UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-51998
Restore Medical, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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41-1955715
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2800 Patton Road
St. Paul, Minnesota 55113
(651) 634-3111
(Address and zip code of principal executive offices and
registrants telephone number, including
area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting Company
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
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No
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Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date: 15,731,094 shares of Common Stock as
of April 22, 2008.
Restore Medical, Inc.
Form 10-Q
Table of Contents
1
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited
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RESTORE MEDICAL, INC.
Condensed Balance Sheets
(Unaudited, in thousands, except per share amounts)
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March 31,
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December 31,
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2008
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2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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2,177
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$
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3,964
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Short-term investments
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4,327
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6,285
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Accounts receivable, net of allowance for doubtful accounts of $25 and $21, respectively
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930
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604
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Related-party receivables
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16
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16
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Inventories
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831
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785
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Prepaid expenses
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77
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141
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Other current assets
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17
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13
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Total current assets
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8,375
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11,808
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Machinery and equipment, net
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429
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487
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Deferred debt issuance costs, net of accumulated amortization of $282 and $251, respectively
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93
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123
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Total assets
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$
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8,897
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$
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12,418
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Liabilities and Stockholders Equity
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Current liabilities:
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Accounts payable
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$
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284
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$
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275
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Accrued expenses
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387
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344
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Accrued payroll and related expense
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607
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616
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Current portion of long-term debt, net of debt discount of $28 and $37, respectively
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2,220
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2,806
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Total current liabilities
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3,498
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4,041
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Long-term debt
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132
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143
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Other long-term liabilities
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16
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16
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Total liabilities
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3,646
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4,200
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Stockholders equity:
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Common stock $0.01 par value: 50,000,000 shares authorized; issued and outstanding
15,731,094 and 15,731,094 shares, respectively
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157
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157
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Additional paid-in capital
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94,492
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94,228
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Deferred stock-based compensation
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(567
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(690
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Accumulated deficit
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(88,831
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(85,477
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Total stockholders equity
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5,251
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8,218
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Total liabilities and
stockholders equity
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$
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8,897
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$
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12,418
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See accompanying notes to condensed financial statements.
2
RESTORE MEDICAL, INC.
Condensed Statements of Operations
(Unaudited, in thousands, except share and per share amounts)
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Three months ended
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March 31
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2008
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2007
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Net sales
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$
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1,393
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$
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1,124
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Cost of sales (1)
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270
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268
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Gross margin
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1,123
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856
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Operating expenses:
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Research and development (1)
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670
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1,052
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General and administrative (1)
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1,171
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1,315
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Sales and marketing (1)
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2,005
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2,734
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Total operating expenses
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3,846
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5,101
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Loss from operations
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(2,723
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(4,245
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Other income (expense):
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Interest income
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119
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284
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Interest expense
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(127
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(196
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Impairment of short-term investment
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(623
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Total other income (expense)
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(631
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88
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Net loss
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$
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(3,354
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$
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(4,157
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Basic and diluted net loss per common share
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$
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(0.21
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$
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(0.26
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Basic and diluted weighted average
common shares outstanding
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16,109,216
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15,971,951
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(1) Includes stock-based compensation of:
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Cost of sales
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$
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25
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$
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23
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Research and development
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49
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22
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General and administrative
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248
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465
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Sales and marketing
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65
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94
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$
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387
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$
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604
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See accompanying notes to condensed financial statements.
3
RESTORE MEDICAL, INC.
Condensed Statements of Cash Flows
(Unaudited, in thousands)
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Three months ended March 31
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2008
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2007
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Cash flows from operating activities:
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Net loss
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$
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(3,354
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$
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(4,157
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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52
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57
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Stock-based compensation
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387
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604
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Bad debt
expense (recovery)
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4
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(11
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Impairment of short-term investments
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623
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Non-cash interest expense
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39
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39
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Change in operating assets and liabilities:
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Trade receivables
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(330
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394
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Related-party receivables
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(21
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Inventories
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(46
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(72
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Prepaid expenses
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64
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36
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Other current assets
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(4
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(24
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Accounts payable
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9
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(540
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Accrued expenses
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43
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(441
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Accrued payroll and related expenses
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(9
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40
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Other long-term liabilities
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Net cash used in operating activities
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(2,522
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(4,096
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Cash flows from investing activities:
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Maturities of short-term investments
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2,135
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10,181
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Purchase of short-term investments
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(800
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(11,899
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Purchases of machinery and equipment
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6
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(74
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Net cash used in investing activities
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1,341
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(1,792
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Cash flows from financing activities:
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Repayments on long-term debt
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(596
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(526
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Capital lease payments
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(10
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(6
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Proceeds from stock options exercised
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146
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Net cash (used in) provided by
financing activities
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(606
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(386
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Net
(decrease) increase in cash and
cash equivalents
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(1,787
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(6,274
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Cash and cash equivalents:
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Beginning of period
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3,964
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11,377
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End of period
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$
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2,177
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$
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5,103
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Supplemental disclosure:
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Interest paid
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$
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87
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$
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157
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See accompanying notes to condensed financial statements.
4
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
(1)
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Nature of Business
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Restore Medical, Inc. (hereinafter we, us or the Company)
develops and markets medical
devices designed to treat sleep disordered breathing. In
December 2002, the Company received Food and
Drug Administration (FDA) 510(k) clearance to market and sell the Pillar
â
palatal
implant system (Pillar System) in the United States for the treatment
of snoring. The Company received
510(k) clearance from the FDA in July 2004 to market and sell
its Pillar System in the United
States for mild to moderate obstructive sleep apnea (OSA). The Company received CE Mark certification
to market and sell its Pillar System in Europe for snoring in May 2003 and for mild to
moderate OSA in December 2004. The Company markets and sells
its products domestically through a direct
sales force and internationally through independent distributors.
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(2)
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Going Concern
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The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. The Company has incurred net losses of $13.5 million and $13.0
million, and negative cash flows from operating activities of
$11.5 million and $10.6 million,
in 2007 and 2006, respectively. In addition, the Company incurred a net loss of $3.4 million
for the three months ended March 31, 2008 and negative cash flows from operating activities of
$2.5 million for the same period. The Company has $2.2 million of debt that is due
in 2008, and will require additional capital to continue funding its
operations in 2008.
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At March 31, 2008 the Company had $2.2 million of
cash and cash equivalents and $5.0 million, par value,
of investments in auction rate securities (with a fair value of
$4.3 million as discussed in Note 4). Auction rate securities are variable-rate debt
securities and have a long-term maturity with the interest rate reset through Dutch auctions
that are typically held every 7, 28 or 35 days. The securities trade at par and are callable
at par on any interest payment date at the option of the issuer. Interest is paid at the end
of each auction period. The Companys auction rate securities are all AAA/Aaa rated and collateralized
by student loans substantially guaranteed by the U.S. government under the Federal Family
Education Loan Program. Until February 2008, the auction rate securities market was highly
liquid. Beginning the week of February 11, 2008, substantially all of the auctions for these
securities have failed as a result of negative overall capital market conditions, meaning
that there was not enough demand to sell the securities at auction. The result of these failed
auctions, which does not signify a default by the issuers, is that these securities continue
to pay interest in accordance with their terms, but the Company will
not be able to liquidate any of these securities until there are successful auctions or until
such time as other markets for these investments develop.
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As discussed in Note 11, on April 22, 2008, the Company, Medtronic, Inc. (Medtronic) and MRM
Merger Corporation, a wholly owned subsidiary of Medtronic (Merger Sub), entered into an
Agreement and Plan of Merger (the Merger Agreement) pursuant to which Merger Sub will be
merged with and into the Company (the Merger). As a result of the Merger, the separate
corporate existence of Merger Sub will cease and the Company will continue as the surviving
corporation in the Merger and as a wholly owned subsidiary of Medtronic.
