expects" and similar expressions. Forward-looking statements involve risks and uncertainties, and our actual results may differ materially from the results anticipated in these forward-looking statements as a result of certain factors, as more fully described in this section under the caption "Certain Factors That May Affect Future Results."
OVERVIEW
Since its inception in 1986, the Company has focused its efforts of the design, development and commercialization of medical technologies which are delivered by minimally invasive procedures. Products and products under development include septal repair devices, vena cava filters and self-expanding stents. In July 1998, the Company acquired the neurosurgical instruments business ("ENI") of Elekta AB (PUBL) and operated the business as the Company's NMT Neurosciences division. In April 2000, following a decision by the Company's board of directors to discontinue the U.K. operations of its NMT NeuroSciences division, the Company sold certain assets of that division, including the Selector(R) Ultasonic Aspirator, and Ruggles(TM) Surgical instruments products. This sale reflected the Company's strategic decision to refocus its efforts on its core septal repair, filter and stent products.
The Company recorded a $3.5 million loss on this sale comprised of proceeds of $12 million, estimated transaction and other costs of $3.7 million and net assets sold of $11.8 million. The transaction costs consisted principally of legal and accounting fees, severance arrangements with certain employees and other estimated costs associated with discontinuing the operation and consummating the sale.
The Company's initial product, a vena cava filter system, received FDA clearance in 1990. This product is distributed in the United States and certain other countries by Bard and in other markets outside the United States by Bard International. Both distributors are obligated to make annual minimum purchases. The filter component of the current vena cava filter system is manufactured by Lake Region. The Company currently purchases components of its delivery systems of the vena cava filter system under purchase orders with third party suppliers. Final assembly of the vena cava filter system is done by the Company.
In November 1994, the Company entered into an agreement with Boston Scientific pursuant to which Boston Scientific obtained exclusive worldwide rights to develop, manufacture, market and distribute the Company's stent technology and products which incorporate such technology. Under this license agreement, Boston Scientific is responsible for performing clinical trials for stents under development and for reimbursing the Company for stent development costs incurred by the Company. These reimbursements are classified as product development revenues in the Consolidated Statement of Operations. The Company also receives license fees, including milestone payments, royalties based upon product sales and certain manufacturing cost reduction incentive payments from Boston Scientific under the license agreement, which are included in the Company's revenues. See "Results of Operations." Most of the Company's costs associated with its stents are included in research and development expenses.
In February 1996, the Company acquired, through the issuance of Common Stock, the rights to develop and commercialize its septal repair device. The Company commenced sales of the CardioSEAL Septal Occluder at the end of September 1996 in connection with clinical trials of the device, and the device has been sold commercially in Europe and other international markets since July 1997. Since September 1999, the FDA has granted approval for use of the CardioSEAL product under HUD regulations for three indications. The Company manufactures this device at its facility in Boston.
The Company has agreed to make certain royalty payments to Children's Medical Center Corporation based on net sales of the CardioSEAL Septal Occluder. The Company has also agreed to pay certain royalties to Morris Simon, M.D., the Company's Chief Scientific Director, co-founder and a current Director, and to Beth Israel Hospital, Boston, based on sales of products using the technology invented by Dr. Simon relating to the SNF. In addition, pursuant to the Company's employment agreement with Mr. Stephen J. Kleshinski the Company has agreed to pay certain royalties based on sales or licenses of products where Mr. Kleshinski was the sole or joint inventor.
In July, 1998, the Company acquired the neurosurgical instruments business of Elekta AB (PUBL), a Swedish corporation, for approximately U.S. $33 million in cash. In connection with the acquisition, the Company issued a total of 675,000 shares of Common Stock to J.H. Whitney & Co. and to one of its affiliates at a purchase price of $5.80 per share. Jeffrey R. Jay, a director of the Company, is a general partner of J.H. Whitney & Co. and Jeffrey F. Thompson, also a director of the Company, is a Vice President of J.H. Whitney & Co.
The acquisition was financed with $13 million of cash, plus approximately $3.1 million of acquisition costs, and a $20 million subordinated note issued to an affiliate of a significant stockholder of the Company. The subordinated note is due September 30, 2003 with quarterly interest payable at 10.101% per annum. The subordinated debt includes certain restrictive covenants relating to maintenance of certain ratios and cash levels. On September 13, 1999, the Company entered into a $10 million senior secured debt facility with a bank, $8 million of the proceeds of which was used to reduce the principal amount of the $20 million subordinated note. The Company also used $6 million of its own cash to further reduce the principal amount of the $20 million subordinated note. The balance outstanding under the subordinated note at December 31, 1999 was approximately $5.2 million. The remaining $2 million of the senior secured debt facility is available to be drawn down by the Company for working capital purposes, as needed. The facility has a term of three years with interest payable monthly at the bank's prime lending rate on U.S. borrowings and an equivalent market rate on foreign currency borrowings. As of December 31, 1999, the Company was not in compliance with certain of the debt covenants contained in both the subordinated note agreement and the senior secured debt agreement. As a result, the Company negotiated a waiver of default with each of these debtholders. Additionally, subsequent to year end, the Company used the proceeds from its sale of the U.K. operations and certain other assets of the NMT Neurosciences division (See Note 3(a) of the Notes to Consolidated Financial Statements in the accompanying financial statements) to reduce the subordinated note payable and the senior secured debt by $500,000 and $7.3 million, respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues for the year ended December 31, 1999 increased to $35.1 million from $25.1 million for the year ended December 31, 1998. Product sales increased to $32.9 million for the year ended December 31, 1999 from $23.0 million for the year ended December 31, 1998. The increase is primarily attributable to the effect of including a full year's revenues related to the Company's NMT Neurosciences division during 1999 when compared to 1998 as the Company acquired this division on July 8, 1998. Additionally the Company had increased unit sales of vena cava filters and CardioSEAL Septal Occluders in the year ended December 31, 1999 as compared with the year ended December 31, 1998. Finally, in September 1999, the Company received approvals from the FDA for use of the CadioSEAL Septal Occluder under certain HUD regulations which contributed to the increased unit sales of that product during the year ended December 31, 1999.
License fees and royalties for the year ended December 31, 1999 amounted to $2.1 million and consist of royalty payments of $1.5 million and cost-sharing payments received from Boston Scientific of approximately $300,000 and patent license payments of approximately $400,000. The Company recorded $2.0 million in license fees and royalties from Boston Scientific related to its stent technology in the year ended December 31, 1998, consisting of $300,000 of milestone payments, $1.5 million of royalty payments, and $200,000 of cost- sharing payments received from Boston Scientific.
Cost of Product Sales. Cost of product sales increased to $15.2 million for the year ended December 31, 1999 from $10.8 million for the year ended December 31, 1998. The increase is primarily attributable to the effect of including a full year's cost of sales related to the Company's NMT Neurosciences division during 1999 when compared to the partial year in 1998. Also contributing to this increase were costs attributable to the Company's increased unit sales of vena cava filters and CardioSEAL Septal Occluders in the year ended December 31, 1999 as compared with the year ended December 31, 1998. Cost of product sales, as a percent of product sales, remained relatively consistent at 46% for the year ended December 31, 1999 as compared with 47% for the year ended December 31, 1998.
Research and Development. Research and development expense increased to $4.5 million for the year ended December 31, 1999 from $3.6 million for the year ended December 31, 1998. The increase is primarily attributable to the effect of including a full year of research and development expenses related to the Company's NMT Neurosciences division during 1999 when compared to the partial year in 1998. Also contributing to this increase in research and development expense were increased regulatory and clinical trial expenses relating to clinical trials of the CardioSEAL Septal Occluder, as well as for more recent clinical trials related to fenestrated Fontan procedures (FEF), and ventricular septal defects (VSDs) for which the Company received FDA approval under HUD regulations in September 1999. In addition, the Company has had increased activity in the Company's development programs for vena cava filters, including CE Mark approval for its removable vena cava filter in September 1999, and for other products under development.
General and Administrative. General and administrative expenses increased to $9.1 million for the year ended December 31, 1999 from $5.0 million for the year ended December 31, 1998. The increase is primarily attributable to the effect of including a full year of general and administrative expenses related to the Company's NMT Neurosciences division during 1999 when compared to the partial year in 1998. In addition, the Company had increased professional fees and travel expenses related to supporting the operations of the Company's NMT Neurosciences division for the full year ended December 31, 1999 as compared to the partial year for the year ended December 31, 1998.
Selling and Marketing. Selling and marketing expenses increased to $8.4 million for the year ended December 31, 1999 from $4.4 million for the year ended December 31, 1998 primarily attributable to the effect of including a full year of selling and marketing expenses related to the Company's NMT Neurosciences division during 1999 when compared to the partial year in 1998. During 1998, marketing activities related to the CardioSEAL Septal Occluder relating to clinical trials and the commencement of commercial sales of the CardioSEAL Septal Occluder that began in June 1997 in European and other international markets increased. During 1999, the marketing efforts related to these clinical trials decreased as the trials were coming to completion. However, marketing efforts were increased for new clinical trials relating to fenestrated Fontan procedures (FEF), and ventricular septal defects (VSDs) for which the Company received FDA approval under HUD regulations in September 1999.
Write Down of Notes Receivable from Image Technologies Corporation. During the year ended December 31, 1999, the Company performed a detailed review of the ITC operations. Based upon this analysis and discussion with ITC's management and other investors, the Company determined that there was a significant risk that the Company's notes receivable from ITC would not be repaid. The analyses and discussions indicated that at September 30, 1999, (1) ITC had insufficient cash resources to fund its operations, (2) ITC's product revenue had declined during the year ended December 31, 1999 and was significantly below planned levels and (3) ITC was seeking additional capital from numerous sources and that any future financings would likely be dilutive to the Company's equity position and could contain a security interest senior to the Company. Accordingly, the Company charged the carrying value of the notes receivable to operations during the year ended December 31, 1999.
