Form 10-QSB for Micro Therapeutics, Inc. (10/03/2004)

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DkV4eNpN0l60oo8LIrw1AD6+WLjbRKl04d9sGg4kaJhuNCd+FxT41P2wD4OIeqBB Flb3ZF62uWjxX5McW3Bang== 0001193125-04-198974.txt : 20041117 0001193125-04-198974.hdr.sgml : 20041117 20041117125626 ACCESSION NUMBER: 0001193125-04-198974 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041003 FILED AS OF DATE: 20041117 DATE AS OF CHANGE: 20041117 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO THERAPEUTICS INC CENTRAL INDEX KEY: 0000311407 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 330569235 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-06523 FILM NUMBER: 041151525 BUSINESS ADDRESS: STREET 1: 2 GOODYEAR CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9498373700 MAIL ADDRESS: STREET 1: 2 GOODYEAR CITY: IRVINE STATE: CA ZIP: 92618 10QSB 1 d10qsb.htm FORM 10-QSB FOR MICRO THERAPEUTICS, INC. (10/03/2004) Form 10-QSB for Micro Therapeutics, Inc. (10/03/2004)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-QSB

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED October 3, 2004

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

FOR THE TRANSITION PERIOD FROM TO .

Commission file number 000-06523

MICRO THERAPEUTICS, INC.

(Exact name of small business issuer as specified in its charter)

Delaware

33-0569235

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

2 Goodyear, Irvine, California 92618

(Address of principal executive offices)

(949) 837-3700

(Issuer’s telephone number)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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


Class		Outstanding at November 10, 2004
Common Stock, $.001 par value		48,357,226

Transitional small business disclosure format: Yes ¨ No x

Page 1 of 23 Pages

Exhibit Index on Page 23

MICRO THERAPEUTICS, INC.

INDEX TO FORM 10-QSB


			Page Number
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheet as of September 30, 2004 (unaudited)	3

		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2004 (unaudited)	4

		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2004 (unaudited)	5

		Notes to Unaudited Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis or Plan of Operation	11

	Item 3.	Controls and Procedures	19

Part II.	Other Information

	Item 1.	Legal Proceedings	20

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

	Item 4.	Submission of Matters to a Vote of Security Holders	21

	Item 6.	Exhibits	21

Signatures			22

MICRO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEET

September 30, 2004

(Unaudited)


ASSETS:
Current assets:
Cash and cash equivalents	$	15,520,000
Accounts receivable, net of allowance for doubtful accounts of $1,732,000		8,700,000
Inventories, net of allowance for obsolescence of $748,000		7,190,000
Prepaid expenses and other current assets		858,000

Total current assets		32,268,000
Property and equipment, net of accumulated depreciation of $5,688,000		2,965,000
Intangible assets, net of accumulated amortization of $5,110,000		8,439,000
Goodwill		20,983,000
Other assets		1,237,000

Total assets	$	65,892,000

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	1,593,000
Accrued salaries and benefits		1,812,000
Accrued liabilities		3,503,000
Payable to sellers of Dendron GmbH		3,750,000
Deferred revenue and other liabilities		1,828,000

Total current liabilities		12,486,000

Contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued or outstanding
Common stock, $0.001 par value, 70,000,000 shares authorized; 48,357,226 shares issued and outstanding		48,000
Additional paid-in capital		194,476,000
Accumulated deficit		(140,684,000	)
Accumulated other comprehensive loss		(434,000	)

Total stockholders’ equity		53,406,000

Total liabilities and stockholders’ equity	$	65,892,000

See notes to unaudited consolidated financial statements.

MICRO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Three and Nine Months Ended September 30, 2003 and 2004

(Unaudited)


	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2003			2004			2003			2004
Net sales	$	5,208,000		$	8,171,000		$	15,943,000		$	24,847,000
Cost of sales		2,033,000			3,144,000			6,018,000			10,125,000

Gross margin		3,175,000			5,027,000			9,925,000			14,722,000

Costs and expenses:
Research and development		2,541,000			2,281,000			7,653,000			6,520,000
Clinical and regulatory		1,529,000			1,326,000			6,364,000			4,442,000
Marketing and sales		2,905,000			3,479,000			10,032,000			10,222,000
General and administrative		2,489,000			3,638,000			6,985,000			10,903,000
Distribution termination		—			554,000			—			823,000

Total costs and expenses		9,464,000			11,278,000			31,034,000			32,910,000

Loss from operations		(6,289,000	)		(6,251,000	)		(21,109,000	)		(18,188,000	)

Other income (expense):
Amortization of exchange feature of notes payable		—			(9,148,000	)		—			(15,338,000	)
Stock issuance expenses		—			—			(600,000	)		—
Interest income		9,000			78,000			90,000			136,000
Interest expense		—			(222,000	)		(90,000	)		(320,000	)
Gain on sale of investment		—			—			14,647,000			1,728,000
Foreign currency transaction gain (loss)		(54,000	)		33,000			(180,000	)		28,000
Other income		9,000			57,000			113,000			36,000

Total other income (expense)		(36,000	)		(9,202,000	)		13,980,000			(13,730,000	)

Loss before provision for income taxes		(6,325,000	)		(15,453,000	)		(7,129,000	)		(31,918,000	)
Provision for income taxes		—			—			2,000			2,000

Net loss		(6,325,000	)		(15,453,000	)		(7,131,000	)		(31,920,000	)

Other comprehensive income (loss)
Foreign currency translation gain (loss)		(20,000	)		3,000			(161,000	)		(7,000	)

Total other comprehensive loss		(20,000	)		3,000			(161,000	)		(7,000	)

Comprehensive loss	$	(6,345,000	)	$	(15,450,000	)	$	(7,292,000	)	$	(31,927,000	)

Per share information
Net loss available to common stockholders	$	(6,325,000	)	$	(15,453,000	)	$	(7,131,000	)	$	(31,920,000	)
Net loss per share (basic and diluted)	$	(0.18	)	$	(0.34	)	$	(0.22	)	$	(0.76	)
Shares used in computation of net loss per share (basic and diluted)		35,004,000			45,045,000			33,001,000			41,958,000

See notes to unaudited consolidated financial statements.

MICRO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2003 and 2004

(Unaudited)


	2003			2004
Cash flows from operating activities:
Net loss	$	(7,131,000	)	$	(31,920,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) loss on sale of fixed assets		(2,000	)		2,000
Amortization of exchange feature of notes payable		—			15,338,000
Non-cash interest expense		—			320,000
Depreciation and amortization		2,504,000			2,487,000
Gain on sale of investment		(14,647,000	)		(1,728,000	)
Non-cash compensation		280,000			243,000
Provision for doubtful accounts		405,000			708,000
Distribution termination expense		—			554,000
Provision for inventory obsolescence		259,000			633,000
Change in operating assets and liabilities:
Accounts receivable		(4,459,000	)		(1,219,000	)
Inventories		(2,736,000	)		(3,118,000	)
Prepaid expenses and other current assets		(264,000	)		(226,000	)
Accounts payable		(1,799,000	)		(788,000	)
Accrued salaries and benefits		971,000			(440,000	)
Accrued liabilities		(1,663,000	)		116,000
Deferred revenue and other liabilities		79,000			1,277,000

Net cash used in operating activities		(28,203,000	)		(17,761,000	)

Cash flows from investing activities:
Proceeds from sale of investment		14,647,000			1,728,000
Acquisition of Dendron, GmbH		(116,000	)		(3,750,000	)
Additions to property and equipment		(1,385,000	)		(957,000	)
Proceeds from sale of fixed assets		4,000			—
Additions to patents and licenses		(419,000	)		(345,000	)
Change in other assets		67,000			(2,000	)

Net cash provided by (used in) investing activities		12,798,000			(3,326,000	)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock purchase plan		98,000			178,000
Proceeds from exercise of stock options		527,000			39,000
Proceeds from issuance of note payable		4,000,000			21,008,000
Costs from issuance of notes payable and exchange of notes for common stock		—			(1,164,000	)
Proceeds from issuance of common stock in private placements, net of costs		14,069,000			—

Net cash provided by financing activities		18,694,000			20,061,000

Effect of exchange rates on cash		(39,000	)		(5,000	)

Net increase (decrease) in cash and cash equivalents		3,250,000			(1,031,000	)
Cash and cash equivalents at beginning of period		1,533,000			16,551,000

Cash and cash equivalents at end of period	$	4,783,000		$	15,520,000

Non-cash financing activities:
Offset of notes payable against investor participation in private placement of common stock	$	7,000,000			—
Issuance of common stock for payment of stock issuance expenses	$	589,000			—
Exchange of notes payable, net of discount, for issuance of common stock				$	22,859,000

See notes to unaudited consolidated financial statements.

MICRO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	The Company

Description

Micro Therapeutics, Inc., which was incorporated on June 11, 1993 in California and was reincorporated in Delaware in November 1996, develops, manufactures and markets minimally invasive medical devices for diagnosis and treatment of neuro and peripheral vascular diseases.

Liquidity and Capital Resources

The Company believes, based on current cash balances and anticipated cash flows from planned operations, it may require additional working capital during the next twelve months to fund future operations. The Company currently has no committed external sources of funds and anticipates seeking to raise such additional working capital through either a public or private debt or equity financing. There is no assurance that Micro Investment or its affiliates will continue to provide financing to the Company, that any financing transaction will be available at terms acceptable to the Company, if at all, or that any financing transaction will not be dilutive to current stockholders. If the Company is not able to raise additional funds, it will be required to significantly curtail or cease its ongoing operations. The Company’s future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future revenues and expenditures, market acceptance of new products, the results and scope of ongoing research and development projects, competing technologies, market and regulatory developments and the future course of intellectual property litigation as discussed in Note 10.

