UNITED STATES
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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For transition period from ____________ to___________
Commission file number 001-12567
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
Preferred Shares Purchase Rights
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 non-affiliates of the
registrant as of October 12, 1998 was approximately $60,508,771.
The number of shares outstanding of the registrant's common stock as of
October 12, 1998: 12,254,941.
Certain responses in Part III are incorporated herein by reference to
information contained in the Company's definitive Proxy Statement for its 1998
annual meeting to be filed on or before October 30, 1998 ("The Proxy
Statement").
<PAGE>
POSSIS MEDICAL, INC.
Forward-Looking Statements
This report on Form 10-K, including the description of the Company's
business, its Year 2000 readiness, 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 Food and Drug Administration ("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, changes
in the Company's marketing strategies, the Company's ability to establish
product distribution channels, changes in manufacturing methods, market
acceptance of the AngioJet System, changes in the level of capital expenditures
by hospitals, the levels of sales of the Company's products that can be
achieved, ability to raise additional capital and other risks set forth in the
cautionary statements included in Exhibit 99 to the Company's report on Form
10-Q dated April 30, 1998, filed with the Securities and Exchange Commission.
PART I
Item 1. Business:
General
Possis Medical, Inc. (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.
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 Note 2 of Notes to Consolidated Financial Statements contained in Part II,
Item 8. These sales enabled Possis to focus its human and financial resources
exclusively on its other products, which are currently in clinical trials and in
early stages of commercialization.
<PAGE>
Products
ANGIOJET(R) RHEOLYTIC(TM) THROMBECTOMY SYSTEM. The development of blood
clots in various sites within the vascular system is common and is one of the
leading causes of morbidity and death. Blood clots may be caused by multiple
factors, including cardiovascular disease, trauma, impediment of normal flow
during 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 intravascular 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 prolonged
infusion 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,
life-threatening 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
significant vascular trauma.
The Company believes that its AngioJet System represents a novel 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 components include a reusable drive
unit, a high-pressure single use pump and a single use, small diameter (5F, 1.7
mm) catheter. In early stages of commercialization and in U.S. clinical trials,
the AngioJet System has demonstrated the ability to remove blood clots within
seconds to minutes without surgical intervention and without the risk of
uncontrolled bleeding.
The AngioJet System removes blood clots through the percutaneous insertion
of the catheter over a guidewire into the patient's blood vessel which is, with
the aid of fluoroscopy, directed to the site of the blood clot. The drive unit
is activated to deliver pressurized saline through tiny holes in the catheter
tip. These waterjets create a suction effect that cleans the blood clot from the
vessel wall, breaks it into small fragments and, in order to prevent formation
of a new blood clot downstream, propels 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 in vessels much larger than the catheter diameter.
Because the Possis AngioJet System is unlike any existing procedure or
device, market potential though difficult to quantify, may be estimated by
determining the number of thrombectomy and thrombolysis 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.
<PAGE>
The Compan's marketing analysis indicates that the versatile AngioJet
System may be effective for the treatment of various blood clot-induced
conditions throughout the body. The following table shows the locations and
conditions where the AngioJet System may be used. In addition, the table
indicates the annual incidences worldwide and the Company's estimated AngioJet
System annual market potential.
<TABLE>
<CAPTION>
Estimated
Annual Annual
Worldwide Market
Incidence Potential
Location Condition (Patients) (Units)
<S> <C> <C> <C>
Cerebral Stroke 1,100,000 500,000
Venous Cerebral Sinus Stroke 4,500 2,000
Cervical Carotid Stroke 6,600 1,000
Lungs Pulmonary Embolism 1,000,000 200,000
Coronary Heart Attacks and 5,300,000 550,000
Unstable Angina
A-V Access Hemodialysis Graft Thrombosis 400,000 190,000
Legs Leg Artery and 1,300,000 220,000
Graft Thrombosis
Venous Deep Vein Thrombosis 2,500,000 900,000
Total 11,611,100 2,563,000
</TABLE>
The Company's established price for the single use catheter and the pump
set to the hospital (worldwide) is between $600 and $1,450. The list price for
the drive unit in the U.S. is $25,000. Outside the U.S. the list price of the
drive unit to the Compan's independent distributors is between $25,000 and
$40,000. 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. In contrast, 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. In October 1998, David J. Cohen, MD, of Beth
Israel Deaconess Medical Center, Boston, Massachusetts, presented his
preliminary cost-effectiveness study results based on the Company's 349 patient
coronary clinical trial, at the Transcatheter Cardiovascular Therapeutics
Symposium. The preliminary results indicate AngioJet System reduced 30-day,
in-house hospital costs by $2,000 to $3,000 per patient as compared to the use
of the blood clot-dissolving drug urokinase. Dr. Cohen plans to present a
12-month cost comparison, including physician costs, at the American College of
Cardiology meeting in March 1999.
On December 6, 1996 the Company received FDA clearance to commence U.S.
marketing of the AngioJet System with labeling claims for removal of blood clots
from grafts used by patients on kidney dialysis. In July 1997 the Company
submitted a 510(k) application to the FDA seeking clearance to expand label
claims for its AngioJet System to include use in peripheral arteries and bypass
grafts in the U.S. The Company expects an FDA decision on the application early
in calendar 1999.
<PAGE>
In September 1998, Possis submitted to the FDA a pre-market approval
("PMA") seeking approval to market its AngioJet System to remove blood clots
from coronary arteries and bypass grafts. The FDA targets completion of its
review and a response to the Company within 180 days. The PMA presents the
results of a 349 patient randomized trial comparing AngioJet System treatment to
intracoronary infusion of the blood clot-dissolving drug urokinase for patients
with demonstrated clot in native coronary arteries and saphenous vein bypass
grafts. The randomized trial showed that AngioJet System treatment had
significantly better outcomes than the urokinase treatment for procedure success
and device success. AngioJet System treatment also had lower in-hospital major
cardiac complications, including fewer bleeding complications and vascular
complications. Also, the results of a cost-effectiveness trial run concurrently
with the coronary AngioJet trials show that the AngioJet System treatment costs
are, on average, significantly lower than those associated with the use of
urokinase. Detailed clinical results will be presented for the first time by
Steven Ramee, MD, at the American Heart Association meeting in November 1998.
PERMA-FLOW(R) CORONARY BYPASS GRAFT. Coronary artery bypass graft ("CABG")
surgery is performed to treat impairment of blood flow to portions of the heart.
CABG surgery involves the grafting of one or more 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 negligible risk of
tissue rejection. However, the surgical harvesting of vessels for autogenous
grafts involves significant patient 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 attacking the graft.
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 a graft
alternative to patients who require bypass surgery but have insufficient or
inadequate native vessels 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 veins.
The Perma-Flow Graft is made of ePTFE, a standard graft material, 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 then 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.
<PAGE>
Company research indicates that in 1998 approximately 700,000 CABG
procedures will be performed worldwide, of which approximately 370,000 will be
performed in the United States. Approximately 10% of these CABG procedures will
be performed on patients who had previously undergone bypass surgery. It is
anticipated that the number of repeat CABGs will continue to increase as a
percentage of procedures performed. Currently, approximately 70% of CABG
procedures are performed utilizing the saphenous vein. Based upon 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 1% of those receiving CABG
procedures, or approximately 7,000 annually. 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.
Currently, no synthetic coronary graft has been approved by the FDA.
Cryopreserved saphenous veins are currently not regulated by the FDA and sell to
U.S. hospitals for approximately $3,500 to $4,000. 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
U.S. sites. As of August 1998, 32 Phase 1 and 90 Phase 2 study patients have
been enrolled at 20 sites. Angiographic results at 30 days following surgery
have been reported on 97 patients, which confirmed 173 of 191 side-to-side
anastomoses to be patent (providing blood to the coronary arteries). Within this
30-day interval, of the remaining 25 patients, angiographic results were not yet
reported for 16 and nine 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 52 patients, which confirmed that 61 of
104 anastomoses were patent. The Company anticipates filing a PMA application
for U.S. marketing authorization in 2003.
In April 1998, the Company received Humanitarian Device Exemption ("HDE")
approval from the FDA, clearing the way for U.S. marketing of the Perma-Flow
Graft for patients who require coronary bypass surgery, but who have inadequate
blood vessels of their own for use in the surgery.
PERMA-SEA(R) 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.
<PAGE>
In September 1998, the Company received FDA marketing approval for its
Perma-Seal Graft. 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 offers 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.
