SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For transition period from ____________ to___________
Commission file number 0-944
POSSIS MEDICAL,
INC.
(Exact name of registrant as specified in its charter)
Minnesota
41-0783184
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9055 Evergreen Blvd, NW, Minneapolis, Minnesota 55433-8003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-780-4555
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, 40 Cents Par Value
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 X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of October 21, 1996 was approximately $189,196,000.
The number of shares outstanding of the registrant's common stock as of
October 21, 1996: 12,061,317.
Certain responses in Part III are incorporated herein by reference to
information contained in the Company's definitive Proxy Statement for its 1996
annual meeting to be filed on or before October 31, 1996.
<PAGE>
POSSIS MEDICAL, INC.
Forward-Looking Statements
Report on Form 10-K, including the description of the Company's business
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements relating to
future events and financial performance, including the submission of
applications to the FDA, revenue and expense levels and future capital
requirements, are forward-looking statements that involve risks and
uncertainties, including the Company's ability to meet its timetable for FDA
submissions, the review time at the FDA, (which is largely out of the Company's
control), changes in the Company's marketing strategies, changes in
manufacturing methods, the Company's dependence on patents and proprietary
technology, the levels of sales of the Company's products that can be achieved
and other risks detailed from time to time in the Company's various Securities
and Exchange Commission filings. The Company can provide no assurance that it
will achieve significant sales or obtain the necessary FDA approvals in a timely
manner or at all.
PART I
Item 1. Business:
General
The Company was incorporated in 1956 and went public in 1960 as Possis
Machine Corporation. Initial operations consisted of design, manufacturing, and
sales of industrial equipment and a division that provided temporary technical
personnel. The Company's involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company, to St. Jude Medical,
Inc. for royalty payments based on St. Jude's valve sales (the "St. Jude
Royalties"). See Note 6 of Notes to Consolidated Financial Statements contained
in Part II, Item 8. In 1982 a subsidiary was established to focus initially on
the development of a synthetic blood vessel used to bypass blocked coronary
arteries. In the late 1980's the Company decided to leverage existing management
expertise and entered the pacemaker lead business. The strategic role of the
pacemaker lead business was to provide cash flow to fund the development of
synthetic grafts and thrombectomy systems and to give the Company access to and
name recognition within the medical device industry. In 1990 the Company made
the decision to focus on medical products and subsequently divested all
non-medical operations, beginning with its Technical Services division in
September 1991 followed by its industrial equipment subsidiary and related land
and buildings in January 1994. See Notes 2 and 12 of Notes to Consolidated
Financial Statements contained in Part II, Item 8. In March 1994 the Company
sold its pacemaker lead business because it anticipated that revenues from this
business would decrease due to a pacemaker lead technology shift. In connection
with this sale, the Company received $1.1 million in cash and the right to
receive royalty payments over a twelve-month period. See Note 11 of Notes to
Consolidated Financial Statements contained in Part II, Item 8. The sale of the
pacemaker lead business has enabled Possis to focus its human and financial
resources exclusively on its other products, which are currently in clinical
trials in the United States and in early stages of commercialization in Europe,
Japan and Canada.
<PAGE>
Products
ANGIOJET THROMBECTOMY SYSTEM. The development of blood clots in various
parts of the vascular system is common and is one of the leading causes of
morbidity and death. Blood clots may be caused by various factors, including
cardiovascular disease, trauma, interventional procedures using catheters and
needles or prolonged bed rest. If a blood clot becomes large enough, it can
block an artery, preventing oxygenated blood from reaching the organ or tissue
supplied by the artery. In addition, if a blood clot breaks off it can travel
through the bloodstream and block oxygenated blood flow to other organs and
tissue. Conditions caused by blood clots include peripheral ischemia, which can
lead to limb loss, vascular access failure, pulmonary embolism, acute myocardial
infarction (heart attack), stroke and deep vein obstruction.
Currently, the two primary methods of removing blood clots are thrombolytic
drugs and mechanical devices. Thrombolytic drug treatment involves the
administration of a drug designed to dissolve the blood clot in an intensive or
critical care setting. Thrombolytic drugs may require several administrations to
be effective, and then may only partially remove the clot. In addition,
thrombolytic drugs may require significant time to take effect, which is costly
in an intensive or critical care setting, and may cause uncontrolled bleeding.
Mechanical devices such as the Fogarty-type catheter operate by inflating a
balloon past the point of the blood clot and then dragging the blood clot out of
the patient's body through the artery. Fogarty-type catheters require surgical
intervention, which may result in overnight hospital stays, are more limited in
their applications and may cause vascular trauma.
Possis believes that its AngioJet System represents a new approach to the
removal of blood clots from arteries, veins and grafts and offers certain
potential advantages over current methods of treatment. The AngioJet System is a
minimally invasive catheter system designed for rapidly removing blood clots
with minimal vascular trauma. The system's principal components are a reusable
drive unit, a high-pressure single use pump and a single use small diameter (3.5
to 5F or 1.2 to 1.7 mm) catheter. In early clinical use outside the United
States and in U.S. clinical trials, the AngioJet System has demonstrated the
ability to remove blood clots within minutes without surgical intervention and
without the risk of uncontrolled bleeding.
The AngioJet System removes blood clots through the non-surgical insertion
of the catheter over a guidewire into the patient's blood vessel and then, with
the aid of fluoroscopy, the catheter is directed to the site of the blood clot.
The drive unit is then activated to deliver pressurized saline through tiny
openings in the catheter's tip. These small waterjets clean the blood clot from
the vessel wall, break it into small fragments and, in order to prevent
formation of a new blood clot downstream, propel the debris down the central
lumen of the catheter and into a collection bag attached to the drive unit,
without the need for a separate suction or vacuum device. Unlike certain other
mechanical devices that are able only to create channels through blood clots of
a size similar to that of the catheter used, the AngioJet System's waterjet
technology enables it to break up large blood clots from vessels much larger
than its catheter diameter.
<PAGE>
Because the Possis AngioJet System is unlike any existing procedure or
device, market potential is difficult to quantify, but may be estimated by
determining the number of thrombectomy and thrombolytic procedures performed
using other therapies and devices and estimating the number of procedures that
might reasonably be replaced or supplemented by using the AngioJet System.
Based upon information provided by medical practitioners and its own
analysis, the Company believes that the AngioJet System may potentially be used
for alternative or supplemental therapy for the 60,000 thrombectomy procedures
using lytic drugs, the 380,000 thrombectomy procedures using mechanical devices
and the 60,000 thrombolysis/revision procedures involving dialysis access grafts
estimated to be performed each year in the United States. The Company also
believes that the AngioJet System may be used in Percutaneous Transluminal
Angioplasty ("PTA") procedures that involve the presence of clinically
significant clot. The Company also believes that of the five million patients
with deep vein thrombosis, 10% would be suitable for treatment with the AngioJet
System. Additionally, the Company believes that the approximately 600,000
patients with pulmonary embolism annually in the United States are candidates
for treatment with the AngioJet System. Further, the Company estimates that more
than 550,000 patients annually are candidates for AngioJet System treatment of
failed or occluded saphenous vein grafts, unstable angina and acute myocardial
infarction. An emerging market for interventional therapy is the treatment of
the brain and the Company believes its technology may be suitable for 500,000
neuro procedures annually including stroke victims.
Although the Company has not yet established pricing for the AngioJet
System, it anticipates that the price to the hospital for the single use
catheter and pump set will be between $800 and $1,500 and for the drive unit the
price will be between $30,000 and $60,000. The Company cannot estimate the
ultimate charge for this procedure to the patient. The average mechanical
thrombectomy procedure is performed in a surgical setting with an overnight
hospital stay and could result in charges to the patient exceeding $20,000.
Lytic drug therapy may cost $500 to $5,000 for the drug plus hospital and
procedure charges, resulting in a total patient cost of as much as $25,000.
The Company is currently conducting clinical trials in the United States
with the AngioJet System for removing blood clots from peripheral arteries and
vascular grafts and for use in removing blood clots from coronary arteries and
coronary bypass grafts. Possis received FDA approval to initiate clinical
testing of its AngioJet System for use in removing blood clots from peripheral
arteries and vascular grafts in December 1992. The first patient was enrolled in
the trial in July 1993 and by March 31, 1994, Phase 1 of the trial, consisting
of 19 patients undergoing 23 treatments, was complete and the summary report had
been submitted to the FDA. In July 1994, the Company received approval from the
FDA to commence Phase 2 of the trial, in which patients receive, on a one-to-one
randomized basis, treatment with either the AngioJet System or a Fogarty-type
catheter already marketed for blood clot removal. As of September 1996, 187
patients had been treated in both phases of the trial, of which 108 were treated
with the AngioJet System. The Company expects to receive a response from the FDA
in December 1996 and is making plans to introduce the AngioJet System for
peripheral use to the U.S. market in early 1997.
<PAGE>
In March 1996, Possis received FDA approval to initiate Phase 2 clinical
testing of its AngioJet System for use in removing blood clots from coronary
arteries and bypass grafts. As of September 1996, 74 patients have been enrolled
in Phase 2 comparing the performance of the AngioJet System to the drug
urokinase. The Company believes that the coronary application of the AngioJet
System will be subject to a PMA approval process and anticipates filing a PMA
application in 1997.
PERMA-FLOW GRAFT. Coronary artery bypass graft ("CABG") surgery is
performed to treat impairment of blood flow to portions of the heart. CABG
surgery involves the addition of one or more new vessels to the heart to
re-route blood around blocked coronary arteries.
Autogenous grafts (using the patient's own saphenous vein or mammary
artery) have been successfully used in CABG procedures for a number of years and
have shown a relatively high patency rate (80% to 90% for saphenous veins and
over 90% for mammary arteries one year after surgery) with no risk of tissue
rejection. However, the surgical harvesting of vessels for autogenous grafts
involves significant trauma and expense. In addition, not all patients requiring
CABG surgery have sufficient native vessels as a result of previous bypass
surgeries, or their vessels may be of inferior quality due to trauma or disease.
Cryopreserved saphenous veins are available, but these veins often deteriorate
due to the body's immune system.
The Possis Perma-Flow Graft is a synthetic graft 5mm in diameter for use in
CABG surgery. The Perma-Flow Graft is intended initially to provide an
alternative to patients with insufficient or inadequate native vessels for use
in bypass surgery as a result of repeat procedures, trauma, disease or other
factors. The Company believes, however, that the Perma-Flow Graft may ultimately
be used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein.