The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern. Accordingly, they do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result from the outcome of these uncertainties.

2.	Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Micro Therapeutics, Inc. and its wholly-owned subsidiaries, Micro Therapeutics International, Inc., incorporated on June 30, 2000 for the purpose of carrying out certain of the Company’s international activities, and Dendron GmbH, acquired on October 4, 2002 (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Reporting Periods

The Company’s fiscal quarters end on the Sunday nearest to the end of the related calendar quarter, except that the fourth fiscal quarter ends on December 31. Accordingly, the first three fiscal quarters in 2003 ended on March 30, June 29 and September 28. The corresponding fiscal quarters in 2004 ended on April 4, July 4, and October 3. For convenience, the first three fiscal quarters in both 2003 and 2004 are referred to in this report on Form 10-QSB as having ended on March 31, June 30 and September 30 of their respective years.

Unaudited Interim Financial Information

The consolidated financial statements included in this Form 10-QSB have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-QSB, are unaudited and do not contain all of the information required by generally accepted accounting principles to be included in a full set of financial statements. The consolidated financial statements in the Company’s 2003 Annual Report on Form 10-KSB include a summary of significant accounting policies of the Company and should be read in conjunction with this Form 10-QSB. In the opinion of management, all material adjustments necessary to present fairly the consolidated financial statements for such periods have been included. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.

Intangible Assets

Costs incurred to obtain patents and licenses, and amounts ascribed to intangible assets acquired in connection with the Company’s acquisition of Dendron in 2002 are capitalized. All amounts assigned to these intangible assets are amortized on a straight-line basis over an estimated five-year useful life from the date of issue or acquisition. The Company evaluates the amortization period and carrying basis of intangible assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

Amortization of intangibles based on patents issued and intangible assets acquired is estimated to be as follows:


Year Ending December 31,
2004	$	2,274,000
2005	$	2,217,000
2006	$	2,183,000
2007	$	1,624,000
2008	$	32,000

3.	Stock-Based Compensation

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for its stock-based compensation arrangements pursuant to Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123. Under APB Opinion No. 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock (i.e., the intrinsic value method). SFAS No. 123 defines a fair value based method of accounting for an employee stock option. Fair value of the stock option is determined considering factors such as the exercise price, the expected life of the option, the current price of the underlying stock and its volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period.

The Company accounts for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

Had compensation cost been determined on the fair value at the grant dates for awards under those plans consistent with the method promulgated by SFAS No. 123, the Company’s net loss and related per share amounts would have been as follows:


	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2003			2004			2003			2004
Net loss
As reported	$	(6,325,000	)	$	(15,453,000	)	$	(7,131,000	)	$	(31,920,000	)
Deduct: Total stock-based employee compensation expense		(63,000	)		(210,000	)	$	(190,000	)	$	(629,000	)

Pro forma	$	(6,388,000	)	$	(15,663,000	)	$	(7,321,000	)	$	(32,549,000	)

Net loss per share (basic and diluted)
As reported	$	(0.18	)	$	(0.34	)	$	(0.22	)	$	(0.76	)
Pro forma	$	(0.18	)	$	(0.35	)	$	(0.22	)	$	(0.78	)

4.	Inventories

Inventories at September 30, 2004 consist of the following:


Raw materials	$	4,352,000
Finished goods		3,586,000

		7,938,000
Reserve for obsolescence		(748,000	)

	$	7,190,000

5.	Debt and Equity Financing Transactions

September 2002 Securities Purchase Agreement and Related Promissory Notes

In September 2002, the Company entered into an agreement providing for a two-stage private placement of its common stock and completed the first stage of the transaction. In February 2003, the Company completed the second stage of the transaction, at which time the investors in the private placement purchased 10,345,905 shares of the Company’s common stock at a purchase price of $2.083 per share, resulting in proceeds to the Company of approximately $14.1 million, net of the offset of certain notes payable as described below. As of the closing of the second stage, Micro Investment LLC (“Micro Investment”), the Company’s majority stockholder, owned approximately 69% of the outstanding shares of the Company’s common stock.

Before the Company could close the second stage of the private placement, stockholder approval was required in order to increase the number of shares of common stock the Company was authorized to issue to 45 million shares of common stock, so that the Company could issue the additional 10,345,905 shares of its common stock to the investors.

In order to satisfy the Company’s anticipated short-term working capital requirements pending the closing of the second stage of the private placement, on November 18, 2002, the Company obtained a short-term loan by issuing an unsecured $3 million promissory note to Micro Investment. On January 8, 2003, the Company obtained a second short-term loan by issuing an unsecured $4 million promissory note to Micro Investment. Both notes had stated interest rates of 10% per annum. Upon closing of the second stage of the private placement on February 20, 2003, these loans, and related accrued interest payable, were offset in full against the investment amount due from Micro Investment pursuant to its participation in the second stage of the private placement, and the related promissory notes were cancelled.

December 2003 Note Purchase Agreement

On December 4, 2003, the Company entered into a note purchase agreement with certain accredited institutional investors under which the Company issued $17 million aggregate principal amount of unsecured exchangeable promissory notes. The notes bore interest at a rate of 7% per annum. Holders of $13 million in aggregate principal amount of the notes were members of ev3 LLC, sole owner of Micro Investment. On January 30, 2004, the company’s stockholders approved an increase in the number of authorized shares of common stock from 45 million to 70 million, and approved the issuance of shares of the Company’s common stock in exchange for the aggregate principal amount of the notes and related accrued interest, at a price of $2.73 per share as set forth in the note purchase agreement, resulting in the issuance of 6,296,565 shares of the Company’s common stock in exchange for the cancellation of the notes.

Generally accepted accounting principles, or GAAP, in the United States, considers the difference between the exchange price of $2.73 per share and the closing market price of $3.74 per share on December 4, 2003, the date the note purchase agreement was executed, to represent a beneficial conversion feature of the notes. Under GAAP, the per share beneficial conversion feature is multiplied by the number of shares to be issued in the exchange. The result is recorded as a discount to the notes, which is reflected as additional paid-in capital in the Company’s consolidated balance sheet, as of the date of their issuance, and amortized on the interest method over their contractual life. Accordingly, upon issuance of the notes on December 4, 2003, the Company recorded a discount to the notes of

approximately $6.3 million, and subsequently recognized amortization, amounting to $100,000, of such discount during 2003. In January 2004, upon completion of the exchange of the notes for the Company’s common stock, the Company recognized amortization of the remaining unamortized discount, amounting to approximately $6.2 million.

June 2004 Note Purchase Agreement

On June 25, 2004, the Company entered into a note purchase agreement with certain accredited institutional investors under which the Company issued $21 million aggregate principal amount of unsecured exchangeable promissory notes. The notes bore interest at a rate of 7% per annum. Holders of $15 million in aggregate principal amount of the notes are members of ev3 LLC. On August 18, 2004, the Company’s stockholders approved the issuance of shares of the Company’s common stock in exchange for the aggregate principal amount of the notes and related accrued interest, at a price of $3.10 per share as set forth in the note purchase agreement, resulting in the issuance of 6,848,163 shares of the Company’s common stock in exchange for cancellation of the notes.

As described above, the notes included a beneficial conversion feature which was calculated as the difference between the exchange price of $3.10 per share and the closing market price of $4.45 per share on June 25, 2004, the date the note purchase agreement was executed, which amounted to $9.1 million. Such amount was recorded as a discount to the notes, and reflected as additional paid-in capital in the Company’s consolidated balance sheet. In August 2004, upon completion of the exchange of the notes for the Company’s common stock, the Company recognized amortization of the entire $9.1 million discount.

Of the seven members of the Company’s Board of Directors, four members directly or indirectly hold equity interests in ev3 LLC, and one is the Company’s President and Chief Executive Officer. The two members of the Company’s Board of Directors who neither hold equity interests in ev3 LLC nor are members of the Company’s management constitute an independent committee of the Company’s Board of Directors. This independent committee evaluates for approval all transactions and other matters between the Company and ev3 LLC and any of its affiliates.

6.	Distribution Agreements

Effective December 31, 2002, the Company entered into a distribution support services agreement with ev3 Inc., which is wholly owned by ev3 LLC. Under the terms of the agreement, ev3 Inc. assumed responsibility for inventory management, customer service, and administrative tasks in connection with the sales and marketing of the Company’s peripheral vascular product line in the U.S. and Canada. The agreement with ev3 Inc. called for the Company to be charged a fee based on a fixed percentage of gross end-customer sales of the applicable products in the U.S. and Canada.

On April 30, 2003, the Company and ev3 Inc. entered into a distribution agreement, which superceded the December 31, 2002 distribution support services agreement described above. Under the terms of the April 2003 agreement, ev3 Inc. purchases peripheral vascular products from the Company at a fixed percentage of the actual sales prices realized by ev3 Inc. from end-user customers. The Company recognizes revenues related to sales of product to ev3 Inc. under the terms of the April 2003 agreement upon ev3 Inc.’s sale of such product to its customers.

On June 2, 2003, the Company and ev3 Inc. entered into a distribution support services agreement under which ev3 Inc. performs inventory and administrative services with respect to certain finished goods inventory of the Company’s neuro vascular products. Under the terms of the agreement, the Company is charged a fee, included in marketing and sales expense in the accompanying consolidated statements of operations, based on a fixed percentage of gross end-customer sales realized by the Company from sales of such products.