Approximately 210,000 patients in the United States undergo kidney dialysis
each year, of which approximately 80,000 receive vascular access procedures
utilizing either natural vessel grafts or synthetic access grafts. The Company
estimates that of these patients approximately 63,000 are implanted with a
synthetic graft. The Company believes that worldwide, approximately 93,000
synthetic grafts are implanted annually
The U.S. 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. Final pricing of the
Company's Perma-Seal Graft has not been established, but is expected to fall
within this range.
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 carotid, neurovascular and large
vessel applications. The Company also believes its AngioJet technology has
application beyond thrombectomy, such as for minimally invasive tissue removal.
Research and development expenses are generally incurred for product design,
development and qualification, development and validation of manufacturing
process, conduct of clinical trials, and seeking and obtaining governmental
approvals. The Company's research and development expenses are expected to
increase as the Company continues its clinical trials and current product
development plans.
As of September 30, 1998, the Company employed approximately 52 full-time
employees in research and development, including 43 in new product concept
screening, prototype building, product and process development and validation,
and nine in 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 $5.2 million, $5.0 million and $3.2 million
in fiscal 1998, 1997, and 1996, respectively, on medical product research and
development.
<PAGE>
Marketing and Sales
The Company is marketing its AngioJet System and graft products to
interventional radiologists and cardiologists and also to physician specialty
groups, including vascular, cardiovascular and thoracic surgeons. The Company is
currently marketing the AngioJet System for hemodialysis graft thrombosis and
plans to market the system for other peripheral vessel and graft applications,
targeting interventional radiologists, vascular surgeons and some cardiologists
who perform percutaneous transluminal angioplasty ("PTA") and other thrombectomy
or lytic procedures. The AngioJet System for coronary applications will be
marketed primarily to interventional cardiologists and some cardiovascular
surgeons. The AngioJet System for stroke treatment will be marketed to
interventional neuroradiologists and cardiologists. The primary customer for the
Perma-Flow Graft is expected to be cardiovascular surgeons and thoracic
surgeons. 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
decision makers 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.
The Company is currently marketing its AngioJet System outside the United
States using an independent distributor network. The Company currently has
distributorship agreements with 18 distributors covering Belgium, Denmark,
Italy, Greece, Luxembourg, The Netherlands, Norway, Spain, Switzerland, Austria,
France, Saudi Arabia, Israel, Australia, Russia, Japan, India, and Taiwan.
Generally, the distributorship agreements are for an initial 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. The Company closed its European distribution center once it received
regulatory clearance in Europe for all of its products as it is now more
cost-effective to ship products directly to European customers from the United
States. All sales made to the Company's independent distributors are denominated
in United States dollars.
On December 6, 1996, the Company received FDA clearance to commence U.S.
marketing of the AngioJet Rheolytic Thrombectomy System with labeling claims for
removal of blood clots from grafts used by patients on kidney dialysis. The
Company is marketing and distributing 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. The initial grafts were shipped to Bard in May 1996. However,
in January 1997, the Company terminated the agreement with Bard. In September
1998, the Company received FDA approval to commence U.S. marketing of the
Perma-Seal Graft.
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. The initial shipment of
Perma-Flow Grafts was made in July 1996. However, in April 1998, the Company
modified the Agreement with Baxter, under which Baxter retains non-exclusive
distribution rights outside of the United States, but has no distribution rights
in the United States for the remaining term of the Distribution Agreement.
<PAGE>
In January 1998, the Company engaged Salomon Smith Barney to assist in the
development and implementation of a strategic plan designed to maximize the
value of the Company's vascular graft business. The Company expects to make an
announcement regarding this project within the next several weeks.
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 opinion leader publications in medical journals and
presentations at medical meetings will be especially important to encourage
broad acceptance of its products. Other marketing activities include medical
journal advertising and supporting studies designed to gather cost effectiveness
data of the Company's products compared to conventional treatment.
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 four patent
applications pending in foreign jurisdictions. The Company holds three United
States patents relating to the AngioJet System. In addition, the Company has
twelve United States and nine foreign patent applications pending relating to
the AngioJet System. Two of the pending applications in the United States have
allowed claims and will issue upon completion of final administrative
requirements. Three AngioJet System patent applications have been accepted by
foreign jurisdictions. In connection with the Perma-Seal Graft, two United
States patents are pending 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. In addition,
no assurance can be given that third parties will not receive patent protection
on their own waterjet devices.
The Company has acquired rights through licensing agreements to patents
relating to processes used in the manufacture of synthetic vascular grafts.
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
treatment methods 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 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
synthetic grafts with needle sealing properties.
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, established
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 Food, Drug and Cosmetic ("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 Good Manufacturing Practices (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 pre-clinical and clinical trial data to prove the safety and efficacy
of the device. Generally, a company is required to obtain an Investigational
Device Exemption ("IDE") before it commences clinical testing in the United
States in support of such a PMA. The FDA monitors and oversees the conduct of
clinical trials under IDE. 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.
In 1996, FDA issued regulations for HDE. These regulations permit that
certain devices, if intended for a small (less than 4,000 per year),
medically-defined group of patients, may qualify as Humanitarian Use Devices and
be authorized for sale in the U.S. under a temporary exemption from PMA or
510(k) requirements. An HDE is authorized by the FDA upon approval of an
appropriate HDE submission. Such submissions must establish the safety and
probable benefit of the device for the proposed intended use. An HDE approval
lasts 12 months, but may be extended with subsequent submissions. Devices
marketed under an HDE may simultaneously undergo clinical trials under an
approved IDE, and be submitted for clearance or approval under a 510(k) or PMA
for a different or broader indication.
<PAGE>
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
pre-clinical 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.
The FDC Act regulates the Company's manufacturing and quality systems 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 regulatory 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 ISO 9001 compliance 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 complies with its requirements. 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 received CE Mark
approval for its current products in July 1997.
<PAGE>
Employees
As of September 30, 1998, the Company had 179 full-time employees, one
part-time employee and eight contract employees. Of these full-time employees,
52 are in research and development, 58 are in manufacturing and production, 10
are in quality systems, 6 are in facilities/maintenance, 36 are in sales and
marketing and 17 are in management or administrative positions. None of the
Company's employees are 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 7 of Notes to Consolidated Financial Statements in Part II,
Item 8.
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>
Name Age Position
<S> <C> <C>
Robert G. Dutcher 53 Director, Chief Executive Officer and President
Joseph J. Afryl Jr 50 Vice President, Sales
Russel E. Carlson 52 Vice President, Finance and Chief Financial Officer
Irving R. Colacci 45 Vice President, Legal Affairs and Human Resources
General Counsel and Secretary
James D. Gustafson 42 Vice President, Quality Systems and
Regulatory/Clinical Affairs
T. V. Rao 55 Vice President/General Manager, AngioJet Business
Robert J. Scott 53 Vice President, Manufacturing Operations
</TABLE>
Robert G. Dutcher has served as President and Chief Executive Officer and
has been a director of the Company since October 1993. From June 1992 until
October 1993, Mr. Dutcher served as Executive Vice President of the Company.
Since 1987, he has served as President and Chief Operating Officer of Possis
Holdings, Inc. (a subsidiary formerly known as Possis Medical, Inc.). 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 medical device company,
since September 1989 and had served in eight financial management positions with
The Pillsbury Company, a food manufacturer and processor, since 1972.
Irving R. Colacci has served as Vice President and General Counsel since
December 1993, and as Secretary and Corporate Counsel of the Company since July
1988. Prior to joining the Company, Mr. Colacci had been an attorney at Dorsey &
Whitney LLP.
<PAGE>
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.
T. V. Rao joined the Company in June 1998 as Vice President and General
Manager of AngioJet Thrombectomy business. Prior to joining the Company, Mr. Rao
served as Vice President of Sales and Marketing for Angeion Corporation from
July 1995 to June 1998, as Vice President of Sales and Marketing for Brunswick
Biomedical Corporation from July 1994 to June 1995 and served in several
positions (most recently as Director of Marketing, Tachyarrhythmia Business) at
Medtronic Inc. since 1980. Mr. Rao holds a master's degree in business from the
College of St. Thomas and a bachelor's degree with honors in mechanical
engineering from Madras, India.