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The Merger Agreement provides that at the effective time of
the Merger (the Effective Time), and as a result thereof, the Companys shareholders
will receive, in exchange for
each share of Company common stock they own immediately prior to the
completion of the Merger, the right to receive a cash payment in the
amount of $1.60 per share, subject to adjustment if the outstanding
capital stock, options and warrants of the Company would cause the
aggregate consideration to exceed $26,333,800. The closing of the
Merger is subject to approval by the holders of a majority of the Companys
outstanding shares at a special meeting to be held as soon as
reasonably practicable, and other customary closing conditions. The Company
anticipates the Merger will close within 90 days.
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5
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
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Medtronic has also agreed to purchase from the Company a total of up to approximately $5 million
par value of auction rate securities owned by the Company. On each of up to five specified dates
between the date of the Merger Agreement and the Effective Time, between $750,000 and $1,100,000
par value of such securities would be purchased by Medtronic, at purchase prices between
approximately 86.7 percent and 88.2 percent of the par value thereof (plus accrued but unpaid
interest). The Company will fund its operations through the closing of the Merger with the $2.2 million
of cash and cash equivalents it had on hand as of March 31, 2008 and through proceeds
generated from the sale of the Companys auction rate securities to Medtronic pursuant to the
terms of the Merger Agreement. Medtronics obligation to
purchase auction rate securities from the Company will terminate
immediately upon the earlier to occur of the Effective Time of the
Merger or the termination of the Merger Agreement.
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In the event that the Merger Agreement is terminated or the
Merger is otherwise not completed, the Company will be required to obtain additional capital to
fund its operations in the form of equity or debt financing or
through licensing its intellectual property. Any sale of additional equity or issuance of debt will result in
dilution to its current stockholders, and the Company cannot be certain that additional public or
private financing will be available in amounts or on terms acceptable
to the Company, or at all. If the Company is unable to obtain additional financing, the Company will need
to significantly reduce the scope of
its operations including a reduction in the size of its sales and marketing, research and
development, administrative and manufacturing staff combined with the elimination of the
significant programs and initiatives planned by each of those functional groups. These changes
would have a material adverse effect on the Companys business.
Any inability to satisfy the Companys liabilities
as they come due could result in the need to file for bankruptcy.
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(3)
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Basis of Presentation
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In the opinion of management, the accompanying unaudited condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the United States
of America and reflect all adjustments, consisting solely of normal recurring adjustments,
needed to fairly present the financial results for these interim periods. These condensed
financial statements include some amounts that are based on managements best estimates and
judgments. These estimates may be adjusted as more information becomes available, and any
adjustment could be significant. The impact of any change in estimates is included in the
determination of earnings in the period in which the change in estimate is identified. The
results of operations for the three months ended March 31, 2008, are not necessarily
indicative of the results that may be expected for the entire 2008 fiscal year.
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According to the rules and regulations of the United States Securities and Exchange
Commission, the Company has omitted footnote disclosures that would substantially duplicate the
disclosures contained in its audited financial statements. These unaudited condensed financial
statements should be read together with the financial statements for the year ended December
31, 2007, and footnotes thereto included in our Annual Report on Form 10-K, filed March 27,
2008, with the United States Securities and Exchange Commission.
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(4)
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Financial Instruments and Fair Value
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The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
157,
Fair Value Measurements
(SFAS 157), effective January 1, 2008. Under this standard, fair
value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
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As of the date of adoption, the Company has short-term investments in auction rate securities
that are valued in accordance with the provisions under SFAS 157. Changes in fair value are
recorded in other comprehensive income, unless there is an other-than-temporary impairment in
the value of the securities.
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SFAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. The hierarchy is broken down into three levels
based on the reliability of inputs as follows:
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Level
1Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access.
6
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
Level 2Valuations based on quoted prices in markets that are not active or for which all
significant inputs are observable, either directly or indirectly.
Level 3Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
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As discussed in Note 2, beginning the week of February 11, 2008, substantially all auctions
for auction rate securities have failed as a result of the negative overall capital market
conditions, meaning that there is not enough demand to sell the securities at auction.
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|
As discussed in Note 2 and Note 11, pursuant to the terms of the Merger Agreement, Medtronic has agreed
to purchase from the Company a total of up to approximately $5 million par value of auction rate securities
owned by the Company. On each of up to five specified dates between the date of the Merger
Agreement and the Effective Time, between $750,000 and $1,100,000 par value of such securities
would be purchased by Medtronic, at purchase prices between approximately 86.7 percent and 88.2
percent of the par value thereof (plus accrued but unpaid interest).
Medtronics obligation to purchase auction rate securities from
the Company will terminate immediately upon the earlier to occur of
the Effective Time of the Merger or the termination of the Merger
Agreement.
|
|
|
|
The following table presents information about the Companys Level 1 assets measured at fair
value on a recurring basis. The fair value of the Companys auction rate securities is based
on the negotiated price of the securities to be purchased by Medtronic pursuant to the Merger
Agreement.
|
|
|
|
Assets measured at fair value (Level 1) on a recurring basis as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
December 31,
|
|
|
|
|
|
Other-than-temporary
|
|
|
|
|
|
March 31,
|
|
|
2007
|
|
Purchases
|
|
impairment
loss
|
|
Settlements
|
|
2008
|
Auction Rate
Securities
|
|
$
|
4,200
|
|
|
$
|
800
|
|
|
$
|
(623
|
)
|
|
$
|
(50
|
)
|
|
$
|
4,327
|
|
|
|
The use of different assumptions, applying different judgment to inherently subjective matters
and changes in future market conditions could result in significantly different estimates of
fair value of these securities, currently and in the future. In the event the acquisition of
the Company by Medtronic is not completed, the future valuation of any auction rate securities
not purchased by Medtronic may be subject to valuation assumptions and assessments, and our
interpretations of relevant market data, which may be different, subject to uncertainties,
difficult to predict, and will require significant judgment. The fair value of our auction
rate securities could change significantly based on changes in market conditions and continued
uncertainties in the credit markets. If these uncertainties continue or if these auction rate
securities experience credit rating downgrades, we may incur additional impairment charges for
the remaining auction rate securities in our investment portfolio. We will continue to monitor
the fair value of our auction rate securities and relevant market conditions and we will
record additional impairment charges in the future if circumstances warrant such charges.
|
|
(5)
|
|
Stock Options and Accounting for Stock-Based Compensation
|
|
|
|
The Company has adopted the Restore Medical, Inc. 1999 Omnibus Stock Plan (the Plan) that
includes both incentive stock options and nonqualified stock options to be granted to
employees, officers, consultants, independent contractors, directors and affiliates of the
Company. Incentive stock options must be granted at an exercise price not less than the fair
market value of the common stock on the grant date. Incentive stock options granted to
participants owning more than 10% of the Companys outstanding voting stock must be granted at
an exercise price not less than 110% of fair market value of the common
stock on the grant date. Options expire ten years from the date of grant and typically vest
25% after the first year of service with the remaining vesting 1/36th each month thereafter.
|
7
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
|
|
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
Remaining
|
|
|
Shares Available
|
|
Under
|
|
Average Exercise
|
|
Contractual Life
|
|
|
for Grant
|
|
Options
|
|
Price Per Share
|
|
in Years
|
Balance, December 31, 2007
|
|
|
256,991
|
|
|
|
2,540,789
|
|
|
$
|
2.02
|
|
|
|
8.5
|
|
Granted
|
|
|
(281,850
|
)
|
|
|
281,850
|
|
|
|
1.19
|
|
|
|
9.8
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
Forfeited
|
|
|
17,021
|
|
|
|
(17,021
|
)
|
|
|
1.53
|
|
|
|
|
|
Cancelled
|
|
|
98,900
|
|
|
|
(98,900
|
)
|
|
|
5.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008
|
|
|
91,062
|
|
|
|
2,706,718
|
|
|
$
|
1.82
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2008
|
|
|
|
|
|
|
892,251
|
|
|
$
|
2.40
|
|
|
|
6.6
|
|
|
|
The following table summarizes information for unvested stock options for the three months
ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
grant date fair
|
|
|
Shares
|
|
value per share
|
Non-vested at January 1, 2008
|
|
|
1,615,999
|
|
|
$
|
3.68
|
|
Granted
|
|
|
281,850
|
|
|
|
1.50
|
|
Vested
|
|
|
(45,590
|
)
|
|
|
4.97
|
|
Forfeited
|
|
|
(14,730
|
)
|
|
|
3.20
|
|
Cancelled
|
|
|
(23,062
|
)
|
|
|
2.54
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2008
|
|
|
1,814,467
|
|
|
$
|
3.44
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R),
Share
Based Payment
(SFAS 123(R)) prospectively to new awards and to awards modified, repurchased or
cancelled after December 31, 2005. Prior to the adoption of SFAS 123(R), the Company used the minimum
value method of
measuring equity share options for the pro forma disclosure under
SFAS 123. The Company will continue
to apply the intrinsic-value method for awards granted prior to the adoption of SFAS 123(R).