The Perma-Flow Graft is made of ePTFE, a standard grafting marterial, and
contains a molded silicone venturi-shaped flow resistance element approximately
2mm in diameter. The Perma-Flow Graft is designed to be implanted by initially
suturing it to the vena cava followed by side-to-side anastomoses (connections)
of the graft to the coronary arteries beyond the blockages and finally suturing
the graft to the aorta. The formation of this artery-to-vein shunt is designed
to create a continuous blood flow at a sufficiently high rate through the graft
to reduce the incidence of blood clot formation, the major reason for synthetic
graft failure in the past. The flow resistance element is designed to prevent
excessive shunting of blood to the vena cava and to maintain high arterial
pressure for effective coronary perfusion.
The Company believes that in 1995 approximately 540,000 CABG procedures
were performed worldwide, of which approximately 300,000 were performed in the
United States, and that approximately 20% of these CABG procedures were
performed on patients who had previously undergone bypass surgery. The Company
further believes that the number of repeat procedures will continue to increase
as a percentage of procedures performed, as the number of patients who have the
procedure increases. Currently, approximately 70% of CABG procedures are
performed utilizing the saphenous vein. Based upon its interviews with
cardiovascular surgeons, including those involved in the clinical trials, the
Company believes that patients whose native vessels are not available for use in
bypass surgery comprise approximately 4% of those receiving CABG procedures, or
approximately 20,000 annually, and that approximately 80,000 patients annually
are determined by the treating physician to have native vessels inadequate to be
used in bypass surgery. If initial use of the Perma-Flow Graft is shown to be
clinically acceptable, the Company believes that the graft may be used for these
patients. The Company further believes that if long-term clinical results are
acceptable to clinicians (generally greater than 50% patency five years after
implant), the graft may ultimately be used as a substitute for native saphenous
veins.
<PAGE>
Currently, no synthetic coronary graft has been approved by the FDA.
Cryopreserved saphenous veins sell to hospitals for approximately $3,500 to
$4,000 in the United States. The Company anticipates pricing for the Perma-Flow
Graft will be competitive with cryopreserved saphenous veins.
The Company received FDA approval to initiate clinical testing of its
Perma-Flow Graft in November 1991. In July 1995, the Company received approval
to commence Phase 2 of the study comprising 150 additional patients at up to 20
sites. As of September 1996, 32 Phase 1 and 20 Phase 2 study patients have been
enrolled at 10 sites. Angiographic results at 30 days following surgery have
been reported on 38 patients, which confirmed 77 of 80 side-to-side anastomoses
to be patent (providing blood to the coronary arteries). Within this 30-day
interval, of the remaining 14 patients, angiographic results were not reported
for nine and five died of causes reported by the investigator to be unrelated to
the graft. In addition, angiographic follow-up was performed approximately 12
months from implant on 13 patients, which confirmed that 19 of 25 anastomoses
were patent. The Company believes this performance is substantially equivalent
to saphenous vein. The Company anticipates filing a PMA application for U.S.
marketing authorization in 1998.
PERMA-SEAL GRAFT. Patients suffering from renal disease may be required to
undergo long-term kidney dialysis. The majority of these patients require
long-term vascular access to facilitate treatment. A point of access for
dialysis needles may be created by connecting an artery and a vein in the
patient's arm. However, because kidney dialysis therapy typically requires
patients to undergo blood dialysis treatment three times per week, these
connections often become unusable over time. Other methods of vascular access
for kidney dialysis such as temporary catheters are not designed for long-term
use.
A synthetic graft may be implanted in kidney dialysis patients to provide
the necessary vascular access. The vast majority of these synthetic grafts are
made of ePTFE. The use of synthetic grafts currently available is often
accompanied by excessive bleeding when the dialysis needle is withdrawn,
requiring a nurse to apply pressure to help stop the bleeding and requiring the
patient to remain in the treatment area until the bleeding has been stopped. In
addition, to limit the risk of graft infection following implant, at least a
two-week healing period following implantation is required to allow for tissue
ingrowth into the graft before initiating dialysis.
The Possis Perma-Seal Graft is a self-sealing synthetic graft comprised of
silicone elastomers, with a winding of polyester yarn encapsulated within its
wall, and is manufactured using proprietary electrostatic spinning technology
developed by the Company. The Company believes that its Perma-Seal Graft may
offer advantages over currently used synthetic grafts because of its needle hole
sealing capability. The Company believes that this characteristic will be
effective in sealing puncture sites in the grafts with minimal compression time
and bleeding as compared with other currently available graft products and, as a
result, will reduce dialysis procedure and administrative time per patient and
the costs associated therewith. In addition, because of its ability to seal a
needle puncture without depending on tissue ingrowth, the Perma-Seal Graft may
provide an option for patients who require dialysis immediately after implant.
<PAGE>
Approximately 170,000 patients in the United States undergo kidney dialysis
each year, of which approximately 140,000 receive vascular access procedures
utilizing either natural vessel grafts or synthetic access grafts. The Company
estimates that of these patients approximately 40,000 are implanted with a
synthetic graft. The Company believes that a comparable market exists outside
the United States as well.
The hospital prices of ePTFE and biological graft products manufactured by
certain other manufacturers currently range from $400 to $700 per unit,
depending on length, style, and configuration. Although final pricing of the
Company's Perma-Seal Graft will depend upon manufacturing costs, distribution
methods, and competitive pressures, the Company anticipates that pricing for the
Perma-Seal Graft will be at a premium relative to standard ePTFE graft products.
In July 1992, Possis received FDA approval to initiate clinical testing of
its Perma-Seal Graft. The study is randomized on a one-to-one basis with
patients receiving either a Perma-Seal Graft or a conventional ePTFE graft. As
of September 1996, 205 patients at five clinical sites had been enrolled in the
study, 104 of which had received the Perma-Seal Graft. Clinical data indicates
that Perma-Seal Graft patients who have been accessed for dialysis have reduced
compression times to stop bleeding after removing the dialysis needles and the
graft can be used for dialysis the same day it is implanted. The Company filed a
510(k) application for marketing authorization with the FDA in August 1994. In
May 1995, the Company received a request for additional information from the FDA
and the Company responded to the request on August 31, 1995. In November 1995,
the FDA responded to the 510(k) with additional questions and in February 1996,
the FDA told the Company it wanted to see data on 124 study patients followed
for 12 months. The Company expects to resubmit the 510(k) application in early
calendar 1997.
Research and Development
The Company's product development efforts for its existing products are
focused primarily on clinical testing, obtaining necessary FDA product
registrations and validating manufacturing processes. The Company's new product
development efforts are focused primarily on developing additional applications
of the AngioJet Thrombectomy System, including venous and neuro applications,
and on utilizing its Perma-Flow Graft and Perma-Seal Graft technologies to
develop other graft products, including endovascular stent grafts. The Company
also believes its AngioJet technology has application beyond thrombectomy, for
minimally invasive tissue removal. Research and development expenses are
generally incurred for product design, development and qualification,
manufacturing process development and validation, the conduct of clinical trials
and governmental approvals. The Company's research and development expense is
expected to increase as the Company continues its clinical trials and current
product development plans.
As of September 30, 1996, the Company employed approximately 35 full-time
employees in research and development, including 24 in new product concept
screening, protoype building, product and process development and validation and
11 in quality systems, regulatory and clinical affairs. The Company performs
substantially all of its research and development activities at its headquarters
in Coon Rapids, Minnesota. The Company spent $3.2 million, $3.3 million and $3.7
million in fiscal 1996, 1995 and 1994, respectively, on medical product research
and development.
<PAGE>
Marketing and Sales
The Company expects to market its AngioJet System and graft products to
physician specialty groups, including vascular surgeons, cardiovascular and
thoracic surgeons, interventional radiologists and interventional cardiologists.
The Company will initially market the AngioJet System for peripheral arterial
and vascular graft thrombosis, targeting vascular surgeons and interventional
clinicians who perform PTA and other thrombectomy or lytic procedures. AngioJet
Systems for coronary applications will be marketed to interventional
cardiologists and cardiovascular surgeons. The primary customer for the
Perma-Flow Graft is expected to be the cardiovascular surgeon and thoracic
surgeon. The initial focus of the Company's marketing will be for use in
procedures involving patients having inadequate native vessels. The Perma-Seal
Graft will be marketed to vascular surgeons, who typically are the primary
decisionmakers with respect to the placement of vascular access grafts for
patients receiving dialysis for renal failure.
The Company will also target other clinicians influential in dialysis
treatment selection, including nephrologists, internists, and dialysis unit
technicians.
Possis is currently marketing its AngioJet System outside the United States
using an independent distributor network. The Company has entered into
distributorship agreements with 16 distributors covering Belgium, Denmark,
Germany, Greece, Italy, Luxembourg, The Netherlands, Norway, Spain, Switzerland,
Austria, France, Sweden, Saudi Arabia, Israel, Australia, New Zealand, Russia
and Japan. Generally, the distributorship agreements are for a five-year term
and provide that the distributors, at their own expense, will investigate,
negotiate and obtain regulatory approvals for the Company's products in the
specified territory. Possis Medical Europe B.V., the Company's subsidiary in The
Netherlands, acts as a point of centralized warehousing and distribution in
Europe in order to enhance response time, efficiency and service to European
customers. All sales made to the Company's independent distributors are
denominated in United States dollars.
The Company will begin commercial marketing of the AngioJet System in the
United States following receipt of FDA marketing authorization. The Company
intends to market and distribute the AngioJet System in the United States
utilizing a direct sales force.
In early 1995, the Company entered into a 10 year distribution agreement
with C. R. Bard ("Bard") pursuant to which the Company granted Bard the
exclusive worldwide right to market, sell and distribute the Company's
Perma-Seal Graft. Under the agreement, Bard agreed to purchase the Perma-Seal
Graft from the Company at certain transfer prices, to purchase certain minimum
quantities and to make certain milestone payments to the Company relating to the
commercialization of the product. The initial grafts were shipped to Bard in May
1996 and the Company expects non-U.S. sales of Perma-Seal Grafts to begin in
fiscal 1997.
In March 1996, the Company entered into a three year distribution agreement
with Baxter Healthcare Corporation ("Baxter") granting Baxter worldwide rights
to market, sell and distribute the Perma-Flow Graft. Under the agreement, Baxter
agreed to purchase the Perma-Flow Graft from the Company at certain transfer
prices, to purchase certain quantities and to make certain milestone payments to
the Company based on the continuation of the agreement. The initial shipment of
Perma-Flow Grafts was made in July 1996 and the Company expects non-U.S. sales
of the product to begin in fiscal 1997.