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 Stockholder
Matters:
The Company had 1,618 common shareholders of record at July 31, 1998. 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, 1998
and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
High Low High Low
QUARTER:
<S> <C> <C> <C> <C>
First............ 15.25 11.00 19.00 14.25
Second........... 15.00 10.38 22.00 15.88
Third............ 17.00 12.50 20.50 11.50
Fourth........... 14.75 9.25 17.38 13.50
</TABLE>
Additional information is contained in Note 5 of Notes to Consolidated
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
YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
In Thousands Except Earnings Per Share Data
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues-
Continuing operations.................. $6,118 $4,834 $1,606 $3,207 $6,315
Net income (loss):
Continuing operations.................. (11,969) (8,608) (8,578) (5,153) (1,246)
Discontinued operations................ -- 112 405 421 523
Net income (loss) per common share -
basic and diluted:
Continuing operations.................. (.98) (.71) (.74) (.53) (.15)
Discontinued operations................ -- .01 .04 .04 .06
Weighted average shares outstanding..... 12,191 12,099 11,611 9,726 8,436
BALANCE SHEET DATA:
Working capital........................ $16,598 $16,840 $24,780 $6,846 $4,007
Total assets........................... 23,897 22,423 29,361 10,321 8,882
Long-term debt,
excluding current maturities.......... 11,493 10 39 93 80
Shareholders' equity................... 8,744 19,800 27,597 8,648 5,684
</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. 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 Note 2 of Notes
to Consolidated Financial Statements. 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. This sale enables
Possis to focus its human and financial resources exclusively on its other
products, which are currently in clinical trials and in early stages of
commercialization.
Over the past several 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
calendar 1994 and 1995 common stock offerings and the $12.0 million from the
issuance of 5% convertible subordinated debentures in 1998, has been used to
fund the Company's operations, including research and development related to its
products. Possis does not expect to become profitable unless it achieves
significant sales in the United States and its products receive additional
United States Food and Drug Agency ("FDA") marketing approvals. There can be no
assurance that significant sales or additional marketing approvals will occur.
Results of Operations
Fiscal Years ended July 31, 1998, 1997 and 1996
Total revenue increased 27% and 201% in fiscal 1998 and 1997, respectively,
compared to prior years. The main factor in the product sales increase in fiscal
1998 and 1997 was the December 1996 FDA clearance to commence U.S. marketing of
the AngioJet(R) Rheolytic(TM) Thrombectomy System, with labeling claims for
removal of blood clots from grafts used by patients on kidney dialysis. U.S.
AngioJet System product revenue was $6,013,000 and $2,633,000 for fiscal 1998
and 1997, respectively. The fiscal 1998 U.S. product revenue increased by 128%
over fiscal 1997.
<PAGE>
Since the U.S. market introduction of the AngioJet System, the Company has
listed its AngioJet System drive unit, considered capital equipment, at $80,000
to hospitals. Despite employing a variety of flexible drive unit acquisition
programs including outright purchase, rental, lease and fee-per-procedure, the
Company sold only 12 drive units to U.S. hospitals through March 31, 1998. In
April 1998, the AngioJet System drive unit list price was reduced to $25,000
after a successful test of the lower price in two of the Company's 15 sales
territories. A lower drive unit sales price is intended to improve the
competitive position of the AngioJet System, facilitate evaluation of the
technology, ease sale closure on units currently under evaluation and provide
added time for the Company's direct sales force to encourage use of the systems
currently in the field. Since the lowering of the retail price to $25,000 in
April 1998 there have been 19 drive units sold to U.S. hospitals versus 12 drive
units in the previous sixteen months. The purchasing cycle for the AngioJet
System drive unit, the Company believes, will vary from purchasing the drive
unit with no evaluation to an evaluation period up to twelve months depending on
the customer's budget cycle.
In December 1997, the Company received approval to commence a clinical
study of the AngioJet System for use in the treatment of stroke caused by
blockage of the carotid arteries, the main vessels supplying blood to the brain.
The Company believes that the treatment of stroke is a significant marketing
opportunity for the AngioJet System. In May 1998, the Company introduced its
AV60 AngioJet Catheter. The AV60 Catheter has been designed specifically to more
effectively and efficiently remove blood clots from dialysis access grafts - the
indication for use for which Possis received FDA marketing approval in December
1996. In September 1998, Possis submitted to the FDA a pre-market approval
("PMA") application seeking approval to market its AngioJet System to remove
blood clots from coronary blood vessels. The FDA targets completion of its
review and a response to the Company within 180 days. However, recent actual
average elapsed time from Company submission to FDA approval is 14 months. The
PMA presents the results of a 349 patient randomized trial comparing AngioJet
System treatment to intracoronary infusion of the blood clot-dissolving drug
urokinase for patients with demonstrated clot in native coronary arteries and
saphenous vein bypass grafts. The randomized trial showed that AngioJet System
treatment had significantly better outcomes than the urokinase treatment for
procedure success and device success. AngioJet System treatment also had lower
in-hospital major cardiac complications, including fewer bleeding complications
and vascular complications. Also, the results of a cost-effectiveness trial run
concurrently with the coronary AngioJet trials show that the AngioJet System
treatment costs are on average significantly lower than those associated with
the use of urokinase. The Company believes that the treatment of blood clots in
coronary vessels is a significant marketing opportunity for the AngioJet System.
The Company expects the U.S. AngioJet System sales will grow primarily through
the addition of sales people, the completion of clinical trials designed to
yield additional FDA label-approved product uses, the publication of clinical
performance and cost effectiveness data, and the introduction of additional
catheter designs.
Foreign sales of the AngioJet System during fiscal 1998, 1997 and 1996 were
$351,000, $806,000 and $919,000, respectively. The Company's German AngioJet
System distributor was terminated in February 1997 which impacted fiscal 1998
and 1997 foreign sales. The Company is evaluating its European AngioJet System
distribution options. Actions the Company is taking to improve AngioJet System
sales in Europe include conducting European cost effectiveness studies, a
carotid artery study in Germany, a deep vein thrombosis study in Italy and
developing European physician advocates for the AngioJet System. In Japan, the
coronary AngioJet System clinical study enrollment was completed in April 1998
and a regulatory filing with the Japanese Ministry of Health and Welfare is
planned in 1998.
<PAGE>
During fiscal 1998, 1997 and 1996, sales of Perma-Flow(R) Coronary Bypass
Graft were $105,000, $58,000 and $111,000, respectively. In March 1996, the
Company entered into a Distribution Agreement with Baxter Healthcare Corporation
("Baxter"). This Agreement granted Baxter exclusive worldwide distribution
rights to the Perma-Flow Coronary Bypass Graft for a three-year term. In April
1998, this Distribution Agreement was modified with Baxter retaining
non-exclusive distribution rights outside the United States but having no
distribution rights in the United States for the remaining term of the
Distribution Agreement. In April 1998, the Company received Humanitarian Device
Exemption ("HDE") approval from the FDA, clearing the way for U.S. marketing of
the Perma-Flow Coronary Bypass Graft for patients who require coronary bypass
surgery but who have inadequate blood vessels of their own for use in the
surgery.
During fiscal 1997 and 1996, sales of Perma-Seal(R) Dialysis Access Graft
were $124,000 and $163,000, respectively. There were no sales in fiscal 1998.
The decrease is due to the termination of the Company's worldwide Perma-Seal
Dialysis Access Graft distributor in January 1997. In September 1998 the Company
received FDA marketing approval for its Perma-Seal Graft.
In January 1998, the Company engaged Salomon Smith Barney to assist in the
development and implementation of a strategic plan designed to maximize the
value of the Company's vascular graft business. The Company expects to make an
announcement regarding this project within the next several weeks.
Sales agreement and other revenue includes $200,000 per year for fiscal
1997 and 1996 from Baxter Healthcare Corporation paid to the Company under a
supply and distribution agreement for the Perma-Flow Coronary Bypass Graft. In
addition, fiscal 1997 sales agreement and other revenue includes $1,799,000 in
cash and returned unused product due to the termination of the Company's
Perma-Seal Graft supply and distribution agreement. The Company received
$1,000,000 through July 31, 1996 from its Perma-Seal Graft distributor. See Note
9 of Notes to Consolidated Financial Statements.
The Company is planning for continued growth in product sales for fiscal
1999 and beyond and believes that for the next several years most of this growth
will come from AngioJet System sales in the U.S. marketplace.