|
|
|
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Since the Company has limited historical data
on the volatility of its stock as
a public company, the expected volatility is based on volatility of similar entities (referred
to as guideline companies). In evaluating similarity, the Company considered factors such as industry,
stage of life cycle, size and financial leverage. The expected term of options granted is
determined using the shortcut method allowed by SAB 107. Under this approach, the expected
term is presumed to be the mid-point between the vesting date and the end of the contractual
term. The shortcut approach is not permitted for options granted, modified or settled after
December 31, 2007. The risk-free rate is based on the U.S. Treasury yield curve in effect at
the time of grant for the estimated life of the option. The Company
has never declared or paid any
cash dividends and does not presently plan to pay cash dividends in the
foreseeable future. The Company
uses historical termination behavior to support estimated forfeiture rates. In addition, SFAS
123(R) requires the Company to reflect the benefits
|
8
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
|
|
of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow
upon adoption. The Company has recognized no such tax benefits to date.
|
|
|
|
The following assumptions were used to estimate the fair value of stock option shares granted
to employees using the Black-Scholes option-pricing model during the three months ended March
31:
|
|
|
|
|
|
|
|
|
|
|
|
Granted to Employees
|
|
|
2008
|
|
2007
|
Volatility
|
|
|
65
|
%
|
|
|
65
|
%
|
Risk-free interest rates
|
|
|
3.0
|
%
|
|
|
5.0
|
%
|
Expected option life
|
|
|
6.40
|
years
|
|
|
6.40
|
years
|
Stock dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Forfeiture rate
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
There were no director options granted during the three months ended March 31, 2008 or 2007.
|
|
|
|
The weighted average grant date fair value of share options granted during the three months
ended March 31, 2008 and 2007 was approximately $1.50 and $2.55 per share, respectively. There
were no stock options exercised and the Company did not recognize any related tax benefits
during the three months ended March 31, 2008. Upon exercise, the Company issues new shares of
stock. The aggregate intrinsic value of share options exercised during the three months ended
March 31, 2008 and 2007 was approximately $0 and $298, respectively. As of March 31, 2008,
there was $3,624 of total unrecognized compensation costs related to outstanding options
granted after the adoption of SFAS 123(R) which is expected to be recognized over a weighted
average period of 3.4 years.
|
|
|
|
Prior to the Companys initial public offering (IPO) in May 2006, certain stock options were granted
with exercise prices that were below the estimated fair value of the common stock at the date
of grant. The Company recorded deferred stock compensation of $2,500 for the period through December
31, 2005 (until the adoption of SFAS 123(R)), in accordance with Accounting Principles Board
(APB) No. 25. As of March 31, 2008, there was $567 of deferred stock-based compensation that
will be amortized on a straight-line basis over a weighted average period of 1.0 years.
|
|
|
|
On February 1, 2007, the Board of Directors of the
Company approved an amendment to 235,250
stock options that were granted to nine Company employees between May 15, 2006 and July 20,
2006 whereby the exercise price of such stock options was reduced from a weighted average of
$7.89 per share to $3.89 per share, which was the closing price of the Companys common stock
on February 1, 2007. The primary objective of this stock option re-pricing was to address the
discrepancy in equity value of the stock options granted to two groups of new employees who
were recruited to the Company during a critical period in the Companys growth and evolution.
The stock options are accounted for as a cancellation and grant in the stock option roll-forward. All other terms of
the stock options, including vesting and termination dates, remained the same. The incremental
fair value created by the amendment to the stock options was $122. The remaining unrecognized
incremental fair value of $90 will be recognized as compensation expense over the weighted
average remaining vesting period of 3.3 years.
|
|
|
|
On March 6, 2007, the Company granted a total of 23,070 options to purchase common stock to
two consultants. The terms of the agreements were consistent with employee stock options,
except that the vesting provision provided for immediate vesting of all options on the date of grant. The Black-Scholes
|
9
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
|
|
option-pricing model was utilized and the assumptions were the same
as stated in the table above for employees, except that an option life of ten years was
utilized, which is the contractual term of the options. The total compensation expense of $64
for these two grants was recognized in March 2007.
|
|
|
|
On August 10, 2007, the Board of Directors of the Company approved the cancellation of options
to purchase 326,950 shares of common stock that were granted to employees with an exercise
price ranging from $3.37 per share to $8.00 and the concurrent grant of an equal number of
replacement stock options with an exercise price of $1.63 per share, which was the historical
45-day trailing average of the closing price of the Companys common stock on August 10, 2007.
The closing price of the Companys common stock on August 10, 2007 was $1.18 per share. The
Board of Directors also approved an amendment on August 10, 2007 to the terms of stock options
to purchase an aggregate of 890,100 shares of common stock granted to eight executive
officers, with exercise prices ranging from $3.37 to $8.00 per share, whereby the exercise
price of such stock options was reduced to $1.63 per share. The primary objective of
re-pricing and amending these employee and executive stock options was to provide appropriate
market-based equity incentives to all Company employees during a critical period in the
Companys evolution and growth. These stock options were accounted for as a cancellation and
grant in the stock option roll-forward. The terms of the replacement and amended stock option
agreements were consistent with the Plan. The incremental fair value created by the
modification to the stock options was $386. The remaining unrecognized incremental fair value
of $309 as of March 31, 2008 will be recognized as compensation expense over the remaining
vesting period of 3.3 years.
|
|
|
|
On October 23, 2007, the Company granted a total of 25,000 options to purchase common stock to
one consultant. The terms of the agreement were consistent with employee stock options, except
that the vesting provision provided for immediate vesting of all options on the date of grant.
The Black-Scholes option-pricing model was utilized and the assumptions were the same as
stated in the table above for employees, except that an option life of ten years was utilized,
which is the contractual term of the options. The total compensation expense of $28 for this
grant was recognized in October 2007.
|
|
|
|
On February 5, 2008, the Board of Directors of the Company approved cancellation of options to
purchase 98,900 shares of common stock granted to eight executive officers, with exercise
prices ranging from $3.37 to $8.00 per share and the concurrent grant of an equal number of
replacement stock options with an exercise price of $1.19 per share, which was the closing
price of the Companys stock on February 5, 2008. The primary objective of re-pricing and
amending these executive stock options was to provide appropriate market-based equity
incentives to the Companys executive officers in lieu of granting new options from the option
pool. These stock options were accounted for as a cancellation and grant in the stock option
roll-forward. The terms of the replacement and amended stock option agreements were consistent with
the Plan. The incremental fair value created by the modification to
the stock options was $44.
The remaining unrecognized incremental fair value of $42 as of March 31, 2008 will be
recognized as compensation expense over the remaining vesting period of 3.8 years.
|
|
|
|
For the three months ended March 31, 2008 and 2007, results of operations reflect compensation
expense for new stock options granted or modified under our stock incentive plans subsequent
to January 1, 2006, and the continued amortization of the deferred compensation for options
granted prior to January 1, 2006.
|
|
(6)
|
|
Net Loss per Share
|
|
|
|
Basic net loss per common share (Basic EPS) is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per common share (Diluted EPS)
is computed by dividing net loss by the weighted average number of common shares and dilutive
potential common shares outstanding. Potential common shares consist of shares issuable upon
the exercise of stock options and warrants. Diluted EPS is identical to Basic EPS since
potential common shares are excluded from the calculation, as their effect is anti-dilutive.