<PAGE>
Promotional activities by the Company are designed primarily to enlist the
support of key medical opinion leaders in the United States and abroad. The
Company believes that sales to key opinion leaders in European countries will be
especially important to encourage broader acceptance of its products and will
give the Company experience in marketing its products prior to their
introduction in the United States. Other promotional activities may include
publishing analytical papers, making scientific symposium presentations and
conducting comparative clinical trials demonstrating the uses, costs and
effectiveness of the Company's products.
Patents, Patent Applications, Licenses and Proprietary Rights
The Company's success depends and will continue to depend in part on its
ability to maintain patent protection for products and processes, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. The Company's policy is to attempt to protect its technology by,
among other things, filing patent applications for technology that it considers
important to the development of its business. The Company currently holds five
United States patents and 17 foreign patents related to the Perma-Flow Graft and
has two patent applications pending in the United States and two patent
applications pending in foreign jurisdictions. The Company also holds two United
States patents relating to the AngioJet System. In addition, the Company has 11
United States and 13 foreign patent applications pending relating to the
AngioJet System. Two AngioJet System patent applications have been accepted by
the European Patent Office. In connection with the Perma-Seal Graft, one United
States patent is pending, one of the claims included in which has been allowed,
and four foreign patent applications are pending. The validity and breadth of
claims covered in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurance can be given
that the Company's pending applications will result in patents being issued or,
if issued, that such patents, or the Company's existing patents, will provide a
competitive advantage, or that competitors of the Company will not design around
any patents issued to the Company. The Company is aware of one pending foreign
patent application relating to a water jet system for removing blood clots.
Although the application was filed after the AngioJet System patent application,
no assurance can be given that such third party will not receive a patent.
The Company has acquired rights through licensing agreements to patents
relating to processes used in the manufacture of the Perma-Seal Graft. Under
these agreements, Possis is required to pay certain annual fees and royalties
based on net sales of products using the technology covered by these patents.
The Company requires its employees having access to proprietary information
to execute non-disclosure agreements upon commencement of employment with the
Company. These agreements generally provide that all confidential information
developed or made known to the individual by the Company during the course of
the individual's employment with the Company is to be kept confidential and not
disclosed to third parties.
<PAGE>
There can be no assurance that the Company's non-disclosure agreements and
other safeguards will protect its proprietary information and know-how or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to independently
develop such information. There has been substantial litigation regarding patent
and other intellectual property rights in the medical device industry.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, to defend the Company
against claimed infringement of the rights of others or to determine the
ownership, scope or validity of the proprietary rights of the Company and
others. An adverse determination in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition
The Company's products will compete with a number of different products and
methods of treatment for the conditions they address. The Company believes that
its AngioJet System will face intense competition from a variety of treatments
for the ablation and removal of blood clots, including thrombolytic drug
therapies, surgical intervention, balloon embolectomy, mechanical and laser
thrombectomy devices, ultrasound ablators, and other thrombectomy devices based
on waterjet systems that are currently being developed by other companies. The
Company is aware that Cordis Corporation has a waterjet-based thrombectomy
system in early stage sales in Europe and Canada.
The Company is not aware of any synthetic graft being developed that will
compete with the Perma-Flow Graft and believes it is the first developer to
obtain FDA approval for clinical trials with a synthetic coronary bypass graft.
The Company's Perma-Seal Graft will compete with ePTFE grafts and other grafts
with needle sealing properties marketed by W. L. Gore and Associates, the
largest synthetic graft company, and other companies.
The medical products market is characterized by rapidly evolving technology
and intense competition. The future success of the Company will depend on its
ability to keep pace with advancing technology and competitive innovations. Many
potential competitors have significantly greater research and development
capabilities, experience in obtaining regulatory approvals and marketing, and
financial and managerial resources than the Company. Many potential competitors
have developed or are in the process of developing technologies that are, or in
the future may be, the basis for competitive products, some of which may employ
an entirely different approach or means of accomplishing the desired therapeutic
effect than products being developed by the Company.
Government Regulation
Government regulation in the United States and other countries is a
significant factor in the development and marketing of the Company's products
and in the Company's ongoing manufacturing and research and development
activities. The Company and its products are regulated by the FDA under a number
of statutes, including the FDC Act.
<PAGE>
Under the FDC Act, medical devices are classified into one of three classes
(i.e., Class I, II or III) on the basis of the controls deemed necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
the least extensive controls, as the safety and effectiveness reasonably can be
assured through general controls (e.g., labeling, premarket notification and
adherence to GMP). For Class II devices, safety and effectiveness can be assured
through the use of special controls (e.g., performance standards, post market
surveillance, patient registries and FDA guidelines). Class III devices (i.e.,
life-sustaining or life-supporting implantable devices, or new devices which
have been found, or are determined to be not substantially equivalent to legally
marketed devices) require the highest level of control, including premarket
approval by the FDA to ensure their safety and effectiveness.
If a manufacturer or distributor of medical devices can establish that a
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required a PMA application, the manufacturer or distributor may seek FDA
marketing clearance for the device by filing a 510(k) notification. Following
submission of the 510(k) notification, the manufacturer or distributor may not
place the device into commercial distribution in the United States until an
order has been issued by the FDA. The FDA's target for issuing such orders is
within 90 days of submission, but the process can take significantly longer. The
order may declare the FDA's determination that the device is "substantially
equivalent" to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent or may require further
information, such as additional test data, before making a determination
regarding substantial equivalence. Any adverse determination or request for
additional information could delay market introduction and have a materially
adverse effect on the Company's continued operations.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to another device via the 510(k)
process, the manufacturer or distributor must seek PMA approval of the proposed
device. A PMA application must be submitted, supported by extensive data,
including preclinical and clinical trial data to prove the safety and efficacy
of the device. Generally, a company is required to obtain an IDE before it
commences clinical testing in the United States in support of such PMA. The FDA
monitors and oversees the use and distribution of such "research use only" and
"investigational use only" products. Although by statute the FDA has 180 days to
review a PMA application once it has been accepted for filing, during which time
an advisory committee may also evaluate the application and provide
recommendations to the FDA, PMA reviews often extend over a significantly
protracted time period, usually 12 to 24 months or longer from filing.
Accordingly, there can be no assurance that FDA review of any PMA application
submitted by the Company will not encounter prolonged delays or that the data
collected and submitted by the Company in its PMA will support approval.
Labeling and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The FDA also imposes
post-marketing controls on the Company and its products, and registration,
listing, medical device reporting, post-market surveillance, device tracking and
other requirements on medical devices. Failure to meet these pervasive FDA
requirements or adverse FDA determinations regarding the Company's clinical and
preclinical trials could subject the Company and/or its employees to injunction,
prosecution, civil fines, seizure or recall of products, prohibition of sales or
suspension or withdrawal of any previously granted approvals.
<PAGE>
The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate compliance with current GMP
as specified in published FDA regulations. The FDA monitors compliance with GMP
by requiring manufacturers to register with the FDA, which subjects them to
periodic unannounced FDA inspections of manufacturing facilities. If violations
of applicable regulations are noted during FDA inspections of the Company's
manufacturing facilities, the continued marketing of the Company's products may
be adversely affected. Such regulations are subject to change and depend heavily
on administrative interpretations.
There can be no assurance that future changes in regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
The Company has complied with GMP requirements in the past and believes it
will be able to comply with all applicable regulations regarding the manufacture
and sale of medical devices.
The export and sale of medical devices outside of the United States are
subject to United States export requirements and foreign regulatory
requirements. A device under a U.S. IDE may be exported to any country, so long
as its import to the receiving country complied with its requirements, and so
long as at least one of the industrialized countries has ageeed to its import.
Legal restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
For countries in the European Union, in January 1995, CE Mark certification
procedures became available for medical devices, the successful completion of
which would allow certified devices to be placed on the market in all European
Union countries. After June 1998, medical devices may not be sold in European
Union countries unless they display the CE Mark. The Company expects to obtain
the right to affix the CE Mark to its products in 1997. There can be no
assurance that Possis will be able to obtain regulatory approvals or clearances
for its products in foreign countries.
Employees
As of September 30, 1996, the Company had 138 full-time employees and five
contract employees. Of these full-time employees, 35 are in research and
development, 69 are in manufacturing and production, 8 are in quality systems, 5
are in facilities/maintenance, and 21 are in management or administrative
positions. None of the Company's employees is covered by a collective bargaining
agreement, and management considers its relations with its employees to be good.
Item 2. Properties:
The Company leases approximately 51,000 square feet of office and
manufacturing space (including approximately 6,500 square feet of clean
manufacturing space) at 9055 Evergreen Boulevard NW, Minneapolis, Minnesota
55433-8003. See Note 8 of Notes to Consolidated Financial Statements in Part II,
Item 8.
<PAGE>
Item 3. Legal Proceedings:
None
Item 4. Submission of Matters to a Vote of Security-Holders:
None
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
Robert G. Dutcher 51 Director, Chief Executive Officer and President
Joseph J. Afryl Jr. 48 Vice President, Sales and Marketing
Russel E. Carlson 50 Vice President, Finance and Chief Financial Officer
Irving R. Colacci 43 Vice President, Human Resources, General Counsel
and Secretary
William J. Drasler 47 Vice President, Research and Development
James D. Gustafson 40 Vice President, Quality Systems and
Regulatory/Clinical Affairs
Robert J. Scott 51 Vice President, Manufacturing Operations
</TABLE>
Robert G. Dutcher served as Executive Vice President of the Company from
June 1992 until October 1993 and has served as President, Chief Executive
Officer and a director of the Company since October 1993 and as President and
Chief Operating Officer of Possis Holdings, Inc. (a subsidiary formerly known as
Possis Medical, Inc.) since 1987. Prior to joining the Company, Mr. Dutcher had
served in several positions (most recently as Director of Research and
Development) at Medtronic, Inc. since 1972. Mr. Dutcher received a master's
degree in biomedical engineering from the University of Minnesota.
Joseph J. Afryl Jr has served as Vice President of the Company since April
1994. Prior to joining the Company, Mr. Afryl served as Vice President of Sales
and Marketing for Bio-Vascular, Inc. from July 1992 to March 1994, as Director
of Sales for Angeion Corporation from September 1991 through July 1992, and as
Director of Marketing at St. Jude Medical, Inc. from May 1987 to September 1991.
Each of these companies is a manufacturer of medical devices.