Cost of medical products increased 17% in fiscal 1998 and decreased 6% in
fiscal 1997, compared to prior years. Production expenses relating to vascular
grafts were $304,000, $299,000 and $1,555,000 for fiscal years 1998, 1997 and
1996, respectively. During most of fiscal 1998 and 1997, the Company worked to
validate the vascular graft production processes and was not producing graft
products. The cost of product and process validation is reported as research and
development expense. AngioJet System production costs for fiscal 1998, 1997 and
1996 were $5,491,000, $4,636,000 and $3,701,000, respectively. The increase is
primarily due to significant growth in AngioJet System product sales. Medical
product gross margins improved by $2,443,000 and $1,980,000 in fiscal 1998 and
1997, respectively, compared to prior years. The Company believes that
manufacturing costs per unit will be reduced as product sales and related
production volumes grow and as identified product and process improvements are
made. In April 1997, the Company received full ISO 9001 quality system
certification. ISO Certification is issued by the International Standards
Organization and incorporates standards of quality and excellence recognized
worldwide in design, development, production, installation and service.
<PAGE>
Selling, general and administrative expenses increased $3,010,000 and
$1,494,000 in fiscal 1998 and 1997, respectively, as compared to prior periods.
The primary factor in fiscal 1998 and 1997 are increased sales and marketing
expenses related to the establishment of a direct sales organization to sell the
AngioJet System and expenses of marketing the product in the United States.
Based upon early physician interest, the Company has grown the U.S. AngioJet
System sales and marketing organization from eight employees in January 1997 to
36 employees in July 1998. The Company plans on increasing its sales and
marketing expenditures in fiscal 1999 in order to maintain its existing direct
U.S. sales force at its present level and to expand its marketing efforts.
Subsequent to the AngioJet System receiving FDA approval for coronary use, the
Company plans to increase the direct U.S. sales force to meet the expected
demand for the Company's AngioJet System.
Research and development expenses increased 5% and 57% in fiscal 1998 and
1997, respectively, as compared to prior periods. The fiscal 1998 increase was
due primarily to increased expenses relating to the Coronary AngioJet System
clinical trial and the development of new AngioJet System thrombectomy
applications. This increase was offset by a reduction of expenses relating to
the Perma-Flow Graft and Perma-Seal Graft clinical trials and development
expenses. The fiscal 1997 increases were due primarily to vascular graft product
and production process validation expenses and increased expenses of conducting
the Perma-Flow Graft and Coronary AngioJet System clinical trials. The Company
believes that research and development expenses will continue to increase as it
completes the development of its current products, invests in development of new
AngioJet System thrombectomy applications and new AngioJet technology-based
products.
Interest income decreased in fiscal 1998 and 1997 from the previous years
due to the use of the Company's cash reserves to fund the Company's operations.
The $12,000,000 received from the issuance of 5% convertible subordinated
debentures had a modest impact on interest income in fiscal 1998 due to
receiving it in July 1998.
The Company recorded the final income relating to the sale of its Technical
Service division during the first quarter of fiscal 1997.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities totaled
approximately $13.8 million at July 31, 1998, a decrease of $1.0 million from
the prior year. The primary factors in the reduction of the Company's cash
position was the net loss of $12.0 million and the issuance of $12.0 million of
5% convertible subordinated debentures in July 1998.
<PAGE>
During fiscal 1998, cash used in operating activities was $11.8 million,
which resulted primarily from an $12.0 million net loss and a $1.8 million
increase in receivables, inventories and other current assets, offset by
depreciation, amortization, stock compensation and an increase in trade accounts
payable and accrued liabilities totaling $2.0 million. Cash provided by
investing activities was $10.4 million, which resulted from the net proceeds
from the sale/maturity of marketable securities of $11.0 million, offset by
additions to plant and equipment of $614,000. Net cash provided by financing
activities was $11.4 million, which resulted from the net proceeds from the
issuance of 5% convertible subordinated debentures of $11.1 million, proceeds
from long-term debt of $175,000 and the exercise of stock options of $142,000.
During fiscal 1997, cash used in operating activities was $8.6 million,
which resulted primarily from an $8.5 million net loss and a $1.7 million
increase in receivables, inventories and other current assets, offset by
depreciation, amortization of goodwill, stock compensation and an increase in
trade accounts payable and accrued liabilities totaling $1.6 million. Cash
provided by investing activities was $4.4 million, which resulted from the net
proceeds from the sale/maturity of marketable securities of $5.0 million, offset
by additions to plant and equipment of $613,000. Net cash provided by financing
activities was $332,000, which resulted primarily from the exercise of stock
options of $405,000.
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 of 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 royalty payments in connection with the sale of
ATS. See Note 2 of Notes to Consolidated Financial Statements. Net cash provided
by financing activities resulted primarily from the Company's October 1996
common stock offering netting approximately $26.7 million.
The Company believes that product sales of the AngioJet System, primarily
in the U.S., will yield meaningful sales growth going forward. Concurrently,
sales and marketing expenditures are planned to increase with the sales growth.
Research and development expenditures are expected to grow as well. The Company
expects to report a loss for fiscal 1999. In addition, the Company expects that
increasing working capital investments in trade receivables and inventory will
be required to support growing product sales.
The Company is currently evaluating its capital needs and the options
available for raising cash, including monies that may be forthcoming from the
Company's graft business project. Additional capital will likely be sought in
fiscal 1999.
<PAGE>
Year 2000 ("Y2K")
The Company established a team in May 1998 to assess and address the
possible exposures related to the Y2K issue. The areas under investigation
include product issues, business computer systems, production equipment, vendor
readiness and contingency plans. Products currently sold by the Company are Y2K
compliant. The Company does not use internally developed computer software and
is therefore not anticipating major reprogramming efforts. The Company's primary
financial and operational system has been assessed and is certified "Y2K
Compliant." There are several personal productivity applications that are not
currently Y2K compliant. The Company expects them to be compliant by
mid-calendar 1999. Various personal computers are not currently Y2K compliant.
These computers are planned to be replaced as part of the Company's technology
update strategy. None of these replacements have been accelerated and they have
no material effect on the Company consolidated financial statements. Equipment
used for production or quality control does not use dates to control operations.
The Company mailed questionnaires to each of its significant vendors in
October 1998 to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Y2K issues. This assessment will
be completed by the end of calendar 1998. In addition, the Company has
investigated its utility providers and believes they will be Y2K compliant. The
Company anticipates developing a contingency plan once it has completed its
assessment of significant vendor compliance which will be no later than the
first quarter of calendar 1999. A contingency plan will be developed to minimize
the Company's exposure to work slowdowns or business disruptions. In the event
any vendors are not Y2K compliant the Company will seek new vendors to meet its
production needs.
The Company has budgeted approximately $50,000 for expenses directly
related to Y2K identification and remediation of internal systems. It has also
purchased continuation of business and director's liability related to the Y2K
issue.
Although the Company does not at this time expect a significant impact on
its consolidated financial position, results of operations and cash flows, our
internal review has not been completed and there can be no assurance that the
systems of other companies or the systems of the Company itself will be
converted on a timely basis and will not have a corresponding adverse effect on
the Company.
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
required to be adopted for the fiscal year beginning August 1, 1998. At that
time, the Company will be required to disclose certain financial and descriptive
information about its operating segments as redefined by SFAS No. 131. The
Company is in the process of assessing the impact of SFAS No. 131 on its
footnote disclosures.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and certain other sections of this 10-K, including the
discussion regarding Year 2000 compliance, contain 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, changes in the Company's marketing
strategies, the Company's ability to establish product distribution channels,
changes in manufacturing methods, market acceptance of the AngioJet System,
changes in the levels of capital expenditures by hospitals, the levels of sales
of the Company's products that can be achieved, ability to raise additional
capital and other risks set forth in the cautionary statements included in
Exhibit 99 to the Company's report on Form 10-Q dated April 30, 1998, filed with
the Securities and Exchange Commission.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
The Company invests its excess cash in money market mutual funds. The
market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of fiscal 1998, the amount of currency held in foreign
exchange was approximately $1,000 USD. The market risk on the Compan's foreign
subsidiary operations is minimal.
At July 31, 1998, all of the Compan's outstanding long-term debt carry
interest at a fixed rate. There is no material market risk relating to the
Compan's long-term debt. The Company's 5% convertible subordinated debentures,
issued July 15, 1998, carry a fixed interest rate of 5%; are due July 15, 2004;
and are convertible into common stock at a price calculated per predetermined
formulas based on the market price of the Company's common stock over a
specified period of time.
<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, 1998 and 1997 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,
1998. Our audits also included the financial statement schedule listed in the
Index at Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audit 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1998, 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.