Effective August 1, 2003, the Company and ev3 International entered into an amended and restated sales representative agreement, which superceded a November 2001 agreement. Under the terms of both the November 2001 and August 2003 agreements, ev3 International provides product promotion, marketing, sales solicitation, inventory management, accounting, invoicing, collection and administrative services in certain countries outside the U.S. and Canada where the Company has no existing third-party distributor for its products, and distributor management services in certain countries outside the U.S. and Canada where the Company has an existing third-party distributor for its products. Under the August 2003 agreement, ev3 International charges the Company a fee based on a fixed percentage of revenues the Company realizes from sales of products to end-user customers in territories in which ev3 International maintains sales representatives, and a fee based on a fixed percentage of sales to third party distributors with respect to whom ev3 International performs distributor management services. Such fees are recognized upon the sale of product to third party customers and are included in marketing and sales expense in the accompanying consolidated statements of operations. Under the November 2001 agreement, the Company had been reimbursing ev3 International for 105% of the costs of its sales force and a portion of ev3 International’s general and administrative expenses.

On June 1, 2003, the Company entered into separate distribution agreements with ev3 K.K. (Japan) and ev3 Canada, Inc., both wholly owned subsidiaries of ev3 Inc. (collectively, the “ev3 subsidiaries”). Under the terms of such distribution agreements, both of the ev3 subsidiaries purchase peripheral and neuro vascular products from the Company at a fixed percentage of the actual sales prices realized by the ev3 subsidiaries from end-user customers. The Company recognizes revenues related to sales of product to the ev3 subsidiaries under the terms of the distribution agreements upon the ev3 subsidiaries’ sales of such products to their customers.

In connection with its acquisition of Dendron in 2002, the Company informed substantially all of Dendron’s distributors of the Company’s intent to terminate the related distribution agreements. In June 2004, the Company reached a settlement with one such distributor, resulting in a charge for termination expense amounting to $269,000. Included in other liabilities in the accompanying consolidated balance sheet is $276,000 representing the Company’s estimate of future termination settlement costs.

In September 2004, the Company terminated its agreement with an international distributor of its products due to actions taken by the distributor that the Company asserts to be in breach of the agreement. The Company has initiated legal action to recover amounts due, however, it is not possible to predict the outcome of such legal action. Accordingly, in the quarter ended September 30, 2004, the Company provided a full reserve for accounts receivable from the distributor resulting in a charge of $554,000 to distributor termination expense.

7.	Enteric Medical Technologies, Inc.

On June 12, 2002, Boston Scientific Corporation and Enteric entered into a merger agreement under which Boston Scientific acquired all the outstanding stock of Enteric Medical Technologies, Inc., of which the Company owned a minority equity interest. Pursuant to the terms of the merger agreement, each Enteric stockholder received a pro rata share of the consideration paid at the closing of the transaction, net of amounts set aside in escrow to provide for future indemnity claims, if any.

In addition, the merger agreement gave each Enteric stockholder the right to receive a pro rata share of two contingent payments, should Enteric have achieved defined milestones. In January 2003, Enteric achieved the first of such milestones, and in February 2003, the Company received its pro rata share of the first contingent payment, amounting to $7.7 million net of escrowed funds, which the Company recorded as gain on sale of investment during the first quarter of 2003. The second contingent payment, amounting to $7.0 million net of escrowed amounts, was received, and recognized as income, by the Company in the second quarter of 2003.

In May 2004, the Company received and recorded as income 50%, or $1.7 million, of amounts set aside in escrow as described above. Under the terms of the merger agreement, the Company will be entitled to receive 50% of the remaining escrowed amounts in May 2005, and the remainder in May 2006, provided that no claims are made against the amounts in escrow.

8.	Per Share Information

Net loss per share for all the periods presented in the accompanying consolidated statements of operations is calculated by dividing the net loss for the applicable period by the weighted average number of common shares issued and outstanding during the period. Potential common shares, represented by options to purchase shares of the Company’s common stock, have been excluded from the diluted per share calculations due to their anti-dilutive effect. Such excluded potential common shares, and the periods to which to they relate, are as follows:


Three Months Ended September 30,		Nine Months Ended September 30,
2003	2004	2003	2004
745,000	511,000	423,000	529,000

9.	Segment Information

Information with respect to net sales for the three and nine months ended September 30, 2003 and 2004 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2004		2003		2004
Product Segments
Embolic products	$	1,715,000	$	2,905,000	$	5,330,000	$	8,422,000
Neuro access and delivery products		2,889,000		4,651,000		8,428,000		14,269,000
Peripheral vascular and other products		604,000		615,000		2,185,000		2,156,000

Total net sales	$	5,208,000	$	8,171,000	$	15,943,000	$	24,847,000

Geographic Segments
United States	$	1,863,000	$	3,076,000	$	5,470,000	$	8,772,000
International		3,345,000		5,095,000		10,473,000		16,075,000

Total net sales	$	5,208,000	$	8,171,000	$	15,943,000	$	24,847,000

No customer accounted for 10% or more of total net sales for the three or nine months ended September 30, 2003 or 2004.

For the three months ended September 30, 2004, sales to customers in Germany accounted for 12% of total net sales. No other countries outside the United States accounted for 10% or more of total net sales for such period, and no countries outside the United States accounted for 10% or more of total sales for the nine months ended September 30, 2004, or for the three or nine months ended September 30, 2003.

At September 30, 2004, receivables from ev3 Inc. and its subsidiaries aggregated approximately $2.8 million. Of this amount, approximately $1.9 million represented amounts collected by ev3 International from third party customers on the Company’s behalf. In addition, included in accounts receivable at September 30, 2004 is approximately $5.6 million representing amounts due to the Company from third parties pursuant to sales transactions in which ev3 International acted as the Company’s sales representative, and will act as the collection agent on the Company’s behalf, in conformity with the Company’s August 2003 agreement with ev3 International described in Note 6.

10.	Contingencies

A description of litigation to which the Company is a party is as follows:

In September 2000, Dendron was named as the defendant in three patent infringement lawsuits brought by the Regents of the University of California, the plaintiff, in the District Court (Landgericht) in Düsseldorf, Germany. The complaints requested a judgment that Dendron’s EDC I coil device infringes three European patents held by the plaintiff and asked for relief in the form of an injunction that would prevent Dendron from producing and selling the devices within Germany and selling from Germany to customers abroad, as well as an award of damages caused by Dendron’s alleged infringement, and other costs, disbursements and attorneys’ fees. In August 2001, the Court issued a written decision that EDC I coil devices do infringe the plaintiff’s patents, enjoined Dendron from selling the devices within Germany and from Germany to customers abroad, and requested that Dendron disclose the individual product’s costs as the basis for awarding damages. In September 2001, Dendron appealed the decision. In addition, Dendron instituted challenges to the validity of each of these

patents by filing opposition proceedings with the European Patent Office, or EPO, against one of the patents (the Company joined Dendron in this action in connection with its acquisition of Dendron), and by filing, with the Company, nullity proceedings with the German Federal Patents Court against the German component of the other two patents. In February and March 2003, the Düsseldorf Court of Appeals stayed the litigation proceedings, pending decisions by the German Federal Patents Court and the EPO.

On July 4, 2001, the plaintiff filed another suit against Dendron alleging that the EDC I coil device infringes another European patent held by the plaintiff. The complaint was filed in the District Court of Düsseldorf, Germany seeking additional monetary and injunctive relief. In April 2002, the Court found that EDC I coil devices do infringe the plaintiff’s patent. The case is under appeal and, likewise, has been stayed by the Düsseldorf Court of Appeal in view of the pending opposition proceedings filed by the company against the patent in the European Patent Office.

Dendron ceased all activities with respect to the EDC I coil device prior to the Company’s October 2002 acquisition of Dendron.

In April 2002, Dendron was named as the defendant in a patent infringement lawsuit brought by William Cook Europe A/S, Denmark alleging that a German Utility Model is infringed upon by Dendron’s EDC II “curved tip” coil devices. The suit was filed in the District Court (Landgericht) in Düsseldorf, seeking monetary and injunctive relief. In January 2003, the court issued a “stay” of the proceedings, pursuant to a request by the Company, pending the outcome of a cancellation request in the Federal German Patent and Trademark Office, or GPTO, filed by the Company against the utility model described above. In October 2003 the GPTO announced its decision, which the Company believes renders its products to be non-infringing. Cook has appealed the GPTO decision, however, the Company believes that such an appeal, if successful, would not have a material impact on the Company’s financial position or results of operations. The product subject to these matters is the Curved Tip coil within the Sapphire product family.

Concurrent with its acquisition of Dendron, the Company initiated a series of legal actions in the Netherlands, the U.K. and Germany, which included a cross-border action that was heard by a Dutch court, as further described below. The primary purpose of these actions was to assert both invalidity and non-infringement by the Company of certain patents held by others. The range of patents at issue are held by the Regents of the University of California and Boston Scientific Corporation, collectively referred to as the “patent holders,” related to detachable coils and certain delivery catheters.