Russel E. Carlson joined the Company in September 1991 and has served as
Vice President and Chief Financial Officer of the Company since June 1992. Prior
to joining the Company, Mr. Carlson had been Chief Financial Officer of
SpectraScience, Inc. (formerly GV Medical, Inc.), a Minneapolis, Minnesota
medical device company, since September 1989 and had served in several financial
management positions with The Pillsbury Company, a food manufacturer and
processor, since 1972.
Irving R. Colacci has served as Secretary and Corporate Counsel of the
Company since July 1988 and as Vice President and General Counsel since December
1993. Prior to joining the Company, Mr. Colacci had been an attorney at Dorsey &
Whitney LLP
<PAGE>
William J. Drasler has served as Vice President of the Company since
December 1993 and as Vice President of Research and Development and Director of
New Product Development of Possis Holdings, Inc. since 1986. Prior to joining
the Company, Dr. Drasler had served as an engineering and program manager at
SciMed Life Systems, Inc. since 1983. Dr. Drasler received a Ph.D. in biomedical
engineering and a M.S. in chemical engineering from the University of Minnesota.
James D. Gustafson has served as a Vice President of the Company since
January 1, 1994 and has been Director of Quality Systems and Regulatory/Clinical
Affairs for Possis Holdings, Inc. since June 1993. Prior to joining the Company,
Mr. Gustafson had served as a Manager of Clinical and Regulatory Affairs and of
Clinical Programs at St. Jude Medical, Inc., a medical device manufacturer,
since June 1989, and as a Senior Clinical Scientist at Shiley, Inc., Irvine,
California, since March 1985. Mr. Gustafson received a master's degree in
management from University of Redlands and a master's degree in biology from the
University of California at Irvine.
Robert J. Scott has served as Vice President of the Company since December
1993 and as Vice President of Manufacturing Operations of Possis Holdings, Inc.
since 1988 and was Director of Manufacturing Operations for Possis Holdings,
Inc. from 1984 through 1988. Prior to joining the Company, Mr. Scott had served
as a consultant to various medical and nonmedical manufacturing companies and as
Manufacturing Manager for Aequitron Medical, Inc. and Resistance Technology
Incorporated and in various positions for Daig Corporation and Medtronic, Inc.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
StockholderMatters:
The Company had 1,781 common shareholders of record at July 31, 1996. The
common stock is traded on The Nasdaq Stock Market under the symbol POSS. High
and low closing sale prices for each quarter of fiscal years ended July 31, 1996
and 1995 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
High Low High Low
QUARTER:
First............................... 17-5/8 12-1/4 6-3/4 5-1/2
Second.............................. 18-1/4 13-3/4 8-1/4 5-1/2
Third............................... 19-3/4 14-1/8 9-1/4 6-3/8
Fourth.............................. 21-3/4 12-7/8 14-7/8 9-1/8
</TABLE>
Additional information is contained in Note 5 of Notes to Consoldiated
Financial Statements included in Part II, Item 8.
The Company has not paid cash dividends on its common stock since 1983. The
Company currently intends to retain all earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future.
Item 6. Selected Financial Data:
SELECTED FINANCIAL DATA
POSSIS MEDICAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
In Thousands Except Earnings Per Share Data
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
INCOME STATEMENT DATA:
Operating revenues-
Continuing operations.................. $1,606 $3,207 $6,315 $8,342 $7,079
Net income (loss):
Continuing operations.................. (8,578) (5,153) (1,246) (181) 471
Discontinued operations................ 405 421 523 (1,331) 153
Net income (loss) per common share:
Continuing operations.................. (.74) (.53) (.15) (.02) .06
Discontinued operations................ .04 .04 .06 (.16) .02
Weighted average shares outstanding......... 11,611 9,726 8,436 8,361 8,238
BALANCE SHEET DATA:
Working capital......................... $24,780 $6,846 $4,007 $5,183 $6,103
Total assets............................ 29,361 10,321 8,882 11,472 11,133
Long-term debt,
excluding current maturities........ 39 93 80 1,279 1,313
Shareholders' equity.................... 27,597 8,648 5,684 5,947 6,969
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was incorporated in 1956 and went public in 1960 as Possis
Machine Corporation. Initial operations consisted of design, manufacturing, and
sales of industrial equipment and a division that provided temporary technical
personnel. The Company's involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company, to St. Jude Medical,
Inc. for royalty payments based on St. Jude's valve sales (the "St. Jude
Royalties"). See Note 6 of Notes to Consolidated Financial Statements contained
in the Annual Report. In 1982 a subsidiary was established to focus initially on
the development of a synthetic blood vessel used to bypass blocked coronary
arteries. In the late 1980's the Company decided to leverage existing management
expertise and entered the pacemaker lead business. The strategic role of the
pacemaker lead business was to provide cash flow to fund the development of
synthetic grafts and thrombectomy systems and to give the Company access to and
name recognition within the medical device industry. In 1990 the Company made
the decision to focus on medical products and subsequently divested all
non-medical operations, beginning with its Technical Services division in
September 1991 followed by its industrial equipment subsidiary and related land
and buildings in January 1994. See Notes 2 and 12 of Notes to Consolidated
Financial Statements contained in the Annual Report. In March 1994 the Company
sold its pacemaker lead business because it anticipated that revenues from this
business would decrease due to a pacemaker lead technology shift. In connection
with this sale, the Company received $1.1 million in cash and the right to
receive royalty payments over a twelve-month period. See Note 11 of Notes to
Consolidated Financial Statements contained in the Annual Report. The sale of
the pacemaker lead business has enabled Possis to focus its human and financial
resources exclusively on its other products, which are currently in clinical
trials in the United States and in early stages of commercialization in Europe,
Japan and Canada.
Over the past three fiscal years, the Company has transitioned its revenue
stream from pacemaker leads and royalty revenues to revenues from the sale of
its new products and related sales agreements. The resulting cash flow, together
with the approximately $34.0 million net proceeds from the Company's 1994 and
1995 Common Stock offerings, has been used to fund the Company's operations,
including research and development related to its products. With the sale of its
pacemaker lead business and the expiration of royalty payments from St. Jude in
March 1995, Possis does not expect to become profitable unless it achieves
significant sales outside the United States and its products receive United
States Food and Drug Agency ("FDA") marketing approval. There can be no
assurance that significant sales or marketing approvals will occur.
<PAGE>
Results of Operations
Fiscal Years ended July 31, 1996, 1995 and 1994
Total revenues decreased 50% in fiscal 1996 and 60% in fiscal 1995 compared
to the prior years. Significant factors in the revenue declines were the March
1994 sale of the Company's pacemaker leads business and the ending of the St.
Jude Royalties in March 1995. Fiscal 1996 medical products revenues are
primarily non-U.S. sales of the AngioJet Thrombectomy System to prominent
physicians for early clinical use. The Company also made the initial shipments
of Perma-Flow and Perma-Seal Grafts to Baxter Healthcare Corporation and C. R.
Bard, respectively, the Company's product marketing partners, both of which are
expected to begin product sales outside the United States in fiscal 1997. Sales
agreement revenue received during fiscal 1996 and fiscal 1995 from Baxter
Healthcare Corporation and C. R. Bard was $0.2 million and $1.0, respectively.
The Company believes that future revenues will come primarily from the sale of
its current products.
Cost of medical products for the years ended July 31, 1996, 1995 and 1994
includes manufacturing start-up expenses of approximately $4.5 million, $3.0
million and $2.3 million, respectively. The Company's products incorporate new
technology and their manufacture requires the development of new processes and
equipment. Manufacturing start-up expense includes excess labor and material
costs, higher than normal levels of scrap product and unabsorbed manufacturing
overhead expense. Additional start-up expenses are expected as the Company
continues to refine its manufacturing processes and until the Company begins to
produce its products in higher volumes.
Selling, general and administrative expense increased 44% to $3.1 million
in fiscal 1996 from $2.1 million in fiscal 1995 which increased 24% from $1.7
million in fiscal 1994. The increases in both years result from a 65-70% annual
growth in sales and marketing expenditures for personnel, travel, conventions
and related expenses necessary to broaden non-U.S. distribution and to prepare
for FDA marketing clearance of its initial products. The Company expects
continued increases in sales and marketing expenditures as it builds a United
States direct sales organization to sell the AngioJet Thrombectomy System and as
it develops the distribution systems for its other products.
Research and development expenditures declined 4% in fiscal 1996 and 12% in
fiscal 1995 from prior year spending. The Company's research activities over the
last three years have been primarily focused on completing the development of
its thrombectomy system and two graft products, including product and process
development, FDA-required human clinical trials and filing U.S. product
registrations on two products. In addition, the Company has a program to screen
new product ideas and identify new product and business opportunities for the
future. FDA regulatory, clinical study and product registration costs were 15%
of total research and development spending in fiscal 1994 and increased to 68%
of total spending in fiscal 1996 as the Company has moved into mid and later
stages of the clinical process on its products. Total research and development
expenditures are expected to grow in future years.
Interest expense has decreased to approximately $14,000 in fiscal 1996 from
$24,000 in fiscal 1995 and $124,000 in fiscal 1994. The Company used a portion
of the proceeds from its fiscal 1995 stock offering to retire $500,000 of debt
in early fiscal 1995. The Company incurred a loss of approximately $64,000 in
fiscal 1996 on the sale of a U.S. government security. The sale proceeds were
reinvested in government securities offering a greater return.
<PAGE>
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments were
approximately $23.5 million at July 31, 1996, an increase of $16.8 million from
the prior year. The primary factor in the improved cash position was the
completion in October 1995 of a stock offering of 1,971,258 shares of common
stock by the Company netting the Company approximately $26.7 million.
During fiscal 1996, cash used in operating activities was $8.8 million,
which resulted primarily from an $8.2 million net loss and a $1.9 million
increase in receivables, inventories and other current assets, offset by
depreciation, amortization of goodwill, stock compensation and an increase in
trade accounts payable totaling $1.1 million. Cash used in investing activities
was $15.6 million, which resulted primarily from net purchases of marketable
securities of $14.8 million and additions to plant and equipment of $1.5
million, offset by the proceeds from the sale of discontinued operations of
$589,000. Fiscal 1996 additions to plant include approximately $1.2 million
associated with the Company's April 1996 relocation to a larger leased facility.
Proceeds from discontinued operations increased $240,000 in fiscal 1996 as a
result of the prepayment by Advanced Technical Services, Inc. ("ATS") of the
notes receivable and estimated remaining royalty payments in connection with the
sale of ATS. See Note 2 of Notes to Consolidated Financial Statements. Net cash
provided by financing activities of $26.7 million resulted primarily from the
Company's October 1996 common stock offering netting approximately $26.7
million.