Impairment of Long-lived Asset. In connection with the sale of the U.K. operations and certain other assets of its NMT Neurosciences division on April 5, 2000 (See Note 3(a) of the Notes to Consolidated Financial Statements in the accompanying financial statements as of December 31, 1999), the Company recorded at December 31, 1999 a $6.8 million impairment charge for goodwill recorded upon the acquisition of NMT Neurosciences in July 1998. This impairment charge was determined based upon the Company's analysis of estimated cash flows of NMT Neurosciences and the carrying value of all of the long-lived assets of NMT Neurosciences which were not sold in April 2000. The Company's assessment of the value of the assets of NMT Neurosciences was corroborated by independent outside parties.
Equity in Net Loss of Image Technologies Corporation. During the year ended December 31, 1999 and 1998, the Company recorded $489,000 and $437,000, respectively, as its equity in the loss of ITC. The carrying value of the note receivable from ITC has been reduced by these amounts and charged to operations during the year ended December 31, 1999. See Note 4 of the Notes to Consolidated Financial Statements in the accompanying financial statements as of December 31, 1999.
Interest Expense. Interest expense was $2.8 million for the year ended December 31, 1999 as compared to $1.5 million for the year ended December 31, 1998. The increase was primarily the result of the Company's acquisition of ENI on July 8, 1998 for which the Company borrowed $20 million of subordinated debt, which accrues interest at 10.101% per annum. In addition, the amortization of original issue discount related to the subordinated note of $531,000 and $293,000 for the years ended December 31, 1999 and 1998, respectively, is included in interest expense in the statements of operations. See Note 9 of the Notes to Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999. In April 2000, the Company repaid approximately $7.3 million of outstanding debt obligations from proceeds received from the sale of the U.K. operations and certain other assets of the NMT Neurosciences division. Accordingly, the Company expects interest expense to decrease in 2000. The Company did not allocate interest expense associated with the senior secured debt and subordinated notes to discontinued operations.
Interest Income. Interest income was $480,000 for the year ended December 31, 1999 as compared to $1.2 million for the year ended December 31, 1998. The decrease was due to the Company's lower cash balances as a result of its financing the acquisition of ENI on July 8, 1998 with cash of $13 million, plus approximately $3.1 million of acquisition costs.
Extraordinary Loss on Early Extinguishment of Debt. In connection with the $14 million reduction in September 1999 of its $20 million subordinated note payable to an affiliate of a significant stockholder of the Company (see Note 9 of the Notes to Consolidated Financial Statements in the accompanying financial statements as of December 31, 1999), the Company recorded a $2.6 million extraordinary loss on the early extinguishment of debt in the statement of operations which primarily relates to the accelerated pro-rata write-off of the original issue discount and deferred financing costs of the subordinated note payable.
Provision for Income Taxes. The Company had a provision for income taxes of $180,000 for the year ended December 31, 1999 which represents the taxes on income generated in France by NMT Neuroscience. The Company generated a net operating loss for federal and state income tax purposes in the United States in the year ended December 31, 1999. The Company had a provision for income taxes of $745,000 for the year ended December 31, 1998 based on an operating income before the write-off of in-process research and development expenses of $4,710,000, the equity in loss of ITC of $437,145 and other nondeductible items and an estimated effective tax rate of approximately 40%.
Loss on Sale of Discontinued Operations. On April 5, 2000, the Company sold the U.K. operations and certain other assets of the NMT Neurosciences division, which consisted primarily of the Selector (R) Ultrasonic Aspirator, Ruggles(TM) Surgical Instruments and cryosurgery product lines, including certain assets and liabilities for $12.0 million in cash. The Company recorded a $3.5 million loss on this sale, comprised of proceeds of $12.0 million less estimated transaction costs of $3.7 million, and net assets sold of $11.8 million. The transaction costs consisted principally of legal and accounting fees, severance arrangements with certain employees and other estimated costs associated with discontinuing the operation and consummating the sale. Consolidated Financial Statements in the accompanying Financial Statements as of
December 31, 1999. Included in the loss on sale are the estimated operating results of the discontinued operations for the period from January 1, 2000 to April 1, 2000. The Company has not allocated interest expense to discontinued operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased to $25.1 million from $10.1 million for the year ended December 31, 1997. Product sales increased to $23.0 million for the year ended December 31, 1998 from $8.6 million for the year ended December 31, 1997. The increase is primarily attributable to the effect of including revenues related to the Company's NMT Neurosciences division during 1998 as the Company acquired this division on July 8, 1998. Additionally the increase is attributable to increased unit sales of vena cava filters and CardioSEAL Septal Occluders in the year ended December 31, 1998 as compared with the year ended December 31, 1997.
License fees for the year ended December 31, 1998 amounted to $2.0 million and consist of milestone payments of $300,000, royalty payments of $1.5 million and cost-sharing payments received from Boston Scientific of approximately $200,000. The Company recorded $1.5 million in license fees from Boston Scientific related to its stent technology in the year ended December 31, 1997, consisting of $300,000 of milestone payments, $1.0 million of royalty payments, and $200,000 of cost-sharing payments received from Boston Scientific.
Cost of Product Sales. Cost of product sales increased to $10.8 million for the year ended December 31, 1998 from $3.8 million for the year ended December 31, 1997. The increase is primarily attributable to the effect of including cost of product sales related to the Company's acquisition of the products comprising NMT Neurosciences division. Additionally, the increase is attributable to increased unit sales of vena cava filters and CardioSEAL Septal Occluders in the year ended December 31, 1998 as compared with the year ended December 31, 1997. Cost of product sales, as a percent of product sales, increased to 47% for the year ended December 31, 1998 from 44% for the year ended December 31, 1997. This increase is due primarily to the inclusion of the cost of sales of products of the Company's acquisition of the products comprising NMT Neurosciences division which have a proportionately higher cost of product sales than do the vena cava filter and the CardioSEAL Septal Occluder.
Research and Development. Research and development expense increased to $3.6 million for the year ended December 31, 1998 from $3.0 million for the year ended December 31, 1997. The increase is primarily attributable to the effect of including research and development expenses related to the Company's NMT Neurosciences division during 1998 as the Company acquired this division on July 8, 1998. The increase also reflects increased regulatory and clinical trial expenses relating to clinical trials of the CardioSEAL Septal Occluder that commenced in September 1996, as well as for clinical trials related to the closure of patent foramen ovales (PFO's) and increased activity in the Company's development programs for vena cava filters and other products under development.
General and Administrative. General and administrative expenses increased to $5.0 million for the year ended December 31, 1998 from $2.9 million for the year ended December 31, 1997. The increase is primarily attributable to the effect of including research and development expenses related to the Company's acquisition of the products comprising NMT Neurosciences division during 1998 as the Company acquired this division on July 8, 1998.
Selling and Marketing. Selling and marketing expenses increased to $4.4 million for the year ended December 31, 1998 from $1.0 million for the year ended December 31, 1997. The increase is primarily attributable to the effect of including selling and marketing expenses related to the Company's acquisition of the products comprising NMT Neurosciences division. The increase is also attributable to increases in marketing activities related to both the CardioSEAL Septal Occluder in connection with clinical trials and the commencement of commercial sales of the CardioSEAL Septal Occluder which began in June 1997 in European and other international markets.
Acquired In-Process Research and Development. For the year ended December 31, 1998, the Company recorded $4.7 million of in-process research and development expenses related to the Company's acquisition of ENI. See Note 3(b) of the Notes to Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999. On the date of acquisition, ENI's in-process research and development value was comprised of five primary research and development programs that were expected to reach completion between late 1998 and 2000. At the acquisition date, continuing research and development commitments to complete the projects were expected to be approximately an aggregate of $2.0 million through 2000 ($680,000, $888,000, and $383,000 in 1998, 1999, and 2000, respectively).
For the year ended December 31, 1997, because of the uncertainty relating to the Company's realization of its investment in ITC, the Company recorded $2.4 million of in-process research and development expenses related to that investment. See Note 4 of the Notes to Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999.
Merger and Integration Charge. As a result of the acquisition of ENI, the Company reorganized certain of its operations. In connection with this reorganization, the Company recorded merger and integration charges of $687,000 during the year ended December 31, 1998. See Note 6 of Notes to the Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999.
Restructuring Charge. During the first half of 1997, the Company reorganized its vena cava filter operations and brought the assembly of its straight-line vena cava filters in-house. In connection with this reorganization, the Company recorded a restructuring charge of $194,000 during the year ended December 31, 1997. See Note 5 of Notes to the Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999.
Equity in Net Loss of Image Technologies Corporation. During the year ended December 31, 1998, the Company recorded $437,000 as its equity in the loss of ITC. The carrying value of the note receivable from ITC has been reduced by the amount of the loss recorded by the Company. See Note 4 of the Notes to Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999.
Interest Expense. Interest expense was $1.5 million for the year ended December 31, 1998 as compared to $46,000 for the year ended December 31, 1997. The increase was primarily the result of the Company's acquisition of ENI on July 8, 1998 for which the Company borrowed $20 million of subordinated debt, which accrues interest at 10.101% per annum. In addition, the amortization of original issue discount related to the subordinated note of $293,000 for the year ended December 31, 1998 is included in interest expense in the statements of operations. See Note 9 of the Notes to Consolidated Financial Statements in the accompanying Financial Statements as of December 31, 1999
Interest Income. Interest income was $1.2 million for the year ended December 31, 1998 as compared to $1.6 million for the year ended December 31, 1997. The decrease was due to the Company's lower cash balances as a result of its financing the acquisition of ENI on July 8, 1998 with cash of $13 million, plus approximately $3.1 million of acquisition costs.