Deloitte & Touche LLP
Minneapolis, Minnesota
August 28, 1998
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1)............................ $13,841,793 $ 3,849,194
Marketable securities (Note 1)................................ -- 10,964,170
Receivables:
Trade (less allowance for doubtful accounts and returns:
$150,000 and $80,000, respectively)..................... 1,144,472 878,893
Other....................................................... 3,091 120,558
Inventories (Note 1):
Parts....................................................... 1,085,236 1,242,580
Work-in-process............................................. 1,740,834 940,918
Finished goods.............................................. 1,913,084 1,191,870
Prepaid expenses and other assets............................. 313,158 264,117
Total current assets................................... 20,041,668 19,452,300
PROPERTY (Notes 1 and 3):
Leasehold improvements........................................ 1,210,984 1,166,306
Machinery and equipment....................................... 3,720,772 3,317,391
Assets in construction........................................ 113,094 51,753
5,044,850 4,535,450
Less accumulated depreciation................................. 2,343,691 1,906,500
Property - net........................................... 2,701,159 2,628,950
OTHER ASSETS:
Deferred debt issue costs (Note 1)............................ 884,105 --
Goodwill (Note 1)............................................. 269,922 341,922
TOTAL ASSETS...................................................... $23,896,854 $22,423,172
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable............................................. $1,245,552 $ 648,502
Accrued salaries, wages, and commissions........................... 1,060,687 762,587
Current portion of long-term debt (Note 3)......................... 97,713 28,356
Clinical trials accrual............................................ 335,067 879,166
Litigation settlement.............................................. 200,000 --
Other liabilities.................................................. 504,624 294,002
Total current liabilities.............................................. 3,443,643 2,612,613
LONG-TERM DEBT (Notes 1 and 3)......................................... 11,492,661 10,213
OTHER LIABILITIES (Note 5)............................................ 216,200 --
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 5):
Common stock-authorized 100,000,000 shares,
of $ .40 par value each; issued and outstanding,
12,218,622 and 12,121,312 shares, respectively................. 4,887,449 4,848,525
Additional paid-in capital......................................... 42,476,257 41,118,611
Unearned compensation.............................................. (489,060) --
Unrealized loss on investments..................................... -- (5,836)
Retained deficit................................................... (38,130,296) (26,160,954)
Total shareholders' equity................................... 8,744,350 19,800,346
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $23,896,854 $22,423,172
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
<TABLE>
<CAPTION>
1998 1997 1996
REVENUES:
<S> <C> <C> <C>
Medical products sales (Note 8).............................. $6,117,850 $2,814,646 $1,156,170
Sales agreement and other (Note 9)........................... -- 2,019,431 450,000
Total revenues........................................... 6,117,850 4,834,077 1,606,170
COST OF SALES AND OTHER EXPENSES:
Cost of medical products .................................... 5,794,901 4,934,887 5,256,179
Selling, general and administrative.......................... 7,555,616 4,545,937 3,052,422
Research and development .................................... 5,193,787 4,964,239 3,167,013
Interest..................................................... 40,599 5,422 14,296
Total cost of sales and other expenses................... 18,584,903 14,450,485 11,489,910
Operating loss.................................................... (12,467,053) (9,616,408) (9,883,740)
Interest income................................................... 489,610 1,001,578 1,369,453
Gain (loss) on sale of investments............................... 8,101 7,109 (64,007)
Loss from continuing operations................................... (11,969,342) (8,607,721) (8,578,294)
Income from discontinued operations - net (Note 2)................ -- 111,539 405,416
Net loss ......................................................... $(11,969,342) $(8,496,182) $(8,172,878)
Weighted average number
of common shares outstanding - basic and diluted............. 12,191,477 12,099,217 11,611,070
Earnings (loss) per common share - basic and diluted:
Continuing operations .................................... $(.98) $(.71) $(.74)
Discontinued operations .................................... -- .01 .04
Net loss ......................................................... $(.98) $(.70) $(.70)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ......................................................... $(11,969,342) $(8,496,182) $(8,172,878)
Adjustments to reconcile net loss to net
cash used in operating activities:
(Gain) loss on sale of marketable securities...................... (8,101) (7,109) 64,007
Loss on disposal of assets........................................ 15,237 4,932 24,239
Depreciation...................................................... 774,027 473,816 395,132
Amortization...................................................... 84,832 72,000 72,000
Stock compensation................................................ 430,046 155,083 505,432
Stock options issued to non-employees............................. 11,648 -- --
Increase in receivables........................................... (148,112) (391,314) (741,886)
Increase in inventories........................................... (1,613,285) (1,286,860) (1,109,773)
Increase in other current assets.................................. (57,920) (56,961) (19,968)
Increase in trade accounts payable................................ 597,052 330,597 158,540
Increase (decrease) in accrued and other current liabilities...... 113,110 601,686 (4,225)
Net cash used in operating activities........................... (11,770,808) (8,600,312) (8,829,380)
INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations..................... -- -- 589,441
Additions to plant and equipment.................................. (614,074) (612,641) (1,453,379)
Proceeds from sale of fixed assets................................ 2,100 20,954 10,945
Purchase of marketable securities................................. (13,612) (1,990,718) (17,992,853)
Proceeds from sale/maturity of marketable securities.............. 10,991,719 7,011,640 3,215,681
Net cash provided by (used in)
investing activities........................................... 10,366,133 4,429,235 (15,630,165)
FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt.................... 12,175,000 -- 19,000
Repayment of long-term debt....................................... (28,356) (73,386) (82,925)
Proceeds from issuance of stock and exercise
of options and warrants......................................... 142,406 405,150 26,761,920
Deferred debt issue costs......................................... (891,776) -- --
Net cash provided by financing activities....................... 11,397,274 331,764 26,697,995
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................................. 9,992,599 (3,839,313) 2,238,450
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR........................................................... 3,849,194 7,688,507 5,450,057
CASH AND CASH EQUIVALENTS AT END OF YEAR............................ $13,841,793 $3,849,194 $7,688,507
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest............................................$ 1,262 $ 5,422 $ 14,296
Inventory transferred to fixed assets............................. 16,288 32,279 19,983
Issuance of restricted stock...................................... 919,106 -- --
Accrued payroll tax related to restricted stock................... 325,397 -- --
Warrants issued related to convertible debt....................... 600,000 -- --
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Unrealized
Common Stock Additional Stock Loss on
Number of Paid-in Compen- Invest- Retained
Shares Amount Capital sation ments Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
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
Employee stock purchase
plan................... 8,537 3,415 123,616 -- -- -- 127,031
Stock options issued to
directors (Note 5)...... -- -- 52,393 -- -- -- 52,393
Stock options exercised..... 68,109 27,243 276,391 -- -- -- 303,634
Stock retired.............. (7,978) (3,191) (22,324) -- -- -- (25,515)
.Unearned stock compensation
amortization............ -- -- -- 102,690 -- -- 102,690
Unrealized gain on investments -- -- -- -- 139,440 -- 139,440
Net loss.................... -- -- -- -- -- (8,496,182) (8,496,182)
BALANCE AT JULY 31, 1997........ 12,121,312 4,848,525 41,118,611 -- (5,836) (26,160,954) 19,800,346
Employee stock purchase
plan..................... 7,811 3,124 69,909 -- -- -- 73,033
Stock options issued to
directors and physicians
(Note 5)................. -- -- 60,455 -- -- -- 60,455
Stock options exercised..... 23,940 9,576 59,797 -- -- -- 69,373
Stock grants................ 65,559 26,224 567,485 (919,106) -- -- (325,397)
Unearned stock compensation
amortization.............. -- -- -- 430,046 -- -- 430,046
Warrants issued............. -- -- 600,000 -- -- -- 600,000
Unrealized gain on
investments............... -- -- -- -- 5,836 -- 5,836
Net loss.................... -- -- -- -- -- (11,969,342) (11,969,342)
BALANCE AT JULY 31, 1998........ 12,218,622 $4,887,449 $42,476,257 $(489,060)$ -- $(38,130,296) $ 8,744,350
<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 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) and Possis
Medical Europe B.V., after elimination of intercompany accounts and
transactions.
Possis Medical, Inc. is a developer, manufacturer and marketer of medical
devices. The Company was incorporated in 1956 and has operated several
businesses over the last 42 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.
In December 1996, Possis Medical received its first AngioJet(R) Rheolytic(TM)
Thrombectomy System U.S. marketing approval.
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 Administration ("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 the estimated useful lives of
the assets at the following annual rates:
Leasehold improvements................................ 10%
Machinery and equipment............................... 10-33%
Deferred Debt Issue Costs Deferred debt issue costs are being amortized on
a straight-line basis over six years, based on the term of the 5% convertible
subordinated debentures due 2004. Accumulated amortization at July 31, 1998 was
$7,671.