During fiscal 1995, cash used in operating activities was $1.9 million,
which resulted principally from the net loss of $4.7 million and a decrease in
accrued and other current liabilities of $1.1 million, offset by depreciation,
amortization of goodwill and stock compensation totaling $546,000 and a decrease
in accounts receivable of $3.2 million. Cash used in investing activities was
$1.5 million, which resulted primarily from net purchases of marketable
securities of $1.3 million and additions to plant and equipment of $562,000,
offset by proceeds from the sale of discontinued operations of $350,000. Net
cash provided by financing activities of $7.1 million resulted principally from
the September 1994 common stock offering of $7.2 million, the exercise of stock
options of $297,000 and proceeds from notes payable of $116,000, offset by the
repayment of long-term debt of $595,000.
During fiscal 1994, cash used in operating activities was $1.2 million,
which resulted principally from a net loss before gains on the sale of the
pacemaker lead business and real estate of approximately $2.3 million and
decreases in accounts payable and accrued and other current liabilities of
$825,000, offset by depreciation, amortization of goodwill and stock
compensation totaling $665,000 and a decrease in accounts receivable of $1.5
million. Cash provided by investing activities was $2.9 million, including
primarily proceeds from the sale of discontinued operations of $1.1 million and
proceeds from the sale of real estate and the pacemaker lead business of $1.2
million and $1.1 million, respectively, offset by additions to plant and
equipment of $554,000. Net cash used in financing activities of $460,000
resulted principally from repayment of long-term debt of $803,000 offset by
proceeds from notes payable of $144,000 and proceeds from the issuance of stock
and exercise of options and warrants of $199,000.
<PAGE>
The Company is growing non-U.S. sales of its current products, but sales to
date have been limited to influential healthcare professionals to gain clinical
experience. The thrombectomy system clinical experience base has grown and the
Company believes non-U.S. sales will increase in countries where the Company has
distributor presence and will also increase as the Company broadens its
distribution to new countries. Non-U.S. marketing of the Company's two graft
products is expected to begin in fiscal 1997. To sell its products in the United
States, the Company must first obtain a clearance or an approval from the FDA.
The Company expects to receive marketing clearance for one and possibly two of
its products during fiscal 1997, which the Company believes will result in
increased product sales. The Company can provide no assurance that it will
obtain the U.S. FDA clearances and approvals required to sell its products in
the United States in a timely manner or at all.
The Company expects it will report another loss in fiscal 1997 as it
continues to incur significant U.S. clinical trial expenses and manufacturing
and sales and marketing start-up costs. The Company believes that the capital
available at July 31, 1996 plus the expected product sales and revenues from
sales agreements will provide sufficient cash to fund expected losses and meet
other cash usage needs until such time as it generates positive cash flow. The
Company can provide no assurance, however, that it will ever become profitable.
<PAGE>
Item 8. Financial Statements and Supplementary Data:
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Possis Medical, Inc.:
We have audited the accompanying consolidated balance sheets of Possis
Medical, Inc. and subsidiaries (the Company) as of July 31, 1996 and 1995 and
the related consolidated statements of operations, cash flows, and changes in
shareholders' equity for each of the three years in the period ended July 31,
1996. Our audit also included the financial statement schedule listed in the
Index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Possis Medical, Inc. and
subsidiaries as of July 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Minneapolis, Minnesota
September 6, 1996
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31, 1996 July 31, 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1)............................ $ 7,688,507 $ 5,450,057
Marketable securities (Note 1)................................ 15,838,543 1,270,654
Receivables:
Trade (less allowance for doubtful accounts:
$60,000 and $27,000, respectively)...................... 389,983 14,976
Notes receivable (Note 2)................................... -- 123,918
Other....................................................... 218,154 204,297
Inventories (Note 1):
Parts....................................................... 755,081 489,418
Work-in-process............................................. 898,721 427,495
Finished goods.............................................. 466,985 94,101
Prepaid expenses and other assets............................. 207,156 191,535
Total current assets................................... 26,463,130 8,266,451
PROPERTY (Notes 1 and 3):
Leasehold improvements........................................ 1,090,935 175,556
Machinery and equipment....................................... 2,782,287 2,287,755
Assets in construction........................................ 92,743 300,377
3,965,965 2,763,688
Less accumulated depreciation................................. (1,482,233) (1,303,021)
Property - net........................................... 2,483,732 1,460,667
OTHER ASSETS:
Goodwill (Note 1)............................................. 413,922 485,922
Notes receivable (Note 2)..................................... -- 108,153
TOTAL ASSETS...................................................... $29,360,784 $10,321,193
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<CAPTION>
July 31, 1996 July 31, 1995
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................. $317,905 $159,365
Accrued salaries, wages, and commissions........................... 725,988 693,402
Current portion of long-term debt (Note 3)......................... 73,386 82,925
Other liabilities (Note 3)......................................... 566,313 484,597
Total current liabilities................................ 1,683,592 1,420,289
DEFERRED REVENUE (Note 2).............................................. 41,768 132,912
LONG-TERM DEBT (Note 3)................................................ 38,569 92,955
OTHER LIABILITIES...................................................... -- 27,380
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 5):
Common stock-authorized, 20,000,000
shares of $ .40 par value each; issued and outstanding,
12,052,644 and 9,970,031shares, respectively................... 4,821,058 3,988,013
Additional paid-in capital......................................... 40,688,535 14,201,925
Unearned compensation.............................................. (102,690) (50,387)
Unrealized loss on investments..................................... (145,276) --
Retained deficit................................................... (17,664,772) (9,491,894)
Total shareholders' equity................................... 27,596,855 8,647,657
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $29,360,784 $10,321,193
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
<CAPTION>
1996 1995 1994
REVENUES:
<S> <C> <C> <C>
Medical products (Notes 9 & 10)......................... $1,156,170 $229,984 $3,140,335
Net heart valve patent payments (Note 6)................ -- 1,817,388 2,998,091
Royalty payments relating to
pacemaker lead business (Note 11)................... -- 410,118 176,292
Sales agreement revenue (Note 13)....................... 450,000 750,000 --
Gain on sale of pacemaker lead
business (Note 11).................................. -- -- 647,816
Gain on sale of real estate (Note 12)................... -- -- 957,573
Total revenues...................................... 1,606,170 3,207,490 7,920,107
COST OF SALES AND OTHER EXPENSES:
Cost of medical products ............................... 5,256,179 3,334,589 3,675,461
Selling, general and administrative..................... 3,052,422 2,116,251 1,705,662
Research and development (Note 9)....................... 3,167,013 3,297,524 3,745,762
Interest................................................ 14,296 23,568 124,104
Total cost of sales and other expenses.............. 11,489,910 8,771,932 9,250,989
Operating Loss .............................................. (9,883,740) (5,564,442) (1,330,882)
Interest income.............................................. 1,369,453 411,696 84,639
Loss on sale of investments................................. (64,007) -- --
Loss from continuing operations.............................. (8,578,294) (5,152,746) (1,246,243)
Income from discontinued operations - net (Note 2)........... 405,416 420,901 523,504
Net Loss .................................................... $(8,172,878) $(4,731,845) $(722,739)
Weighted average number
of common shares outstanding............................ 11,611,070 9,726,105 8,435,818
Earnings (loss) per common share:
Continuing operations................................... $(.74) $(.53) $(.15)
Discontinued operations................................. .04 .04 .06
Net Loss $(.70) $(.49) $(.09)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
<CAPTION>
<S>
1996 1995 1994
OPERATING ACTIVITIES:
<C> <C> <C>
Net loss ...................................................... $(8,172,878) $(4,731,845) $(722,739)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of marketable securities.......................... 64,007 -- --
Gain on sale of discontinued operations........................ -- -- (68,123)
Loss on disposal of assets..................................... 24,239 5,631 245
Gain on sale of lead business.................................. -- -- (647,816)
Gain on sale of real estate.................................... -- -- (957,573)
Depreciation................................................... 395,132 361,024 353,584
Amortization of goodwill....................................... 72,000 72,000 72,000
Stock compensation............................................. 505,432 113,298 238,930
(Increase) decrease in receivables............................. (741,886) 3,157,870 1,537,092
(Increase) decrease in inventories............................. (1,109,773) 32,610 (18,722)
(Increase) decrease in other current assets.................... (19,968) 56,493 (159,734)
Increase (decrease) in trade accounts payable.................. 158,540 44,006 (457,786)
Decrease in accrued and other current liabilities.............. (4,225) (1,059,792) (367,340)
Net cash used in operating activities...................... (8,829,380) (1,948,705) (1,197,982)
INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations.................. 589,441 349,679 1,111,792
Additions to plant and equipment............................... (1,453,379) (561,817) (553,506)
Proceeds from sale of fixed assets............................. 10,945 2,728 430
Proceeds upon disposal of real estate.......................... -- - 1,200,000
Proceeds upon sale of lead business............................ -- - 1,100,000
Purchase of marketable securities.............................. (17,992,853) (11,431,373) --
Proceeds from sale/maturity of marketable securities........... 3,215,681 10,160,719 --
Net cash provided by (used in)
investing activities....................................... (15,630,165) (1,480,064) 2,858,716
FINANCING ACTIVITIES:
Proceeds from notes payable.................................... 19,000 115,673 143,928
Repayment of long-term debt.................................... (82,925) (594,530) (803,136)
Proceeds from issuance of stock and exercise
of options and warrants.................................... 26,761,920 7,588,335 198,988
Net cash provided by (used in)
financing activities 26,697,995 7,109,478 (460,220)
INCREASE IN CASH AND CASH EQUIVALENTS.............................. 2,238,450 3,680,709 1,200,514
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD......................................................... 5,450,057 1,769,348 568,834
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $7,688,507 $5,450,057 $1,769,348
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest......................................... $14,296 $23,568 $130,313
Inventory transferred to fixed assets.......................... 19,983 30,473 21,298
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock Additional Unearned Unrealized
Number of Paid-in Stock Loss on Retained
Shares Amount Capital Compensation Investments Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1993........ 8,419,803 $3,367,921 $6,912,420 $(295,668) -- $(4,037,310) $5,947,363
Employee stock purchase
plan................... 16,019 6,408 95,714 -- -- -- 102,122
Stock options issued to
directors (Note 5)...... -- -- 62,100 -- -- -- 62,100
Stock options exercised..... 20,430 8,172 109,855 -- -- -- 118,027
Unearned stock compensation
amortization............ -- -- -- 176,832 -- -- 176,832
Net loss.................... -- -- -- -- -- (722,739) (722,739)
BALANCE AT JULY 31, 1994........ 8,456,252 3,382,501 7,180,089 (118,836) -- (4,760,049) 5,683,705
Employee stock purchase
plan..................... 10,932 4,373 65,319 -- -- -- 69,692
Stock options issued to
directors (Note 5)........ -- -- 44,849 -- -- -- 44,849
Stock options exercised..... 147,000 58,800 640,021 698,821
Stock retired............... (58,281) (23,312) (378,229) -- -- -- (401,541)
Stock bonus................. 11,628 4,651 59,303 -- -- -- 63,954
Stock offering.............. 1,402,500 561,000 6,590,573 -- -- -- 7,151,573
Unearned stock compensation
amortization.............. -- -- -- 68,449 -- -- 68,449
Net loss.................... -- -- -- -- -- (4,731,845) (4,731,845)
BALANCE AT JULY 31, 1995........ 9,970,031 3,988,013 14,201,925 (50,387) -- (9,491,894) 8,647,657
Employee stock purchase
plan................... 17,194 6,878 106,537 -- -- -- 113,415
Stock options issued to
directors and distributors
(Note 5)................ -- -- 292,240 -- -- -- 292,240
Stock options exercised..... 123,800 49,520 858,030 -- -- -- 907,550
Stock retired.............. (47,639) (19,056) (857,074) -- -- -- (876,130)
Stock grants................ 18,000 7,200 206,015 (265,500) -- -- (52,285)
Stock offering.............. 1,971,258 788,503 25,880,862 -- -- -- 26,669,365
Unearned stock compensation
amortization............ -- -- -- 213,197 -- -- 213,197
Unrealized loss on investments -- -- -- -- (145,276) -- (145,276)
Net loss.................... -- -- -- -- -- (8,172,878) (8,172,878)
BALANCE AT JULY 31, 1996........ 12,052,644 $4,821,058 $40,688,535 ($102,690) ($145,276) ($17,664,772) $27,596,855
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation The accompanying consolidated financial statements
include the accounts of Possis Medical, Inc. (the Company) and its wholly-owned
subsidiaries, Possis Holdings, Inc., JEI Liquidation, Inc.(Jet Edge) (Note 2)
and Possis Medical Europe B.V., after elimination of intercompany accounts and
transactions.