Provision for Income Taxes. The Company had a provision for income taxes of $745,000 for the year ended December 31, 1998 based on an operating income before the $4,710,000 write-off of in-process research and development expenses, the equity in loss of ITC of $437,145 and other nondeductible items and an estimated effective tax rate of approximately 40%. For the year ended December 31, 1997 the Company had a provision for income taxes of $229,500 which reflects the non-deductibility of the in-process research and development expenses of $2,449,000, a portion of the $194,000 restructuring charge recorded in the period then ended, and the utilization of carry-forward net operating losses from previous years.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and marketable securities equal to $3.5 million at December 31, 1999 as compared to $4.0 million as of December 31, 1998. During year ended December 31, 1999, the Company's operations used cash of approximately $203,000 which consists of approximately $15 million of cash used by operations prior to approximately $14 million of noncash charges and before changes in working capital items.
In July 1998, the Company financed a portion of the acquisition of ENI with $16.1 million of the Company's cash and a $20 million subordinated note issued to an affiliate of a significant stockholder of the Company. The subordinated note is due September 30, 2003 with quarterly interest payable at 10.101% per annum, The subordinated debt includes certain covenants relating to maintenance of certain ratios and cash levels. On September 13, 1999, the Company entered into a $10 million senior secured debt facility with a bank, $8 million of the proceeds of which was used to reduce the principal amount of the $20 million subordinated note. The Company also used $6 million of its own cash to further reduce the principal amount of the $20 million subordinated note. The balance outstanding under the subordinated note at December 31, 1999 was approximately $5.2 million. The remaining $2 million of the senior secured debt facility is available to be drawn down by the Company for working capital purposes, as needed. The facility has a term of three years with interest payable monthly at the bank's prime lending rate on U.S. borrowings and an equivalent market rate on foreign currency borrowings. As of December 31, 1999, the Company was not in compliance with certain of the debt covenants contained in both the subordinated note agreement and the senior secured debt agreement. As a result, the Company negotiated a waiver of default with each of these debtholders. Additionally, subsequent to year end, the Company used the proceeds from the sale of the U.K. operations and certain other assets of the NMT Neurosciences division (See Note 3(a) of the Notes to Consolidated Financial Statements in the accompanying financial statements) to reduce the subordinated note payable and the senior secured debt by $500,000 and $7.3 million, respectively.
Purchases and capitalized leases of property and equipment for use in the Company's research and development and general and administrative activities amounted to $518,000 for the year ended December 31, 1999. The Company also spent approximately $1.1 million on purchases of property and equipment in 1999 primarily in connection with the Company's implementation of new management information systems, which was financed through capital lease arrangements. Additionally the Company has entered into a finance facility agreement with a bank for borrowings of approximately $475,000 under which borrowings of $428,000 are outstanding as of December 31, 1999. See Note 9(c) of the Notes to Consolidated Financial Statements in the accompanying financial statements.
The Company is party to various contractual arrangements including royalty arrangements and employment and consulting agreements with current employees and consultants which are likely to increase as additional agreements are entered into and additional personnel are retained. Subsequent to year-end, Thomas M. Tully, President and Chief Executive Officer, resigned from the Company. The amount of his severance of approximately $300,000 will be charged to operations during the second quarter of 2000.
The Company also has committed to purchase certain minimum quantities of the vena cava filter from a supplier through June 2001. See Note 10 of Notes to the Consolidated Financial Statements in the accompanying Financial Statements. All of these arrangements require cash payments by the Company over varying periods of time. Certain of these arrangements are cancelable on short notice and certain require termination or severance payments as part of any early termination.
The Company may require additional funds for its research and product development programs, preclinical and clinical testing, operating expenses, regulatory processes, manufacturing and marketing programs and potential licenses and acquisitions. Any additional equity financing may be dilutive to stockholders, and additional debt financing, if available, may involve restrictive covenants. The Company's capital requirements will depend on numerous factors, including the sales of its products, the progress of its research and development programs, the progress of clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, developments and changes in the Company's existing research, licensing and other relationships and the terms of any collaborative, licensing and other similar arrangements that the Company may establish.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the "euro" as their national currency unit and irrevocably established fixed conversion rates between their existing sovereign currencies and the euro. During the three-year transition period between January 1, 1999 and January 1, 2002, the euro will be a "cashless" currency, existing only as a unit of account. Payments made to accounts in these member states may be made either in the denominated legacy currency unit of the account or in euros. Beginning on January 1, 2002, euro banknotes and coins will be introduced, and legacy currency banknotes and coins will be withdrawn from circulation. No later than July 1, 2002, the euro will be the sole national currency unit in these member states, and the legacy currency banknotes and coins will no longer be accepted as legal tender.
The Company conducts a substantial portion of its business within the member countries of the European Union, and accordingly its existing systems are generally capable of accommodating multiple currencies, including the euro.
The Company is assessing the potential impact from the euro conversion in a number of areas, including the following: (1) the competitive impact of cross- border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis; (2) the impact on currency exchange costs and currency exchange rate risk; and (3) the impact on existing contracts.
As of December 31, 1999, the impact of the euro conversion has not had a material impact on the operations of the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time.
WE HAVE HISTORICALLY FAILED TO MEET COVENANTS IN OUR LOAN AGREEMENTS AND MAY FACE DIFFICULTIES IN MEETING THEM IN THE FUTURE.
We financed a significant portion of the acquisition of our neurosurgical instruments business with $20 million of subordinated debt borrowed from an affiliate of J.H. Whitney & Co., one of our significant stockholders. Subsequently, we entered into a $10 million senior secured debt facility with Brown Brothers Harriman & Co. In connection with this refinancing, we negotiated covenants relating to the operation of our business. As of December 31, 1999, we were not in compliance with certain of the debt covenants. In connection with our recent sale of a portion of the neurosurgical instruments business, we obtained a waiver of default from each lender. Although we believe that we will be able to satisfy the covenants as modified, our failure to meet our financial plan could result in our breach of certain of the covenants. If we breach any of these covenants and are not successful in obtaining a waiver, either noteholder could demand immediate repayment of the note. In addition, in the event of a breach of certain of the covenants, the interest rate we owe in connection with the debt may increase. We may seek to refinance this debt. We cannot be certain that we will be able to refinance on terms that are favorable to us or at all.
WE MAY FACE DIFFICULTIES IN SATISFYING OUR FUTURE CAPITAL REQUIREMENTS.
In the event that we are unable to obtain access to additional capital on terms that are favorable to us or at all, we may fail to meet our financial plan. Moreover, our failure to meet our financial plan could result in our breach of certain debt covenants. Our capital requirements will depend on a number of factors, including:
. product sales; . progress of research and development programs and preclinical and clinical testing; . cost and time involved in obtaining regulatory approvals, and cost of filing; prosecuting, defending and enforcing patent claims and other intellectual property rights; and . unanticipated needs for capital, such as, a successful claim for indemnification by the buyer of our neurosurgical instruments business against us under the purchase agreement.
WE FACE CHALLENGES IN REFOCUSING OUR BUSINESS STRATEGY.
In connection with the commercialization of our CardioSEAL product and the recent sale of a portion of our neurosurgical instruments business, we have had to refocus our business strategy. This refocusing has placed significant demands on management and other resources. Our future success will depend on our ability to manage and implement our refocused business strategy effectively, including by:
. developing and improving our operational, financial and other internal systems; . improving our sales and marketing capabilities; and . continuing to train, motivate and manage our employees.
WE FACE UNCERTAINTIES WITH RESPECT TO COMMERCIALIZATION, PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE OF OUR PRODUCTS.
Before certain of our products can be marketed and sold in the United States, including our CardioSEAL product, we may be required to conduct further research, product development, preclinical and clinical testing and obtain additional governmental regulatory approvals. We cannot be certain that our current products, or products currently under development, will achieve or continue to have market acceptance. Certain of the medical indications that can be treated by our devices can also be treated by surgery, drugs or other medical devices. Currently, the medical community widely accepts many alternative treatments, and these other treatments have a long history of use. We cannot be certain that our devices and procedures will be able to replace such established treatments or that either physicians or the medical community, in general, will accept and utilize our devices or any other medical products that we may develop. In addition, our future success depends, in part, on our ability to develop additional products. Even if we determine that a product candidate has medical benefits, the cost of commercializing that product candidate may be too high to justify development. In addition, competitors may develop products that are more effective, cost less or are ready for commercial introduction before our products. If we are unable to develop additional, commercially viable products, our future prospects will be limited.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY BECAUSE OF INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY.
The medical device industry is characterized by rapidly evolving technology and intense competition. Existing and future products, therapies, technological approaches and delivery systems will continue to compete directly with our products. Many of our competitors have substantially greater capital resources, greater research and development, manufacturing and marketing resources and experience and greater name recognition than we do. In addition, new surgical procedures and medications could be developed that replace or reduce the importance of current or future procedures that utilize our products. As a result, any products that we develop may become obsolete before we recover any expenses incurred in connection with development of these products.
OUR FUTURE SUCCESS MAY DEPEND IN PART UPON MAINTENANCE OF BUSINESS RELATIONSHIPS WITH COLLABORATORS.
