U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-19467
MEDAMICUS, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1533300
(State of Incorporation) (IRS Employer Identification No.)
15301 HIGHWAY 55 WEST, PLYMOUTH, MN 55447
(Address of principal executive office, including zip code)
(612) 559-2613
(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Shares, $.01 Par Value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes __X__ No ____
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB __X__
The issuer's revenues for its most recent fiscal year were $7,172,786
The aggregate market value of the Common Shares held by nonaffiliates of the
issuer as of February 27, 1998 was approximately $8,130,659 (based on the
average of the closing bid and asked prices of the issuer's Common Shares on
such date which was $2.625/share).
Common Shares outstanding at February 27, 1998: 4,112,274 shares
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the issuer's Proxy Statement for the Annual Meeting of Shareholders
scheduled for April 30, 1998 are incorporated by reference into Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
MedAmicus, Inc. (the "Company") is a medical products company engaged in the
following:
* The design, development, manufacture and marketing of a pressure
measurement system utilizing a proprietary fiber optic transducer for
measuring and monitoring physiological pressures in the human body,
referred to herein as the LuMax(TM) System.
* The manufacture and marketing of a percutaneous vessel introducer and the
design and development of related vascular access products.
* The manufacture of medical devices and components for other medical product
companies on a contract basis.
FIBER OPTIC PRESSURE TRANSDUCER (LUMAX SYSTEM)
DESCRIPTION
Since the completion of its initial public offering in September 1991, the
Company has devoted a substantial portion of its research and development
efforts to the design and development of the LuMax Cystometry System, a fiber
optic pressure transducer system designed to measure physiological pressures
within the human body. Measurement of physiological pressures is a frequently
used procedure in the diagnosis and treatment of disorders in the
cardiovascular, respiratory, neurological and urinary systems. The Company's
fiber optic pressure transducer system received marketing clearance from the U.
S. Food and Drug Administration in January 1993.
The Company's LuMax system consists of a monitor and catheter. The catheter
contains optical fibers which transmit light in both directions within the
catheter. The distal end of the catheter includes a stainless steel housing with
an opening covered by a flexible membrane. The membrane is designed to move into
the light path in response to the pressure exerted. An external monitor emits
the light and then measures the amount of light returned through the catheter
for conversion into a pressure reading. In addition to reading pressure, the
monitor calibrates the catheter, records pressures over time and alerts the user
to pressure readings outside of a specified range.
The Company manufactures two different catheters in several sizes and two
separate monitors, which are designed to be used for urological diagnostic
procedures. Both catheters have one sensor, the difference being one has an
infusion lumen and one does not. An infusion lumen allows the physician to
infuse liquid through the catheter during the procedure. The Company markets
both single use disposable catheters and catheters which can be sterilized and
reused twenty times by the physician. The Company received Food and Drug
Administration marketing clearance for the reusable catheter in February 1996.
Each of the two monitors addresses separate urological market segments. One of
the monitors is a stand alone system (the LuMax Cystometry System) which is
designed to conduct tests necessary for a physician to diagnose and treat
patients with urological disorders including incontinence and benign prostatic
hyperplasia (BPH). Its primary market focus is the office-based gynecology and
urology practice. The second monitor is an interface unit (the LuMax Interface
System) designed to be connected to an existing urodynamic testing system
allowing a hospital or urology clinic, with such testing equipment already in
place, to use the Company's fiber optic catheters. The Company is completing
final development on the Interface System and anticipates marketing the product
in the second half of 1998.
<PAGE>
In September 1996, the Company began marketing a uroflow accessory to the LuMax
Cystometry System which allows urologists to conduct pressure flow studies, a
common procedure in the diagnosis of prostate conditions. A uroflow measures
volume of urine flow over time to determine severity of blockages caused by an
enlarged prostate or other factors. The Company received Food and Drug
Administration marketing clearance for this accessory in January 1996.
The most commonly used pressure measuring device now on the market is the
disposable external strain gauge transducer. Over 7.5 million such devices are
used annually in the U. S. An external strain gauge transducer measures internal
body fluid pressures through a series of saline solution-filled tubes connected
to a catheter which has been inserted into the body. The pressure of the body
fluid is conducted through the tubing to the externally located transducer. The
transducer then converts that pressure into an electrical signal which is
displayed as a pressure reading.
The Company believes that the disposable external strain gauge transducer has a
number of disadvantages when compared to its fiber optic pressure transducer:
* The disposable external strain gauge must be level with the pressure
monitoring site on the patient.
* A leak anywhere in the tubing system could result in inaccurate readings.
* The fluid column connecting the catheter to the external transducer must
remain bubble free.
* There are delays in response times as pressure is "piped" from the point of
measurement to the external transducer which may cause inaccuracies.
* A strain gauge device can be affected by electromagnetic interference from
other patient monitors.
A more recent development in pressure measurement devices is the micro-tipped
catheter, which is comprised of a miniaturized strain gauge transducer on the
tip of a catheter. While the micro-tipped catheter offers many of the same
advantages as the fiber optic catheter and is reusable, it is sold at a
substantially higher cost than the Company's current reusable catheter.
MARKETS AND MARKETING
The Company has evaluated various markets for the application of its fiber optic
pressure transducer, including hemodynamic testing, ventilator monitoring,
neurological pressure monitoring and urodynamic testing. The Company has
initially focused its efforts on the urodynamic testing market because
management believes it provides the greatest immediate opportunity for market
acceptance and revenue growth. It is estimated that over 12 million Americans
suffer from some form of incontinence, a problem that is just beginning to be
discussed openly and for which a number of treatments have recently been
introduced. In order to prescribe the most appropriate therapy, clinicians
usually rely on urodynamic testing, which includes several pressure measurement
procedures which the Company's LuMax System is designed to perform.
An enlarged prostate or benign prostatic hyperplasia (BPH) is a condition that
affects half of all men over age 55. A pressure flow study is a urodynamic test
designed to measure the severity of the blockage and determine if intervention
is appropriate. The Company's new LuMax System with uroflow is designed to
perform this study.
The urodynamic testing market in the United States consists of three segments:
approximately 2,300 urology practices having access to hospital-based urodynamic
monitoring systems; uro-gynecology practices, a small but emerging market
primarily focused on incontinence, which generally have sophisticated urodynamic
systems located in their offices, and; 19,000 gynecology practices of which only
a small percentage are currently equipped to conduct urodynamic testing and,
thus, effectively provide the services necessary to treat the incontinent
patient.
In January 1995, the Company launched a direct sales effort to market its
stand-alone LuMax Cystometry System domestically. As a result, the Company hired
a National Sales manager, a Marketing Manager and two sales representatives,
located in Texas and Illinois. In mid-1995, the Company elected to broaden its
sales coverage by contracting with independent sales representatives who were
primarily focused on the office-based gynecology market. In September 1995, the
first independent sales representative group was trained. In September 1996, the
Company
<PAGE>
engaged independent sales representatives to market the LuMax Cystometry System
with Uroflow into the urology office-based market.
Today, the Company has three regional and a national sales manager in the United
States that oversee the activities of thirty one independent sales groups
totaling sixty individuals. Twenty-six representatives call exclusively on
gynecologists, twelve on urologists and twenty two representatives market the
LuMax System to both gynecologists and urologists. The Company has no plans at
this time for international distribution agreements.
MANUFACTURING
The Company currently manufactures its catheters in its existing facility and
expects that adequate space will be available to meet the Company's needs during
the next several years. As of February 1998, the Company has the capacity to
manufacture approximately 5,000 catheters per month on a single shift using
semi-automated equipment designed by the Company. The Company expects such
equipment will be adequate to meet production requirements until automated
equipment is required to increase capacity. The Company is conducting ongoing
studies related to the feasibility and cost of automated manufacturing
equipment.
As of February 1998, the Company has the capacity to assemble approximately 50
monitors per month on one shift. It is believed that the Company has adequate
capacity to meet monitor requirements for the foreseeable future.
The Company has approved suppliers for all materials necessary to manufacture
the monitors and catheters and believes that other acceptable suppliers exist
for these materials.