In October 2003, the Dutch court ruled that three patents at issue related to detachable coils are valid and that the Company’s Sapphire coils do infringe such patents. The Dutch court also ruled that the patent holders’ patent at issue related to the delivery catheter was invalid. Under the court’s ruling, the Company has been enjoined from engaging in infringing activities related to the Sapphire coils in most countries within the European Union, and may be liable for unspecified monetary damages for activities engaged in by the Company since September 27, 2002. While the Company has filed an appeal with the court, the Company believes it is in compliance with the Dutch court’s injunction and intends to continue such compliance.

In January 2003, the Company initiated a legal action in the U.K. that seeks a declaration that a patent held by the patent holders related to delivery catheters is invalid, and that the Company’s products do not infringe this patent. The patent in question is the U.K. designation of the same patent that was found by the Dutch court in October 2003 to be invalid, as discussed above. The patent holders have counterclaimed for alleged infringement by the Company. The trial for this matter has been scheduled for February 2005.

In the U.S., concurrent with the U.S. Food and Drug Administration’s, or FDA’s, marketing clearance of the Sapphire line of embolic coils received in July 2003, the Company initiated a declaratory judgment action against the patent holders that also includes assertions of non-infringement by the Company and invalidity of a range of patents held by the patent holders related to detachable coils and certain delivery catheters. In October 2003, the court dismissed the Company’s actions for procedural reasons without prejudice and without decision as to the merits of the parties’ positions. In December 2003, the University of California filed an action against the Company in the U.S. alleging infringement by the Company with respect to a range of patents held by the University of California related to detachable coils and certain delivery systems. The Company has filed a counterclaim against the University of California and other parties claiming interest in the patents in question asserting non-infringement by the Company and invalidity of the patents.

Included in accrued liabilities in the accompanying consolidated balance sheet is $719,000, which represents the Company’s estimate of losses it may incur in connection with the matters described above related to Dendron’s former EDC I product line. The Company has not established an accrual for the other matters described above because a loss is not determined to be probable.

The Company is involved in other litigation from time to time in the ordinary course of business, the outcome of which the Company’s management believes will not have a material adverse effect on the Company’s financial position or results of operations.

Under the terms of the stock purchase agreement entered into in connection with its acquisition of Dendron, the Company may be required to make additional payments, aggregating up to $15,000,000, which are contingent upon Dendron products achieving certain revenue targets between 2003 and 2008. In 2003, the $4 million revenue target for sales of Dendron products during 2003 was met. Accordingly, an additional payment to the former Dendron stockholders of $3.75 million was made in May 2004. Based on product revenues for the nine months ended September 30, 2004, the Company believes it is probable that the $5 million revenue target for 2004 will be met, in which case the Company would be required to pay an additional $3.75 million to the former Dendron stockholders in the first half of 2005. Accordingly, such amount has been included in accrued liabilities in the accompanying consolidated balance sheet. A final additional payment of $7.5 million is contingent upon Dendron products achieving annual revenues of $25 million in any year during the period between 2003 through 2008. Such final payment would be due in the year following the year of target achievement.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and the related Notes thereto included elsewhere in this Quarterly Report on Form 10-QSB. This Quarterly Report on Form 10-QSB contains forward-looking statements that involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference are discussed under “Certain Factors that May Affect Our Business and Future Results.”

OVERVIEW

The Company is engaged in the design, development, manufacturing and marketing of minimally invasive devices for treatment of vascular disease. The Company derives its revenues principally from three product segments: embolic products, neuro access and delivery products and peripheral vascular products.

The Company manufactures its products at its facilities in Irvine, California and Bochum, Germany. Certain accessories are manufactured and processes performed by contract manufacturers.

Future revenues and results of operations may fluctuate significantly from quarter to quarter and will depend upon, among other factors, actions relating to regulatory and reimbursement matters, the extent to which the Company’s products gain market acceptance, the rate at which the Company and third-party distributors, as applicable, establish their domestic and international sales and distribution networks, the progress of clinical trials and the introduction of competitive products for diagnosis and treatment of neuro and peripheral vascular disease. Because of these factors, accurate prediction of future operating results is difficult. Although the Company has experienced sales growth in certain recent periods, the Company may not be able to sustain sales growth or gain profitability on a quarterly or annual basis, and its growth may not be consistent with predictions made by securities analysts.

The Company manufactures product for stock and ships product shortly after the receipt of orders, and anticipates that it will do so in the future. Accordingly, the Company has not developed a significant backlog and does not anticipate that it will develop a significant backlog in the near term.

Embolic Products

The Company’s embolic products consist primarily of Onyx, a proprietary embolic material developed internally by the Company, and the Sapphire, NXT and Topaz families of embolic coils.

In the United States, the Company received FDA approval in 2001 to begin a pivotal clinical trial for the use of Onyx in treating brain aneurysms, the protocol for which was modified, with FDA approval, in July 2002. In November 2003, Onyx for the treatment of large and wide-neck brain aneurysms received designation from the FDA as a Humanitarian Use Device, or HUD. Concurrent with receiving the HUD designation, the Company suspended the pivotal clinical trial described above in order to focus its efforts on the related Humanitarian Device Exemption, or HDE, application process. The Company expects to submit the HDE application in 2005.

Also in 2001, the Company received FDA approval to begin a pivotal clinical trial for the use of Onyx in treating AVMs in the brain, and, in March 2003, the Company submitted a PMA application to the FDA for approval of this use of Onyx. In August 2003, an FDA advisory panel recommended approval of the PMA upon the Company’s satisfaction of certain conditions. The Company is currently working with the FDA in addressing such conditions, and expects the PMA to be approved in either late 2004 or early 2005.

In July 2003, the Company received 510(k) clearance from the FDA to market the Sapphire family of embolic coils, which the Company commenced in September 2003.

The Company directly markets and sells its embolic products in the United States. On June 2, 2003, the Company and ev3 Inc. entered into a distribution support services agreement under which ev3 Inc. performs inventory and administrative services with respect to finished goods inventory of the Company’s embolic products. Under the terms of the agreement, ev3 Inc. charges the Company a fee based on a fixed percentage of gross end-customer sales realized by the Company from sales of such products.

Internationally, the Company’s embolic products are marketed and sold under an amended and restated sales representative agreement, executed in August 2003 with ev3 International, which superceded a November 2001 agreement. Under the terms of the August 2003 agreement, ev3 International provides product promotion, marketing, sales solicitation, inventory management, accounting, invoicing, collection and administrative services in certain countries outside the U.S. and Canada where the Company has no existing third-party distributor for its products, and distributor management services in certain countries outside the U.S. and Canada where the Company has an existing third-party distributor for its products. Under the agreement, ev3 International charges the Company a fee based on a fixed percentage of revenues the Company realizes from sales of products to end-user customers in territories in which ev3 International maintains sales representatives, and a fee based on a fixed percentage of sales to third party distributors with respect to whom ev3 International performs distributor management services. Under the November 2001 agreement, the Company had been reimbursing ev3 International for 105% of the costs of its sales force and a portion of ev3 International’s general and administrative expenses.

In connection with the Company’s acquisition of Dendron in October 2002, the Company terminated the distribution agreements with substantially all of Dendron’s distributors, and transferred sales, marketing and distribution responsibilities for Dendron’s products to ev3 International in conformity with the terms of the August 2003 agreement described above.

The Company is a party to litigation in the United States and Europe regarding whether its Sapphire embolic coils and certain delivery catheters infringe patents held by others. The Company has received rulings unfavorable to it in Europe and has been enjoined from engaging in infringing activities with respect to these products in most European countries. The Company has appealed the unfavorable rulings. See Note 10 of “Notes to Unaudited Consolidated Financial Statements.”

In the first quarter of 2004, the Company commercially launched the NXT family of embolic coils in Europe, which replaces the Sapphire embolic coil product line in that geographic market.

There is no assurance that the Company will be successful in the appeal of the court rulings described above, that the NXT product introduction in Europe will be successful or that the NXT product line will not also be subject to legal challenge.

Neuro Access and Delivery Products

The Company’s neuro access and delivery products consist of guidewires, micro catheters and balloon systems, developed internally by the Company to access remote vessels in the brain primarily for the delivery of embolic products, including the Company’s Sapphire and NXT coils, and Onyx. All of the Company’s neuro access and delivery products currently marketed have received CE Mark in Europe and 510(k) clearance in the United States. Such products are marketed, sold and distributed under the same agreements as the Company’s embolic products.

Peripheral Vascular Products

The Company’s peripheral vascular products consist of interventional catheters, micro catheters, infusion wires and a mechanical brush for the delivery of thrombolytic agents for the dissolution of blood clots. Effective January 1, 2003, the Company entered into a distribution support services agreement with ev3 Inc., under which ev3 provided warehousing for the Company’s peripheral blood clot therapy products, which currently comprise nearly all of the Company’s peripheral vascular product segment sales, and charged the Company a fee at a fixed percentage of the Company’s sales of such products. In April 2003, the Company and ev3 Inc. entered into a distribution agreement, which superseded the January 2003 distribution support services agreement. Under the terms of the April 2003 agreement, ev3 Inc. purchases peripheral vascular products from the Company at a fixed percentage of the actual sales prices realized by ev3 Inc. from end-user customers.

The Company markets its peripheral vascular products internationally principally under the terms of the August 2003 agreement with ev3 International described above.