We have entered into distribution agreements with Bard Radiology and Bard International granting them exclusive distribution rights to our SNF, and into a license agreement with Boston Scientific granting Boston Scientific exclusive worldwide rights to develop, manufacture, market and distribute our stent technology, along with products incorporating such technology. Although Bard Radiology and Bard International have agreed not to sell competing filters, Boston Scientific is not prohibited from selling other stents and, in fact, manufactures and licenses from others a variety of stents that may compete with our stents. Boston Scientific may choose to emphasize such other stents in its developmental and marketing efforts. We cannot be certain that our arrangements will be renewed or that our existing relationships with Bard Radiology, Bard International or Boston Scientific will continue in their current form. Our business could be materially adversely affected if these arrangements prove unsuccessful or if these companies terminate their arrangements with us, negotiate lower prices, sell additional competing products, whether manufactured by themselves or others, or otherwise alter the nature of their relationships with us.
OUR LIMITED MANUFACTURING HISTORY, DEPENDENCE ON THIRD PARTY MANUFACTURERS AND THE POSSIBILITY OF NON-COMPLIANCE WITH MANUFACTURING REGULATIONS RAISE UNCERTAINTIES WITH RESPECT TO OUR ABILITY TO COMMERCIALIZE FUTURE PRODUCTS.
We use third parties to manufacture and distribute certain of our products. If our third party manufacturers experience delays or difficulties in producing, packaging or distributing our products, market introduction and subsequent sales of such products would be adversely affected, and we might have to seek alternative sources of supply. We cannot be certain that we will be able to enter into alternative supply arrangements at commercially acceptable rates, if at all. If we are unable to obtain or retain third party manufacturers on commercially acceptable terms, we may not be able to commercialize medical products as planned.
The FDA and other regulatory authorities require that our products be manufactured according to rigorous standards including, but not limited to, Good Manufacturing Practice and ISO 9000. These regulatory requirements may significantly increase our production or purchasing costs and may even prevent us from making or obtaining our products in amounts sufficient to meet market demand. If we, or a third party manufacturer, change our approved manufacturing process, the FDA will require a new approval before that process could be used. Failure to develop our manufacturing capabilities may mean that even if we develop promising new products, we may not be able to produce them profitably, as a result of delays and additional capital investment costs.
WE MAY BE UNABLE TO SUCCESSFULLY MARKET OUR PRODUCTS DUE TO LIMITED MARKETING AND SALES EXPERIENCE.
Our neurosurgical implants and septal repair devices are generally marketed directly through our direct sales force. Because we have marketed our older products through third parties, we have limited experience marketing our products. In order to market directly the CardioSEAL Septal Occluder and any related products, we will have to develop a marketing and sales organization with technical expertise and distribution capabilities.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS.
Our success will depend, in part, on our ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. We cannot be certain that:
. any pending patent applications or any future patent application will result in issued patents; . the scope of any patent protection will exclude competitors or provide competitive advantages to us; . any of our patents will be held valid if subsequently challenged; or . others will not claim rights in or ownership of the patents and other proprietary rights held by us.
Furthermore, we cannot be certain that others have not or will not develop similar products, duplicate any of our products or design around any patents issued or that may be issued in the future to us or to our licensors. Whether or not patents are issued to us or to our licensors, others may hold or receive patents which contain claims having a scope that covers products developed by us. We could incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by
third parties. In addition, we may be required to obtain licenses to patents or proprietary rights from third parties. There can be no assurance that such licenses will be available on acceptable terms, if at all.
AS A RESULT OF GOVERNMENT REGULATIONS, WE MAY EXPERIENCE LOWER SALES AND EARNINGS.
The manufacture and sale of medical devices intended for commercial distribution are subject to extensive governmental regulations in the United States. Medical devices generally require pre-market clearance or pre-market approval prior to commercial distribution. Certain material changes or modifications to medical devices are also subject to regulatory review and clearance or approval. The regulatory approval process is expensive, uncertain and lengthy. If granted, the approval may include significant limitations on the indicated uses for which a product may be marketed. In addition, any products that we manufacture or distribute are subject to continuing regulation by the FDA. We cannot be certain that we will be able to obtain necessary regulatory approvals or clearances for our products on a timely basis or at all. The occurrence of any of the following events could have a material adverse effect on our business, financial condition and results of operations:
. delays in receipt of, or failure to receive, regulatory approvals or clearances; . the loss of previously received approvals or clearances; . limitations on the intended use of a device imposed as a condition of regulatory approvals or clearances; or . our failure to comply with existing or future regulatory requirements.
In addition, sales of medical device products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Failure to comply with foreign regulatory requirements also could have a material adverse effect on our business, financial condition and results of operations.
WE FACE UNCERTAINTIES WITH RESPECT TO THE AVAILABILITY OF THIRD PARTY REIMBURSEMENT.
In the United States, Medicare, Medicaid and other government insurance programs, as well as private insurance reimbursement programs, greatly affect revenues for suppliers of health care products and services. Such third party payors may affect the pricing or relative attractiveness of our products by regulating the maximum amount, if any, of reimbursement which they provide to the physicians and clinics using our devices, or any other products that we may develop. If, for any reason, the third party payors decided not to provide reimbursement for our products, this would materially adversely affect our ability to sell our products. Moreover, mounting concerns about rising health care costs may cause the government or private insurers to implement more restrictive coverage and reimbursement policies in the future. In the international market, reimbursement by private third party medical insurance providers and by governmental insurers and providers varies from country to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third party governmental reimbursement.
WE MAY NOT HAVE SUCCESSFULLY REDESIGNED THE CLAMSHELL SEPTAL REPAIR DEVICE.
Between 1989 and 1991, Bard sponsored trials of an earlier version of the septal repair device, known as the Clamshell. In 1991, Bard discovered fractures of the stainless steel framework in certain of the devices implanted during such clinical trials and, following such discovery, suspended its clinical trials worldwide except for patients whose status of being at high risk for surgery made their use of the Clamshell particularly necessary. We determined that the fractures were caused by "metal fatigue", resulting from higher than anticipated forces acting on the Clamshell. Our redesign efforts resulted in the design of the current version of the septal repair device. Although the CardioSEAL Septal Occluder has undergone in vitro testing and has obtained limited humanitarian use designation by the FDA, we cannot be certain that such testing accurately simulates the actual forces in the human body or that similar fractures will not occur with the CardioSEAL Septal Occluder. If such fractures occur with adverse clinical consequences, our efforts to commercialize the CardioSEAL Septal Occluder may be significantly delayed, as we may be required to invest significant resources in further design and engineering of the device, or we may even have to discontinue development efforts.
PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS AND UNINSURED OR UNDERINSURED LIABILITIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
The testing, marketing and sale of implantable devices and materials carry an inherent risk that users will assert product liability claims against us or our third party distributors. In these lawsuits, users might allege that their use of our devices had adverse effects on their health. A product liability claim or a product recall could have a material adverse effect on our business, financial condition and results of operations. Certain of our devices are designed to be used in life-threatening situations where there is a high risk of serious injury or death. Although we currently maintain limited product liability insurance coverage, we cannot be certain that in the future we will be able to maintain such coverage on acceptable terms or that current insurance or insurance subsequently obtained will provide adequate coverage against any or all potential claims. Furthermore, we cannot be certain that we will avoid significant product liability claims and the attendant adverse publicity. Any product liability claim or other claim with respect to
uninsured or underinsured liabilities could have a material adverse effect on our business, financial condition, and results of operations.
INTENSE INDUSTRY COMPETITION FOR QUALIFIED EMPLOYEES THREATENS OUR ABILITY TO ATTRACT AND RETAIN NECESSARY, QUALIFIED PERSONNEL.
In the medical device field, there is intense competition for qualified personnel, and we cannot be assured that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. Both the loss of the services of existing personnel as well as the failure to recruit additional qualified scientific, technical and managerial personnel in a timely manner would be detrimental to our anticipated growth and expansion into areas and activities requiring additional expertise such as marketing. The failure to attract and retain such personnel could adversely affect the our business.
ITEM 7A.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to market risk in the form of interest rate risk and foreign currency risk. Interest rate risk is immaterial to the Company. As an international concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time and could have a material adverse impact on the Company's financial condition and results of operations. The Company's most significant foreign currency exposures relate to the United Kingdom and France, as a result of its manufacturing activities and assets in those countries. The accounts of the Company's foreign subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency Translation. In translating the accounts of the foreign subsidiaries into U.S. dollars, assets and liabilities are translated at the rate of exchange in effect at the end of each reporting period, while stockholders' equity is translated at historical rates. Revenue and expense accounts are translated using the weighted average exchange rate in effect during the year. The Company's foreign currency transaction gains or losses are included in the accompanying consolidated statements of operations and amounted to a foreign currency transaction gain of $105,000 for the year ended December 31, 1999 as compared with a foreign currency transaction loss of $88,000 for the year ended December 31, 1998. The Company records the effects of changes in balance sheet items (i.e., cumulative foreign currency translation gains and losses) as a component of consolidated stockholders' equity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial statements required to be filed hereunder are filed as Appendix A hereto, are listed under Item 14(a) and are incorporated herein by this reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in part under the caption "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K and in part in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on June 1, 2000 (the "2000 Proxy Statement") under the caption "Proposal 1 -- Election of Directors," which section is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the Board.
The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is contained in the 2000 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the 2000 Proxy Statement under the caption "Proposal 1 -- Election of Directors," which section is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is contained in the 2000 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management," which section is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is contained in the 2000 Proxy Statement under the caption "Certain Transactions," which section is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements. The following documents are filed as Appendix A -------------------- hereto and are included as part of this Annual Report on Form 10-K:
Financial Statements of NMT Medical, Inc.: Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements
(b) Financial Statement Schedules. The Company is not filing any financial ----------------------------- statement schedules as part of this Annual Report on Form 10-K because such schedules are either not applicable or the required information is included in the financial statements or notes thereto.