COMPETITION
The Company's LuMax System competes with both the traditional external strain
gauge transducer, and with transducers that incorporate new designs such as
fiber optic transducers and micro-tipped catheter transducers.
Companies that market disposable external strain gauge transducers for use in
the urological testing markets include Cobe Laboratories, Inc., Lakewood,
Colorado; Spectramed Inc., Critical Care Division, Oxnard, California; and
Baxter Healthcare Corporation, Edwards Division, Santa Ana, California.
Companies which are applying fiber optic technology to pressure sensing devices
include Camino Laboratories, San Diego, California, which markets a device used
primarily for application in neurological procedures; Radi Medical Systems,
Sweden, which markets its device in Europe for hemodynamic testing and possibly
urological monitoring and Bard Urological, a subsidiary of C. R. Bard, Inc.
which markets a urodynamic system similar to the Company's LuMax System. Bard
Urological is aggressively marketing their fiber optic system through a network
of direct sales personnel into the U. S. urology office market. Management
believes that each of the companies mentioned above may have significantly
greater financial and other resources than the Company. The Company believes
that the primary bases of competition will be product performance, price and
marketing.
While the Company has obtained patents relating to its transducer, such patents
may not prevent the above described companies or any other companies from
developing competing fiber optic devices for the urodynamic testing market or
for any other pressure measurement applications which the Company may pursue.
RESEARCH AND DEVELOPMENT
With the capital made available from its initial public stock offering, the
Company established a research and development staff devoted to the transducer
project. For the years ended December 31, 1997 and 1996, the Company expended
$405,562 and $563,196, respectively, on the transducer development effort. The
research and development group intends to continue work on enhancing the
transducer for the gynecology and urology markets and begin efforts to apply the
technology to other potential applications.
<PAGE>
INTRODUCER PRODUCTS
DESCRIPTION
The Company manufactures and markets a proprietary disposable percutaneous
vessel introducer which allows physicians to insert infusion catheters,
implantable ports and pacemaker leads into a blood vessel.
In order to introduce a catheter or pacemaker lead into a vein, a hypodermic
needle is first used to access the vessel. A guide wire is inserted through the
hypodermic needle. The needle is then removed and a vessel introducer,
consisting of a hollow sheath and a dilator, is inserted over the guide wire to
expand the opening. The guide wire and dilator are then removed, leaving only
the hollow sheath through which the catheter or pacemaker lead is introduced.
Once the catheter or pacemaker lead is in place, the vessel introducer sheath is
usually removed.
To the Company's knowledge, all vessel introducer sheaths currently marketed in
competition with the Company's vessel introducer are manufactured with small
handles on either side of the sheath at the proximal end, and use what is
referred to as the "peel-away" method of sheath removal. As the physician pulls
the handles, the sheath tears apart and can then be removed.
The Company's vessel introducer, which includes the standard dilator and sheath,
also incorporates a proprietary slitting device, resulting in what management
believes to be an improved method of removing the sheath. The slitter clamps
onto the catheter or lead and has a recessed blade. The physician draws the
sheath onto the slitter, which cuts the entire length of the sheath, permitting
easy removal. The removal of the sheath can be performed by one physician,
unlike the peel-away method which typically requires two people. To the best of
the Company's knowledge, there are no other companies marketing vessel
introducers which use a slitting method of sheath removal.
In 1993, the Company entered into an agreement with Medtronic, Inc.
("Medtronic") to package a "peel-away" introducer into a kit. While the Company
believes the slitter introducer is superior to the "peel-away", studies indicate
that a significant percentage of physicians will continue to utilize the
"peel-away" technology. In August 1994, the Company commenced shipments of
"peel-away" introducer kits to Medtronic. The Company is now the sole supplier
to Medtronic of introducer kits for pacing lead applications.
MARKETS AND MARKETING
The Company estimates that there are more than 1,000,000 procedures performed
worldwide each year in which venous vessel introducers are used. Because the
majority of vessel introducers are sold in combination with the sale of infusion
catheters, implantable ports or pacing leads, the Company's management
determined that it is advantageous for the Company to enter into distribution
agreements with medical device manufacturers who will market the Company's
vessel introducer with their catheters, implantable ports or pacing leads.
Accordingly, the Company entered into such agreements with Medtronic and with
Bard for the sale of the introducer into their respective markets.
Medtronic, which the Company believes has the largest worldwide market share of
pacing leads, is currently purchasing complete sterilized introducer kits, which
include a syringe, hypodermic needle and guide wire, as well as the vessel
introducer, packaged by the Company in boxes designed by Medtronic. Medtronic
markets the Company's vessel introducer with the slitting device worldwide under
its own trade name, "SOLO-TRAK(TM)". Medtronic has indicated that approximately
40% of their introducer sales consist of SOLO-TRAK, and the remainder of the
sales are "peel-away" introducers.
The Company's distribution agreement with Medtronic was executed in May 1991,
and amended in August 1994, August 1995 and again in August 1996. Under the
terms of the agreement, Medtronic is obligated to purchase certain specified
annual quantities of both slitter introducers and "peel-away" introducers in
order to retain exclusive rights in the pacing lead market. The agreement has an
indefinite term, but Medtronic may terminate the agreement any time, upon 180
days prior written notice.
<PAGE>
Bard Access Systems, Inc. ("Bard"), a subsidiary of C.R. Bard, Inc., which is
reported to have the largest combined market share of infusion catheters and
implantable ports, is primarily purchasing vessel introducers and slitters,
which Bard packages in procedural trays with its catheters and ports. Bard
markets the vessel introducer under its trade name, "INTRO-EZE(TM)".
The Company's distribution agreement with Bard expired in December 1997. The
agreement had called for minimum purchases of kits or introducer components in
order to maintain the exclusive right to market the Company's vessel introducer
in Bard's market. The Company expects to continue sales of the slitter
introducer to Bard on a non-exclusive basis.
Infusion catheter, implantable port and pacing lead applications represent an
estimated 85% of the market applications for the introducer. The Company does
not anticipate significant sales from other applications; consequently, the
Company's relationships with both Medtronic and Bard are important to the
success of the Company.
For the years ended December 31, 1997, 1996 and 1995, Medtronic accounted for
51%, 58% and 72% of sales, respectively. The loss of Medtronic as a customer
would have a material adverse effect on the Company.
MANUFACTURING
The vessel introducer is manufactured by the Company and packaged in a "kit"
with other components for Medtronic, or sold as a component set consisting of a
sheath, dilator and slitter to Bard. The sheath and dilator for the Company's
proprietary introducer and the "peel-away" introducer are manufactured from
polyethylene tubing which is acquired from outside sources and fabricated by the
Company, while the slitter is injection molded by the Company. The Company has
designed and constructed a number of pieces of its production and packaging
equipment, and has purchased the remainder from outside sources. The vessel
introducer kits are packaged in the Company's clean room facility. The Company
manufactures and packages vessel introducers in 38 different kit combinations.
The Company presently obtains several of its components, raw materials and
sterilization services from sole suppliers, but believes that all components,
raw materials and sterilization services are readily available from several
sources. The Company believes any one of such sources would be acceptable,
although Medtronic and Bard each has the right to approve suppliers.
COMPETITION
The Company's vessel introducers compete with other vessel introducers, all of
which utilize the peel-away method. The Company believes that the three major
competitors in the venous vessel introducer market are Cook Incorporated,
Bloomington, Indiana; Daig Corporation, Minnetonka, Minnesota (recently acquired
by St. Jude Medical, St. Paul, Minnesota); and B. Braun of America Company,
Allentown, Pennsylvania. Both Daig and B. Braun market their vessel introducers
primarily by establishing distribution arrangements with established companies
in the medical field, the same strategy the Company follows. Cook markets a
variety of vessel introducer kits through distributors and with a direct sales
force. Each of these competitors has significantly greater financial, personnel
and other resources than the Company.