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 2003 and 2004

The following table sets forth, for the three and nine months ended September 30, 2003 and 2004, the Company’s results of operations expressed as dollar amounts and as percentages of net sales:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2003					2004					2003					2004
	Amount			% of Sales		Amount			% of Sales		Amount			% of Sales		Amount			% of Sales
Net sales	$	5,208,000		100.0	%	$	8,171,000		100.0	%	$	15,943,000		100.0	%	$	24,847,000		100.0	%
Cost of sales		2,033,000		39.0	%		3,144,000		38.5	%		6,018,000		37.7	%		10,125,000		40.7	%

Gross margin		3,175,000		61.0	%		5,027,000		61.5	%		9,925,000		62.3	%		14,722,000		59.3	%

Costs and expenses:
Research and development		2,541,000		48.8	%		2,281,000		27.9	%		7,653,000		48.0	%		6,520,000		26.2	%
Clinical and regulatory		1,529,000		29.4	%		1,326,000		16.2	%		6,364,000		39.9	%		4,442,000		17.9	%
Marketing and sales		2,905,000		55.8	%		3,479,000		42.6	%		10,032,000		62.9	%		10,222,000		41.1	%
General and administrative		2,489,000		47.8	%		3,638,000		44.5	%		6,985,000		43.8	%		10,903,000		43.9	%
Distributor termination		—		—			554,000		6.8	%		—		—			823,000		3.3	%

Total costs and expenses		9,464,000		181.7	%		11,278,000		138.0	%		31,034,000		194.7	%		32,910,000		132.5	%

Loss from operations		(6,289,000	)	-120.8	%		(6,251,000	)	-76.5	%		(21,109,000	)	-132.4	%		(18,188,000	)	-73.2	%

Other income (expense):
Amortization of exchange feature of notes payable		—		—			(9,148,000	)	-112.0	%		—		—			(15,338,000	)	-61.7	%
Stock issuance expenses		—		0.0	%		—		—			(600,000	)	-3.8	%		—		—
Interest income, net		9,000		0.2	%		(144,000	)	-1.8	%		—		0.0	%		(184,000	)	-0.7	%
Gain on sale of investment		—		0.0	%		—		0.0	%		14,647,000		91.9	%		1,728,000		7.0	%
Foreign currency transaction gain (loss)		(54,000	)	-1.0	%		33,000		0.4	%		(180,000	)	-1.1	%		28,000		0.1	%
Other		9,000		0.2	%		57,000		0.7	%		113,000		0.7	%		36,000		0.1	%

Total other income (expense)		(36,000	)	-0.7	%		(9,202,000	)	-112.6	%		13,980,000		87.7	%		(13,730,000	)	-55.3	%

Loss before provision for income taxes		(6,325,000	)	-121.4	%		(15,453,000	)	-189.1	%		(7,129,000	)	-44.7	%		(31,918,000	)	-128.5	%
Provision for income taxes		—		—			—		—			2,000		0.0	%		2,000		0.0	%

Net loss	$	(6,325,000	)	-121.4	%	$	(15,453,000	)	-189.1	%	$	(7,131,000	)	-44.7	%	$	(31,920,000	)	-128.5	%

Following is information with respect to net sales for the three and nine months ended September 30, 2003 and 2004:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2004		2003		2004
Product Segments
Embolic products	$	1,715,000	$	2,905,000	$	5,330,000	$	8,422,000
Neuro access and delivery products		2,889,000		4,651,000		8,428,000		14,269,000
Peripheral vascular and other products		604,000		615,000		2,185,000		2,156,000

Total net sales	$	5,208,000	$	8,171,000	$	15,943,000	$	24,847,000

Geographic Segments
United States	$	1,863,000	$	3,076,000	$	5,470,000	$	8,772,000
International		3,345,000		5,095,000		10,473,000		16,075,000

Total net sales	$	5,208,000	$	8,171,000	$	15,943,000	$	24,847,000

The increases in embolic product sales from the three and nine months ended September 30, 2003 to 2004 is attributable primarily to volume increases in sales of the Sapphire family of embolic coils in the United States and in international markets other than Europe, and to volume increases in sales of Onyx in such international markets.

The increases in sales of neuro access products for the three and nine months ended September 30, 2004, relative to 2003, is primarily attributable to worldwide volume increases in sales of neuro balloons, micro catheters and neuro guidewires.

Sales of peripheral vascular and other products for the three and nine months ended September 30, 2004 were at approximately the same amounts as for the corresponding periods of 2003.

Cost of sales for the three and nine months ended September 30, 2004 were $3.1 million and $10.1 million, respectively, as compared to $2.0 million and $6.0 million for the respective corresponding periods in 2003. These increases resulted primarily from volume increases in sales of product as discussed above. As a percentage of sales, cost of sales for the three-month period ended September 30, 2004 was 38.5%, relatively unchanged from 39.0% for the corresponding period of 2003. For the nine-month period ended September 30, 2004, cost of sales increased to 40.7% from 37.7% for the corresponding period in 2003, due primarily to costs incurred in the first half of 2004 associated with the initiation of commercial manufacturing of the NXT embolic coil product line in the Company’s German facility and of the Sapphire embolic coil product line in the United States.

Research and development expenses were $2.3 million and $6.5 million for the three and nine-month periods ended September 30, 2004, respectively, as compared to $2.5 million and $7.7 million for the respective corresponding periods in 2003. The decreases were due primarily to relatively high expenditure levels that were incurred in 2003 related to projects in connection with the Sapphire and NXT families of embolic coils.

Clinical and regulatory expenses decreased to $1.3 million and $4.4 million for the three and nine-month periods ended September 30, 2004, respectively, from $1.5 million and $6.4 million during the respective corresponding periods in 2003. These decreases resulted primarily from costs incurred in connection with the Company’s Onyx clinical trial activity in the U.S. in 2003, which activity had been substantially reduced by the end of 2003.

Marketing and sales expenses were $3.5 million and $10.2 million during the three and nine-month periods ended September 30, 2004, respectively, which reflect increases from marketing and sales expenses of $2.9 million and $10.0 million for the corresponding respective periods of 2003. These increases were primarily attributable to distribution costs that vary positively with increases in sales, net of reduced costs incurred under of the Company’s revised sales representative agreement with ev3 International, which became effective August 1, 2003.

General and administrative expenses increased from $2.5 million and $7.0 million for the three and nine-month periods ended September 30, 2003, respectively, to $3.6 million and $10.9 million in the respective corresponding periods of 2004. These increase are due primarily to increased legal expenses in connection with intellectual property litigation, which expenses amounted to $0.9 million and $2.7 million for the three and nine months ended September 30, 2003, respectively, as compared to $1.6 million and $6.1 million during the respective corresponding periods in 2004. See Note 10 of “Notes to Unaudited Consolidated Financial Statements.”

On December 4, 2003, the Company entered into a note purchase agreement under which it sold exchangeable promissory notes, in an aggregate principal amount of $17 million, which the Company exchanged for issuance of shares of its common stock, pursuant to exchange provisions in the note purchase agreement, in January 2004. Under generally accepted accounting principles, or GAAP, in the United States, the difference between the exchange price and the closing market price per share represents a beneficial conversion feature of the notes, which is reflected as a discount to the notes and amortized over the contractual life of the notes. On January 30, 2004, upon the exchange of the notes for the Company’s common stock, the Company expensed the remaining unamortized discount as of that date, amounting to approximately $6.2 million.

On June 25, 2004, the Company entered into a note purchase agreement under which it sold exchangeable promissory notes in an aggregate principal amount of $21 million. Similar to the notes issued under the December 2003 agreement described above, the notes issued under the June 2004 agreement contain a beneficial conversion feature amounting to $9.1 million. Accordingly, upon issuance of the notes on June 25, 2004, the Company recorded a discount to the notes of $9.1 million, and, upon exchange of the notes for the Company’s common stock on August 18, 2004, the Company expensed the entire $9.1 unamortized discount.

In the second quarter of 2003, the Company incurred stock issuance expenses pursuant to the terms of the securities purchase agreement entered into on September 3, 2002 between the Company and Micro Investment LLC under which Micro Investment was the lead investor in a private placement of the Company’s common stock. The terms of the securities purchase agreement required the Company to prepare and file with the Securities and Exchange Commission, as soon as practicable after the closing of the final stage of the private placement, a registration statement for the purpose of registering under the Securities Act of 1933, all of the shares of the Company’s common stock that were sold in the private placement. The registration rights provisions further provided that, for each complete 30-day period subsequent to March 31, 2003, in which the registration statement had not been declared effective by the Securities and Exchange Commission, the investors in the private placement could demand, and the Company would be obligated to pay, liquidated damages in the amount of 2% of the aggregate purchase price paid for the shares of common stock in the first and second stages of the private placement. The registration statement was declared effective on May 9, 2003. Accordingly, the amount of liquidated damages payable was $600,000, which amount was accrued as a liability and expensed in the second quarter of 2003.

In June 2002, Boston Scientific Corporation and Enteric entered into a merger agreement under which Boston Scientific acquired all the outstanding common and preferred stock of Enteric Medical Technologies, Inc., of which the Company owned a minority equity interest. Pursuant to the terms of the merger agreement, each Enteric stockholder received a pro rata share of the consideration paid at the closing of the transaction, net of amounts set aside in escrow to provide for future indemnity claims, if any.

Impact of Foreign Currency Exchange Rates

The Company’s sales in Europe and certain countries outside Europe are either denominated in or determined by the local currency, primarily the Euro, of the Company’s customers. During the three and nine months ended September 30, 2004, the U.S. dollar was lower in value against such currencies than during the corresponding periods in 2003. The Company estimates that approximately $250,000 and $900,000 of the respective increases in total revenues from the three and nine months ended September 30, 2003 to the corresponding period in 2004 were attributable to fluctuation in currency exchange rates.