(c) Exhibits. The exhibits filed as part of this Annual Report on -------- Form 10-K are listed in the Exhibit Index immediately preceding such exhibits, and are incorporated herein by this reference. The Company has identified with asterisks in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 14(c) of Form 10-K.
(d) Reports on Form 8-K. The Company did not file any Reports on Form 8-K ------------------- during the fiscal quarter ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NMT MEDICAL, INC.
By: /s/ C. Leonard Gordon ____________________________________________ C. Leonard Gordon Acting President and Chief Executive Officer
Dated: April 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Appendix A ----------
NMT MEDICAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NMT MEDICAL, INC. AND SUBSIDIARIES:
A-1
Report of Independent Public Accountants
To NMT Medical, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of NMT Medical, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NMT Medical, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts April 5, 2000
A-2
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying Notes are an integral part of these Consolidated Financial Statements.
A-3
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Notes are an integral part of these Consolidated Financial Statements.
A-4
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Consolidated Statements of Stockholders' Equity - (continued)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
A-5
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes are an integral part of these Consolidated Financial Statements.
A-6
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
NMT Medical, Inc. (formerly Nitinol Medical Technologies, Inc.) (the Company) designs, develops and markets innovative medical devices that utilize advanced technologies and are delivered by minimally invasive procedures. The Company's products are designed to offer alternative approaches to existing complex treatments, thereby reducing patient trauma, shortening procedure, hospitalization and recovery times and lowering overall treatment costs. The Company's patented medical devices include self-expanding stents, vena cava filters and septal repair devices (the CardioSeal Septal Occluder). The Company's stents have been commercially launched in Europe and in the United States (U.S.) for certain indications, its vena cava filters are marketed in the U.S. and abroad and the CardioSEAL Septal Occluder is sold commercially in the U.S. for certain humanitarian uses only, and in Europe and other international markets. Through its NMT Neurosciences division, the Company develops, manufactures, markets and sells specialty implants and instruments for neurosurgery including cerebral spinal fluid shunts, the Spetzler Titanium Aneurysm Clip and endoscopes and instrumentation for minimally invasive surgery. On April 5, 2000, the Company sold the U.K. operations of its NMT Neurosciences division including the Selector Ultrasonic Aspirator, Ruggles Surgical Instruments and cryosurgery product lines, including certain assets and liabilities, for approximately $12.0 million cash (see Note 3(a)). The results of these discontinued operations have been included in the accompanying financial statements for the years ended December 31, 1999 and 1998.
As of December 31, 1999, the Company was not in compliance with certain of the debt covenants contained in both the subordinated note agreement and the senior secured debt agreement discussed in Notes 9(a) and 9(b). The Company obtained a waiver of default with each of these debtholders and also subsequently paid down approximately $7.8 million of this debt from the proceeds of the sale of the U.K. operations of NMT Neurosciences.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
A-7
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(b) Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting periods and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents, Marketable Securities and Long-Term Investments in Marketable Securities
The Company considers all investments with maturities of 90 days or less from the date of purchase to be cash equivalents and all investments with original maturity dates greater than 90 days to be marketable securities. Marketable securities are classified as current or long-term based on their remaining maturity as of the balance sheet date.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company has classified certain of its marketable securities as held-to- maturity and available-for-sale and its long-term investments in marketable securities as held-to-maturity. Held-to-maturity securities represent those securities for which the Company has the intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities represent those securities that do not meet the classification of held-to- maturity, are not actively traded and are reported at fair market value with unrealized gains and losses included in stockholders' equity. There were no unrealized gains or losses as of December 31, 1999 or 1998.
Cash and cash equivalents, which are carried at cost and approximate market, consist of cash and money market accounts.
A-8
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities and Long-Term Investments in Marketable Securities--(continued)
Marketable securities, with a weighted average maturity of approximately 7 1/2 months at December 31, 1998, consist of the following:
There were no realized gains or losses on the sale of available-for-sale securities during 1999 and 1998.
Long-term investments in marketable securities, with a weighted average maturity of approximately 15 months at December 31, 1998, are carried at cost, which approximates market, and consist of the following:
A-9
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Cash and Cash Equivalents, Marketable Securities and Long-Term Investments in Marketable Securities--(continued)
In addition, the following amounts of interest receivable generated from the Company's cash and cash equivalents, marketable securities, and long-term investments in marketable securities are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets:
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
Finished goods consist of materials, labor and manufacturing overhead.
(e) Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of an estimate of the fair value of certain financial instruments. The Company's financial instruments consist of cash and cash equivalents, marketable securities, long-term investments in marketable securities, accounts receivable and debt obligations. The estimated fair value of these financial instruments approximates their carrying value at December 31, 1999 and 1998, respectively. The estimated fair values have been determined through information obtained from market sources and management estimates.
A-10
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(e) Financial Instrument--(continued)
The Company does not have any material derivative or any other financial instruments as defined by SFAS No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with Off- Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consist primarily of trade accounts receivable. Accounts receivable subject the Company to the potential for credit risk with customers in the health care industry. The Company performs ongoing credit evaluations of its customers' financial condition but does not require collateral. Historically, the Company has not experienced significant losses related to its accounts receivable. The Company utilizes primarily one distributor for the sales of its filter products. This distributor had amounts due to the Company of approximately $748,000 and $992,000 as of December 31, 1999 and 1998, respectively. This distributor accounted for 26%, 33%, and 65% of product revenues for fiscal 1999, 1998 and 1997, respectively. The Company also had one customer whose revenues accounted for 12% and 10% of product revenues for fiscal 1999 and 1998. This customer's accounts receivable balance represented 5% and 8%, respectively of total accounts receivable for the years ended December 31, 1999 and 1998. The Company has a number of accounts receivable denominated in foreign currencies that are translated at year-end exchange rates. For the years ended December 31, 1999 and 1998, foreign sales accounted for 48% and 45% of total revenues, respectively.
(g) Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 addresses accounting and reporting requirements for impairment of long-lived assets based on their fair market values.
A-11
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(g) Impairment of Long-Lived Assets--(continued)
The carrying value of intangible assets, principally goodwill, is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related business unit. At December 31, 1999, the Company recorded a $6,801,000 impairment charge for goodwill recorded upon the acquisition of NMT Neurosciences in July 1998. This impairment charge was determined based upon the Company's analysis of estimated future cash flows of NMT Neurosciences and the carrying value of all of the long-lived assets of NMT Neurosciences which were sold in April 2000. The Company's assessment of the value of the assets of NMT Neurosciences was corroborated by independent outside parties.
(h) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to operations using the straight-line method, which allocates the cost of property, plant and equipment over the following estimated useful lives:
(i) Revenue Recognition
The Company records product sales upon shipment to the customer. Products sold to the Company's distributors are not subject to a right of return for unsold product. License fees, royalties and product development revenue are recognized as earned.
A-12
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(j) Net Loss per Common and Potential Common Share
The Company applies SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. In accordance with Staff Accounting Bulletin (SAB) No. 98, the Company has determined that there were no nominal issuances of common stock or potential common stock in the periods prior to the Company's initial public offering. Diluted loss per share is the same as basic loss per share as the effects of the Company's potential common stock (2,066,956, 1,933,273 and 1,746,861 shares for the years ended December 31, 1999, 1998 and 1997, respectively) are antidilutive.
(k) Foreign Currency
The accounts of the Company's subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, the accounts of the Company's foreign subsidiaries are translated from their local currency, which is the functional currency, into U.S. dollars, the reporting currency, using the exchange rate at the balance sheet date. Income and expense accounts are translated using an average rate of exchange during the period. Cumulative foreign currency translation gains or losses are reflected as a separate component of consolidated stockholders' equity and amounted to a cumulative loss of approximately $708,000 for the year ended December 31, 1999 and a cumulative gain of $687,000 for the year ended December 31, 1998. There was no foreign currency translation gains or losses for the year ended December 31, 1997. Additionally, the Company had a foreign currency exchange transaction gain of approximately $105,000 for the year ended December 31, 1999 and foreign currency losses of approximately $88,000 and $15,000 for the years ended December 31, 1998 and 1997, respectively. Foreign currency transaction gains and losses result from differences in exchange rates between the functional currency and the currency in which a transaction is denominated and are included in the consolidated statement of operations in the period in which the exchange rate changes.
A-13
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(l) Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. If presented on the statement of operations, comprehensive net loss would have increased the reported net loss by $1,395,000 for the year ended December 31, 1999 and decreased the net loss by $687,000 for the year ended December 31, 1998.
(m) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 as amended by SFAS No. 137, Deferral of the effective date of the FASB Statement No. 133 is effective for fiscal quarters beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting disclosure standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Company does not expect adoption of this statement to have a material impact on its consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition." This bulletin established guidelines for revenue recognition. The Company does not expect the adoption of this methodology to have a material impact on the financial condition or results of operations.
(n) Pension Obligations
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The statement is effective for fiscal years beginning December 15, 1997. During the year ended December 31, 1998, the Company adopted the provisions of SFAS No. 132, which establishes accounting and reporting disclosure standards for pension and other postretirement benefit plans. As part of the acquisition of Elekta Neurosurgical Instruments (ENI) (See Note 3(b)), the Company assumed a defined benefit plan covering substantially all of its U.K. employees. This defined benefit plan was included in liabilities assumed by the purchaser of the Company's U.K. operations in April 2000 (see Note 3(a)).