RESEARCH & DEVELOPMENT
The Company's development activities are focused primarily on improved vessel
introducers. The Company's management believes that, with the trend towards less
invasive percutaneous surgical procedures, there will be increasing demand for
vessel introducers in a variety of medical procedures and the Company intends to
devote some portion of its development activities to understanding the needs of
this market and designing products to meet those needs. There can be no
assurance that the Company's development efforts will result in additional
revenue. The Company's research and development activities have been coordinated
primarily by employees of the Company, although the Company has utilized outside
specialists on a contract basis, and expects to continue to do so.
For the years ended December 31, 1997 and 1996, the Company expended $105,391
and $235,733, respectively, on research and development activities directly
related to introducer products.
<PAGE>
CONTRACT MANUFACTURING
Since October 1985, the Company has performed contract manufacturing services
for a variety of medical device companies in the Minneapolis and St. Paul,
Minnesota metropolitan area, but currently manufactures four medical products
for one company. The Company is not aggressively pursuing contract manufacturing
revenue.
For the years ended December 31, 1997, 1996, and 1995, contract manufacturing
revenues were approximately 5%, 9% and 7% respectively, of the Company's total
revenues.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in some instances, by state and foreign authorities.
Pursuant to the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, and regulations promulgated thereunder, medical devices intended
for human use are classified into three categories (Classes I, II and III),
depending upon the degree of regulatory control to which they will be subject.
Both the transducer and the introducer are considered Class II devices.
If a Class II device is substantially equivalent to an existing device that has
been continuously marketed since the effective date of the 1976 Amendments, FDA
requirements may be satisfied through a Premarket Notification Submission (a
"510(k) Submission"), under which the applicant provides product information
supporting its claim of substantial equivalence. In a 510(k) Submission, the FDA
may also require that it be provided with clinical test results demonstrating
the safety and efficacy of the device.
The Company submitted a 510(k) Submission to the FDA with respect to the
transducer in February 1992 and received approval to market the transducer in
the United States in January 1993. The Company has obtained 510(k) approval to
market its introducer in the United States.
As a manufacturer of medical devices, the Company is also subject to certain
other FDA regulations, and its manufacturing processes and facilities are
subject to continuing review by the FDA to ensure compliance with Good
Manufacturing Practices regulations. The Company believes that its manufacturing
and quality control procedures substantially conform to the requirements of FDA
regulation. In addition, the Company's sales and marketing practices are subject
to regulation by the U.S. Department of Health and Human Services pursuant to
federal anti-kickback laws, and are also subject to similar state laws.
The Company's devices may also be subject to regulation in foreign countries.
Medtronic and Bard are responsible for obtaining approval from the foreign
countries in which they desire to sell the vessel introducers manufactured by
the Company. Depending upon the distribution relationships established to market
the transducer, the Company may be responsible for obtaining approval to sell
the transducer in foreign countries.
INTELLECTUAL PROPERTY
The Company has made and continues to make, when appropriate, efforts to obtain
patents, including additional patents on existing products. Certain aspects of
the vessel introducer and the fiber optic pressure transducer are the subject of
United States Patent Numbers 4,997,424 and 5,005,584, respectively, issued on
March 5, 1991 and April 9, 1991, respectively. Both patents have been assigned
to the Company by the inventor, Richard L. Little, the Company's former
President and Chief Executive Officer, and both expire in the year 2008.
The introducer patent covers a means for attaching a slitter with a recessed
blade to a catheter or pacing lead for the purpose of removing a sheath from the
catheter or pacing lead. The Company has received additional patent protection
on features of the vessel introducer.
<PAGE>
The Company's transducer patent covers a means for incorporating one or more
transducers onto a guide wire. The Company has received additional patent
protection on technical features of the transducer which have evolved during the
development to date.
On several occasions, and as recently as February 1998, the Company has received
correspondence or inquiries from a competitor in the fiber optic transducer
market regarding patents it holds relating to fiber optic transducers,
specifically referencing a patent on a technique to calibrate the fiber optic
system and requesting additional information regarding the Company's calibration
technique and why such technique does not infringe the competitor's patent. The
Company has responded to such inquiries each time they have been received. The
Company has been aware of this patent and has specifically designed the
calibration system associated with its transducer so as not to infringe the
competitor's patent. In addition, the Company has been issued a United States
patent on its calibration technique. The Company has also received an opinion of
counsel that its calibration system does not infringe such patent. While the
Company is not aware of the competitors intentions with respect to this matter,
the Company will continue to respond to such inquiries and may suggest a
cross-licensing arrangement with this competitor to avoid such inquiries in the
future.
Due to the rapid technological changes experienced in the medical device
industry, the Company's management believes that the improvement of existing
products, reliance upon trade secrets and unpatented proprietary know-how and
the development of new products are generally as important as patent protection
in establishing and maintaining a competitive advantage.
EMPLOYEES
As of February 27, 1998, the Company employed 75 persons, consisting of 73
full-time and 2 part-time.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative, manufacturing and research and development
facilities, consisting of approximately 21,665 square feet, are located at 15301
Highway 55 West, Plymouth, Minnesota 55447. The Company leases these facilities
pursuant to a lease that expired April 30, 1997. The lease provides for up to
five one-year extensions which are automatic if the Company does not give a six
month notice of evacuation. The lease calls for rent payments of $13,242 per
month, which includes base rent, a portion of the operating expenses and real
estate taxes. The base rent can escalate yearly based on the consumer price
index. The Company has elected to extend the lease until April 30, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company's management is not aware of any litigation pending against the
Company or its properties.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock has been traded on The Nasdaq Stock Market(SM) under
the symbol MEDM since September 1991. The following sales quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
<PAGE>
<TABLE>
<CAPTION>
------------------------- ------------------------- ------------------------- -------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------------- ------------------------- ------------------------- -------------------------
YEAR LOW HIGH LOW HIGH LOW HIGH LOW HIGH
- ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 3.000 4.250 3.750 4.750 2.750 4.250 2.125 3.750
- ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1997 2.000 3.250 1.875 2.750 2.250 2.875 2.625 3.625
- ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1998* 2.375 3.125
- ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
* Through February 27
As of February 27, 1998, the Company had approximately 175 record holders and
1,600 beneficial holders of its common stock. The Company has not paid cash
dividends in the past and does not expect to do so in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated under the laws of Minnesota in 1981 and commenced
operations in 1985. During the first three years of its existence, the Company
devoted the majority of its activities to research and development projects. In
1990, the Company's first proprietary product was announced, a percutaneous
venous vessel introducer. Exclusive distribution arrangements were negotiated
with Medtronic and Bard for the sale of the introducer into their respective
markets.
In September 1991, the Company completed its initial public stock offering,
raising approximately $3,400,000, net of expenses. With these resources,
manufacturing capabilities and capacity were expanded and a number of contract
manufacturing jobs were secured. The influx of capital also allowed the Company
to significantly accelerate its development efforts on a second proprietary
product, the LuMax Fiber Optic Cystometry System. In January 1993, marketing
clearance on the fiber optic system was received from the Food and Drug
Administration.
In January 1994, the Company completed a private placement of common stock and
warrants, resulting in proceeds to the Company of approximately $1,000,000, net
of offering expenses. In July 1994, the Company entered into loan agreements
aggregating $500,000 with two unaffiliated private investors and subsequently
amended the agreements in December 1994 to extend the maturity of the loans to
June 1996. In October 1994, a private investor purchased 200,000 shares of
common stock from the Company for $500,000 and the same investor purchased
266,667 shares for $500,000 in January 1995.
With these additional resources, the Company embarked upon a direct sales
strategy in January 1995 to distribute the LuMax System into the gynecology
office-based market. A sales and marketing staff was hired and, in mid-1995, the
Company began contracting with independent sales representatives to sell into
this market.
The Company also developed a sales strategy to distribute the LuMax System into
the urology office-based market. In order to sell into this market, the LuMax
System needed to be upgraded to allow it to perform pressure flow studies in
addition to the cystometry tests that were already being done. Development on
this upgraded LuMax System was started in July 1995 and was completed in
November 1996. The Company has contracted with independent sales representative
groups to market the LuMax System into the gynecology and urology office-based
markets. Currently, thirty-one groups are under contract totaling sixty
individuals. Twenty-six of these representatives call specifically on
gynecologists, twelve call specifically on urologists and twenty-two represent
the Company's product in both markets.