The weighted average shares outstanding for basic and diluted loss per share includes 378,122
shares of common stock underlying warrants to purchase common stock as
|
10
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
|
|
such warrants are immediately exercisable and have an exercise price of $0.02 per share. The common stock
underlying the warrants is considered outstanding in substance for EPS purposes. Historical
outstanding potential common shares not included in diluted net loss per share attributable to
common stockholders were 3,034,294 for the three months ended March 31, 2008 and 2,838,912 for
the three months ended March 31, 2007.
|
|
|
|
Net loss per share for the three months ended March 31, 2008 and 2007 is based on the weighted
average shares outstanding as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31
|
|
|
|
2008
|
|
|
2007
|
|
Weighted average common shares and equivalents outstanding:
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
15,731,094
|
|
|
|
15,593,829
|
|
Warrants issued at a nominal exercise price
|
|
|
378,122
|
|
|
|
378,122
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted
|
|
|
16,109,216
|
|
|
|
15,971,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
(7)
|
|
Inventories
|
|
|
|
The Company states its inventories at the lower of cost or market, using the first-in, first-out method.
Market is determined as the lower of replacement cost or net realizable value. Inventory
write-downs are established when conditions indicate that the selling price could be less than
cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand
and reductions in selling prices. Costs associated with excess capacity are charged to
earnings as incurred. Inventory write-downs are measured as the difference between the cost of
inventory and estimated realizable value. Inventories at March 31, 2008 and December 31, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw Materials
|
|
$
|
25
|
|
|
$
|
39
|
|
Work In Process
|
|
|
429
|
|
|
|
437
|
|
Finished Goods
|
|
|
377
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
$
|
831
|
|
|
$
|
785
|
|
|
|
|
|
|
|
|
11
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
(8)
|
|
Long-Term Debt
|
|
|
|
Long-term debt consisted of the following as of March 31, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Term loan (interest at prime plus 3%
maturing December 2008), net of debt
discount of $28
and $37 , respectively
|
|
$
|
2,178
|
|
|
$
|
2,765
|
|
Capital lease for leasehold improvements
(interest at 14.33%, monthly payments
maturing
March 2010)
|
|
|
18
|
|
|
|
20
|
|
Capital lease for equipment (interest at
12.14%, monthly payments maturing July
2011)
|
|
|
63
|
|
|
|
66
|
|
Capital lease for equipment (interest at
8.77%, monthly payments maturing August
2012)
|
|
|
93
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
2,352
|
|
|
|
2,949
|
|
Less current portion, net of debt
discount of $28 at March 31, 2008 and
$37 at December 31, 2007
|
|
|
(2,220
|
)
|
|
|
(2,806
|
)
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
132
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
The term loan is payable over 30 consecutive monthly payments of principal and interest which
began on July 1, 2006, with an additional final payment in an amount equal to 5% of the
original loan due on December 31, 2008.
|
|
|
|
In August 2007, the Company entered into a new capital lease agreement for the purchase of equipment
with an annual interest rate of 9.16% and monthly payments commencing in September 2007
maturing in August 2012. The total capital lease amount financed was
$102 and included the new equipment and the
remaining outstanding debt obligation of $14 from the capital lease obligation originally
maturing September 2009, for which the Company retired the assets originally associated with that lease
commitment.
|
|
(9)
|
|
Significant Customers
|
|
|
|
The following table summarizes the number of customers who individually comprise greater than
10% of total net sales and their aggregate percentage of the Companys total net sales for the
three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Percent of total
|
|
|
customers
|
|
net sales
|
March 31, 2008
|
|
|
1
|
|
|
|
21
|
%
|
March 31, 2007
|
|
|
1
|
|
|
|
26
|
%
|
|
|
In 2007, the Company negotiated a monthly payment plan for $198 of past due accounts receivable with
its largest domestic customer and requires payment be mailed to the Company at the time of
shipment for all future shipments until the past due balance is paid. The Company has not
established a specific reserve for any estimated losses related to
this customer. The customer is in compliance with the agreement and has reduced the
past due balance to $165 as of
March 31, 2008.
|
12
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
|
|
The following table summarizes the number of customers who individually comprise greater than
10% of total net accounts receivables and their aggregate percentage of the Companys total
net accounts receivables:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Percent of total
|
|
|
customers
|
|
net receivables
|
March 31, 2008
|
|
|
2
|
|
|
|
32
|
%
|
December 31, 2007
|
|
|
1
|
|
|
|
33
|
%
|
(10)
|
|
Adoption of New Accounting Pronouncement
|
|
|
|
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in a
companys financial statements in accordance with Statement 109 and prescribes a recognition
threshold and measurement attributable for financial disclosure of tax positions taken or
expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted the provisions of FIN 48 as of January 1, 2007.
The adoption of FIN 48 did not impact the Companys financial position, results of operations or cash
flows for the three months ended March 31, 2008.
|
|
|
|
As of the date of adoption the Companys total amount of unrecognized tax benefits was approximately
zero. The Company files a United States federal income tax return and income tax returns in Minnesota.
With few exceptions, the Company is subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years after 2002. Neither the Internal Revenue Service
(IRS) nor the State of Minnesota have commenced an examination of income tax returns.
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In September 2006, the FASB issued SFAS 157,
Fair Value Measurements
, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP) and expands disclosure about fair value measurements. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The provisions of SFAS 157 were adopted on January
1, 2008 and had a material impact on the Companys financial
position as discussed in Note 4.
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In February 2008, the FASB issued FASB Staff Position No. SFAS 157-b,
Effective Date of FASB
Statement No. 157
, which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. In accordance with this
interpretation, the Company has only adopted the provisions of SFAS 157 with respect to its
financial assets and liabilities that are measured at fair value within the financial
statements as of March 31, 2008. The provisions of SFAS 157 have not been applied to
non-financial assets and non-financial liabilities; however, the Company does not have any
non-financial assets or liabilities to which the deferral has been applied.
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(11)
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Subsequent Event
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On April 22, 2008, the Company, Medtronic, Inc., a Minnesota corporation (Medtronic), and MRM
Merger Corporation, a Delaware corporation and wholly owned subsidiary of Medtronic (Merger Sub)
entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant
to which Merger Sub will be merged with and into the Company (the
Merger). As a result of the Merger, the separate
corporate existence of Merger Sub will cease and the Company will
continue as the
surviving corporation and as a wholly owned subsidiary of Medtronic.
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13
RESTORE MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
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On the terms and subject to the conditions of the Merger Agreement, which has been unanimously
approved by the Board of Directors of the Company, at the effective time of the Merger (the
Effective Time), and as a result thereof, each share of common stock, par value $0.01, of the
Company (Restore Common Stock) that is issued and outstanding prior to the Effective Time (other
than shares held by the Company, Medtronic or their subsidiaries, which will be canceled without
payment of any consideration, and shares for which appraisal rights have been validly exercised and
not withdrawn) will be converted into the right to receive $1.60 in cash, without interest (the
Merger Consideration), subject to adjustment if the outstanding capital stock, options and
warrants of the Company would cause the aggregate consideration to exceed $26,333,800. Each option
and warrant to purchase Restore Common Stock that is outstanding as of the Effective Time will be
canceled in exchange for the right to receive in cash the amount by which the Merger Consideration
exceeds the exercise price, multiplied by the number of shares subject to such option or warrant.
Medtronic has also agreed to purchase from the Company a total of up to approximately $5 million
par value of auction rate securities owned by the Company. On each of up to five specified dates
between the date of the Merger Agreement and the Effective Time, between $750,000 and $1,100,000
par value of such securities would be purchased by Medtronic, at purchase prices between
approximately 86.7 percent and 88.2 percent of the par value thereof (plus accrued but unpaid
interest). Medtronic's obligation to purchase auction rate securities
from the Company will terminate immediately upon the earlier to occur
of the Effective Time of the Merger or the termination of the Merger
Agreement.