A-14
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(n) Pension Obligation--(continued)
In October 1996, the Company adopted a qualified defined contribution plan, the Nitinol Medical Technologies, Inc. 401(k) Plan (the 401(k) Plan) pursuant to which U.S. employees may defer up to 15% of their salary, subject to certain limitations. The Company did not make any employee matching or other discretionary contributions to the 401(k) Plan for the years ended December 31, 1999, 1998 and 1997.
(o) Prior-Year Account Balances
Certain prior-year account balances have been reclassified to be consistent with the current year's presentation.
A-15
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(p) Noncash Investing and Financing Activities
The following table summarizes the supplemental disclosures of the Company's noncash financing and investing transactions for the periods indicated below:
(3) NMT NEUROSCIENCES DIVISION
(a) Sale of U.K. Operations of NMT Neurosciences Division
On April 5, 2000, the Company sold the U.K. operations of its NMT Neurosciences division including the Selector Ultrasonic Aspirator, Ruggles Surgical Instruments and cryosurgery product lines and certain assets and liabilities for $12.0 million in cash. The Company recorded a $3.5 million loss on this sale, comprised of net proceeds of $12.0 million less estimated transaction and other costs of $3.7 million, and net assets sold of $11.8 million. The transaction costs consisted principally of legal and accounting fees, severance arrangements with certain employees and other estimated costs associated with discontinuing the operation and consummating the sale.
A-16
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) NMT NEUROSCIENCES DIVISION--(CONTINUED)
(a) Sale of U.K. Operations of NMT Neurosciences Division--(continued)
The net assets sold as of December 31, 1999 consist of the following:
The consolidated financial statements of the Company have been restated to reflect the financial results of the U.K. entity as a discontinued operation for the years ended December 31, 1999 and 1998. The Company did not allocate interest expense associated with the senior secured debt and subordinated notes discussed in Notes 9(a) and 9(b) to discontinued operations. The discontinued operation is estimated to have break-even operating results for the first quarter of 2000.
The Company used approximately $7.3 million of the proceeds from this sale to fully pay down its senior secured debt agreement and $500,000 to pay down its subordinated note agreement as discussed in Notes 9(a) and 9(b).
(b) Acquisition of Elekta Neurosurgical Instruments
On July 8, 1998, the Company acquired ENI, the neurosurgical instruments business of Elekta AB (PUBL), a Swedish corporation, for approximately $33 million, plus acquisition costs of approximately $3.1 million. The acquisition has been accounted for as a purchase in accordance with the requirements of Accounting Principles Board (APB) Opinion No. 16, Business Combinations, and accordingly ENI's results of operations are included in those of the Company beginning on the date of the acquisition. The transaction was financed with $13 million of the Company's cash, $3.1 million of acquisition costs and $20 million of subordinated debt borrowed from an affiliate of a significant stockholder of the Company (see Note 9(a)). A significant portion of the purchase price was identified as intangible assets in an independent appraisal, using proven valuation procedures and techniques.
A-17
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) NMT NEUROSCIENCES DIVISION--(CONTINUED)
(b) Acquisition of Elekta Neurosurgical Instruments--(continued)
These intangible assets included $4.7 million for acquired in-process research and development for projects that did not have future alternative uses. This allocation represents the estimated fair market value based on risk-adjusted cash flows related to the in-process research and development programs. The in-process research and development consists of five primary research and development programs that were expected to reach completion between late 1998 and 2000. At the acquisition date, continuing research and development commitments to complete the projects were expected to be approximately $2.0 million through 2000.
These estimates are subject to change given the uncertainties of the development process. At the date of acquisition, the development of these programs had not yet reached technological feasibility and the in-process research and development had no alternative future uses. Accordingly, these costs were written off during the year ended December 31, 1998. For income tax purposes, a significant portion of the acquisition represented the purchase of stock with a carryover tax basis. Accordingly, a deferred tax liability has been established to account for the book and tax differences in book value for building and leasehold improvements.
The remaining premium of approximately $17.2 million was allocated to the following identifiable assets, goodwill and other intangibles and will be amortized over periods of 7 to 30 years:
A-18
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) NMT NEUROSCIENCES DIVISION--(CONTINUED)
(b) Acquisition of Elekta Neurosurgical Instruments--(continued)
The total consideration allocated to the fair market value of assets and liabilities acquired on the purchase date is as follows, net of cash acquired of approximately $2.2 million:
The Company issued 113,793 shares of the Company's $.001 par value common stock, valued at $5.80 per share, to a significant stockholder as a finders' fee in connection with the acquisition. In addition, the Company incurred direct acquisition costs of approximately $1.9 million. These amounts have been included in the purchase price.
The following table presents selected unaudited financial information of the Company and the neurosurgical division of Elekta AB, assuming the companies combined on January 1, 1998. The unaudited pro forma results are not necessarily indicative of either the actual results that would have occurred had the acquisition been consummated on January 1, 1998 or of future results:
A-19
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INVESTMENT IN IMAGE TECHNOLOGIES CORPORATION
In May 1997, the Company invested $2.3 million in Image Technologies Corporation (ITC) in exchange for 345,722 shares of ITC's redeemable convertible Series A preferred stock, $.01 par value per share, which represented a 23% ownership interest in ITC. During the years ended December 31, 1999 and 1998, the Company recorded $489,000 and $437,000, respectively, as its equity in the net loss of ITC. Under the terms of this agreement, the Company also extended to ITC a $2 million credit line that bears interest at 10% per annum, payable monthly beginning March 31, 2001. This $2 million senior note is secured by substantially all of the assets of ITC. The principal amount of the note is convertible, at the option of the Company, into additional shares of ITC Series A preferred stock at a price per share of $2.54 at any time before January 1, 2001 and, if converted, any interest accrued as of such date shall be forgiven. If not converted, the note is payable on December 31, 2002. On December 30, 1998 and February 3, 1999, the Company amended its revolving credit note agreement with ITC to provide for additional borrowings of $50,000 and $100,000, respectively, under which ITC borrowed $38,043 and $100,000. The borrowings under the $50,000 note were repaid in April 1999. The $100,000 note accrues interest at 10% per annum and is generally subject to the same terms as the $2 million credit line agreement, except that it is convertible into additional shares of ITC Series A preferred stock at a price per share of $9.97. In connection with the issuance of the $100,000 note, ITC granted a warrant to the Company to purchase 10,030 shares of ITC Series A preferred stock at $9.97 per share. As of December 31, 1999, ITC borrowed $2.1 million under these agreements and owes the Company accrued interest of $281,000. During the year ended December 31, 1999, the Company performed a detailed review of the ITC operations. Based upon this analysis and discussion with ITC's management and investors, the Company determined that there was a significant risk that its notes receivable would be repaid by ITC. The analyses and discussions indicated that during the year ended December 31, 1999, ITC had insufficient cash resources to fund its operations, that product revenue had declined during 1999 and was far below planned levels and that ITC was seeking additional capital from numerous sources and that any future financing would possibly be dilutive to the Company's equity position and may contain a security interest senior to the Company's notes receivable. Accordingly, the Company charged the carrying value of the notes receivable to operations during the year ended December 31, 1999.
A-20
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) RESTRUCTURING CHARGE
During 1997, the Company reorganized its vena cava filter operations and brought the assembly of its straight-line vena cava filters in-house. In connection with this restructuring, the Company reduced staff and incurred other nonrecurring costs. The $194,000 restructuring charge in the accompanying statements of operations includes a noncash charge of $112,000 for the accelerated vesting of certain stock options, cash severance and benefits of $62,000, and $20,000 for the transfer of assembly technology. Other start-up costs related to the in-house assembly of the straight-line vena cava filter, including the training of manufacturing personnel and associated materials and overhead, are included in cost of goods sold in the accompanying statements of operations.
(6) MERGER AND INTEGRATION CHARGE
In connection with the acquisition of ENI on July 8, 1998, the Company reorganized its operations and recorded approximately $687,000 in merger and integration expenses during the year ended December 31, 1998. This amount consists principally of employee severance and replacement costs of $374,000, employee relocation costs of $152,000 and printing and corporate name change costs of $161,000. As of December 31, 1998, the accompanying consolidated balance sheet included approximately $235,000 of merger and integration expenses that were incurred but not yet paid. There are no such accrued expenses on the balance sheet as of December 31, 1999.
(7) INCOME TAXES
The Company provides for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Accordingly, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates expected to be in effect when these differences reverse.
The provision for income taxes in the accompanying consolidated statement of operations for the years ended December 31, 1999 and 1998 consists of the following:
A-21
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has federal and state net operating loss carryforwards of approximately $15 million to reduce to reduce federal and state taxable income in future periods, if any and approximately $50,000 and $140,000 of federal and state tax credit carryforwards, respectively, to reduce federal and state income taxes in future periods, if any. These carryforwards are subject to review and possible adjustment by the Internal Revenue Service and their utilization may be limited by aggregate changes in significant ownership of the Company over a three year period as prescribed by Section 382 of the Internal Revenue Code. These carryforwards expire on various dates through 2019.
As of December 31, 1999, the Company has available foreign net operating loss carryforwards of approximately $1.2 million. These operating losses were acquired in connection with the purchase of ENI, as discussed in Note 3. The Company did not allocate any of the purchase price to the net operating losses due to the uncertainty surrounding the ability to utilize the losses and the possibility that the losses are subject to review and possible adjustments by foreign tax authorities. The Company was able to utilize approximately $450,000 and $1.8 million of acquired operating losses during the years ended December 31, 1999 and 1998, respectively and credited the benefit of such losses of $180,000 and $674,000 to goodwill. The Company recorded the tax effect of utilizing these loss carryforwards as a reduction in the carrying value of the goodwill.