Liquidity and Capital Resources

Since inception, the Company’s costs and expenses have significantly exceeded its sales, resulting in an accumulated deficit of approximately $141 million at September 30, 2004. Consequently, the Company has historically financed its operations through debt and equity placements. In late 2003 and 2004, the Company completed two private placements of exchangeable promissory notes resulting in aggregate proceeds to the Company of $38 million, of which $28 million resulted from sales of notes to members of ev3 LLC. The exchangeable promissory notes were subsequently exchanged for an aggregate of 13,144,728 shares of the Company’s common stock.

In addition to generating cash from operation, the Company will be entitled to receive 50% of the remaining escrowed amounts under the terms of the Enteric merger agreement described above, which the Company estimates to be approximately $850,000, in May 2005, and the remaining estimated $850,000 in May 2006, provided that no claims are made against the amounts in escrow.

As of September 30, 2004, the Company had cash and cash equivalents of $15.5 million. Cash used in the Company’s operations during the nine months ended September 30, 2004 was $17.8 million, reflecting primarily the loss from operations, increases in accounts receivable and inventories, and decreases in accounts payable, and accrued salaries and benefits. The Company expects that operations will continue to consume cash into at least the second half of 2005. The increases in accounts receivable and inventories in 2004 are related, in part, to increases in sales volume during the period, and the Company expects such relationships to continue.

Cash used in investing activities during the nine months ended September 30, 2004 was $3.3 million, which primarily reflects the increase in goodwill resulting from the accrual of the $3.75 million second contingent payment to the former Dendron shareholders, discussed further below, and the expenditure of approximately $1.3 million for additions to property and equipment and intellectual property, net of the receipt of $1.7 million of the amounts previously set aside in escrow in connection with the Enteric transaction. While continued investments will be made in property and equipment and intellectual property, the Company had no significant commitments as of September 30, 2004.

Cash provided by financing activities during the nine months ended September 30, 2004 was $20.1 million, primarily consisting of the proceeds from the issuance of $21 million of exchangeable notes in June 2004.

The Company believes that current cash balances and anticipated cash flows from planned operations will be sufficient to fund future operations into mid-2005, at which time the Company may not have achieved cash flow positive operations. The Company currently has no committed external sources of funds and anticipates seeking to raise such additional working capital through either a public or private debt or equity financing. There is no assurance that Micro Investment or its affiliates will continue to provide financing to the Company, that any financing transaction will be available at terms acceptable to the Company, if at all, or that any financing transaction will not be dilutive to current stockholders. If the Company is not able to raise additional funds, it will be required to significantly curtail or cease its ongoing operations.

The Company’s future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future revenues and expenditures, market acceptance of new products, the results and scope of ongoing research and development projects, competing technologies, market and regulatory developments and the future course of intellectual property litigation. See Notes 1 and 10 of “Notes to Unaudited Consolidated Financial Statements;” and “Results of Operations.”

CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS

Some of the information included herein contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of, estimates made by and information currently available to, our management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including, without limitation, statements to the effect that Micro Therapeutics or our management “may,” “will,” “expects,” “anticipates,” “estimates,” “continues,” “plans,” “believes,” or “projects,” or statements concerning “potential” or “opportunity,” any variations thereof, comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. Our actual results may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impaired by risks including, but not limited to the following:

•	our ability to sufficiently fund our operations or achieve cash flow positive operations;

•	our ability to protect and defend our patents and proprietary technology;

•	our ability to successfully bring our products to market;

•	our ability to successfully develop new products;

•	market acceptance of our products;

•	our ability to compete;

•	our dependence on third party suppliers and manufacturers;

•	our limited marketing and distribution experience;

•	the market opportunity for our products;

•	our ability to obtain and maintain required regulatory approvals; and

•	the ability of our customers to obtain third-party reimbursement for procedures involving our products.

Because of these and other factors that may affect our operating results, past performance should not be considered as an indicator of future performance and investors should not use historical results to anticipate results or trends in the future. We assume no obligation to update such forward-looking statements or to update the reasons actual results could differ materially from those anticipated in such forward-looking statements.

We continue to incur negative cash flows from operations. Our operations to date have consumed substantial amounts of cash, and we expect this condition will continue into at least the second half of 2005. Our current cash balances and expected cash flows from operations may not be be sufficient to fund our operations beyond mid-2005. If adequate funds were not available to us, our business would be negatively impacted.

We currently have no committed external sources of funds and we anticipate seeking to raise such additional working capital through either a public or private debt or equity financing. However, such additional financing may not be available on acceptable terms or at all. If we raise additional funds by issuing equity securities, further dilution to our existing stockholders could result. If adequate funds were not available to us, our business would be negatively impacted.

We depend on patents and proprietary technology to protect our intellectual property, our revenue base and our business. Our success will depend in part on our ability to:

•	obtain and maintain our patents;

•	preserve our trade secrets; and

•	operate without infringing the proprietary rights of others.

The patent position of a medical device company may involve complex legal and factual issues. Our issued patents cover technology underlying our neuro vascular products, such as our embolic products and micro catheters, and our peripheral vascular products, such as the thrombolytic brush. Issued patents may not provide us significant proprietary protection, pending patent applications may not be issued, and products incorporating the technology in issued patents or pending applications may not be free of challenge from competitors. It is possible that patents belonging to competitors will require us to alter our technology and products, pay licensing fees, or cease to market or develop our current or future technology and products. We also rely on trade secrets to protect our proprietary technology, and it is possible that others will independently develop or otherwise acquire equivalent technology or that we will be unable to maintain our technology as trade secrets. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. If we fail to protect our intellectual property rights, there could be a negative impact on our business.

There has been extensive litigation in the medical device industry regarding patents and other intellectual property rights. Prior to our acquisition of Dendron, it became involved in litigation in Europe involving patents covering certain of its products, which litigation is still active. Concurrent with our acquisition of Dendron, we initiated a series of legal actions in Europe and the U.K. with the primary purpose of asserting both invalidity and non-infringement by us of certain patents held by others with respect to detachable coils and certain delivery systems. In addition, the patent holders against whom we initiated the actions in Europe and the U.K. have initiated legal actions against us in the United States that allege infringement by us of certain patents held by them. See Part II, Item 1, “Legal Proceedings.”

It is possible that other infringement, invalidity, right to use or ownership claims could be asserted against us with respect to our products. Although patent and intellectual property disputes in the medical device industry have often been settled through licensing or similar arrangements, these arrangements can be costly and the necessary licenses may not be available to us on satisfactory terms or at all under such circumstances. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business.

One of our stockholders and its affiliates hold a majority of our common stock, which enables this affiliated group to control our Board of Directors and cause or prevent significant transactions. One of our stockholders, Micro Investment LLC, a Delaware limited liability company, and members of ev3 LLC, a Delaware limited liability company and sole owner of Micro Investment, and their affiliates beneficially own an aggregate of approximately 70% of our outstanding common stock. In addition, four members of our Board of Directors, James Corbett, Dale A. Spencer, Richard B. Emmitt and Elizabeth H. Weatherman, directly or indirectly hold equity interests in ev3 LLC. Ms. Weatherman, is a general partner of Warburg, Pincus & Co., the sole general partner of Warburg, Pincus Equity Partners, L.P., which, together with three affiliated entities, owns a majority interest in ev3 LLC.

Micro Investment and its affiliates will be able to exercise voting control over us for the foreseeable future and will be able to elect the entire Board of Directors, set dividend policy and otherwise generally determine our management. Micro Investment, which itself owns approximately 50% of our outstanding common stock, appointed three of the seven members of our current Board of Directors, and so long as Micro Investment holds 30% of the outstanding shares of our common stock, Micro Investment is entitled to designate four of the members of our Board of Directors. This control by Micro Investment and its affiliates could prevent, or make more difficult, a sale of Micro Therapeutics that is not on terms acceptable to Micro Investment and its affiliates. In addition, this control would allow Micro Investment to prevent, or alternatively, to cause to occur, significant corporate transactions.

Several of our products are in developmental stages and may not successfully come to market, which could harm our sales and revenues. We have only recently introduced a number of products commercially, and several of our products, including extensions of existing products, are in the early stage of development. Some of our products only recently emerged from clinical trials and others have not yet reached the clinical trial stage. Our ability to market these products will depend upon a number of factors, including our ability to demonstrate the safety and efficacy of our products in the clinical setting. Our products may not be found to be safe and effective in clinical trials and may not ultimately be cleared for marketing by U.S. or foreign regulatory authorities. Our failure to develop safe and effective products that are approved for sale on a timely basis would have a negative impact on our business.

If we cannot obtain approval from governmental agencies we will be unable to sell our products in some countries. The process of obtaining FDA and other required regulatory clearances is lengthy, expensive and uncertain. We may not receive regulatory clearance for some of our products or, if regulatory clearance is granted, it may include significant limitations on the indicated uses for which a product may be marketed.

With respect to certain modifications we have made to products covered under 510(k) clearances, the FDA may not agree with our determinations that a new 510(k) notice was not required for such changes and could require us to submit a new 510(k) notice for any of the changes made to a device. If the FDA requires us to submit a new 510(k) notice for any device modification, we may be prohibited from marketing the modified device until the FDA clears the 510(k) notice. Delays that would be caused by the submission of a new 510(k) notice could materially adversely affect our business.

Delays in receipt of, failure to receive, or loss of regulatory approvals or clearances to market our products would negatively impact our business.