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Medtronic and the Company have made customary representations, warranties and covenants in the
Merger Agreement, including, among others, covenants that: (i) the Company will conduct its
business in the ordinary course consistent with past practice during the interim period between the
execution of the Merger Agreement and the Effective Time, (ii) the Company will not engage in
certain kinds of transactions during such period, (iii) the Company will cause a meeting of its
stockholders to be held to consider adoption of the Merger Agreement,
and (iv) subject to certain
customary exceptions, that the Board of Directors of the Company will recommend adoption by its
stockholders of the Merger Agreement. The Company has also made certain additional customary covenants, including, among
others, covenants not to: (i) solicit proposals relating to alternative business combination
transactions or (ii) subject to certain exceptions, enter into discussions concerning or provide
confidential information in connection with any proposals for alternative business combination
transactions.
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Consummation of the Merger is subject to customary conditions, including (i) approval of the
holders of a majority of the outstanding shares of Restore Common Stock, (ii) absence of any law or
order prohibiting the consummation of the Merger, (iii) not more than 10% of the outstanding shares of Restore Common Stock
being the subject of validly exercised appraisal rights, (iv) the absence of a material adverse
effect with respect to the Company, and (v) satisfaction of third party obligations, and other
customary conditions.
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The Merger Agreement contains certain termination rights for both Medtronic and the Company, and
further provides that, upon termination of the Merger Agreement under certain specified
circumstances, the Company would be required to pay Medtronic a
termination fee of $1.5 million.
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As described above, the Merger Agreement contains representations
and warranties by Medtronic and
the Company. These representations and warranties have been made solely for the benefit of the
other parties to the Merger Agreement and (i) may be intended not as statements of fact, but rather
as a way of allocating the risk to Medtronic or the Company if those statements prove to be
inaccurate, (ii) have been qualified by disclosures that were made to the other party in connection
with the negotiation of the Merger Agreement, (iii) may apply materiality standards different from
what may be viewed as material to investors and (iv) were made only as of the date of the Merger
Agreement or such other dates as may be specified in the Merger Agreement and are subject to more
recent developments. Accordingly, these representations and warranties should not be relied on as
characterizations of the actual state of facts or for any other purpose either at the time they
were made or at any other time.
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The foregoing description of the Merger and the Merger Agreement does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the full text of the Merger
Agreement, a copy of which has been filed by the Company as Exhibit 2.1 to the Companys Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2008.
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14
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We develop, manufacture and market our proprietary and patented Pillar
®
palatal implant
system (Pillar System). The Pillar System is a simple, innovative, minimally invasive, implantable
medical device used to treat sleep disordered breathing, which includes mild to moderate
obstructive sleep apnea, or OSA, and habitual or socially disruptive snoring. During the Pillar
Procedure
®
, a physician implants three small, braided, proprietary polyester inserts
into the muscle of the soft palate. These Pillar inserts, together with the bodys natural fibrotic
response to the implanted Pillar inserts, add structural support and stiffen the soft palate,
thereby minimizing or eliminating the palatal tissue vibration that can cause snoring and the
collapse that can obstruct the upper airway and cause OSA. We believe the Pillar Procedure is a
safe, clinically effective, long-lasting and low-risk procedure with minimal pain or complications
that offers significant benefits to both patients and physicians over other available treatment
options.
Our Pillar System was cleared by the United States Food and Drug Administration, or FDA, for
snoring in December 2002 and for mild to moderate OSA in July 2004. Our Pillar System received CE
Mark certification for both snoring and mild to moderate OSA from the European Commission in May
2003 and December 2004, respectively.
We currently market and sell our Pillar System to otolaryngologists (ear, nose and throat
physicians) and to a limited number of oral maxillofacial surgeons. We employ a direct sales force
in the United States currently consisting of 15 sales representatives and 3 regional sales
directors, and market our products in more than 20 countries outside the United States through
independent distributors. We expect to incur net losses through at least 2008 as we continue to
invest in the development of the market for the Pillar System.
On
April 22, 2008, we, Medtronic, Inc., a
Minnesota corporation (Medtronic), and MRM Merger Corporation, a Delaware corporation and wholly
owned subsidiary of Medtronic, entered into an Agreement and Plan of
Merger (the Merger Agreement) pursuant to which MRM Merger Corporation will be merged with
and into the Company (the Merger). As a result of the
Merger, the separate corporate existence of MRM Merger Corporation
will cease and the Company will continue as the surviving corporation and a wholly owned
subsidiary of Medtronic.
The Merger Agreement provides that at the effective time of the
Merger, and as a result thereof, our shareholders will receive, in
exchange for each share of our common stock they own immediately
prior to completion of the Merger, the right to receive a cash
payment in the amount of $1.60 per share, subject to adjustment if
the outstanding capital stock, options and warrants of the Company
would cause the aggregate consideration to exceed $26,333,800. Consummation of the Merger is subject to customary
conditions, including (i) approval of the holders of a majority of our outstanding shares, (ii)
absence of any law or order prohibiting the consummation of the Merger, (iii) not more than 10% of our outstanding shares
being the subject of validly exercised appraisal rights, (iv) the absence of a material adverse
effect with respect to the Company, and (v) satisfaction of third party obligations, and other
customary conditions. We anticipate the Merger will close within 90
days.
Application of Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted
in the United States of America, or GAAP. The application of GAAP requires that we make estimates
that affect our reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. We evaluate our
estimates and assumptions on an ongoing basis. Our actual results may differ significantly from
these estimates.
A description of the Companys critical accounting policies that represent the more significant
judgments and estimates used in the preparation of the Companys financial statements was provided
in the Managements Discussion and Analysis of Financial Condition and Results of Operations
section of the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
15
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Results of Operations (in thousands, except for average selling price)
Comparison of the Three Months Ended March 31, 2008 and 2007
Net Sales
.
Net sales increased by $269, or 24%, to $1,393 for the three months ended March 31,
2008 from $1,124 in the same period in 2007.
The following table summarizes the geographic dispersion of the Companys revenue:
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|
|
|
|
|
|
|
Three months ended March 31
|
|
|
|
2008
|
|
|
2007
|
|
United States
|
|
$
|
1,143
|
|
|
$
|
1,013
|
|
Asia Pacific
|
|
|
50
|
|
|
|
|
|
Europe
|
|
|
96
|
|
|
|
111
|
|
All other markets
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,393
|
|
|
$
|
1,124
|
|
|
|
|
|
|
|
|
Net sales in the United States increased by $130, or 13%, to $1,143 for the first quarter of 2008
from $1,013 in the first quarter of 2007. The growth of our U.S. business in the first quarter of
2008 was driven by a significant increase in reorder revenue, which was up 22% compared to the
first quarter of 2007 and accounted for 90% of our first quarter 2008 domestic revenue compared to
83% in the first quarter of 2007. The United States average selling price for the three Pillar
inserts used in each Pillar Procedure was approximately $640 and $680 in the first three months of
2008 and 2007, respectively.
Net sales
internationally increased by $139, or 125%, to $250 during the first quarter of 2008 from
$111 in the first quarter of 2007. The increase in the international sales during the first quarter
of 2008 was due to an increase in reorder volume from a larger number of established distributors,
as compared to the first quarter of 2007. Our independent distributors purchase our Pillar System
from us at a discount to our U.S. list price for resale; the end-user price of our Pillar System in
each country is determined by the distributor and varies from country to country.
Cost of sales and gross margin
.
Our cost of sales consists primarily of material, labor and
manufacturing overhead expenses. Cost of sales also includes warranty expenses, as well as salaries
and personnel-related expenses, including stock-based compensation, for our operations management
team and quality control. Cost of sales of $270 for the first quarter of 2008 is consistent with
cost of sales of $268 for the first quarter of 2007. As a percentage of net sales, gross margin was
81% for the first quarter of 2008, compared to 76% for the first quarter of 2007. The improvement
in gross margin as a percent of sales during the first quarter of 2008 was a result of a decrease
in the cost to manufacture each Pillar System due to fixed manufacturing costs which were allocated
over a higher production volume.
Research and development expenses
. Our research and development expenses consist of salaries and
other personnel-related expenses, including stock-based compensation, for employees engaged in
research, development and engineering activities and materials used and other overhead expenses
incurred in connection with the design and development of our products. Research and development
expenses decreased by $382, or 36%, to $670 for the first quarter of 2008 from $1,052 in the first
quarter of 2007. The decrease in expenses
during the first quarter of 2008 was attributable to decreased compensation expense of $249 due to
reduced headcount and a decrease in clinical study costs of $97 as compared to the first quarter of
2007.