Original Issue Discount Original issue discount is being amortized on a
straight-line basis over six years, based on the term of the 5% convertible
subordinated debentures due 2004.
<PAGE>
The original amount of $600,000 was the value associated with the
detachable stock warrants issued in conjunction with the convertible
subordinated debentures. Accumulated amortization at July 31, 1998 was $5,161.
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(TM) Graft acquired in 1988. Accumulated amortization at July 31, 1998
and 1997 was $717,500 and $645,500, 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.
Revenue Recognition Revenue associated with medical products sales is
recognized when products are shipped. 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 has adopted SFAS No. 128, "Earnings
per Share," effective December 31, 1997. SFAS No. 128 requires the Company to
report both basic and diluted earnings per share (EPS). The change in
methodology of the basic and diluted EPS calculations had no effect on the
Company's EPS as previously reported. Loss per share for 1998, 1997 and 1996 is
computed by dividing the net loss by the weighted average number of common
shares outstanding. Warrants, options, and convertible debentures representing
2,511,762, 1,359,344 and 1,046,187 shares of common stock at July 31, 1998, 1997
and 1996, respectively, have been excluded from the computations because the
effect is antidilutive.
Cash Equivalents The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
Marketable Securities All Company securities as of July 31, 1997 are
classified as available-for-sale and consisted primarily of U.S. government
securities. These investments are reported at fair value with a net unrealized
loss of $5,836 included in shareholders' equity as of July 31, 1997. During 1998
and 1997, the Company sold available-for-sale securities aggregating
approximately $5,992,000 and $1,012,000, realizing a gain of $8,101 and $7,109
in 1998 and 1997, respectively.
<PAGE>
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,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss is recognized, based on the difference between
the carrying value and the discounted cash flows of an asset, when the estimated
future undiscounted cash flows from the asset are less than the carrying value
of the asset. The adoption of SFAS No. 121 had no material effect on the
consolidated financial statements.
Segment Reporting In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is required to be adopted for the fiscal year beginning
August 1, 1998. At that time, the Company will be required to disclose certain
financial and descriptive information about its operating segments as redefined
by SFAS No. 131. The Company is in the process of assessing the impact of SFAS
No. 131 on its footnote disclosures.
2. DISCONTINUED OPERATIONS
Technical Services Division 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 received a percentage of ATS's annual revenues in excess of a specified
amount through September 1996. 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 the now complete agreement was 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, 1997, all
amounts related to the Company's sale of ATS were paid in full.
Income from Discontinued Operations Operating results of the Technical
Services division were as follows for the years ended July 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales ............................... $ -- $ --
Income from operations................ $ -- $ 225
Amortization of not-to-compete
agreement.......................... 41,768 154,647
Percentage of ATS's revenues.......... 69,771 250,544
Income from discontinued operations .. $111,539 $405,416
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
3. LONG-TERM DEBT
Long-term debt at July 31, 1998 and 1997 is as follows: 1998 1997
Unsecured convertible subordinated registered debentures due July 2004,
face value of $12,000,000, net of unamortized original issue discount
of $594,839 as of July 31, 1998, interest at 5% due the earlier of July
2004 or conversion.............................................................. $11,405,161 $ --
Notes payable, interest at 9.75%-10.15%, .principal and interest
payable monthly, final payments due between November 1998 and
December 1998, collateralized by the Company's equipment........................ 4,513 25,269
Noninterest bearing note payable, principal payable in 10 equal
quarterly payments beginning January 1997, final payment due
April 1999, unsecured........................................................... 5,700 13,300
Note payable, interest at 4.5%, interest and principal due June
1999 and June 2001, collateralized by the Company's equipment................... 175,000 --
11,590,374 38,569
Less current maturities.......................................................... (97,713) (28,356)
$11,492,661 $10,213
</TABLE>
In July 1998, the Company received $12,000,000 from the issuance of 5%
convertible subordinated debentures due 2004 and 110,640 warrants valued at
$600,000. The debentures are convertible into common stock at a price equal to
$14.79 for a period of six months; thereafter, the conversion price and the
maximum number of shares available for conversion will be calculated per
predetermined formulas based on the market price of Company's common stock over
a specified period of time. The warrants are exercisable for common stock at
$15.58 per share.
4. INCOME TAXES
At July 31, 1998, the Company has net operating loss carryforwards of
approximately $34,167,000 for federal tax purposes which expire in 2003 through
2013 and $11,053,000 for Minnesota tax purposes which expire in 2003 through
2013. In addition, at July 31, 1998 the Company has approximately $1,909,000 and
$455,000 in federal and state tax credits, respectively, substantially all of
which are research and development tax credits, which expire from 2000 through
2013, and a $65,182 AMT credit which does not expire.
<PAGE>
Deferred tax assets and liabilities as of July 31, 1998 and 1997 are
described in the table below. The Company has not recorded any net deferred tax
assets due to the uncertainty of realizing such assets:
<TABLE>
1998 1997
<S> <C> <C>
Current assets (liabilities):
Allowance for doubtful accounts............. $ 24,000 $ 28,000
Inventory................................... 150,000 284,000
Accrued vacation............................ 44,000 34,000
Other ..................................... 150,000 57,000
368,000 403,000
Valuation allowance......................... (368,000) (403,000)
Net ..................................... $ -- $ --
Long-term assets:
Net operating losses........................ $12,700,000 $ 8,551,000
Amortization of patents..................... 239,000 187,000
Tax credits................................. 1,975,000 1,687,000
Depreciation................................ (192,000) (133,000)
14,722,000 10,292,000
Valuation allowance......................... (14,722,000) (10,292,000)
Net ..................................... $ -- $ --
</TABLE>
The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1998, 1997 and 1996 as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Tax benefit on loss from
continuing operations computed at
statutory rate of 34%............... $(4,069,000) $(2,889,000) $(2,778,000)
Decrease in tax benefit due to
nonrecognizable benefits of net
operating loss carryforwards
and others.......................... 4,069,000 2,889,000 2,778,000
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. In 1997, the Company amended the 1992 Stock Compensation
Plan by increasing the number of shares issuable under the Plan each year from
2% to 3% of the total number of shares outstanding at July 31 of the prior
fiscal year. At July 31, 1998, there were 1,443,571 shares reserved for
outstanding options and 278,956 shares available for granting of options 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 1998, 1997 and 1996, the Company granted 8,874, 5,207 and 4,760
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, 1998 follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Shares under option at
beginning of year.................. 1,212,944 899,787 728,102
Options granted - 1992 plan.......... 302,674 460,557 254,660
Options granted - Non plan........... -- -- 55,000
Options exercised.................... (23,940) (68,109) (123,800)
Options canceled..................... (48,107) (79,291) (14,175)
Shares under option at end of year... 1,443,571 1,212,944 899,787
Shares exercisable at end of year.... 691,209 581,238 348,204
Exercise price of options granted.... $5.50-16.69 $10.62-20.45 $8.75-17.50
Exercise price of options exercised.. $1.00-5.75 $1.00-14.625 $2.75-14.625
Market price of options exercised.... $13.13-19.25 $16.75-19.625 $13.75-21.25
Aggregate market value of options
exercised.......................... $424,396 $1,241,296 $2,245,906
</TABLE>
<PAGE>
Stock option weighted average exercise prices during 1998 and 1997 are
summarized below:
<TABLE>
1998 1997
<S> <C> <C>
Outstanding at beginning of year....... $11.63 $ 9.15
Granted................................ 13.55 15.81
Exercised.............................. 4.20 4.46
Canceled............................... 13.79 12.40
Outstanding at end of year............. 2.10 11.63
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable options as of July 31, 1998:
<TABLE>
<CAPTION>
<S>
Weighted
Average
Range of Remaining Weighted- Weighted
Exercise Shares Contractual Life Average Shares Average
Price Outstanding in Years Exercise Price Exercisable Exercise Price
<C> <C> <C> <C> <C> <C>
$1 - $6 231,801 3.75 $ 4.50 222,603 $ 4.64
$6 - $12 318,117 5.5 9.00 261,967 8.59
$12 - $17 678,803 8.2 14.21 143,926 14.29
$17 - $21 214,850 8.2 18.22 62,713 18.21
</TABLE>
In 1993, the Company granted 37,000 shares of restricted stock to employees
under the terms of the 1992 Plan, which vested 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 would 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 vesting December 2, 1993, unvested shares were
forfeited. Unearned compensation of $342,250 was recorded at the date of grant
and was recognized over the vesting period. In 1996, the Company granted 18,000
shares of restricted stock to employees which vested 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
believed that the employees would elect to receive fewer shares in lieu of
paying the withholding taxes. Unearned compensation of $265,500 was recorded at
the date of grant and was recognized over the vesting period.