The provision for income taxes in the year ended December 31, 1999 represents the taxes on income generated in France by NMT Neurosciences. The Company generated a net operating loss for federal and state income tax purposes in the United States in the year ended December 31, 1999.
The provision for income taxes in 1998 and 1997 is calculated on the income before provision for taxes without taking into account the write-off of acquired in-process research and development, the equity in the loss of ITC and goodwill amortization. The acquired in-process write-off was $4,710,000 and $2,449,071 for 1998 and 1997, respectively, the equity in the net loss of ITC was $437,145 for 1998, and the goodwill amortization was $140,000 and $0 for 1998 and 1997, respectively.
The tax effects of temporary differences that give rise to the significant portions of the current deferred tax asset (included in prepaid expenses and other current assets) and long-term deferred tax liability at December 31, 1999 and 1998 are as follows:
A-22
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has provided a valuation allowance for its gross deferred tax asset due to the uncertainty surrounding the ability to realize this asset. The deferred tax liability relates primarily to the tax impact of the difference in the tax basis and book basis of the building and leasehold improvements resulting from the ENI purchase accounting. This difference in basis will not be deductible in future years. See Note 3.
(8) DEFERRED REVENUE
On November 22, 1994, the Company licensed exclusive, worldwide rights, including the right to sublicense to others, to develop, produce and market its stent technology to an unrelated third party (the License Agreement). Under the License Agreement the Company earned $1,829,000, $1,729,000 and $1,200,000 in license revenues during the years ended December 31, 1999, 1998 and 1997, respectively.
(9) DEBT OBLIGATIONS
The Company has the following debt outstanding as of December 31, 1999 and 1998:
(a) Subordinated Note Payable
The Company financed a significant portion of the acquisition of ENI (see Note 3(b)) with $20 million of subordinated debt borrowed from an affiliate of a significant stockholder of the Company. The subordinated debt is due September 30, 2003 with quarterly interest payable at 10.101% per annum and is subject to certain covenants, as amended.
On September 13, 1999, the Company entered into a $10 million senior secured debt facility with a bank (See Note 9(b)), $8 million of the proceeds of which was used to reduce the principal amount of the subordinated note. The Company also used $6 million of its own cash to further reduce the principal amount of this note. In conjunction with this transaction, the Company recorded a $2.6 million extraordinary loss on the early extinguishment of debt in the accompanying statement of operations which primarily relates to the accelerated pro-rata write-off of the original issue discount and deferred financing costs of the subordinated note payable. The remaining original issue discount at December 31, 1999, is being amortized to interest expense over the remaining term of the subordinated debt of 45 months. The Company recorded approximately $531,000 of interest expense relating to the amortization of original issue discount for the year ended December 31, 1999. As of December 31, 1999, the Company was not in compliance with certain of the debt covenants of the subordinated note payable and has obtained a waiver of default from the holder of the note. Subsequent to year-end, the Company paid down $500,000 of this note from the proceeds obtained in connection with the sale of part of its Neurosciences division (see Note 3(a)).
A-23
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(b) Senior Secured Debt
On September 13, 1999, the Company entered into a $10 million senior secured debt facility with a bank, $8 million of the proceeds of which was used to reduce the principal amount of the Company's subordinated note payable (See Note 9(a)). The remaining $2 million of the senior secured debt facility is available to be drawn down by the Company for working capital purposes, as needed. The facility has a term of three years with interest payable monthly at the bank's prime lending rate (8.5% at December 31, 1999) on U.S. borrowings and an equivalent market rate on foreign currency borrowings. As of December 31, 1999, the Company had outstanding borrowings of $7.3 million under this facility. As of December 31, 1999, the Company was not in compliance with certain of the debt covenants of the secured debt facility and has obtained a waiver of default from the bank. Subsequent to year-end, the Company paid down this note in its entirety from the proceeds obtained in connection with the sale of part of its Neurosciences division (see Note 3(a)).
(c) Capital Lease Obligations
In June 1996, the Company entered into a $1.5 million lease finance facility agreement with a bank under which the Company leases equipment at an interest rate that is 200 basis points above the bank's cost of funds. Leases under this agreement are payable in equal monthly installments over a period of 36- 60 months and expire through November 2001. Borrowings of $572,000 were made under this agreement, of which $202,000 was outstanding as of December 31, 1999.
Upon expiration of this agreement in June 1997, the Company entered into a new agreement with the bank that provided the Company with similar terms and the option to borrow up to $1 million in the aggregate for the Company and ITC through March 31, 1998. Leases under this agreement are payable in equal monthly installments over a period of 36-60 months and expire through December 2002. Borrowings of $376,000 and $250,000 were made under this agreement by the Company and ITC, respectively, of which $196,000 and $113,000 were outstanding as of December 31, 1999.
A-24
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(c) Capital Lease Obligations--(continued)
On April 1, 1998, the Company entered into a new agreement with this bank that provided the Company and ITC with similar terms and the option to borrow up to $750,000 through March 31, 1999. Borrowings of $169,000 and $163,000 have been made under this new agreement by the Company and ITC, respectively, of which $128,000 and $124,000 were outstanding as of December 31, 1999, respectively. Leases under these agreements are payable in equal monthly installments over a period of 60 months and expire through May 2004. The Company guarantees the outstanding leases of ITC under these agreements.
In June 1999, the Company entered into a lease agreement with a bank for approximately $150,000 to be used for equipment purchases. Borrowings under this agreement accrue interest at 6.67%, are payable in monthly installments, are collateralized by the equipment purchased, and expire in June 2002. Approximately $105,000 is outstanding under this agreement as of December 31, 1999.
In December 1999, the Company entered into a lease agreement with a bank for approximately $1 million to be used for equipment purchases. Borrowings under this agreement accrue interest at 5.64%, are payable in monthly installments, are collateralized by the equipment purchased, and expire in December 2002. Approximately $1 million of borrowings are outstanding as of December 31, 1999.
A-25
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(c) Capital Lease Obligations--(continued)
Future minimum lease payments under the capital lease obligations of the Company as of December 31, 1999 are approximately as follows:
(d) Line-of-Credit Facility
In June 1999 the Company entered into a finance facility agreement with a bank for approximately $475,000. Borrowings under this facility accrue interest at a rate of 5.38% per annum and are collateralized by the Company's accounts receivables. Borrowings of $428,000 under this line were outstanding as of December 31, 1999.
A-26
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT OBLIGATIONS--(CONTINUED)
(e) Future Maturities of Debt Obligations
Future payments of the Company's subordinated note, senior secured debt, and capital lease obligations are as follows:
(10) COMMITMENTS
(a) Manufacturing Agreement
The Company contracts with an unrelated third party for the manufacture of certain components. Under the amended agreement dated February 15, 1996, the Company is required to purchase minimum unit quantities through June 2001. The aggregate minimum purchases under the agreement are approximately $2.6 million. In addition, in the event of an order cancellation or product conversion, the Company has agreed to purchase all in-process materials and all special materials purchased by the manufacturer for use in the production of these components, limited to purchase orders through 180 days after cancellation.
(b) Operating Leases
The Company has entered into operating leases for office and laboratory space and for motor vehicle leases. These leases expire through 2006. The leases require payment of all related operating expenses of the building, including real estate taxes and utilities in excess of base-year amounts.
A-27
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) COMMITMENTS--(CONTINUED)
Future minimum rental payments due under operating lease agreements as of December 31, 1999 are approximately as follows:
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to approximately $602,000, $524,000 and $482,000, respectively. In addition, the Company is a guarantor of the lease of office space for ITC (see Note 9(c)).
(c) Royalties
The Company has entered into various agreements that require payment of royalties based on specified percentages of future sales, as defined. In addition, the Company has agreed to pay royalties to certain employees based on sales or licenses of products where they were the sole or joint inventor. Future minimum commitments under these agreements are approximately $15,000 per year. Royalty expense under royalty agreements was $838,000, $640,000 and $278,000 for the years December 31, 1999, 1998 and 1997, respectively.
In addition to the royalties discussed above, during the year ended December 31, 1998, the Company entered into an agreement to pay royalties of $87,500 per quarter to two individuals for a product for which these individuals own the rights. Payment of these royalties began in the fourth quarter of 1998 and are to be paid each quarter through the quarter ending September 30, 2001. The Company paid $350,000 for such royalties during the year ended December 31, 1999 of which approximately $50,000 has been expensed during 1999 and the remaining royalties will be expensed over the life of the royalty arrangement.
Additionally, these individuals are also to receive $50,000 per quarter for their product development and marketing consulting efforts. These payments began in the third quarter of 1998 and will continue each quarter through the quarter ended June 30, 2000. The Company recorded $200,000 and $100,000 for such services during the years ended December 31, 1999 and 1998, respectively.
(d) Legal Proceedings
In papers dated November 24, 1999 Elekta AB (publ) filed a request for arbitration in the London Court of International Arbitration ("LCIA") alleging that the Company breached its payment obligation under the Sale and Purchase Agreement between the parties dated May 8, 1998 pursuant to which the Company purchased certain assets from Elekta as discussed in Note 3(b). Elekta seeks approximately $1.6 million in damages. On January 14, 2000, the Company filed its response with the LCIA in which the Company denied Elekta's claims and indicated that it would assert a counterclaim for approximately $2.5 million for Elekta's breach of the
A-28
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
same contract. On February 17, 2000 an arbitrator was appointed, and a Statement of the Case was sent to the LCIA by Elekta on March 23, 2000. The parties are currently in the pleadings stage.