16
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
General and administrative expenses
.
Our general and administrative expenses consist primarily of
salaries and other personnel-related expenses, including stock-based compensation for executive,
accounting and administrative personnel, professional service fees and other general corporate
expenses. General and administrative expenses decreased by $144, or 11%, to $1,171 for the first
quarter of 2008 from $1,315 in the first quarter of 2007. The decrease in expenses in the first
quarter of 2008 was due primarily to a decrease in stock-based compensation of $217, which is
mainly a result of issuing options with a lower fair value, partially
offset by increased administrative
expenses.
Sales and marketing expenses.
Our sales and marketing expenses consist primarily of salaries,
commissions and other personnel-related expenses, including stock-based compensation, for employees
engaged in sales, marketing and support of our products, trade show, co-marketing, promotional and
public relations expenses and management and administration expenses in support of sales and
marketing. Sales and marketing expenses decreased by $729, or 27%, to $2,005 for the first quarter
of 2008 from $2,734 in the first quarter of 2007. A decrease in advertising, promotion, public
relation and professional fees of $450, and a decrease in travel expenses of $50 and personnel
recruiting fees of $58 accounted for the decrease in expenses between the first quarter of 2007 and
2008.
Interest income
. Interest income decreased by $165 to $119 for the first quarter of 2008 from $284
for the first quarter of 2007. The decrease in the three months ended is attributable to the change
in the cash available for investing activities and interest earned from those investments.
Interest expense
. Interest expense decreased by $69 to $127 for the first quarter of 2008 from $196
for the first quarter of 2007. The decrease in the three-month period was due to the interest
expense resulting from draws on our loan facility with Lighthouse Capital Partners during the first
quarter of 2006 prior to our IPO, and the subsequent pay down of the loan facility and the
correlating decrease in expense.
Impairment
of short-term investments.
We recognized an expense for the other-than-temporary impairment of
short-term investments of $623 for the first quarter of 2008 as a result of the decrease in fair
value of our auction rate securities.
Liquidity and Capital Resources
Since our inception and prior to May 2006, we funded our operations primarily through issuances of
convertible
preferred stock and related warrants, which provided us with aggregate gross proceeds of $39.9
million. On May 22, 2006, we sold 4,000,000 shares of common stock in an IPO for aggregate gross
proceeds of $32.0 million to finance current operations and provide for general corporate purposes,
including expanding domestic and international marketing and sales organizations and programs,
increasing product development efforts and increasing our clinical study initiatives. After
deducting the underwriters commissions and discounts, we received net proceeds of approximately
$27.7 million. As of March 31, 2008, we had total cash, cash equivalents and short-term investments
totaling $6.5 million.
Net cash used in operating activities was $2.5 million during the first quarter of 2008 compared to
$4.1 million in the first quarter of 2007. Cash used in operating activities has historically
resulted from operating losses and net increases or decreases in accounts receivable, inventories
and accounts payable resulting from the changes within our business.
Net cash provided by investing activities was $1.3 million during the first quarter of 2008
compared to $1.8 million used in investing activities in the first quarter of 2007. During 2008 and
2007, cash used in investing activities primarily related to the purchase and sale of marketable
securities.
17
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Net cash used in financing activities was $606,000 during the first quarter of 2008 compared to
$386,000 used in the first quarter of 2007 and primarily related to repayments of long-term debt.
Interest on the loan accrues at a variable rate of prime plus 3% and is payable monthly, with
principal due at the maturity date of December 31, 2008 and an additional final payment in an
amount equal to 5% of the original loan principal. The term debt loan is collateralized by
substantially all of our assets excluding our intellectual property. As of March 31, 2008, we were
in compliance with all of the financial and other covenants contained in the term debt loan
agreement.
At March 31, 2008 the Company had
$2.2 million of cash and cash equivalents and $5.0 million,
par value, of
investments in auction rate securities (with a fair value of
$4.3 million as discussed in Note 4 of the Notes to
Condensed Financial Statements). Auction rate securities are variable-rate debt securities
and have a long-term maturity with the interest rate reset through Dutch auctions that are
typically held every 7, 28 or 35 days. The securities trade at par and are callable at par on any
interest payment date at the option of the issuer. Interest is paid at the end of each auction
period. Our auction rate securities are all AAA/Aaa rated and collateralized by student loans
substantially guaranteed by the U.S. government under the Federal Family Education Loan Program.
Until February 2008, the auction rate securities market was highly liquid. Beginning the week of
February 11, 2008, substantially all auctions for auction rate securities have failed as a result
of negative overall capital market conditions, meaning that there was not enough demand to sell the
securities at auction. The result of failed auctions, which does not signify a default by the
issuers, is that these securities continue to pay interest in
accordance with their terms, but we will not be able to liquidate any
of these securities until
there are successful auctions or until such time as other markets for these investments develop.
As discussed in Note 11, on April 22, 2008,
the Company, Medtronic and MRM
Merger Corporation, a wholly owned subsidiary of Medtronic (Merger Sub), entered into an
Agreement and Plan of Merger (the Merger Agreement) pursuant to which Merger Sub will be merged
with and into the Company. As a result of the Merger, the separate corporate
existence of Merger Sub will cease and the Company will continue as the surviving corporation in
the Merger and as a wholly owned subsidiary of Medtronic.
The Merger
Agreement provides that at the effective time of the Merger (the
Effective Time), and as a result thereof, the Companys shareholders will receive, in exchange for each
share of Company common stock they own immediately prior to the
completion of the Merger, the right to receive a cash
payment in the amount of $1.60 per share, subject to adjustment if
the outstanding capital stock, options and warrants of the Company
would cause the aggregate consideration to exceed to $26,333,800. The closing of the Merger is subject to approval by the
holders of a majority of our outstanding shares at a special meeting
to be held as soon as reasonably practicable, and other customary
closing conditions. We anticipate the Merger will close within
90 days.
Medtronic has also agreed to purchase from us a total of up to approximately $5 million par value
of our auction rate securities. On each of up to five specified dates between the date of the
Merger Agreement and the Effective Time, between $750,000 and $1,100,000 par value of such
securities would be purchased by Medtronic, at purchase prices between approximately 86.7 percent
and 88.2 percent of the par value thereof (plus accrued but unpaid interest). We will
fund our operations through the completion of the Merger with the $2.2 million of
cash and cash equivalents we had on hand as of March 31, 2008 and through proceeds generated from
the sale of our auction rate securities to Medtronic pursuant to the terms of Merger
Agreement. Medtronics obligation to purchase auction rate securities from the Company will terminate immediately upon the
earlier to occur of the Effective Time of the Merger or the
termination of the Merger Agreement.
In the
event that the Merger Agreement is terminated or the Merger is
otherwise not completed,
we will require additional capital to fund our operations in the form of equity or debt financing or through licensing our intellectual
property. Any sale of additional equity or issuance of debt will result in dilution to our current
stockholders, and we cannot be certain that additional public or private financing will be
available in amounts or on terms acceptable to us, or at all. If we are unable to obtain additional
financing, we will need to significantly reduce the scope of our operations including a reduction
in the size of our sales and marketing, research and development, administrative and manufacturing
staff combined with the elimination of the significant programs and initiatives planned by each of
those functional groups. These changes would have a material adverse effect on our business. Any
inability to satisfy our liabilities as they come due could result in the need to file for
bankruptcy.
18
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Disclosures about Contractual Obligations and Commercial Commitments
The following table aggregates all contractual commitments and commercial obligations that affect
our financial condition and liquidity position at March 31, 2008 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining 9
|
|
|
|
|
|
|
|
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
months 2008
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
Term debt facility
|
|
$
|
2,233
|
|
|
$
|
2,233
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
174
|
|
|
|
31
|
|
|
|
89
|
|
|
|
54
|
|
|
|
|
|
Operating leases
|
|
|
889
|
|
|
|
216
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
Deposit payable
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations
|
|
$
|
3,301
|
|
|
$
|
2,485
|
|
|
$
|
762
|
|
|
$
|
54
|
|
|
$
|
|
|
|
|
|
The above contractual obligations exclude interest on the term facility and capital lease
obligations.