In fiscal 1998, the Company granted 65,559 shares of restricted stock to
employees under the terms of the 1992 Plan, which vested 21,853 shares each year
in fiscal years 1999, 2000 and 2001. Approximately $325,000 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, unvested shares are forfeited.
Unearned compensation of $919,106 was recorded at the date of grant and is being
recognized over the vesting period.
In fiscal 1998, 1997 and 1996, total compensation expense of $430,046,
$102,690 and $213,197, respectively, was recognized on these restricted stock
grants.
<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. Selling, general
and administrative expense of approximately $251,000 was recorded in connection
with these transactions.
Effective August 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS 123, the Company has elected to
continue following the guidance of APB No. 25 for measurement and recognition of
stock-based transactions with employees. No compensation cost has been
recognized for stock options issued under the 1992 Plan because the exercise
price for all options granted was at least equal to the fair value of the common
stock at the date of grant except as noted previously in this note. If
compensation cost for the Company's stock option and employee purchase plans had
been determined based on the fair value at the grant dates for grants during
1998, 1997 and 1996, consistent with the method provided in SFAS No. 123, the
Company's net loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net Loss:
As reported.................... $(11,969,342) $(8,496,182) $(8,172,878)
Pro forma...................... (14,122,375) (9,752,401) (8,617,407)
Loss per Share-basic and diluted:
As reported.................... $ (.98) $ (.70) $ (.70)
Pro forma...................... (1.16) (.81) (.74)
</TABLE>
The fair value of options granted under the various option plans during
1998 and 1997 was estimated on the date of grant using the Black-Sholes
option-pricing model with the following weighted average assumptions and
results:
<TABLE>
1998 1997
<C> <S> <S>
Dividend yield............................... None None
Expected volatility.......................... 47% 40%
Risk-free interest rate...................... 6.5% 6.5%
Expected life of option...................... 120 mo. 120 mo.
Fair value of options on grant date.......... $2,795,547 $4,353,803
</TABLE>
Stock Warrants Stock purchase warrants held by unrelated parties
representing the right to purchase 26,400 shares of the Company's common stock
at $8.52 a share were outstanding
as of July 31, 1998. 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 any sixty consecutive calendar days.
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, 1997, all
such warrants were outstanding.
In July 1998, the Company issued to various investors 110,640 stock
purchase warrants in conjunction with a July 1998 private placement of
convertible debentures (See Note 3). These warrants expire on July 15, 2002 and
are exercisable into common stock at $15.58 per share.
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 7,811 shares in 1998,
8,537 shares in 1997 and 17,194 shares in 1996 under this plan.
<PAGE>
6. 401 K PLAN
The Company has an employees' savings and profit sharing plan for all
qualified employees who have completed six months 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, 1998, 1997 and 1996 were $154,863, $97,765 and $90,114,
respectively.
7. COMMITMENTS AND CONTINGENCIES
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, 1998. Rental expense charged to operations was $241,674 in fiscal 1998,
$237,742 in fiscal 1997, and $329,340 in fiscal 1996. The future annual rentals
on this operating lease are approximately $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.
The Company is a defendant in various lawsuits relating to business, some
of which involve claims for unspecified amounts. Although the ultimate outcome
of these matters cannot be predicted with certainty, management believes that
the outcome will not have a material adverse effect on the financial statements
of the Company.
8. 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 5% of 1998, 29% of 1997, and 80% of 1996's medical product sales
were to foreign customers. In 1998 and 1997 there were no individual customers
with sales exceeding 10%. 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.
9. 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 granted 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 had received $1,000,000. In January 1997, the Company terminated the
Agreement with Bard. Upon termination, the Company received $1,750,000 in cash
and approximately $49,000 in returned unused product.
On March 15, 1996 the Company entered into a Distribution Agreement with
Baxter Healthcare Corporation ("Baxter"). This Agreement granted Baxter
exclusive worldwide distribution rights to the Possis Perma-Flow Coronary Bypass
Graft for a three-year term. Under this Agreement, through July 31, 1997, the
Company received $400,000 and was scheduled to receive up to an additional
$200,000, on the second anniversary date of agreement signing, as long as the
agreement was still in effect. In April 1998, this Distribution Agreement was
modified with Baxter retaining non-exclusive distribution rights outside of the
United States but has no distribution rights in the United States for the
remaining term of the Distribution Agreement. In conjunction with the
modification, the Company waived the $200,000 second anniversary payment.
<PAGE>
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure:
During fiscal 1997 and 1998, 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" and"Compliance with
Section 16(a) of the Exchange Act" 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, 1998 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 "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 Balance Sheets, July 31, 1998 and 1997
Consolidated Statements of Operations for each of the three years in the
period ended July 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the
period ended July 31, 1998.
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended July 31, 1998.
Notes to Consolidated Financial Statements
2. Schedules
The following financial statement schedules are submitted herewith:
Consent of independent certified public accountants.
SCHEDULE II - Valuation Accounts
Other schedules are omitted because they are not required or are not
applicableor 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 three pages.
<PAGE>
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as amended
July 31, 1994 and restated to date
3.2 S-2 Amendment No.1 Bylaws as amended and restated
August 9, 1994 to date
4.1 8-A December 13, 1996 Rights agreement, dated December 12,
1996, between the Company and
Norwest Bank Minnesota N.A., as
rights agent
4.2 S-2 Amendment No. 1 Form of Warrant to John G. Kinnard
August 9, 1994 and Company, Incorporated, included in
underwriting agreement entered into
between the Company and John G.
Kinnard and Company
4.3 8-K July 24, 1998 Convertible Debenture Purchase
Agreement dated July 14, 1998
4.4 8-K July 24, 1998 Form of Series A 5% Convertible
Debenture due July 15, 2004,
dated July 14, 1998
4.5 8-K July 24, 1998 Registration Rights Agreement
between the Company and
purchasers of the Convertible Debt
dated July 14, 1998
4.6 8-K July 24, 1998 Form of Redeemable Warrant to
purchasers of the Convertible
Debt dated July 15, 1998
4.7 10-K November 23, 1966 Debenture Agreement with St. Paul
Fire and Marine Company and
Western Life Insurance Company
and form of debenture rates and
warrants
10.1 8-K December 6, 1996 Settlement agreement and mutual
release relating to the termination
of the Perma-Seal supply and
distribution agreement with C.R.Bard,Inc.
<PAGE>
Exhibit Form Date Filed Description
10.2 S-2 Amendment No.1 License agreement with Imperial
August 9, 1994 Chemical Industries Plc., dated
April 15, 1991
10.3 S-2 Amendment No.1 License agreement with the
August 9, 1994 University of Liverpool, dated
May 10, 1990
10.4 S-1 June 30, 1988 Form of indemnification agreement
with officers and directors of
Registrant
* 10.5 S-8 February 7, 1990 1983 Incentive Stock Option Plan as
amended to date
* 10.6 S-1 June 30, 1988 1985 Nonqualified Stock Option
Plan as amended to date
* 10.7 10-K Fiscal year ended Form of incentive stock option
July 31, 1989 agreement for officers
* 10.8 10-K Fiscal year ended Form of stock option agreement for
July 31, 1989 directors
* 10.9 S-8 June 16, 1998 1992 Stock Compensation Plan
* 10.10 10-K Fiscal year ended Form of restricted stock agreement
July 31, 1993 for officers (1992 Plan)
* 10.11 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for officers (1992 Plan)
* 10.12 10-K Fiscal year ended Form of incentive stock option
July 31, 1993 agreement for officers (1992 Plan)
* 10.13 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1992 directors' fees
(1992 Plan)
* 10.14 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1990 directors' fees
* 10.15 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1989 directors' fees
<PAGE>
Exhibit Form Date Filed Description
10.16 10-Q Quarter ended Supply & distribution agreement
January 31, 1995 with Bard Vascular Systems
Division, C.R.Bard, Inc.
10.17 10-Q Quarter ended Lease agreement for corporate
January 31, 1996 headquarters and manufacturing
facility dated December 15, 1995.