The Company is a developer, manufacturer and marketer of medical devices.
The Company was incorporated in 1956 and has operated several businesses over
the last 40 years. In 1990 the Board of Directors decided to focus on medical
products, which led to the sale of the Technical Services Division in 1991 and
the Jet Edge industrial waterjet business in 1994. In March 1994 the Company
sold its pacemaker lead business because it anticipated that revenues from this
business would decline due to a pacemaker lead technology shift. The name of the
Company was changed to Possis Medical, Inc. in 1993. In January 1995, the
Company established a 100% owned subsidiary (Possis Medical Europe B.V.) in the
Netherlands to support international product distribution.
The Company's thrombectomy and graft products utilize new technology and
the production processes and production equipment used to manufacture them are
unique and have been designed and constructed by Company employees. In addition,
the medical device industry is subject to the laws and oversight of the United
States Food and Drug Agency ("FDA") as well as non-U.S. regulatory bodies in
countries where the Company does business.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories Inventories are stated at the lower of cost (on the first-in,
first-out basis) or market.
Property, Depreciation, and Amortization Property is carried at cost and
depreciated using the straight-line method over estimated useful lives of the
assets at the following annual rates:
Leasehold improvements ............................. 3-10%
Machinery and equipment ............................. 10-25%
Goodwill Goodwill is being amortized on a straight-line basis over 13-1/2
years, based on the remaining life of patent rights related to the Perma-Flow
Graft acquired in 1988. Accumulated amortization at July 31, 1996 and 1995 was
$573,500 and $501,500, respectively.
Income Taxes The Company accounts for income taxes under Statement of
Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes."
Certain items are accounted for tax purposes in a different period than for
financial statement purposes.
<PAGE>
Revenue Recognition Revenue associated with medical products sales is
recognized when products are shipped. Heart valve patent revenue and royalty
payments related to the pacemaker leads business sale were accrued based on
estimated sales of the companies making the royalty payments. Revenue under
product supply and distribution agreements is recognized when the required
milestones have been achieved.
Fair Value of Financial Instruments Marketable securities are carried at
fair value. The carrying value of all other financial instruments, except
long-term debt, approximates fair value due to the short-term nature of the
instrument. The carrying value of long-term debt approximates fair value due to
the fixed interest rates being consistent with current market rates of interest.
Earnings (Loss) Per Share The Company's outstanding stock options and stock
warrants are not considered in the computation of earnings per share because the
impact would be antidilutive because of the net loss. The difference between
primary and fully diluted earnings per share was not significant in any period.
Cash Equivalents The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
Marketable Securities Effective August 1, 1994 the Company adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." All
Company securities as of July 31, 1996 are classified as available-for-sale and
consist primarily of U.S. government securities. These investments are reported
at fair value with a net unrealized loss of $145,276 included in shareholders'
equity. These securities have maturity dates ranging from January 15, 1997 to
March 5, 2001. The Company utilizes the specific identification method in
computing gains or losses. During 1996 the Company sold available-for-sale
securities aggregating approximately $1,941,000, realizing a loss of $64,007.
There was no material difference between amortized cost and fair value for the
marketable securities at adoption or at July 31, 1995.
Impairment of Long-Lived Assets SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
was issued in March 1995 and will be adopted by the Company in fiscal 1997. The
Company does not expect that adoption of this Standard will have a material
impact on the consolidated financial statements.
Stock-Based Compensation SFAS No.123, "Accounting for Stock-Based
Compensation," was issued in October 1995 and must be adopted no later than
fiscal 1997, except for transactions with nonemployees which is effective for
all transactions entered into subsequent to December 15, 1996. The Company
intends to continue to measure compensation cost for employee-based stock
compensation plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and will follow the disclosure requirements of SFAS No. 123
beginning in fiscal 1997.
<PAGE>
2. DISCONTINUED OPERATIONS
Waterjet Equipment In January 1994, the Company sold its waterjet equipment
business (Jet Edge) to TC/American Monorail, Inc. The sale resulted in a book
gain of $68,123. Technical Services On September 29, 1991, the Company sold its
Technical Services division to Advance Technical Services, Inc. (ATS), which is
51% owned by a former officer of the Company. Under the terms of the sale, the
Company received approximately $550,000 in cash and a note of $250,000 for the
net assets of the business and realized a gain of $66,517. In addition, the
Company will receive a percentage of ATS's annual revenues in excess of a
specified amount through September 1996, up to a maximum of $2,000,000. These
amounts are recognized as income when received or when collection is reasonably
assured. As part of the sale, the Company also received $200,000 in cash and a
note of $500,000 for an agreement not to compete for a five-year period; income
from this agreement is recognized ratably over the period of the agreement.
During 1996, ATS prepaid the notes receivable and the estimated remaining
royalty payments in connection with the sale of ATS. At July 31, 1996, the only
remaining balance outstanding related to the Company's sale of ATS is deferred
revenue of $41,768 related to estimated royalties from August and September of
1996.
Notes receivable related to the Technical Services division at July 31,
1995 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
9% note receivable, due in 20 quarterly
installments of principal and interest
through October 1, 1996.......................................... $ -- $62,500
Note receivable, no interest, principal
due in five equal annual installments
on October 1, 1992 through
October 1, 1996.................................................. -- 200,000
Discount on noninterest bearing note
(amortized over the term of the note)............................ -- (30,429)
-- 232,071
Less current portion -- (123,918)
$ -- $108,153
</TABLE>
Income from Discontinued Operations Operating results of the waterjet
equipment business and Technical Services division were as follows for the years
ended July 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Sales ..................................................... $ -- $ -- $3,400,170
Income from operations...................................... $ 225 $ 87,306 $ 142,259
Amortization of not-to-compete
agreement................................................ 154,647 113,916 113,916
Percentage of ATS's revenues................................ 250,544 219,679 199,206
Income before income taxes............................... 405,416 420,901 455,381
Gain on disposal of Jet Edge................................ -- -- 68,123
Income from discontinued operations ........................ $405,416 $420,901 $ 523,504
</TABLE>
<PAGE>
3. OTHER CURRENT LIABILITIES AND LONG-TERM DEBT
Other current liabilities at July 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Animal trial expense ..................... $ 23,292 $ 19,344
Clinical trial expense ................... 378,638 243,202
Legal fees................................ 15,183 96,900
Other..................................... 149,200 125,151
$566,313 $ 484,597
Long-term debt at July 31, 1996 and 1995 is as follows:
1996 1995
Notes payable, interest at 8.25%-10.15%,
principal and interest payable monthly,
final payments due between February 1997
and December 1998, collateralized by
the Company's equipment................. $92,955 $175,880
Noninterest bearing note payable, principal
repaid in 10 equal quarterly payments
beginning January 1997, final payment
due April 1999, unsecured................ 19,000 --
111,955 175,880
Less current maturities............. (73,386) (82,925)
$38,569 $92,955
</TABLE>
Maturities of long-term debt are $73,386 in 1997, $28,356 in 1998 and
$10,213 in 1999.
4. INCOME TAXES
At July 31, 1996, the Company has net operating loss carryforwards of
approximately $14,145,000 for federal tax purposes which expire in 2003 through
2011 and $5,138,000 for Minnesota tax purposes which expire in 2003 through
2011.
In addition, at July 31, 1996 the Company has approximately $1,441,000 in
federal tax credits, substantially all of which is a research and development
tax credit, which expire from 1999 through 2011, and a $65,182 AMT credit which
does not expire.
Deferred tax assets and liabilities as of July 31, 1996 and 1995 are
described in the table below. The Company has not recorded any net deferred tax
assets due to the uncertainty of realizing such assets:
<PAGE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current assets (liabilities):
Allowance for doubtful accounts..................... $ 20,000 $ 10,000
Inventory........................................... 302,000 294,000
Accrued vacation.................................... 34,000 45,000
Other ............................................. 80,000 31,000
436,000 380,000
Less valuation allowance (436,000) (380,000)
Net ............................................. $ -- $ --
Long-term assets:
Net operating losses................................ $4,891,000 $2,912,000
Amortization of patents............................. 142,000 122,000
Tax credits......................................... 1,506,000 1,480,000
Depreciation........................................ (74,000) 4,000
6,465,000 4,518,000
Less valuation allowance............................ (6,465,000) (4,518,000)
Net ............................................. $ -- $ --
</TABLE>
The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax benefit on loss from
continuing operations computed at
statutory rate of 34%.......................... $(2,916,620) $(1,751,930) $(423,640)
Decrease in tax benefit due to nonrecognizable
benefits of net operating loss
carryforwards.................................. 2,916,620 1,751,930 423,640
Total income tax expense
continuing operations.......................... $ -- $ -- $ --
</TABLE>
5. COMMON STOCK
Stock Options Certain officers, directors, key employees, and certain other
individuals may purchase common stock of the Company under stock option plans.