Significant Customers
One customer individually accounted for 21% and 26% of our total net sales for the three months
ended March 31, 2008 and 2007, respectively.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48).
FIN 48 clarifies the accounting for uncertainties in income taxes recognized in a companys
financial statements in accordance with Statement 109 and prescribes a recognition threshold and
measurement attributable for financial disclosure of tax positions taken or expected to be taken on
a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of
FIN 48 as of January 1, 2007. The adoption of FIN 48 did not impact our financial position, results
of operations or cash flows for the three months ended March 31, 2008.
As of the
date of adoption our total amount of unrecognized tax benefits was approximately zero. We
file a United States federal income tax return and income tax returns in Minnesota. With few
exceptions, we are subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for years after 2002. Neither the Internal Revenue Service (IRS) nor the State of
Minnesota have commenced an examination of income tax returns.
In
September 2006, the FASB issued SFAS 157,
Fair Value Measurements
, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP) and expands disclosure about fair value measurements. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value. The standard does
not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The provisions of SFAS 157 were adopted on January 1, 2008 and had a material
impact on our financial position as discussed in Note 4.
In February 2008, the FASB issued FASB Staff Position No. SFAS 157-b,
Effective Date of FASB
Statement No. 157
, which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-
financial liabilities, except those that are recognized or disclosed in the financial statements at
fair value at least annually. In accordance with this interpretation,
we have only adopted
the provisions of SFAS 157 with respect to our financial assets and liabilities that are measured
at fair value within the financial statements as of March 31, 2008. The provisions of SFAS 157 have
not been applied to non-financial assets and non-financial
liabilities; however, we do not have any non-financial assets or liabilities to which the
deferral has been applied.
19
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. All statements other than statements of historical facts are
forward-looking statements for purposes of these provisions, including any projections of
earnings, revenue or other financial items, any statement of the plans and objectives of management
for future operations, any statements concerning proposed new product development, any statements
regarding future economic conditions or performance and any statement of assumptions underlying any
of the foregoing. In some cases, forward-looking statements can be identified by the use of
terminology such as may, will, expects, plans, anticipates, estimates, potential, or
continue or the negative thereof or other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained herein are reasonable, there can
be no assurance that such expectations or any of the forward-looking statements will prove to be
correct, and actual results could differ materially from those projected or assumed in the
forward-looking statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to inherent risks and uncertainties, including, but not
limited to the following factors:
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|
the successful completion of the Merger;
|
|
|
|
|
the availability of capital to fund our future operations;
|
|
|
|
|
the demand for and acceptance of our Pillar System to treat mild to moderate OSA and
snoring by both physicians and patients;
|
|
|
|
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the success of alternative therapies and surgical procedures to treat individuals
suffering from sleep disordered breathing, and the possible future introduction of new
products and treatments for sleep disordered breathing;
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our ability to maintain current pricing for our Pillar System;
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the expansion and rate of success of our direct sales force in the United States and our independent
distributors internationally;
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the successful completion of current and future clinical studies, the presentation and
publication of positive outcomes data from these clinical studies and the increased
adoption of the Pillar Procedure by physicians as a result of the
data from these clinical studies;
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actions relating to ongoing FDA and European Union compliance;
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the size and timing of orders from physicians and independent
distributors;
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our ability to obtain reimbursement for the Pillar Procedure to treat
mild to moderate OSA in the future from third-party healthcare insurers;
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the willingness of patients to pay out-of-pocket for the
Pillar Procedure to treat snoring and, in the absence of reimbursement from third-party healthcare
insurers, mild to moderate OSA;
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unanticipated delays in the development and introduction of our future products and/or
an inability to control costs;
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seasonal fluctuations in revenue due to the elective nature
of sleep-disordered breathing procedures and treatments, including the Pillar Procedure;
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20
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
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fluctuation in the fair value of our auction rate securities based on
future market conditions and continued uncertainties in the credit markets;
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general economic conditions as well as those specific to our customers and markets;
and
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other risks and factors identified from time to time in our reports and prospectuses
filed with the Securities and Exchange Commission, including, without limitation, the
risk factors set forth in our Annual Report on Form 10-K for the year ended December 31,
2007.
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All forward-looking statements and
reasons why results may differ included in this report are made
as of the date hereof, and we assume no obligation to update these forward-looking statements or
reasons why actual results might differ.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our cash is invested in bank deposits and
money market funds denominated in U.S. dollars. The
carrying amount of these cash equivalents approximates fair market value. Our investments in
marketable securities are subject to interest rate risk and our financial condition and results of
operations could be adversely affected due to movements in interest rates. Due to the short-term
nature of these investments, a 1% change in market interest rates would have an impact of
approximately $43,000 on an annual basis. We do not utilize derivative financial instruments,
derivative commodity instruments or other market risk-sensitive instruments, positions or
transactions to any material extent.
Foreign Currency Exchange Risk
Historically, our only foreign denominated
payments were for clinical expenditures. Foreign
currency gains and losses associated with these expenditures have not been significant. Although
substantially all of our sales and purchases are denominated in U.S. dollars, in future periods, we
believe a greater portion of our net sales could be denominated in currencies other than the U.S.
dollar, thereby increasing our exposure to exchange rate gains and losses on non-United States
currency transactions. We do not currently enter into forward exchange contracts to hedge exposure
denominated in foreign currencies or any other derivative financial instruments for trading or
speculative purposes. In the future, if we believe an increase in our currency exposure merits
further review, we may consider entering into transactions to help mitigate that risk.
Auction Rate Securities
Our
short-term investments include approximately $5 million, par value, of investments in auction rate
securities. Auction rate securities are variable-rate debt securities and have a long-term maturity
with the interest rate being reset through Dutch auctions that are typically held every 7, 28 or 35
days. The securities trade at par and are callable at par on any interest payment date at the
option of the issuer. Interest is paid at the end of each auction period. Our auction rate
securities are all AAA/Aaa rated and collateralized by student loans substantially guaranteed by
the U.S. government under the Federal Family Education Loan Program. Until February 2008, the
auction rate securities market was highly liquid. Beginning the week of February 11, 2008,
substantially all auctions for these auction securities have failed as a result of negative
overall capital market conditions, meaning that there was not enough demand to sell these
securities at auction. The result of a failed auction, which does not signify a default by the
issuer, is that these securities continue to pay interest in
accordance with their terms, but we will not be able to liquidate any of these securities until
there is a successful auction or until such time as other markets for these investments develop.
21
RESTORE MEDICAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the Evaluation Date), we carried out an
evaluation, under the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act
of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective to ensure that information required to be disclosed in the reports that
we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in the applicable rules and forms, and (ii) accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
During the most recent fiscal quarter, there has been no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
22
RESTORE MEDICAL, INC.
Part II. OTHER INFORMATION
Item 1A. Risk Factors
Important
risk factors applicable to us are outlined in Part I,
Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2007. As a result of developments in our business
since the filing of our Form 10-K, we are providing below an
update of the risk factors outlined in our Form 10-K relating to
our future capital requirements.
We will require additional capital to operate our business, and our short-term investments in
auction rate securities may prove to be illiquid.
We believe that our current cash, cash equivalents, short-term investments and cash generated
from operations will be sufficient to fund our working capital and capital resource needs into mid
2008.
Our short-term
investments include $5.0 million, par value, of investments in
auction rate securities (with a fair value of $4.3 million at
March 31, 2008, as discussed in Note 4 of the Notes to
Condensed Financial Statements).