(11) STOCK OPTIONS AND WARRANTS
(a) Nonqualified Stock Options
The Company granted nonqualified options to various officers, directors, employees, and/or consultants to purchase shares of common stock. The options become exercisable in full or in part at issuance or within one to four years of the date of issuance. All unexercised grants expire on the earlier of approximately seven to ten years from date of issuance or 90 days after termination of service as an officer, director, employee and/or consultant. As of December 31, 1999, 1,097,068 shares are subject to outstanding options at exercise prices of $.76-$14.00 per share.
(b) Stock Option Plans
1994 Stock Option Plan. In May 1994, the Board of Directors approved a stock option plan (the 1994 Plan), which authorizes the Company to issue options to purchase up to 315,789 shares of the Company's common stock. The Company may grant options to officers, key employees, directors and consultants of the Company at an exercise price not less than fair market value as determined by the Board of Directors. Through December 31, 1999 the Company has granted 308,368 options under this plan and does not intend to grant any additional options under this plan. As of December 31, 1999, 58,880 shares are subject to outstanding options at exercise prices of $2.15- $8.93 per share.
1996 Stock Option Plan. The Nitinol Medical Technologies, Inc. 1996 Stock Option Plan (the 1996 Plan) was approved by the Company's stockholders in July 1996. The 1996 Plan provides for the grant of options to acquire a maximum of 600,000 shares of common stock. As of December 31, 1999, 586,284 shares are subject to outstanding options at exercise prices of $2.00-$14.63 per share. The Board of Directors has appointed a Stock Option Committee of the Board as the Plan Administrator. The 1996 Plan permits the granting of incentive stock options or nonstatutory stock options at the discretion of the Plan Administrator. Subject to the terms of the 1996 Plan, the Plan Administrator determines the terms and conditions of options granted under the 1996 Plan. At December 31, 1999, 13,716 shares are available for future grants under the 1996 Plan.
A-29
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The 1996 Director's Stock Plan. The Nitinol Medical Technologies, Inc. 1996 stock option plan for nonemployee directors (the 1996 Directors' Stock Plan) was approved by the Company's stockholders in July 1996. The 1996 Directors' Stock Plan provides for the automatic grant of nonstatutory stock options to purchase shares of common stock to directors of the Company who are not employees of the Company and who do not otherwise receive compensation from the Company. Under the 1996 Directors' Stock Plan, 150,000 shares of common stock have been reserved for issuance of options. Each eligible director serving on the Board on the effective date of the 1996 Directors' Stock Plan automatically received an option to purchase 10,000 shares of common stock at a price equal to the initial public offering price, subject to vesting in equal monthly installments over a period of three years.
In the future, each nonemployee director not otherwise compensated by the Company who joins the Board will automatically receive an initial grant of options to purchase 10,000 shares of common stock at an exercise price equal to the fair market value per share at the date of grant, subject to vesting in equal monthly installments over a three-year period.
In each year other than the year in which a director receives an initial grant of options, such director will automatically receive options to purchase 2,500 shares of common stock that shall become fully vested six months after the date of grant. As of December 31, 1999, 87,500 shares are subject to outstanding options at an exercise price of $3.38-$13.13 per share, of which 83,056 shares are exercisable.
1998 Stock Incentive Plan. The Nitinol Medical Technologies, Inc. 1998 Stock Incentive Plan (the 1998 Plan) was approved by the Company's stockholders during 1998. The 1998 Plan provides for the grant of options to acquire a maximum of 800,000 shares of common stock. As of December 31, 1999, 237,225 shares are subject to outstanding options at exercise prices of $2.75-$6.50 per share. The 1998 Plan permits the granting of incentive stock options or nonstatutory stock options at the discretion of the Board of Directors. Subject to the terms of the 1998 Plan, the Board of Directors determines the terms and conditions of options granted under the 1998 Plan. As of December 31, 1999, 562,775 shares are available for future grants under the 1998 Plan.
A-30
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The following table summarizes all stock option activity under all of the Company's stock option plans, including grants outside of the 1998, 1996 and 1994 Plans:
The following detail pertains to outstanding options of the Company at December 31, 1998:
The Company accounts for its stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 establishes a fair-value based method of accounting for stock-based compensation plans.
A-31
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(b) Stock Option Plans--(continued)
The Company has adopted the disclosure-only alternative under SFAS No. 123 for grants to employees, which requires disclosure of the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted, as well as certain other information. The Company has computed the pro forma disclosures required under SFAS No. 123 for all employee stock options granted in 1998, 1997 and 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the years ended December 31, 1999, 1998 and 1997 are as follows:
The effect of applying SFAS No. 123 would be as follows for the years ended December 31, 1999, 1998 and 1997:
A-32
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)
(c) Warrants
The following table summarizes the Company's warrant activity :
On April 15, 1999, the Company negotiated a waiver of the default with the holder of the subordinated note payable (see note 9(a)). In connection with such waiver, the Company issued to the noteholder warrants to purchase 25,000 shares of common stock at $3.41 per share.
Subsequent to year-end in connection with the Company's pay-down of debt discussed in note 9(c), the Company issued the noteholder warrants to purchase 20,000 shares of the Company's common stock at $4.94 per share.
The Company determined the value of these warrants using the Black-Scholes option pricing model.
(d) Employee Stock Purchase Plan
Effective October 1, 1997, the Company's shareholders approved an employee stock purchase plan (the Stock Plan). The Stock Plan allows eligible employees to purchase common stock of the Company through payroll deductions at a price that is 85% of the lower of the closing price of the Company's stock on the either the beginning or ending of the six-month offering period. The Company has reserved 90,000 of its $.001 par value common stock for issuance under this Stock Plan. The Company issued 22,461 shares of common stock under the Stock Plan during the year ended December 31, 1999.
A-33
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) TECHNOLOGY PURCHASE AGREEMENT
Pursuant to a technology purchase agreement (TPA), the Company purchased from a stockholder/founder the proprietary rights to the primary patent for the SNF and related technology. Under the terms of the TPA, the Company made an initial payment of $15,000 and agreed to pay royalties based upon various rates of cumulative net sales, as defined, with minimum royalties payable of $15,000 per year. Royalties are payable over the life of the primary patent and commenced after FDA approval. The Company has granted the stockholder/founder a security interest in substantially all proprietary rights acquired by the Company. In the event of unsecured defaults, as set forth in the TPA, the Company has agreed to immediately pay the stockholder/founder damages of $100,000.
(13) RELATED PARTY TRANSACTIONS
Three stockholders of the Company and related entities provided management consulting services to the Company during the year ended December 31, 1997 amounting to $196,000. During the years ended December 31, 1999 and 1998, only one shareholder provided consulting services to the Company, at a rate of $100,000 per annum. Additionally, during the year ended December 31, 1999, an affiliate of a stockholder provided consulting services to the Company amounting to approximately $103,000.
In September 1998, a former employee of the Company entered into a secured promissory note agreement with the Company under which the former employee borrowed $167,100, which accrues interest at 10 % per annum, and was due the earlier of September 30, 1999 or the tenth business day on which the closing price of the Company's stock is greater than $8.00 per share for any consecutive three-day period. As of December 31, 1999, the amount owed under this note agreement is approximately $131,000. The note agreement was extended under similar terms to September 30, 2000 and was paid in full subsequent to year-end.
On September 1, 1998, a former employee of the Company borrowed $25,000 from the Company. The loan accrues interest at 10.101% per annum and is collateralized. The loan was due on January 15, 2000 but was subsequently extended to March 31, 2000 under similar terms.
A-34
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) ACCRUED EXPENSES
Accrued expenses consist of the following:
A-35
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Revenues by country for the years ended December 31, 1999, 1998 and 1997 are as follows:
Long-lived assets by country as of December 31, 1999 and 1998 are as follows:
(16) SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision, or decision making group, in deciding how to allocate resources and in assessing performance.
A-36
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) SEGMENT REPORTING--(CONTINUED)
The Company's chief operating decision making group is the Chief Executive Officer, members of Senior Management, and the Board of Directors. The operating segments are managed separately because each represents specific types of medical devices for specific markets (i.e. the core technologies segment includes minimally-invasive medical devices that were the primary products of the Company prior to the acquisition of ENI, while the neurosurgical segment includes primarily neurosurgical medical devices that were the primary products of ENI).
The Company's operating segments include the core technologies product line and the neurosurgical product line. Revenues for the core technologies product line are derived from sales of the Simon Nitinol Filter (SNF) and the CardioSEAL Septal Occluder, as well as from licensing revenues from the Company's self-expanding stents. Revenues for the neurosurgical product line are derived from sales of cerebral spinal fluid shunts, the Spetzler Titanium Aneurysm Clip and endoscopes and instrumentation for minimally invasive surgery.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on stand-alone operating segment net income. Revenues are attributed to geographic areas based on where the customer is located. The Company operated in only one operating segment, core technologies products, during the year ended December 31, 1997. Segment information is presented as follows:
A-37
NMT MEDICAL, INC. (FORMERLY NITINOL MEDICAL TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Segment balance sheet information is as follows as of December 31, 1999 and 1998:
(17) VALUATION OF QUALIFYING ACCOUNTS
The following table sets forth the activity in the Company's allowance for doubtful accounts and sales returns:
* represents additions arising from the acquisition of ENI, net of reserves reclassified to net assets from discontinued operations.
A-38
EXHIBIT INDEX
(1) Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 333-06463).
(2) Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Commission.
(3) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(4) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K, dated July 8, 1998.
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to Exhibits to the Registrant's Amended Quarterly Report on Form 10-Q/A for the quarter ended April 31, 1998.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1999.
(8) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K, dated June 7, 1999.
(9) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(10) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(11) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(**) Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.