In 1992, the Company established the 1992 Stock Compensation Plan (the 1992
Plan), which replaced the 1983 and 1985 plans. Although the 1983 and 1985 plans
remain in effect for options outstanding, no new options may be granted under
these plans.
The 1992 Plan authorizes awards of the following types of equity-based
compensation: Incentive Stock Options, Nonqualified Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Annual Grants of Stock
Options to Directors, Stock Options to Directors in Lieu of Compensation for
Services rendered as Directors, and Other Stock-Based Awards valued in whole or
in part by reference to stock of the Company. No Incentive Stock Options may be
granted on or after August 1, 2002, nor shall such options remain valid beyond
ten years following the date of grant.
<PAGE>
The total number of shares of stock reserved and available for distribution
under the 1992 Plan originally was 600,000 shares, a maximum of 350,000 of which
may be issued as Incentive Stock Options. The total number of shares reserved
and available for distribution under the plan was increased annually on January
2, 1993, 1994 and 1995, by 1% of the number of shares of the Company's common
stock outstanding at July 31 of the prior fiscal year. In 1995 the Company
amended the 1992 Stock Compensation Plan by increasing the number of common
shares issuable under the plan each year from 1% to 2% of the total number of
shares outstanding at July 31 of the prior fiscal year. In addition, the number
of common shares issuable as Incentive Stock Options under the plan was
increased to 1,000,000. At July 31, 1996, there were 1,587,519 shares reserved
and 1,024,531 shares available for granting under the 1992 Plan.
In 1983, the Company established an Incentive Stock Option Plan. A maximum
of 545,000 shares were authorized under the plan at an option price of at least
100% of the fair market value at date of grant. The options become exercisable
at date of grant, except for those options granted after March 17, 1985, which
vest ratably over a three or four year period. All options expire ten years from
date of grant.
In 1985, the Company established a Nonqualified Stock Option Plan under
which a maximum of 200,000 shares were authorized to be granted at a price of at
least 100% of the fair market value at date of grant. The options vest ratably
over a three or four year period and expire not more than ten years from date of
grant.
In fiscal 1996, 1995 and 1994, the Company granted 4,760, 11,574 and 16,560
compensatory options, respectively, to its outside directors in lieu of cash
payments for directors fees. These options were granted under the 1992 Plan.
A summary of changes in outstanding options for each of the three years
ended July 31, 1996 follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Shares under option at
beginning of year.................................. 728,102 880,478 761,835
Options granted - 1992 plan........................... 254,660 33,374 163,560
Options granted - Non plan............................ 55,000 -- --
Options exercised..................................... (123,800) (147,000) (23,417)
Options canceled...................................... (14,175) (38,750) (21,500)
Shares under option at end of year.................... 899,787 728,102 880,478
Shares exercisable at end of year..................... 348,204 497,841 551,603
Exercise price of options granted..................... $8.75-17.50 $3.875-7.75 $3.75-7.50
Exercise price of options exercised................... $2.75-14.625 $2.625-11.38 $2.75-8.625
Market price of options exercised..................... $13.75-21.25 $6.25-13.625 $5.71-10.25
Aggregate market value of options
exercised.......................................... $2,245,906 $1,180,469 $153,587
</TABLE>
In 1993, the Company granted 37,000 shares of restricted stock to employees
under the terms of the 1992 Plan, which vest 7,400 shares each on December 2,
1993 and on June 3, 1994, 1995, 1996 and 1997. Approximately $128,000 was
accrued to pay the estimated withholding taxes on those shares as management
believes that the employees will elect to receive fewer shares in lieu of paying
the withholding taxes. In case of termination of the employees, with the
exception of those shares that vested December 2, 1993, unvested shares are
forfeited. Unearned compensation of $342,250 was recorded at the date of grant
and is being recognized over the vesting period. In addition, the Company issued
5,717 shares of deferred stock under the 1992 Plan which were fully vested at
July 31, 1993. In 1996 the Company granted 18,000 shares of restricted stock to
employees which vest 9,000 shares each on June 3, 1996 and 1997, under terms
similar to the 1993 grants. Approximately $112,000 was accrued to pay the
estimated withholding taxes on those shares as management believes that the
employees will elect to receive fewer shares in lieu of paying the withholding
taxes. Unearned compensation of $265,540 was recorded at the date of grant and
is being recognized over the vesting period. In fiscal 1996, 1995 and 1994,
total compensation expense of $213,197, $68,449 and $176,832, respectively, was
recognized on these shares.
<PAGE>
During 1996, the Company issued options to purchase 55,000 shares of common
stock to various distributors of the Company's products. The options are
exercisable at $12.56 - $14.39 per share and expire in 2001. SG&A expense of
approximately $251,000 was recorded in connection with these transactions.
Stock Warrants Stock purchase warrants held by unrelated parties
representing the right to purchase an aggregate of 26,400 shares of the
Company's common stock at $8.52 a share were outstanding at July 31, 1996. These
warrants do not have an expiration date and must be exercised if the market
value of the Company's common stock exceeds $22.73 per share for a specified
period.
On September 15, 1994, warrants to purchase 120,000 shares of common stock
at $6.90 per share were issued to John G. Kinnard & Company in conjunction with
the Company's September 1994 public stock offering. As of July 31, 1996, all
such warrants were outstanding.
Employee Stock Purchase Plan The Employee Stock Purchase Plan, effective
January 1, 1991, enables eligible employees, through payroll deduction, to
purchase the Company's common stock at the end of each calendar year. The
purchase price is the lower of 85% of the fair market value of the stock on the
first or last day of the calendar year. The Company issued 17,194 shares in
1996, 10,932 shares in 1995 and 16,019 shares in 1994 under this plan.
6. RELATED-PARTY TRANSACTIONS
The Company and St. Jude Medical, Inc. (St. Jude), an unrelated
corporation, entered into an agreement under which the Company transferred to
St. Jude its entire right, title, and interest in the patents relating to a
prosthetic heart valve developed by Z. C. Possis, former Chief Executive Officer
of the Company, on his own time and without consideration. Under the terms of
the agreement, St. Jude remitted royalty payments to the Company through March
14, 1995 equal to 2% of St. Jude's total net sales of heart valves in excess of
$4,052,000 per year. The Company paid 25% of such payments to a group of
individuals including a shareholder of the Company, three relatives of Z. C.
Possis and four unrelated persons and 11.25% (7.5% through February 1992) to Z.
C. Possis or his estate.
7. 401 K PLAN
The Company has an employees' savings and profit sharing plan for all
qualified employees who have completed one year of service. Company
contributions are made at the discretion of the Board of Directors subject to
the maximum amount allowed under the Internal Revenue Code. Contributions for
the years ended July 31, 1996, 1995, and 1994 were $90,114, $77,907 and $98,417,
respectively.
<PAGE>
8. LEASE COMMITMENTS
The Company's medical products operation is conducted from a leased
facility under an operating lease which expires in 2006. Rental payments under
the lease are guaranteed by a letter of credit in the amount of $20,000 at July
31, 1996. Rental expense charged against earnings was $329,340 in fiscal 1996,
$379,706 in fiscal 1995, and $340,342 in fiscal 1994. The future annual rentals
on this operating lease are $242,000 per year through 2006. The lease is
noncancelable before April 2001, after which it can be canceled with notice and
payment of a termination fee.
9. RESEARCH AND DEVELOPMENT
The Company has had agreements for joint funding of certain research and
development costs related to the Company's products and projects. In connection
therewith, the Company recorded medical products revenue of approximately
$576,000 in fiscal 1994 in exchange for the rights to the use of certain
technology and products.
10. SALES TO MAJOR CUSTOMERS
The Company's continuing operations are in one segment, the design,
manufacture and distribution of cardiovascular and vascular medical devices.
Approximately 80% of medical product sales are to foreign customers. In 1996,
sales to four customers amounted to 21%, 17%, 14% and 12% of medical products
revenues, and the receivables related to these customers were 21%, 2%, 0%, and
6% of total receivables, respectively. In 1995, sales to two customers amounted
to 62% and 15% of medical products revenues and in 1994, sales to two customers
totaled 70% and 14% of medical product revenues.
11. SALE OF PACEMAKER LEADS BUSINESS
On March 18, 1994, the Company sold the assets of the pacemaker lead
product line to Innovex, Inc. The Company received $1,100,000 in cash in
exchange for $451,786 in inventories and fixed assets, recording a gain of
$647,816. In addition, the Company received a 75% royalty on gross sales of
certain leads and related services for one year. The pacemaker leads was a
product line and component of the medical products segment. Since other
components of this segment (research and development activities and initial
production of new products) are continuing, the sale of the lead business has
not been reported as a discontinued operation.
12. SALE OF REAL ESTATE
In March 1994, the Company closed on the sale of its land, buildings and
leasehold improvements associated with the Jet Edge business to TC/American
Monorail, Inc. The property sold for $1,200,000 and the Company recorded a gain
on the sale of $957,573. All Company operations are now conducted at the leased
facility in Coon Rapids, Minnesota.
13. PRODUCT SUPPLY AND DISTRIBUTION AGREEMENTS
On December 30, 1994, the Company executed a Supply and Distribution
Agreement with Bard Vascular Systems Division, C.R. Bard, Inc. ("Bard"). This
Agreement grants to Bard exclusive worldwide sales and marketing rights to the
Possis Perma-Seal Dialysis Access graft for an initial 10-year term, renewable
for the life of applicable patents. Under this Agreement, through July 31, 1996,
the Company has received $1,000,000 and will receive up to an additional
$1,500,000 if the Company achieves certain additional regulatory and
commercialization milestones.
<PAGE>
On March 15, 1996 the Company entered into a Distribution Agreement with
Baxter Healthcare Corporation ("Baxter"). This Agreement grants Baxter exclusive
worldwide distribution rights to the Possis Perma-Flow Coronary Bypass Graft for
a three-year term. Under this Agreement, through July 31, 1996, the Company
received $200,000 and will receive up to an additional $400,000, $200,000 on
each of the first and second anniversary dates of agreement signing, as long as
the agreement is in effect.