In March 1996, the Company obtained a $1,200,000 revolving line of credit with a
financial institution. The Company used the line of credit to pay off the
$500,000 notes payable with two unaffiliated private investors. In May 1996, the
Company completed a private placement of its common stock, resulting in net
proceeds to the Company of $1,622,103. In June 1997, the Company renewed its
revolving line of credit through June 1998.
<PAGE>
SALES
Net sales were $7,172,786 for 1997, compared to $5,659,522 in 1996, representing
an increase of $1,513,264 or 26.7%. Sales of vessel introducers, primarily to
Medtronic under an exclusive distribution arrangement, were $4,039,685 in 1997
compared to $3,445,704 in 1996, representing an increase of $593,981 or 17.2%.
This increase was primarily due to two factors. First, Medtronic rebuilt its
inventories of introducers during the first four months of 1997 which were
depleted during the third quarter of 1996 because of a component supply problem.
Second, Medtronic's sales of introducers to their customers increased in 1997
over 1996 which led to increased purchases from the Company.
Contract manufacturing sales were $365,397 in 1997 compared to $513,814 in 1996,
representing a decrease of $148,417 or 28.9%. This decrease was primarily due to
two factors. First, one of the Company's contract manufacturing customers
decided to manufacture their product internally during 1997. While the Company
benefited from some additional orders during the second quarter, the Company
does not anticipate any additional business from this customer. Second, the
Company's other contract manufacturing customer placed some large orders with
the Company during the first quarter of 1997 and then informed the Company that
they had excess inventory and would not be placing any additional orders for
product for most of 1997. This customer resumed placing orders in 1998.
The Company does contract research and development work periodically for
Medtronic and realized sales of $28,593 in 1997 compared to $190,341 in 1996.
While the Company has generated revenue from this type of work over the past two
years, it does not expect it to be a continuous source of revenue.
Sales of the Company's fiber optic pressure sensing catheter and monitor
transducer products were $2,739,111 in 1997, compared to $1,509,663 in 1996,
representing an increase of $1,229,448 or 81.4%. Monitor sales increased from
$1,213,894 in 1996 to $1,957,872 in 1997, an increase of 61.3%. Catheter sales
increased from $282,668 in 1996 to $731,174 in 1997, an increase of 158.7%.
Accessory and service sales increased from $13,101 in 1996 to $50,065 in 1997.
The Company has continued to actively market the upgraded version of its LuMax
System into the gynecology and urology office markets by adding sales
management, attending major trade shows and conducting various direct mail and
telemarketing campaigns. While the Company has only minimal experience to date
in selling the LuMax System, management believes that the largest percentage of
these sales typically occur in the fourth quarter.
GROSS PROFIT ON SALES
Gross profit as a percentage of sales by category for the years ended December
31, 1997 and 1996 was as follows:
1997 1996
- --------------------------------------------------------------------------
Introducers and contract manufacturing 52.5% 46.9%
Fiber optic products 31.7 13.5
- --------------------------------------------------------------------------
Total gross profit percent 44.6% 38.0%
==========================================================================
The Company saw an increase in its gross profit percentage related to its vessel
introducer and contract manufacturing business in 1997, primarily due to
increased introducer sales to Medtronic which affected the Company's utilization
of available capacity. The Company expects gross profit in the introducer and
contract business to decline slightly in the future as it reduces pricing to
Medtronic for introducers in order to respond to competitive pressures.
The Company realized improvement in gross profit dollars and percent related to
its fiber optic business during 1997, due to a combination of increased sales,
which resulted in improved efficiencies and better utilization of the Company's
available capacity, and process improvements, which improved yields and reduced
the cost of the Company's catheters. The Company expects gross profits in the
fiber optic business to increase in the future as the Company increases sales
resulting in better utilization of its capacity, and implements further process
improvements.
RESEARCH AND DEVELOPMENT
Total research and development expenditures were $510,953, or 7.1% of sales in
1997, compared to $798,929, or 14.1% of sales in 1996. Approximately 79% and 70%
of the 1997 and 1996 expenditures, respectively, were devoted
<PAGE>
to the development of the Company's LuMax System and the remainder to introducer
products. The Company does expect research and development expenditures to
increase both in dollar amount and as a percentage of sales in 1998 as it
continues to work on improving catheter yields, as well as development of new
products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $2,780,203 or 38.8% of
sales in 1997, compared to $2,385,953 or 42.2% of sales in 1996. Sales and
marketing expenses increased $446,181 in 1997 compared to 1996 primarily because
of increased salary, travel, depreciation and commission expense. The Company
hired two regional sales managers in 1997 which were not in place during 1996.
As a result of these hires, the Company has also experienced an increase in its
travel expenses. Depreciation expense has increased during the comparable
periods because the Company has placed a greater number of the new LuMax
machines with our expanded independent sales force to support the increased
sales effort. Commission expense increased during 1997 due to increased sales
activity. General and administrative expenses decreased $51,931 in 1997 compared
to 1996. This decrease is primarily due to decreased spending on insurance and
investor relations expenses.
NET LOSS
As a result of the above, the Company incurred a net loss of $145,566 or $.04
per share in 1997, compared to a net loss of $1,071,115 or $.28 per share in
1996. Inflation has not had a material impact on the Company's revenues or
earnings.
The Company currently has sixty independent sales representatives under contract
to distribute its LuMax System into both the gynecology and urology markets. The
first quarter of each year has historically shown a drop in monitor sales, as
well as increased sales and marketing expenses related to promotional activities
related to the large national shows. As a result, the Company expects losses to
continue at least through the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had unrestricted cash and cash equivalents
and investments of $1,102,490, compared to $1,205,783 as of December 31, 1996.
Net cash provided by operating activities during the year ended December 31,
1997 was $210,543, consisting primarily of a net loss of $145,566, adjusted for
non-cash items of depreciation and amortization of $485,066, less a net change
in operating assets and liabilities of $128,957.
Net cash used in investing activities in 1997 was $183,813, consisting primarily
of the net sale of investments totaling $10,989, the acquisition of property and
equipment for $189,115, and the addition to patent rights of $5,687.
Net cash used in financing activities totaled $130,023, consisting of $59,933 in
proceeds from the exercise of stock options, offset by payments on the Company's
capital lease obligations of $52,013, payments on a note payable to a customer
of $14,400, and a reduction of the line of credit balance of $123,543.
In March 1996, the Company obtained a $1,200,000 revolving line of credit with a
financial institution and on June 24, 1997, signed a one year extension through
June 30, 1998. The availability under the line is subject to borrowing base
requirements, and advances are at the discretion of the lender. The agreement
calls for interest at the rate of 2.25% over the financial institution's base
rate with minimum interest due over the term of the agreement of $70,000. The
line is secured by substantially all of the Company's assets. The Company
anticipates that it will be able to extend the line of credit when it expires in
June 1998. If the financial institution decides not to extend the agreement,
depending on the level of cash flows generated from operating activities in
1998, if any, additional capital may be required to fund 1998 operations and
capital expenditure requirements. Sources of additional capital may include
additional debt financing and/or the sale of debt or equity securities. If the
Company is unable to obtain financing when required, the Company could be forced
to curtail its operations.
As of December 31, 1997, the Company's current assets exceeded current
liabilities by $1,859,102, with a current ratio of 2.2 to 1, compared to working
capital of $1,685,731 or a current ratio of 1.8 to 1 as of December 31, 1996.
Accounts receivable decreased from $1,346,289 as of December 31, 1996 to
$1,004,939 as of December 31, 1997, a
<PAGE>
decrease of $341,350. Inventory decreased from $1,203,372 as of December 31,
1996 to $1,170,289 as of December 31, 1997, a decrease of $33,083. The Company
installed a new management information system in 1997 which has allowed for more
aggressive follow-up on accounts receivable and better management of inventory.