Our products may not be accepted by the market, which could harm our sales and revenues. Even if we are successful in developing safe and effective products that have received marketing clearance, our products may not gain market acceptance. In order for any of our products to be accepted, we must address the needs of potential customers. However, even if customers accept our products, this acceptance may not translate into sales. Additionally, our market share for our existing products may not grow, and our products that have yet to be introduced may not be accepted in the market.

New products and technologies in the market could create additional competition, which may reduce the demand for our products. The markets in which we compete involve rapidly changing technologies and new product introductions and enhancements. We must enhance and expand the utility of our products, and develop and introduce innovative new products that gain market acceptance. New technologies, products or drug therapies developed by others could reduce the demand for our products. We may encounter technical problems in connection with our own product development that could delay introduction of new products or product enhancements. While we maintain research and development programs to continually improve our product offerings, which include adding interventional devices, our efforts may not be successful, and other companies could develop and commercialize products based on new technologies that are superior to our products either in performance or cost-effectiveness.

We face intense competition from many large companies, which may reduce the demand for our products. The medical technology industry is intensely competitive. Our products compete with other medical devices, surgical procedures and pharmaceutical products. A number of the companies in the medical technology industry, including manufacturers of neuro vascular and peripheral vascular products, have substantially greater capital resources, larger customer bases, broader product lines, greater marketing and management resources, larger research and development staffs and larger facilities than ours. These competitors have developed and may continue to develop products that are competitive with ours. They may develop and market technologies and products that are more readily accepted than ours. Their products could make our technology and products obsolete or noncompetitive. Although we believe that our products may offer certain advantages over our competitors’ currently marketed products, companies entering the market early often obtain and maintain significant market share relative to those entering the market later. While we believe we have designed our products to be cost effective and more efficient than competing technologies, we might not be able to provide better methods or products at comparable or lower costs.

We also compete with other manufacturers of medical devices for clinical sites to conduct human trials. If we are not able to locate such clinical sites on a timely basis, it could hamper our ability to conduct trials of our products, which may be necessary to obtain required regulatory clearance or approval.

We rely heavily on affiliated third parties for the distribution of our products. ev3 Inc. or its subsidiaries distribute most of our products outside the United States and our peripheral blood clot therapy product in the United States. The ev3 entities, which are affiliated with the Company as described elsewhere herein, may not be successful in performing their obligations under their agreements with us. If the ev3 entities are not successful, we may not be able to enter into substitute agreements on acceptable terms or at all in order to continue selling our products. Alternatively, we may not be able to attract, motivate and retain qualified sales personnel in a timely enough manner to continue selling our products. Accordingly, if the ev3 entities are not successful in distributing our products, our revenues could be negatively impacted.

We are exposed to product liability claims that could have a negative effect on our business. The nature of our business exposes us to risk from product liability claims. We currently maintain product liability insurance for our products, with limits of $30 million per occurrence and an annual aggregate maximum of $30 million. However, our insurance may not be adequate to cover existing and future product liability claims. Additionally, we may not be able to maintain adequate product liability insurance at acceptable rates. Any losses that we may suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products may divert management’s attention from other matters and may have a negative effect on our business.

We may need to expand our manufacturing capacity. It is likely that expansion of our manufacturing capacity will be necessary in the future. Development and commercialization requires additional money for facilities, tooling and equipment and for leasehold improvements. We expect that such expansion would be achieved through modified space utilization in our current leased facilities, improved efficiencies, automation and acquisition of additional tooling and equipment, however we may find it necessary to relocate all, or portions of, our leased facilities, which process is time consuming and expensive. We may not be able to obtain the required funds for expansion of our manufacturing capacity. Improved efficiencies might not result from such an expansion. Any delay or inability to expand our manufacturing capacity, including obtaining the commitment of necessary capital resources, could materially adversely affect our manufacturing ability.

Our dependence on single source suppliers puts us at risk of interruptions in our business. We purchase some components and services used in connection with our products from third parties. Our dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. Delays in delivery or services or component shortages can cause delays in the shipment of our products. Our single-source components are generally acquired through purchase orders placed in the ordinary course of business, and we have no guaranteed supply arrangements with any of our single-source suppliers. Because of our reliance on these vendors, we may also be subject to increases in component costs. It is possible that we could experience quality control problems, supply shortages or price increases with respect to one or more of these components in the future. If we need to establish additional or replacement suppliers for some of these components, our access to the components might be delayed while we qualify such suppliers. Any quality control problems, interruptions in supply or component price increases with respect to one or more components could have a negative impact on our business.

We rely on independent contract manufacturers to produce some of our products and components. Our reliance on independent contract manufacturers involves several risks, including:

•	inadequate capacity of the manufacturer’s facilities;

•	interruptions in access to certain process technologies; and

•	reduced control over product quality, delivery schedules, manufacturing yields and costs.

Independent manufacturers have possession of and in some cases hold title to molds for certain manufactured components of our products. Shortages of raw materials, production capacity constraints or delays by our contract manufacturers could negatively affect our ability to meet our production obligations and result in increased prices for affected parts. Any such reduction, constraint or delay may result in delays in shipments of our products or increases in the prices of components, either of which could have a material adverse effect on our business.

We do not have supply agreements with all of our current contract manufacturers and we often utilize purchase orders, which are subject to acceptance by the supplier. An unanticipated loss of any of our contract manufacturers could cause delays in our ability to deliver our products while we identify and qualify a replacement manufacturer, which delays could negatively impact our revenues.

We depend upon key personnel to operate our business, which puts us at risk of a loss of expertise if key personnel were to leave us. We depend upon the contributions, experience and expertise of certain members of our management team and key consultants. Our success will depend upon our ability to attract and retain additional highly qualified management, sales, technical, clinical and consulting personnel.

Our revenues could be diminished if we cannot obtain third party reimbursement for sales of our products. We believe that health care providers will be able to obtain reimbursement for our products based on reimbursement policies for embolization procedures currently in effect. However, these reimbursement policies may not be applied by healthcare payors in all markets to procedures in which our products are used, or, even if currently applicable, may be changed in the future. Changes in reimbursement policies of governmental (both domestic and international) or private healthcare payors could negatively impact our business to the extent any such changes affect reimbursement for procedures in which our products are used.

Reimbursement systems in international markets vary significantly by country, and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed health care systems that govern reimbursement for new devices and procedures. In

most markets, there are private insurance systems as well as government-managed systems. Obtaining reimbursement approvals in each country can require approximately 12 to 18 months or longer. Any delays in obtaining, or an inability to obtain, reimbursement approvals could have a material adverse effect on our business.

Our international operations subject us to additional business risks, such as business interruption, increased costs and currency exchange rate fluctuations, and may cause our profitability to decline. International sales are subject to inherent risks, including unexpected changes in regulatory requirements, fluctuating exchange rates, difficulties in staffing and managing foreign sales and support operations, additional working capital requirements, customs, duties, tariff regulations, export license requirements, political and economic instability, potentially limited intellectual property protection and difficulties with distributors. In addition, sales and distribution of our products outside the United States are subject to extensive foreign government regulation. In addition, generally we sell products in local currency, which subjects us to currency exchange risks.

Provisions in our charter documents, our stockholder rights plan and Delaware law may make an acquisition of us more difficult. Provisions of our Amended and Restated Certificate of Incorporation, Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to stockholders. Our Amended and Restated Certificate of Incorporation provides for 5,000,000 authorized shares of Preferred Stock, the rights, preferences and privileges of which may be fixed by our Board of Directors without any further vote or action by our stockholders. In addition, our stock option plans, under certain circumstances, provide for the acceleration of vesting of options granted under such plans in the event of certain transactions that result in a change of control of Micro Therapeutics. Further, Section 203 of the General Corporation Law of Delaware prohibits us from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of Micro Therapeutics without action by our stockholders, and therefore, could materially adversely affect the price of our common stock.

In May 1999 our Board of Directors adopted a Stockholder Rights Plan. The Stockholder Rights Plan, as amended, provides each stockholder of record one right for each share of common stock of Micro Therapeutics. The rights are represented by our common stock certificates, and are not traded separately from common stock and are not exercisable. The rights will become exercisable only if, unless approved by the Board of Directors, a person acquires or announces a tender offer that would result in ownership of 20% or more of Micro Therapeutics’ common stock, at which time, each right would enable the holder to buy shares of our common stock at a discount to the then market price. Micro Therapeutics may redeem the rights for $0.01 per right, subject to adjustment, at any time before the acquisition by a person or group of 20% or more of Micro Therapeutics’ stock. The rights have a ten-year term. The Stockholder Rights Plan may have the effect of delaying, deferring or preventing a change in control of our stock. This may discourage bids for our common stock at a premium over the market price of the common stock and may adversely affect the market price of the common stock.

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.

Our quarterly operating results may fluctuate significantly because of several factors, including:

•	the timing of regulatory approvals and clearances;

•	the rate at which the Company and third-party distributors, as applicable, establish their domestic and international sales and distribution networks;

•	our levels of expenses, in particular with respect to intellectual property litigation;

•	the progress of clinical trials and the introduction of competitive products for diagnosis and treatment of neuro and peripheral vascular disease;

•	the level of orders within a given quarter and preceding quarters;

•	the timing of product shipments within a given quarter;

•	our timing in introducing new products;

•	changes in our pricing policies or in the pricing policies of our competitors or suppliers;

•	the availability and cost of key components used to manufacture our products;

•	termination of supply or distribution contracts for our products;

•	our ability to manufacture a sufficient quantity of our products to meet customer demand; and

•	fluctuations in foreign currency exchange rates.