10.18 8-K March 28, 1996 Supply and distribution agreement
with Edwards CVS Division, Baxter
Healthcare Corporation
10.19 10-K Fiscal Year ended Addendum to Distributor Agreement
July 31, 1998 with Edwards CVS Division, Baxter
Healthcare Corporation dated
May 1, 1998
21 10-K Fiscal year ended Subsidiaries of registrant
July 31, 1995
23 Consent of independent certified
public accountants
27 Financial data schedule
99 10-Q Quarter ended Investment risk factors
April 30, 1998
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the quarter ended July 31, 1998, the Company filed a report on Form
8-K dated July 14, 1998 reporting under Item 5 that the Company had entered into
the Convertible Debenture Purchase Agreement.
<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 16, 1998
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 16, 1998
Donald C. Wegmiller
/s/ Robert G. Dutcher Director, President and October 16, 1998
Robert G. Dutcher Chief Executive Officer
/s/ Dean Belbas Director October 16, 1998
Dean Belbas
/s/ Seymour J. Mansfield Director October 16, 1998
Seymour J. Mansfield
/s/ Whitney A. McFarlin Director October 16, 1998
Whitney A. McFarlin
<PAGE>
SCHEDULE II
POSSIS MEDICAL, INC.
VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
_____________________________________________________________________________
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
and returns - deducted from trade
receivables in the balance sheet:
Year ended July 31, 1998 $ 80,000 $ 140,000 $ 70,000 $ 150,000
Year ended July 31, 1997 60,000 96,530 76,530 80,000
Year ended July 31, 1996 27,019 50,000 17,019 60,000
Valuation allowance on
deferred tax asset:
Year ended July 31, 1998 $10,695,000 $4,395,000 $ -- $15,090,000
Year ended July 31, 1997 7,657,000 3,038,000 -- 10,695,000
Year ended July 31, 1996 4,898,000 2,759,000 -- 7,657,000
Reserve for inventory
obsolescence:
Year ended July 31, 1998 $ 99,573 $ 87,526 $106,151 $ 80,948
Year ended July 31, 1997 150,000 86,000 136,427 99,573
Year ended July 31, 1996 125,000 38,795 13,795 150,000
</TABLE>
<PAGE>
POSSIS MEDICAL, INC.
FORM 10-K - ITEM 14(a)3
EXHIBIT INDEX
Exhibit
Number Description
23 Consent of independent certified public accountants
27 Financial data schedule
<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, Registration Statement No. 33-56728 on Form
S-8, and Registration Statement No. 333-57289 on Form S-8 of our report, dated
August 28, 1998, appearing in this Annual Report on Form 10-K of Possis Medical,
Inc. for the year ended July
31, 1998.
Deloitte & Touche LLP
Minneapolis, Minnesota
October 15, 1998
<PAGE>
Exhibit 10.19
ADDENDUM TO DISTRIBUTOR AGREEMENT DATED MARCH 15, 1996
BETWEEN POSSIS MEDICAL, INC. AND
BAXTER HEALTHCARE CORPORATION, EDWARDS CVS DIVISION
This Addendum is made effective this first day of May 1998, by and between
Possis Medical, Inc., with offices located at 9055 Evergreen Boulevard
Northwest, Minneapolis, Minnesota 55433 ("PMI"); and Baxter Healthcare
Corporation, Edwards CVS Division, with offices located at 17221 Red Hill
Avenue, Irvine, California 92614 (the "Distributor" or "Baxter").
WITNESSETH
WHEREAS, the above-named parties have performed certain activities pursuant
to a Distributor Agreement dated March 15, 1996 (the "Distributor Agreement"),
and
WHEREAS, the parties desire to revise said Agreement in accordance with
their mutual agreement as to activities and rights that are to be applicable in
the future; and
WHEREAS, said revisions are incorporated into this Addendum to Agreement,
which shall govern the relationship of the parties until March 15, 1999, the
original expiration date of the Distributor Agreement.
NOW, THEREFORE, in consideration of the premises and performance of the
covenants herein contained, it is agreed that:
1. This instrument, together with the Distributor Agreement dated March 15,
1996, contains the entire agreement of the parties relating to the subject
matter hereof and may not be changed, modified or amended, except by writing
signed by both parties.
2. The $200,000.00 payment due from Baxter to PMI on the second anniversary
of execution of the Distributor Agreement, pursuant to Section II(A)(iii) of the
Distributor Agreement, is hereby waived by PMI.
3. The exclusive distribution rights granted to Baxter pursuant to Section
I(A) of the Distributor Agreement are modified such that Baxter shall retain
only non-exclusive distribution rights outside of the United States and shall
have no distribution rights in the United States for the remaining term of the
Distributor Agreement.
4. Section II(B) of the Distributor Agreement is revised such that PMI
shall not be obligated to refund any previously paid installment payments in the
event that it terminates the Agreement pursuant to Section XII(C).
5. Section I(E) of the Distributor Agreement is deleted from the Agreement
in its entirety.
6. The minimum purchase requirements, pursuant to Section VI(A)&(B) of the
Distributor Agreement, are hereby waived.
7. Section XII(H) of the Distributor Agreement is deleted in its entirety.
<PAGE>
8. Within thirty (30) days, or as soon thereafter as is reasonably
feasible, Baxter will provide to PMI the original artwork and the original of
any other materials it generated in connection with the Product Brochure, Case
Study, Advertisement, and Implant Video used to promote the Perma-Flow(R) Graft.
All copies of such materials shall be destroyed by Baxter within thirty (30)
days of the termination of the Distributor Agreement, except that one copy of
each of such materials shall be retained by Baxter for record keeping purposes.
With respect to the Investigators Meeting Proceedings Booklet, Baxter shall
transfer and assign to PMI the copyright to such booklet. Notwithstanding its
receipt and use of these materials, PMI will not use the Baxter trademark on any
of its sales and marketing materials and will not otherwise trade on the Baxter
or Edwards CVS Division name in the promotion of its products. In addition, PMI
will not use such materials in its promotion of the Perma-Flow Graft outside of
the United States until the Distributor Agreement expires or is otherwise
terminated.
9. Section XII(E) of the Distributor Agreement is deleted from the
Agreement in its entirety. Upon any termination of this Agreement, Baxter shall
immediately cease using the name, trademark, service mark, logo or any other
reference of or to PMI and shall, at its expense, surrender and deliver to PMI
within thirty (30) days, all documents, papers, and records which contain
confidential information of PMI, except that one copy of such confidential
documents, papers and records shall be retained by Baxter for record keeping
purposes.
10. In the event that PMI appoints a distributor in Europe prior to the
expiration of the term of the Distributor Agreement, PMI or its European
distributor will purchase Baxter's remaining inventory of Perma-Flow Grafts at
the price Baxter paid to PMI for said Grafts.
11. Any communications concerning the modified relationship between Baxter
and PMI made by PMI to Baxter's existing Perma-Flow customers, or made by PMI in
a press release, shall be subject to review and approval by Baxter, said
approval not to be unreasonably withheld.
12. Upon the request of PMI, Baxter will transfer its regulatory submission
for Japan to PMI or another distributor appointed by PMI. In the event of such
transfer, PMI shall pay Baxter reasonable out of pocket expenses incurred by
Baxter in connection with such submission.
13. Baxter's Perma-Flow Graft inventory, whether in Baxter's possession in
Canada or held on consignment by clinical sites in Canada, shall be repurchased
by PMI at the price Baxter paid to PMI for said grafts.
14. PMI shall not distribute, directly or through a distributor appointed
by PMI, Perma-Flow Grafts that bear the Baxter trademark and/or logo on its
packaging and/or instructions for use.
POSSIS MEDICAL, INC. BAXTER HEALTHCARE CORPORATION
By: /s/ By: /s/
Robert G. Dutcher Anita B. Bessler
Title: President and CEO Title: President, Edwards CVS Division
Date: Date:
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 13,841,793
<SECURITIES> 0
<RECEIVABLES> 1,297,563
<ALLOWANCES> 150,000
<INVENTORY> 4,739,154
<CURRENT-ASSETS> 20,041,668
<PP&E> 5,044,850
<DEPRECIATION> 2,343,691
<TOTAL-ASSETS> 23,896,854
<CURRENT-LIABILITIES> 3,443,643
<BONDS> 11,492,661
0
0
<COMMON> 4,887,449
<OTHER-SE> 3,856,901
<TOTAL-LIABILITY-AND-EQUITY> 23,896,854
<SALES> 6,117,850
<TOTAL-REVENUES> 6,117,850
<CGS> 5,794,901
<TOTAL-COSTS> 5,794,901
<OTHER-EXPENSES> 12,749,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,599
<INCOME-PRETAX> (11,969,342)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,969,342)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,969,342)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
</TABLE>