Accounts payable decreased from $1,109,640 as of December 31, 1996 to $607,029
as of December 31, 1997, a decrease of $502,611 which primarily offset the
decreases in accounts receivable and inventory. Finally, notes payable to bank
decreased from $782,783 as of December 31, 1996 to $659,240 as of December 31,
1997, a decrease of $123,543. The Company has chosen to use the line of credit
instead of available cash as working capital because it is committed to paying a
minimum of $70,000 in interest over the term of the agreement on the line of
credit with the bank.
At December 31, 1997, the Company had income tax carryforwards of net operating
losses (NOL's) of approximately $5,687,000 and research and development credit
carryforwards of approximately $193,000. At December 31, 1997, the Company's net
deferred tax assets, totaling approximately $2,587,000, have been fully offset
by a valuation allowance due to their uncertainty of realization. Realization of
these deferred tax assets is dependent upon sufficient future taxable income
during the period the deductible temporary differences and carryforwards are
expected to be available to reduce taxable income.
The Company has investigated the impact of the Year 2000 issue on both its own
internal information systems and the products it develops, markets and sells.
During 1997, the Company purchased, from a world-wide supplier and developer of
information systems, an enterprise-wide information system with written
assurance from the developer that the system will correctly function across the
year 2000. During 1997, the Company reviewed all of the products it develops,
markets and sells, as well as the raw materials and subassemblies required to
manufacture them, and believes that there are no Year 2000 issues. Therefore,
Year 2000 is not expected to have a material effect on the Company's financial
position, operations or cash flow.
Forward-looking statements contained in this annual report on Form 10-KSB,
including without limitation in Management's Discussion and Analysis, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Certain important factors could cause results to differ
materially from those anticipated by some statements made herein. You are
cautioned that all forward-looking statements involve risks and uncertainties.
Among the factors that could cause results to differ materially are the
following: delays in new product launches; lack of market acceptance of the
Company's products; introduction of competitive products; competitive pricing
developments; lack of performance by the Company's distribution network;
challenges to the Company's intellectual property rights; and government
regulation matters. Reference is also made to the risk factors contained in the
Company's report on Form 8-K as filed with the Securities and Exchange
Commission on November 15, 1996.
ITEM 7. FINANCIAL STATEMENTS
The Independent Auditor's Report for the years ended December 31, 1997 and 1996
is included as Exhibit 23.2 attached hereto.
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------
<S> <C> <C>
ASSETS (Note 6)
CURRENT ASSETS:
Cash and cash equivalents $ 1,102,490 $ 1,205,783
Accounts receivable, less allowance for doubtful accounts of
$2,050 and $8,250, respectively (Note 9) 1,004,939 1,346,289
Inventories (Note 3) 1,170,289 1,203,372
Prepaid expenses and other assets 96,423 60,300
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,374,141 3,815,744
- ------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT: (Note 7)
Equipment 1,942,072 1,819,901
Office furniture, fixtures and computers 502,806 437,053
Leasehold improvements 363,950 362,759
- ------------------------------------------------------------------------------------------------------
2,808,828 2,619,713
Less accumulated depreciation and amortization (1,940,914) (1,477,554)
- ------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 867,914 1,142,159
- ------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS, RESTRICTED (Notes 2 and 7) 19,296 28,888
PATENT RIGHTS, NET OF ACCUMULATED AMORTIZATION OF
$124,319 AND $102,613, RESPECTIVELY 18,202 34,221
======================================================================================================
TOTAL ASSETS $ 4,279,553 $ 5,021,012
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank (Note 6) $ 659,240 $ 782,783
Accounts payable 607,029 1,109,640
Accrued expenses (Note 4) 208,112 174,399
Current installments of note payable to customer (Note 6) 2,822 14,400
Current installments of capital lease obligations (Note 7) 37,836 48,791
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,515,039 2,130,013
- ------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Note payable to customer, less current installments (Note 6) 0 2,822
Capital lease obligations, less current installments (Note 7) 47,190 88,248
- ------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 47,190 91,070
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,562,229 2,221,083
- ------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY: (Note 8)
Preferred stock-undesignated, authorized 1,000,000 shares 0 0
Common stock-$.01 par value, authorized 9,000,000 shares 41,123 40,668
Additional paid-in capital 8,578,142 8,515,636
Accumulated deficit (5,901,941) (5,756,375)
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,717,324 2,799,929
======================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,279,553 $ 5,021,012
======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATMENTS
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Note 9) $ 7,172,786 $ 5,659,522
Cost of sales 3,976,791 3,509,497
- --------------------------------------------------------------------------------------------
GROSS PROFIT 3,195,995 2,150,025
- --------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 510,953 798,929
Selling, general and administrative 2,780,203 2,385,953
- --------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,291,156 3,184,882
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
OPERATING LOSS (95,161) (1,034,857)
- --------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (80,765) (89,165)
Interest income 48,796 55,689
Other (18,436) (2,782)
- --------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (50,405) (36,258)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET LOSS $ (145,566) $ (1,071,115)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.28)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 4,090,811 3,836,271
- --------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-In Accumulated
YEARS ENDED DECEMBER 31, 1997 AND 1996 Shares Amount Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995 3,434,774 $ 34,348 $ 6,871,803 $ (4,685,260) $ 2,220,891
Stock options exercised 22,000 220 27,830 0 28,050
Common stock purchased by private investors,
net of offering costs 610,000 6,100 1,616,003 0 1,622,103
Net loss for the year ended December 31, 1996 0 0 0 (1,071,115) (1,071,115)
- ------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 4,066,774 $ 40,668 $ 8,515,636 $ (5,756,375) $ 2,799,929
Stock options exercised 44,075 441 59,492 0 59,933
Common stock issued as sales incentive 1,425 14 3,014 0 3,028
Net loss for the year ended December 31, 1997 0 0 0 (145,566) (145,566)
- ------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 4,112,274 $ 41,123 $ 8,578,142 $ (5,901,941) $ 2,717,324
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (145,566) $(1,071,115)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 485,066 402,148
Interest accretion on notes payable to private investors 0 22,037
Interest added to investments (1,397) (388)
Common stock issued as sales incentive 3,028 0
Changes in operating assets and liabilities:
Accounts receivable 341,350 (611,363)
Inventories 33,083 (417,604)
Prepaid expenses and other assets (36,123) (36,663)
Accounts payable (502,611) 469,162
Accrued expenses 33,713 (35,529)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 210,543 (1,279,315)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (189,115) (488,199)
Additions to patent rights (5,687) (6,340)
Purchase of available-for-sale marketable securities, including reinvestment
of securities which matured (19,011) (28,500)
Sale of available-for-sale marketable securities, including sales of securities
which matured 30,000 996,145
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (183,813) 473,106
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (52,013) (49,817)
Proceeds from sales of stock, net of offering costs 0 1,622,103
Proceeds from exercise of stock options 59,933 28,050
Payments on notes payable to private investors 0 (500,000)
Proceeds from (payments on) note payable to bank (123,543) 782,783
Payments on note payable to customer (14,400) (14,400)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (130,023) 1,868,719
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (103,293) 1,062,510
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,205,783 143,273
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,102,490 $ 1,205,783
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 82,782 $ 60,073
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases incurred on purchase of equipment $ 0 $ 134,739
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NATURE OF BUSINESS MedAmicus, Inc. (the "Company") is a medical products company
engaged in the following:
* The design, development, manufacture and marketing of a pressure
measurement system utilizing a proprietary fiber optic transducer for
measuring and monitoring physiological pressures in the human body.
* The manufacture and marketing of a percutaneous vessel introducer and the
design and development of related vascular access products.
* The manufacture of medical devices and components for other medical product
companies as a contract manufacturer.
REVENUE RECOGNITION The Company recognizes revenue upon shipment of the product
to the customer.
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 period.
Actual results could differ from those estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and
assumptions were used to estimate the fair value of each class of certain
financial instruments for which it is practicable to estimate that value:
* CASH EQUIVALENTS: The carrying amount approximates fair value because of
the short maturity of those instruments.