Due to these and other factors, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. In any quarterly period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to decrease.

Stock prices are particularly volatile in some market sectors and our stock price could decrease. The stock market sometimes experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations can cause a decrease in the price of our common stock. Changes in the medical device industry generally may have a material adverse effect on the market price of our common stock. In addition, during a future quarterly period, our results of operations may fail to meet the expectations of stock market analysts and investors and, in such event, our stock price could materially decrease.

Most of our outstanding shares of common stock are freely tradable. The market price of our common stock could drop due to sales of a large number of shares or the perception that such sales could occur. These factors also could make it more difficult to raise funds through future offerings of common stock.

Item 3. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to litigation in the United States, the United Kingdom, the Netherlands and Germany involving embolic coils developed by the Company’s wholly owned subsidiary, Dendron GmbH, and whether such coils infringe certain patents of the University of California licensed to Boston Scientific Corp. In addition, the Company is involved in other litigation from time to time in the ordinary course of business, the outcome of which the Company’s management believes will not have a material adverse effect on the Company’s financial position or results of operations. During the period from July 5, 2004 to the date of this Quarterly Report no material developments occurred in such litigation.

For more information regarding such litigation see Note 10 of “Notes to Unaudited Consolidated Financial Statements” included elsewhere herein, the Company’s Annual Report of Form 10-KSB for the year ended December 31, 2003, and the Company’s Quarterly Reports on Forms 10-QSB for the periods ended April 4, 2004 and July 4, 2004.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 25, 2004, the Company entered into a note purchase agreement with certain accredited institutional investors under which the Company issued $21 million aggregate principal amount of unsecured exchangeable promissory notes. Holders of $15 million in aggregate principal amount of the notes are members of ev3 LLC. On July 13, 2004, the Company filed a Definitive Proxy Statement with the Securities and Exchange Commission in connection with a special meeting of the Company’s stockholders which was held on August 18, 2004 for the purpose of approving the issuance of shares of the Company’s common stock at a price of $3.10 per share in exchange for the aggregate principal amount of the notes and related accrued interest. After receiving such stockholder approval, the Company issued 6,848,163 shares of its common stock in exchange for the cancellation of the notes. As required by the note purchase agreement, the Company filed with the Securities and Exchange Commission a registration statement under the Securities Act for the purposes of registering the resale of the shares of common stock issued upon exchange of the notes. The Securities and Exchange Commission declared such registration statement effective on August 25, 2004.

Exemption from the registration requirements of the Securities Act for the sale of the securities described above was claimed under Section 4(2) of the Securities Act, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. No underwriting or broker’s commissions were paid in connection with the foregoing transactions.

Item 4. Submission of Matters to a Vote of Security Holders

A special meeting of stockholders was held on August 18, 2004, at which one proposal was presented and voted on.

The issuance of shares of the Company’s common stock upon exchange of the exchangeable promissory notes sold by the Company in a private placement on June 25, 2004 was approved. The voting results were: For, 33,968,938; Against or Abstain, 138,422.

Item 6. Exhibits

See Index To Exhibits on Page 23 of this Quarterly Report on Form 10-QSB.

SIGNATURES

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


	MICRO THERAPEUTICS, INC.

Date: November 17, 2004	By:	/S/ HAROLD A. HURWITZ
		Harold A. Hurwitz Chief Financial Officer

Exhibit Index


Exhibit Number		Description
10.45		Letter of Employment effective July 23, 2004 by and between Micro Therapeutics and William Dippel

31.1		Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934.

31.2		Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934.

32		Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.45 2 dex1045.htm LETTER OF EMPLOYMENT EFFECTIVE JULY 23, 2004 Letter of Employment effective July 23, 2004

Exhibit 10.45

June 30, 2004

William Dippel

12708 Fredericksburg Drive

Saratoga, CA 95070

Dear Bill:

It gives me great pleasure to offer you employment with Micro Therapeutics, Inc. (MTI) on the following terms and conditions:

1.	Your title will be Vice President, Operations and you will report directly to me. Your duties and responsibilities will include:

•

Provide direction for operations of the manufacturing, manufacturing engineering, purchasing, warehousing, inventory control, product distribution and overall facilities.

•

Plan, direct and control production and related support functions to provide high quality product in a cost effective manner to support the company’s sales plan.

•

Contribute to the overall strategy of the company as a member of the senior management team.

Responsibility for other areas of the Company’s business may be assigned to you as the Company deems necessary.

2.	Your full time employment shall begin on a date still to be determined.

You will receive a base annual salary of $227,500 (or $8,750 per pay period, with 26 pay periods per year). Your status will be salaried exempt. You will be eligible to participate in the company’s 2004 incentive bonus program on a pro-rated basis, at a guaranteed minimum 80% payout. The bonus is targeted to be cash up to 35% of your base salary, and is based upon performance relative to Company goals and individual goals that will be established after your employment with MTI commences.

4.	You will be entitled to 15 days paid vacation each year, accruing on a monthly basis. You will also be eligible for coverage under the Company’s group health/dental plan, and other benefits that the Company provides to comparable employees as they are established.

5.	Upon commencement of your employment with Micro Therapeutics, Inc., you will be paid a one time sign-on bonus of $70,000.

William Dippel

Page 2

I am also pleased to inform you that as part of this offer, and once Confidential Information Agreements are signed, and following Board of Directors approval, you will be granted an option to purchase 150,000 shares of the Company’s Common Stock at the fair market value, determined by the quoted Closing Price of the Company’s Common Stock on either the date you commence employment with MTI, or the date on which the option grant is approved by the Board, whichever is later. Following twelve (12) months of employment, this option will be vested to the extent of twenty-five percent (25%) and, from there on, at the rate of 2.083% per month until fully vested. The option is subject to conditions outlined in the Company’s 1996 Incentive Stock Option (ISO) Plan.

7.	Reasonable costs to a maximum of $100,000 related to your move from Saratoga to Southern California will be covered according to the terms set forth in a separate letter from Hal Hurwitz, MTI’s CFO. It would be preferable that your relocation takes place no later than December 31, 2004.

If for logistical reasons your relocation requires greater time, the Company is willing to extend the relocation time period until July 7, 2005.

This moving package may be repayable to Micro Therapeutics, Inc. if the duration of your employment with the Company is less than one year and your employment is voluntarily terminated.

8.	Officer performance reviews are conducted shortly after the end of each calendar year. During the 2004 performance assessment process, the Company will give due consideration to offering you a merit increase that is not pro-rated.

9.	If your employment is terminated by MTI for a reason other than cause or layoff, you will receive a package to include 6 months salary continuation.

10.

Employment with Micro Therapeutics, Inc. is at the mutual consent of the employee and the company. Accordingly, while MTI has every hope that employment relationships will be mutually beneficial and rewarding, employees and the company retain the right to terminate the employment relationship at will, at any time, with or without cause. Please note that no individual has the authority to make any contrary agreement or representation. Accordingly, this constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

11.	You agree to abide by the Company’s policies and procedures, including those set forth in the Company’s Employee Handbook. You will be required to sign the signature page of this Employee Handbook.

12.

You will be required to sign the Employee Confidential Information Agreement that is enclosed as well as the necessary tax forms before starting full time employment. You will also be required to provide proof of your identity and authorization to work in the United States as required by Federal immigration laws.

William Dippel

Page 3

Bill, we look forward to you joining our effort on a full time basis and hope the opportunity will be mutually rewarding. To confirm that you agree to the terms stated in this letter, please sign and date the enclosed copy of this letter and return it to me. Congratulations!

Regards,

MICRO THERAPEUTICS, INC.

Thomas C. Wilder

President and

Chief Executive Officer

Encl.: Employee Confidential Information Agreement (2), Job Description (2)

This will acknowledge my acceptance of this offer of employment.


		/s/ William H. Dippel				July 8, 2004
		William Dippel				Date

EX-31.1 3 dex311.htm CEO CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a)

Exhibit 31.1

Certifications

I, Thomas C. Wilder III, President and Chief Executive Officer of Micro Therapeutics, Inc. (the “Company”), certify that:

1.	I have reviewed this quarterly report on Form 10-QSB of the Company;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 17, 2004

By:

/S/ THOMAS C. WILDER III

Thomas C. Wilder III

President and Chief Executive Officer

EX-31.2 4 dex312.htm CFO CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a)

Exhibit 31.2

Certifications

I, Harold A. Hurwitz, Chief Financial Officer of Micro Therapeutics, Inc. (the “Company”), certify that:

1.	I have reviewed this quarterly report on Form 10-QSB of the Company;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 17, 2004

By:

/S/ HAROLD A. HURWITZ

Harold A. Hurwitz

Chief Financial Officer

EX-32 5 dex32.htm CEO & CFO CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 CEO & CFO Certifications Pursuant to 18 U.S.C. Section 1350

EXHIBIT 32

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Thomas C. Wilder III, President and Chief Executive Officer of Micro Therapeutics, Inc. (the “Company”), and Harold A. Hurwitz, Chief Financial Officer of the Company, each hereby certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)

the Quarterly Report on Form 10-QSB of the Company for the quarterly period ended October 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d)); and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 17, 2004	By:	/S/ THOMAS C. WILDER III
		Thomas C. Wilder III
		President and Chief Executive Officer

Date: November 17, 2004	By:	/S/ HAROLD A. HURWITZ
		Harold A. Hurwitz
		Chief Financial Officer

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