Auction rate securities are variable-rate debt securities and have a long-term maturity with the
interest rate reset through Dutch auctions that are typically held every 7, 28 or 35 days. The
securities trade at par and are callable at par on any interest payment date at the option of the
issuer. Interest is paid at the end of each auction period. Our auction rate securities are all
AAA/Aaa rated and collateralized by student loans guaranteed by the U.S. government under the
Federal Family Education Loan Program. Until February 2008, the auction rate securities market was
highly liquid. Starting the week of February 11, 2008, a substantial number of auctions failed as
a result of negative overall capital market conditions, meaning that there was not enough demand to
sell the securities at auction. The result of a failed auction, which does not signify a default by
the issuer, is that these securities continue to pay interest in accordance with their terms until
there is a successful auction or until such time as other markets for these investments develop. We
will not be able to liquidate any of these auction rate securities until a future auction is
successful, or until we decide to sell the securities in a secondary market. A secondary market
sale of any of these securities could take a significant amount of time to complete and would
potentially result in a significant loss.
Typically, the fair value of auction rate securities approximates par value due to the
frequent resets through the auction-rate process. Given the current market conditions, we will
continue to monitor our auction rate securities
for substantive changes in relevant market conditions, changes in financial condition or other
changes in these investments. We may be required to record unrealized losses for impairment if we
determine that a decline in fair value of our auction rate securities has occurred that is
temporary or other-than-temporary and these impairment charges could be substantial.
On April 22, 2008, we entered into an Agreement and Plan of Merger (the Merger Agreement)
with Medtronic, Inc., a Minnesota corporation (Medtronic), and MRM Merger Corporation, a Delaware
corporation and wholly owned subsidiary of Medtronic, pursuant to which Medtronic will acquire all
of our outstanding shares for $1.60 per share in cash, subject to adjustment if the outstanding
capital stock, options and warrants of the Company would cause the aggregate consideration to
exceed $26,333,800, and pursuant to which MRM Merger Corporation will be merged with and into the
Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of
Medtronic. The closing of the
merger is subject to approval by the holders of a majority of our outstanding shares at a special
meeting to be held as soon as reasonably practicable, and other customary closing conditions. We
anticipate the merger will close within 90 days.
Medtronic has also agreed to purchase from us a total of up to approximately $5 million par
value of our auction rate securities. On each of up to five specified dates between the date of the
Merger Agreement and the Effective Time, between $750,000 and $1,100,000 par value of such
securities would be purchased by Medtronic, at purchase prices between approximately 86.7 percent
and 88.2 percent of the par value thereof (plus accrued but unpaid interest). We will fund our
operations through the completion of the Merger with the $2.2 million of cash and cash equivalents
we had on hand as of March 31, 2008 and through the proceeds generated from the sale of our auction
rate securities to Medtronic pursuant to the terms of the Merger
Agreement. Medtronics obligation to purchase auction rate
securities from the Company will terminate immediately upon the
earlier to occur of the Effective Time of the Merger or the
termination of the Merger Agreement.
In
the event that the Merger Agreement is terminated or the Merger is
otherwise not completed, we will require additional investments to fund our
operations in the form of equity or debt financing or through licensing our intellectual property.
Any sale of additional equity or issuance of debt will result in dilution to our current
stockholders, and we cannot be certain that additional public or private financing will be
available in amounts or on terms acceptable to us, or at all. If we are unable to obtain additional
financing, we will need to significantly reduce the scope of our operations including a reduction
in the size of our sales and marketing, research and development, administrative and manufacturing
staff combined with the elimination of the significant programs and initiatives planned by each of
those functional groups. These changes would have a material adverse effect on our business. Any
inability to satisfy our liabilities as they come due could result in the need to file for
bankruptcy.
Our business and our financial condition may be adversely affected if our proposed merger with
Medtronic is not completed, which could cause our stock price to decline.
Our proposed merger with Medtronic is subject to several customary conditions, including (i)
approval of the holders of a majority of our outstanding shares, (ii) absence of any law or order
prohibiting the consummation of the merger, (iii) not more than 10% of our outstanding shares being the subject of validly exercised
appraisal rights, (iv) the absence of a material adverse effect with respect to the Company, and
(v) satisfaction of third party obligations, and other customary conditions. During the months
following execution of our definitive Merger Agreement with Medtronic until we are able to secure
these necessary approvals and close the transaction, our employees and customers could be
significantly distracted and our business could be adversely affected by the uncertainty created by
the announcement of our proposed transaction. If our proposed merger with Medtronic ultimately is
not completed and we have to remain independent, we believe our business would have been, and would
continue to be, adversely affected by a variety of risks, including those identified below, and we
believe we would not be in as good as a position as we would have been had we not attempted the
transaction with Medtronic in the first place:
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the consequences of our managements attention having been diverted from our
day-to-day business over an extended period of time between execution of our definitive
Merger Agreement with Medtronic and the date on which the agreement would terminate;
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the disruption to our relationships with customers and suppliers as a result of our
and their efforts relating to the merger;
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the potential distraction to our sales force caused by uncertainties relating to the
proposed merger;
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potential litigation associated with our proposed transaction with Medtronic; and
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our inability to acquire further necessary financing to fund our ongoing operations
post-termination of our proposed merger with Medtronic.
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Additionally, in the event that the Merger Agreement is terminated or the merger is otherwise
not completed, the future valuation of any auction rate securities
not purchased by Medtronic may be
subject to valuation assumptions and assessments, and our interpretations of relevant market data,
which may be different, subject to uncertainties, difficult to predict, and will require
significant judgment. The fair value of our auction rate securities could change significantly
based on changes in market conditions and continued uncertainties in the credit markets. If these
uncertainties continue or if these auction rate securities experience credit rating downgrades, we
may incur additional impairment charges for the remaining auction rate securities in our investment
portfolio.
If our proposed merger with Medtronic is not completed, the holders of our common stock will not
receive the cash merger consideration provided in the Merger Agreement.
Pursuant to the Merger Agreement, each share of our common stock that is issued and
outstanding prior to the Effective Time (other than shares held by us, Medtronic or their
subsidiaries, which will be canceled without payment of any consideration, and shares for which
appraisal rights have been validly exercised and not withdrawn) will be converted into the right to
receive $1.60 in cash, without interest, subject to adjustment if the outstanding capital stock,
options and warrants of the Company would cause the aggregate consideration to exceed $26,333,800.
Our proposed merger with Medtronic is subject to several customary conditions, including (i)
approval of the holders of a majority of our outstanding shares, (ii) absence of any law or order
prohibiting the consummation of the merger, (iii) not more than 10% of our outstanding shares being the subject of validly exercised
appraisal rights, (iv) the absence of a material adverse effect with respect to the Company, and
(v) satisfaction of third party obligations, and other customary conditions. We may not be able to
obtain all necessary approvals or to meet all closing conditions in order to complete the proposed
merger. If we are not able to complete the merger, the holders of our common stock will not receive
the cash merger consideration provided in the Merger Agreement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 22, 2006, we completed our IPO of 4,000,000 shares of common stock (the IPO Shares). We
sold the IPO Shares to the public at a price of $8.00 per share. Our sale of IPO Shares was
registered under the Securities Act of 1933, as amended, pursuant to a registration statement on
Form S-1 (Registration Stmt. No. 333-132368), which was declared effective by the Securities and
Exchange Commission on May 16, 2006. We received net proceeds from the sale of the IPO Shares,
after deducting the underwriting discount and offering expenses, of approximately $27.7 million.
The net proceeds have been invested in money market funds, investment grade commercial paper and
debt instruments of the U.S. government and its agencies. During the three months ended March 31,
2008, we used approximately $3.1 million of the net proceeds from the IPO for general corporate
purposes.
Item 6. Exhibits
The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference
(as stated therein) as part of this Quarterly Report on Form 10-Q.
23
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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RESTORE MEDICAL, INC.
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by:
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/s/ Christopher R. Geyen
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Christopher R. Geyen
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Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
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April 25, 2008
24
Exhibit Index
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Exhibit No
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Description
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10.1
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Agreement and Plan of Merger, dated
April 22, 2008, among Medtronic, Inc., MRM Merger Corporation and
Restore Medical, Inc. (Incorporated by reference to Exhibit 2.1
to the registrants Current Report on Form 8-K filed on
April 22, 2008)
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31.1
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Rule 13a-14(a)/15d-14(a) Certification
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31.2
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Rule 13a-14(a)/15d-14(a) Certification
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32
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Section 1350 Certifications
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25
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