* MARKETABLE SECURITIES: The fair values of these investments are estimated
based on quoted market prices for those or similar instruments. At December
31, 1997 and 1996, the fair value of the Company's marketable securities
approximated their carrying value.
* NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: The fair value of the
Company's notes payable and capital lease obligations is estimated based on
the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities with
similar collateral requirements. At December 31, 1997 and 1996, the fair
value of the Company's notes payable and capital lease obligations
approximated their carrying value.
CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with an
original maturity of three months or less. The Company maintains its cash in
bank accounts which, at times, exceed federally insured limits. The Company has
not experienced any losses in such accounts.
INVENTORIES Inventories are stated at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated
and amortized on a straight-line basis over a period of three to seven years.
Leasehold improvements are amortized over the term of the lease. Repair and
maintenance costs are charged to operations as incurred. The Company
periodically reviews the utilization of its long-lived assets in its business
for impairment. To date, management had determined that no impairment of
long-lived assets exists.
PATENT RIGHTS Patent rights, which are amortized over a five-year period,
include costs incurred by the Company to secure patents for technology that the
Company has developed.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENDITURES The Company's research and development
expenditures are expensed as incurred.
NET LOSS PER SHARE The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE, which supersedes APB
Opinion No. 15. SFAS No. 128 requires the presentation of earnings per share by
all entities that have common stock or potential common stock, such as options,
warrants, and convertible securities, outstanding that trade in a public market.
Those entities that have only common stock outstanding are required to present
basic earnings-per-share amounts. Basic per-share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. All other entities are required to present basic and
diluted per-share amounts. Diluted per-share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless the
effect is anti-dilutive, thereby reducing a loss or increasing the income per
common share. The Company initially applied Statement No. 128 for the year ended
December 31, 1997 and, as required by the Statement, has restated the per share
information for the prior year to conform to the statement. As described in Note
8, at December 31, 1997 and 1996, the Company had options and warrants
outstanding to purchase a total of 1,239,571 and 1,289,479 shares of common
stock, respectively, at a weighted average exercise price of approximately $3.60
and $3.50, respectively. However, because the Company has incurred a loss in all
periods presented, the inclusion of those potential common shares in the
calculation of diluted loss per-share would have a anti-dilutive effect.
Therefore, Basic and Diluted loss per-share amounts are the same in each period
presented.
- --------------------------------------------------------------------------------
2. MARKETABLE SECURITIES
- --------------------------------------------------------------------------------
Long-term investments, as of December 31, 1997, consist of a U.S. Treasury bill
which matures in September 1998. The Treasury bill is recorded as long-term
because it is pledged as collateral to a capital lease through November 1999
(See Note 7). Investments are recorded at cost plus accrued interest earned. The
Company recognizes interest income on U.S. Treasury bills on a straight-line
basis over the term of the securities. Due to the short-term maturity of the
Company's marketable securities, the market value approximates their carrying
value. Therefore, no unrealized gains or losses for available-for-sale
marketable securities have been recorded in either 1997 or 1996.
- --------------------------------------------------------------------------------
3. INVENTORIES
- --------------------------------------------------------------------------------
INVENTORIES AT DECEMBER 31, 1997 AND 1996 CONSIST OF THE FOLLOWING:
1997 1996
- -----------------------------------------------------------------------
Purchased parts and subassemblies $ 638,542 $ 655,584
Work in process 238,042 412,520
Finished goods 293,705 135,268
- -----------------------------------------------------------------------
$ 1,170,289 $ 1,203,372
=======================================================================
- --------------------------------------------------------------------------------
4. ACCRUED EXPENSES
- --------------------------------------------------------------------------------
ACCRUED EXPENSES AT DECEMBER 31, 1997 AND 1996 CONSIST OF THE FOLLOWING:
1997 1996
- -----------------------------------------------------------------------
Payroll and commissions $ 49,056 $ 34,475
Vacation and sick pay 78,168 59,112
Other 80,888 80,812
- -----------------------------------------------------------------------
$ 208,112 $ 174,399
=======================================================================
<PAGE>
- --------------------------------------------------------------------------------
5. INCOME TAXES
- --------------------------------------------------------------------------------
At December 31, 1997, the Company had income tax carryforwards of net operating
losses (NOL's) of approximately $5,687,000 and research and development credit
carryforwards of approximately $193,000. These carryforwards are available to
offset future taxable income and related income taxes, and expire as follows:
Net Research And
Operating Development Tax
Year of Expiration Losses Credits
- -------------------------------------------------------------------
2002 $67,000 $1,000
2003 90,000 3,000
2004 200,000 5,000
2005 285,000 3,000
2006 275,000 10,000
2007 670,000 28,000
2008 1,300,000 55,000
2009 1,170,000 36,000
2010 664,000 13,000
2011 966,000 16,000
2012 0 23,000
- -------------------------------------------------------------------
$5,687,000 $193,000
===================================================================
Deferred tax assets (net of any valuation allowance) and liabilities resulting
from temporary differences, net operating loss carryforwards and tax credit
carryforwards are recorded using an asset and liability method. Deferred taxes
relating to temporary differences and loss carryforwards are measured using the
enacted tax rate expected to be in effect when they are reversed or are
realized.
The appropriate tax effect of each type of temporary difference and carryforward
is:
1997 1996
- ----------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $2,161,000 $2,162,000
Depreciation 162,000 115,000
Vacation accrual 27,000 18,000
Inventory 1,000 0
Other 43,000 38,000
Tax credit carryforwards 193,000 170,000
......................................................................
2,587,000 2,503,000
Valuation allowance (2,587,000) (2,503,000)
- ----------------------------------------------------------------------
Net deferred tax asset $0 $0
======================================================================
Due to the uncertainty surrounding the timing of realizing the benefits of its
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets. A
reconciliation of the valuation allowance for deferred tax assets is as follows:
1997 1996
- ----------------------------------------------------------------------------
Valuation at beginning of the year $2,503,000 $2,101,000
Addition to allowance 84,000 402,000
- ----------------------------------------------------------------------------
Valuation allowance at end of the year $2,587,000 $2,503,000
============================================================================
<PAGE>
Total tax benefit differs from the expected tax benefit, computed by applying
the federal statutory rate of 35% as follows:
1997 1996
- --------------------------------------------------------------------------------
Expected income tax benefit (51,000) $(375,000)
Effect of net operating loss and tax credit carryforwards
with no current benefit 79,000 433,000
State income taxes (5,000) (42,000)
Income tax credits (23,000) (16,000)
- --------------------------------------------------------------------------------
$0 $0
================================================================================
- --------------------------------------------------------------------------------
6. NOTES PAYABLE
- --------------------------------------------------------------------------------
NOTE PAYABLE TO BANK During 1996, the Company entered into a $1,200,000 line of
credit with a financial institution which expired June 30, 1997. On June 24,
1997, the Company signed an extension through June 30, 1998 on the line of
credit. The availability under the line is subject to borrowing base
requirements, and advances are at the discretion of the lender. The agreement
calls for interest at the rate of 2.25% over the financial institution's base
rate with minimum interest due over the term of the agreement of $70,000. The
line is secured by substantially all of the Company's assets. The agreement also
requires the Company to meet certain financial covenants. Outstanding borrowings
under the agreement were $659,240 at December 31, 1997.
NOTE PAYABLE TO CUSTOMER On May 14, 1991, the Company entered into a $100,000
non-interest bearing note payable agreement with a customer. The agreement
called for quarterly payments commencing May 1, 1992. In February 1993, the
customer agreed to defer payments for one year. On January 1, 1994, the Company
commenced payments at the rate of $1,200 per month which continue until the loan
is retired in February 1998.