Item 9. Changes in and disagreements with Accountants on Accounting
andFinancial Disclosure:
During fiscal 1995 and 1996, there were no changes in or disagreements with
the Company's independent certified public accountants on accounting procedures
or accounting and financial disclosures.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant:
Information under the heading "Election of Directors" in the Proxy
Statement is incorporated herein by reference. The information regarding
executive officers is included in Part I of this report under the caption
"Executive Officers of the Registrant."
Item 11. Executive Compensation:
Information regarding compensation of directors and officers for the fiscal
year ended July 31, 1996 is in the Proxy Statement and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
The security ownership of certain beneficial owners and management is in
the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions:
Information regarding related party transactions is contained in Note 6 of
Notes to Consolidated Financial Statements in Part II, Item 8 and "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) 1. Financial Statements
The following financial statements of the Company, accompanied by an
Independent Auditors' Report, are contained in Part II, Item 8:
Consolidated Statements of Operations for each of the three years in the
period ended July 31, 1996
Consolidated Balance Sheets, July 31, 1996 and 1995
Consolidated Statements of Cash Flows for each of the three years in the
period ended July 31, 1996.
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended July 31, 1996.
Notes to Consolidated Financial Statements
2. Schedules
The following financial statement schedules are submitted herewith:
Consent of independent certified public accountants.
SCHEDULE VIII - Valuation Accounts
Other schedules are omitted because they are not required or are not
applicable or because the required information is included in the financial
statements listed above.
3. Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated on the following two pages.
<PAGE>
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation
July 31, 1994 as amended and restated to
date
3.2 S-2 Amendment No.1 Bylaws as amended and restated
August 9, 1994 to date
4.3 10-K Fiscal year ended Norwest Equipment Finance, Inc.
July 31, 1994 loan agreement, dated January
12, 1994
10.1 S-1 June 30, 1988 Agreement with St. Jude Medical,
Inc., dated August 2, 1983
10.2 8-K February 14, 1994 Asset purchase agreement with
TC/American Monorail, Inc.,
dated January 28, 1994
10.3 S-2 July 1, 1994 Real estate purchase agreement
with TC/AmericanMonorail, Inc.,
dated January 28, 1994
10.4 10-Q Quarter ended Asset purchase agreement with
January 31, 1994 Innovex, Inc., dated March 11,
1994
10.5 S-2 July 1, 1994 Lease agreement for corporate
headquarters and manufacturing
facility, dated January 4, 1991
10.6 S-2 Amendment No.1 License agreement with Imperial
August 9, 1994 Chemical Industries Plc., dated
April 15, 1991
10.7 S-2 Amendment No.1 License agreement with the
August 9, 1994 University of Liverpool, dated
May 10, 1990
10.8 S-1 June 30, 1988 Form of indemnification
agreement with officers and
directors of Registrant
* 10.9 S-8 February 7, 1990 1983 Incentive Stock Option Plan
as amended to date
* 10.10 S-1 June 30, 1988 1985 Nonqualified Stock Option
Plan as amended to date
<PAGE>
Exhibit Form Date Filed Description
* 10.11 10-K Fiscal year ended Form of incentive stock option
July 31, 1989 agreement for officers
* 10.12 10-K Fiscal year ended Form of stock option agreement
July 31, 1989 for directors
* 10.13 S-8 December 30, 1992 1992 Stock Compensation Plan
* 10.14 10-K Fiscal year ended Form of restricted stock
July 31, 1993 agreement for officers (1992
Plan)
* 10.15 10-K Fiscal year ended Form of nonqualified stock
July 31, 1993 option agreement for officers
(1992 Plan)
* 10.16 10-K Fiscal year ended Form of incentive stock option
July 31, 1993 agreement for officers (1992
Plan)
* 10.17 10-K Fiscal year ended Form of nonqualified stock
July 31, 1993 option agreement for 1992
directors' fees (1992 Plan)
* 10.18 10-K Fiscal year ended Form of nonqualified stock
July 31, 1993 option agreement for 1990
directors' fees
* 10.19 10-K Fiscal year ended Form of nonqualified stock
July 31, 1993 option agreement for 1989
directors' fees
10.20 S-2 Amendment No. 1 Underwriting agreement entered
August 9, 1994 into between the Company and
John G. Kinnard and Company,
Incorporated including form of
warrant to representative dated
September 8, 1994
10.21 10-Q Quarter ended Supply & distribution agreement
January 31, 1995 with Bard Vascular Systems
Division, C.R.Bard, Inc.
10.22 S-3 Amendment No. 2 Underwriting agreement entered
September 29, 1995 into between the Company, Dain
Bosworth Incorporated and John
G. Kinnard and Company,
Incorporated dated October 2,
1995.
<PAGE>
Exhibit Form Date Filed Description
10.23 10-Q Quarter ended Lease agreement for corporate
January 31, 1996 headquarters and manufacturing
facility dated December 15,
1995.
10.24 8-K March 28, 1996 Supply and distribution
agreement with Edwards CVS
Division, Baxter Healthcare
Corporation
21 10-K Fiscal year ended Subsidiaries of registrant
July 31, 1995
23 Consent of independent certified public accountants
27 Financial data schedule
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
July 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POSSIS MEDICAL, INC.
by: /s/ Russel E. Carlson
Russel E. Carlson
Vice President of Finance
Chief Financial and Accounting Officer
Dated: October 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
Date
/s/ Donald C. Wegmiller Chairman of the Board October 21, 1996
Donald C. Wegmiller
/s/ Robert G. Dutcher Director, President and October 21, 1996
Robert G. Dutcher Chief Executive Officer
/s/ Dean Belbas Director October 21, 1996
Dean Belbas
/s/ Seymour J. Mansfield Director October 21, 1996
Seymour J. Mansfield
/s/ Demetre Nicoloff, MD Director October 21, 1996
Demetre Nicoloff, MD
/s/ Ann M. Possis Director October 21, 1996
Ann M. Possis
/s/ Joe A. Walters Director October 21, 1996
Joe A. Walters
<PAGE>
SCHEDULE VIII
POSSIS MEDICAL, INC.
VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
______________________________________________________________________________
Column A Column B Column C Column D Column E
Additions
Balance at Charged to
Beginning Costs and Deductions Balance at
Description of Year Expenses Write-offs End of Year
Allowance for doubtful accounts -
deducted from trade receivables
in the balance sheet:
Year ended July 31, 1996 $ 27,019 $ 50,000 $ 17,019 $ 60,000
Year ended July 31, 1995 120,000 (76,375) 16,606 27,019
Year ended July 31, 1994 309,000 (93,220) 95,780 120,000
Reserve for loss on disposal
of discontinued waterjet
equipment segment:
Year ended July 31, 1996 $ -- $ -- $ -- $ --
Year ended July 31, 1995 -- -- -- --
Year ended July 31, 1994 850,000 (68,123) 781,877 --
Valuation allowance on
deferred tax asset:
Year ended July 31, 1996 $4,898,000 $2,003,000 $ -- $6,901,000
Year ended July 31, 1995 2,556,000 2,342,000 -- 4,898,000
Year ended July 31, 1994 2,298,000 515,000 257,000 2,556,000
Reserve for inventory
obsolescence:
Year ended July 31, 1996 $125,000 $ 38,795 $ 13,795 $150,000
Year ended July 31, 1995 150,000 136,086 161,086 125,000
Year ended July 31, 1994 27,775 135,051 12,826 150,000
<PAGE>
POSSIS MEDICAL, INC.
FORM 10-K - ITEM 14(a)3
EXHIBIT INDEX
Exhibit
Number Description
3.1 Articles of incorporation as amended and restated to date
3.2 Bylaws as amended and restated to date
4.1 Loan agreement with Norwest Equipment Finance, Inc.,
dated January 12, 1994
10.1 Agreement with St. Jude Medical, Inc., dated August 2, 1983
10.2 Asset purchase agreement with TC/American Monorail, Inc.,
dated January 28, 1994
10.3 Real estate purchase agreement with TC/American Monorail, Inc.,
dated January 28, 1994
10.4 Asset purchase agreement with Innovex, Inc., dated
March 11, 1994
10.5 Lease agreement for corporate headquarters and manufacturing
facility, dated January 4, 1991
10.6 License agreement with Imperial Chemical Industries Plc.,
dated April 15, 1991
10.7 License agreement with the University of Liverpool,
dated May 10, 1990
10.8 Form of indemnification agreement with officers and directors
of Registrant
10.9 1983 Incentive Stock Option Plan as amended to date
10.10 1985 Nonqualified Stock Option Plan as amended to date
10.11 Form of incentive stock option agreement for officers
<PAGE>
Exhibit
Number Description
10.12 Form of stock option agreement for directors
10.13 Restated 1992 Stock Compensation Plan
10.14 Form of restricted stock agreement for officers (1992 Plan)
10.15 Form of nonqualified stock option agreement for officers (1992 Plan)
10.16 Form of incentive stock option agreement for officers (1992 Plan)
10.17 Form of nonqualified stock option agreement for 1992 directors'
fees (1992 Plan)
10.18 Form of nonqualified stock option agreement for 1990 directors' fees
10.19 Form of nonqualified stock option agreement for 1989 directors' fees
10.20 Underwriting agreement entered into between the Company and
John G. Kinnard and Company, Incorporated including form of warrant
to representative dated September 9, 1994
10.21 Supply and distribution agreement with Bard Vascular Systems
Division, C. R. Bard, Inc.
10.22 Underwriting agreement entered into between the Company, Dain
Bosworth Incorporated and John G. Kinnard and Company, Incorporated
dated October 2, 1995
10.23 Lease agreement for corporate headquarters and manufacturing
facility dated December 15, 1995
10.24 Supply and distribution agreement with Edwards CVS Division, Baxter
Healthcare Corporation
21 Subsidiaries of registrant
23 Consent of independent certified public accountants
27 Financial data schedule
Document has heretofore been filed with the Securities and
Exchange Commission as indicated in Item 14(a) 3 and is
incorporated herein by reference.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Possis Medical, Inc.:
We consent to the incorporation by reference in Post-Effective Amendment
No. 1 to Registration Statement No. 33-5467 on Form S-8, Post-Effective
Amendment No. 1 to Registration Statement No. 33-33416 on Form S-8, Registration
Statement No. 33-39987 on Form S-8, and Registration Statement No. 33-56728 on
Form S-8 of our report, dated September 6, 1996, appearing in this Annual Report
on Form 10-K of Possis Medical, Inc. for the year ended July 31, 1996.
Minneapolis, Minnesota
October 25, 1996
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<SECURITIES> 15,838,543
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<COMMON> 4,821,058
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