- --------------------------------------------------------------------------------
7. LEASES
- --------------------------------------------------------------------------------
The Company is obligated under capital lease agreements for equipment and
leasehold improvements. Future minimum payments under capital leases are as
follows:
Years Ending December 31,
1998 $52,979
1999 42,458
2000 3,720
2001 620
- -------------------------------------------------------------------------
Total minimum lease payments 99,777
Less amounts representing interest imputed at 11% to 17.9% 14,751
- -------------------------------------------------------------------------
Present value of net minimum lease payments 85,026
Less current installments 37,836
- -------------------------------------------------------------------------
$47,190
=========================================================================
Capital leases are secured by the equipment under lease. In addition, one of the
capital leases is also secured by the Company's investment in U.S. Treasury
bills at December 31, 1997 (See Note 2).
<PAGE>
Equipment and leasehold improvements under capital leases as of December 31,
1997 and 1996 are as follows:
1997 1996
- --------------------------------------------------------------------
Equipment $128,589 $134,739
Leasehold improvements 0 152,451
Less accumulated amortization (55,845) (169,326)
- --------------------------------------------------------------------
$72,744 $117,864
====================================================================
The Company leases its office and manufacturing facility under an operating
lease that expires in April 1999 with a monthly base rent of $9,793, which
escalates yearly based on the consumer price index. Operating expenses and real
estate taxes are paid by the Company. Rent expense, including operating expenses
and real estate taxes, was approximately $159,000 for each of the years ended
December 31, 1997 and 1996.
- --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
WARRANTS In connection with both stock and debt offerings, as well as several
consulting arrangements, the Company has issued warrants to purchase the
Company's common stock. The warrants outstanding as of December 31, 1997 are
summarized in the table below:
<TABLE>
<CAPTION>
EVENT # SHARES PRICE EXPIRE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-employee consultant 13,333 $2.125 02/01/98
Non-employee consultant 2,500 $3.750 08/10/98
Investment agreement with Empi 66,845 $5.610 01/21/99
Private placement 1994 309,555 $5.610 01/21/99
Private placement 1994 (placement agent) 30,313 $4.490 01/21/99
Private placement 1996 (placement agent) 107,000 $3.900 01/21/99
Non-employee consultant 2,000 $3.000 02/08/99
Private investors note payable 50,000 $1.500 07/29/99
Private investors note payable (investment advisor) 5,517 $1.500 08/03/99
Private stock purchase 1994 (investment advisor) 8,000 $2.500 10/06/99
Private investors note payable amendment 30,000 $1.500 12/30/99
Private investors note payable amendment (investment advisor) 4,483 $1.500 12/30/99
Private stock purchase 1995 (investment advisor) 10,667 $1.875 01/27/00
Non-employee consultant 7,500 $2.560 02/25/02
- -----------------------------------------------------------------------------------------------------
TOTAL OUTSTANDING 647,713
- -----------------------------------------------------------------------------------------------------
</TABLE>
STOCK OPTIONS The Company has three stock option plans: the 1989 Incentive Plan,
the 1991 Non-Qualified Plan and the 1996 Non-Employee Director and Medical
Advisory Board Plan. In April 1997, the Shareholders approved increasing the
number of options available under the Incentive Plan from 200,000 to 400,000.
Under the three plans, a maximum of 780,000 options were designated for grant at
prices not less than 85% of fair market value at date of grant if a
non-qualified option, or 100% if an incentive option as defined under the
Internal Revenue Code. Options vest over periods ranging from two years to five
years and the options expire over periods ranging from six to fifteen years
after the date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123). Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense for the Company's three stock option
plans been determined based on the fair value at the grant date for awards in
1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net loss - as reported $ (145,566) $ (1,071,115)
Net loss - pro forma $ (189,513) $ (1,103,575)
Basic and diluted net loss per share - as reported $ (.04) $ (.28)
Basic and diluted net loss per share - pro forma $ (.05) $ (.29)
- --------------------------------------------------------------------------------------
</TABLE>
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net income (loss) for future years
because options vest over several years and additional awards generally are made
each year.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield $0 $0
Expected stock price volatility 43.6% 57.3%
Risk-free interest rate 6.3% 6.3%
Expected life of options (years) 5 5
- --------------------------------------------------------------------------------------
Weighted average fair value of options granted $1.18 $1.96
- --------------------------------------------------------------------------------------
</TABLE>
Additional information relating to all outstanding options as of December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
----------------------------- -------------------------
1997 1996
----------------------------- -------------------------
WEIGHTED AVG WEIGHTED AVG
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 376,291 $2.51 278,541 $1.99
Options granted 84,600 2.63 135,000 3.46
Options exercised (44,075) 1.36 (22,000) 1.28
Options surrendered (45,583) 2.94 (15,250) 3.10
- --------------------------------------------------------------------------------------------------------
Options outstanding, end of year 371,233 $2.63 376,291 $2.51
Options available for grant at end of year 220,625 265,475
- --------------------------------------------------------------------------------------------------------
Total reserved shares 591,858 641,766
- --------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
----------------------------------- ----------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------- ----------------------------------
Weighted Avg
Number Remaining Number
Range of Exercise Outstanding Contractual Life Weighted Avg Exercisable at Weighted Avg
Prices at 12/31/97 (Yrs) Exercise Price 12/31/97 Exercise Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.28 - $2.12 80,000 8.0 $1.28 80,000 $1.28
$2.13 - $3.19 158,533 3.8 $2.58 66,889 $2.48
$3.20 - $4.00 132,700 4.9 $3.49 39,900 $3.54
- --------------------------------------------------------------------------------------------------------
$1.28 - $4.00 371,233 5.1 $2.63 186,789 $2.19
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
9. SIGNIFICANT CUSTOMER
- --------------------------------------------------------------------------------
The Company extends unsecured credit to customers primarily in the United
States. For the years ended December 31, 1997 and 1996, one customer accounted
for 51% and 58% of sales, respectively. The customer accounted for 33% of
accounts receivable as of December 31, 1997 and 50% as of December 31, 1996.
- --------------------------------------------------------------------------------
10. RETIREMENT PLAN
- --------------------------------------------------------------------------------
The Company has a profit sharing plan (the Plan) classified as a defined
contribution plan and qualifying under Section 401(k) of the Internal Revenue
Code. The Plan allows employees to defer a portion of their annual compensation
through pre-tax contributions to the Plan. The Company matches 10% of an
employee's contribution provided the employee's contribution does not exceed 5%
of the employee's compensation. Matching contributions for the years ended
December 31, 1997 and 1996 were $6,884 and $6,372, respectively. The Company's
Board of Directors may approve discretionary contributions to the Plan. No
discretionary contribution has been made since the Plan's inception.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 concerning the executive officers and
directors of the Company is incorporated herein by reference to pages 3 through
6 of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the close of the fiscal year
for which this report is filed.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to pages
6 and 7 of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the close of the fiscal year
for which this report is filed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference to pages
2 and 3 of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the close of the fiscal year
for which this report is filed.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
A. Documents filed as part of this report
(1) Exhibits. See "Exhibit Index" on page following signatures
B. Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned thereunto duly authorized:
MEDAMICUS, INC.
Date: March 03, 1998 By: /s/ James D. Hartman
President and Chief Financial Officer
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 in
the capacities and on the dates indicated:
/s/ James D. Hartman President and Chief Executive Officer 03/03/98
Principal Financial and Accounting Officer
Director
// Richard W. Kramp Director
/s/ Richard L. Little Director 03/03/98
/s/ Richard F. Sauter Director 03/03/98
//Ted Schwarzrock Director
<PAGE>
EXHIBIT INDEX
EXHIBIT # DESCRIPTION PAGE
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-18 [File No. 33-42112C]).
3.2 Articles of Amendment of Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-18 [File No.
33-42112C]).
3.3 By-laws of the Company (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement on
Form S-18 [File No. 33-42112C]).
*10.1 Employment Agreement, dated January 1, 1993, between the
Company and Richard L. Little (incorporated by reference
to Exhibit 10.1 to the Company's annual report on Form
10-KSB for the year ended December 31, 1993).
*10.2 Employment Agreement, dated February 19, 1996, between
the Company and Dennis S. Madison (incorporated by
reference to Exhibit 10.2 to the Company's annual report
on Form 10-KSB for the year ended December 31, 1995).
*10.3 Employment Agreement, dated February 19, 1996, between
the Company and James D. Hartman (incorporated by
reference to Exhibit 10.3 to the Company's annual report
on Form 10-KSB for the year ended December 31, 1995).
*10.4 MedAmicus, Inc. 1991 Non-Statutory Stock Option Plan,
restated to reflect amendments dated December 18, 1991
(incorporated by reference to Exhibit 10.7 to the
Company's annual report on Form 10-K for the year ended
December 31, 1991).
*10.5 MedAmicus, Inc. Stock Option Incentive Plan, restated to
reflect amendments dated December 18, 1991, amendments
approved by shareholders on April 21, 1994, and
amendments approved by shareholders on April 24, 1997.
10.6 Supply and Distribution Agreement, dated July 31, 1990,
between the Company, Davol Inc. and Sigma Medical U.S.A.,
Ltd. (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-18 [File No.
33-42112C]).
10.7 Supply and Distribution Agreement, dated October 1, 1990,
between the Company, Sigma Medical U.S.A., Ltd. and Davol
Inc. (incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-18 [File No.
33-42112C]).
10.8 Amendment No. 2 to Supply and Distribution Agreement,
dated January 10, 1991, between the Company, Sigma
Medical U.S.A., Ltd. and Davol Inc. (incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-18 [File No. 33-42112C]).
10.9 Supply and Distribution Agreement Amendment No. 3, dated
June 4, 1991 and June 6, 1991, between the Company and
Davol Inc. (incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-18 [File
No. 33-42112C]).
10.10 Supply Agreement, dated May 3, 1991, between the Company
and Medtronic, Inc. (incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form
S-18 [File No. 33-42112C]).
<PAGE>
EXHIBIT # DESCRIPTION PAGE
- --------------------------------------------------------------------------------
10.11 Promissory Note, dated May 14, 1991, to Davol Inc.
(incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-18 [File No.
33-42112C]).
10.12 Lease Agreement, dated February 2, 1990, between the
Company and Jagodzinski Properties, including First
Amendment to Lease Agreement, dated May 1, 1991
(incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-18 [File No.
33-42112C]).
10.13 Form of Agreement Restricting Sale of Stock (incorporated
by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-18 [File No. 33-42112C]).
10.14 Second Amendment to Lease Agreement, dated December 3,
1991, between Jagodzinski Properties and the Company
(incorporated by reference to Exhibit 10.16 to the
Company's annual report on Form 10-K for the year ended
December 31, 1991).
*10.15 MedAmicus, Inc. 1992 Non-Employee Director Plan
(incorporated by reference to Exhibit 10.22 to the
Company's annual report on Form 10-K for the year ended
December 31, 1991).
10.16 Investment Agreement, dated November 9, 1993, between the
Company and Empi, Inc. (incorporated by reference to the
Exhibit to the Company's report on Form 10-QSB for the
quarter ended September 30, 1993).
10.17 Form of Bridge Loan Agreement (incorporated by reference
to the Exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended June 30, 1994).
10.18 Form of Bridge Warrant (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on
Form S-3 [File No. 33-86292]).
10.19 Form of Advisor's Warrant (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-3 [File No. 33-86292]).
10.20 Form of Bridge Loan Extension Agreement, dated as of
December 30, 1994 (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-3
[File No. 33-86292]).
10.21 Form of Bridge Warrant pursuant to Extension Agreement
(incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-3 [File No.
33-86292]).
10.22 Subscription Agreement, Letter of Investment Intent and
Investor Rights Agreement, between the Company and
Rudiger Dahle, dated as of January 27, 1995 (incorporated
by reference to Exhibit 10.22 to the Company's annual
report on Form 10-KSB for the year ended December 31,
1994).
10.23 International Distribution Agreement, by and between the
Company and NICOLAI, dated as of January 1, 1995
(incorporated by reference to Exhibit 10.23 to the
Company's annual report on Form 10-KSB for the year ended
December 31, 1994).
10.24 Addendum to Supply Agreement, dated August 1, 1994, by
and between the Company and Medtronic, Inc. (incorporated
by reference to Exhibit 10.24 to the Company's annual
report on Form 10-KSB for the year ended December 31,
1994).
<PAGE>
EXHIBIT # DESCRIPTION PAGE
- --------------------------------------------------------------------------------
10.25 Credit and Security Agreement, dated March 5, 1996, by
and between the Company and Norwest Credit, Inc.
(incorporated by reference to Exhibit 10.2 to the
Company's annual report on Form 10-KSB for the year ended
December 31, 1995).
10.26 Revolving Note, dated March 26, 1996 to Norwest Credit,
Inc. (incorporated by reference to Exhibit 10.2 to the
Company's annual report on Form 10-KSB for the year ended
December 31, 1995).
10.27 Collateral Account Agreement, dated March 26, 1996, by
and between the Company and Norwest Credit, Inc.
(incorporated by reference to Exhibit 10.2 to the
Company's annual report on Form 10-KSB for the year ended
December 31, 1995).
10.28 Lockbox Agreement, dated March 26, 1996 by and among the
Company, Norwest Credit, Inc. and Norwest Bank Minnesota
(incorporated by reference to Exhibit 10.2 to the
Company's annual report on Form 10-KSB for the year ended
December 31, 1995).
10.29 Management Support Agreement, dated March 26, 1996 by and
among the Company, James Hartman and Norwest Credit, Inc.
(incorporated by reference to Exhibit 10.2 to the
Company's annual report on Form 10-KSB for the year ended
December 31, 1995).
*10.30 MedAmicus, Inc. 1996 Non-Employee Director and Medical
Advisory Board Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the Company's annual report
on Form 10-KSB for the year ended December 31, 1995).
10.31 First Amendment to Credit and Security Agreement, dated
June 24, 1997, by and between the Company and Norwest
Credit, Inc. (incorporated by reference to Exhibit 10.1
to the Company's quarterly report on Form 10-QSB for the
quarter ended June 30, 1997).
21.1 Subsidiaries of the Registrant. None.
23.1 Consent of McGladrey & Pullen, LLP.
23.2 Independent Auditor's Report for the years ended December
31, 1996 and 1997
* Indicates a management contract or compensatory plan or arrangement.
EXHIBIT 10.5
STOCK OPTION INCENTIVE PLAN
MEDAMICUS, INC.
(restated to reflect (i) amendments dated December 18, 1991;
(ii) amendments approved by shareholders on April 21, 1994; and
(iii) amendment approved by the Board on August 1, 1996
and by shareholders on April 24, 1997)
1. Purpose.
The purpose of this Plan is to further the growth and general
prosperity of MedAmicus, Inc., the Company, by enabling the employees of the
Company, who have been or will be given responsibility for the affairs of the
Company, to acquire shares of its common stock under the terms and conditions
and in the manner set forth by this Plan, increasing their personal involvement
in the Company and to enable the Company to obtain and retain the services of
those employees.
2. Administration.
This Plan shall be administered by a Committee of at least two (2)
Directors who are disinterested administrators within the meaning of Section 16
of the Securities Exchange Act of 1934 and the rules, regulations and
interpretations promulgated thereunder.
Each option granted will be evidenced by a written agreement (Stock
Option Agreement) and a document containing the terms and conditions of the
Plan.
3. Eligibility and Participation.
Employees eligible to receive options under the Plan shall be key
personnel including officers of the Company and directors who are also employees
of the Company. The Committee shall allot to such participant options to
purchase shares as the Committee shall from time to time determine: provided,
however, that no employee shall be allotted an option for any greater number of
shares than would result in him owning directly or indirectly, more than 10% of
the total combined voting power or value of the stock of the Company or any of
its subsidiaries unless the option price is at least 85% of the market value of
the stock on the date of grant, and the option is, by its terms, not exercisable
after six (6) years from the date of grant.
4. Shares Subject to Plan.
<PAGE>
Subject to adjustment as provided in Section 5, an aggregate of up to
400,000 shares of the Common Stock of the Company shall be subject to the Plan
and the Committee is authorized to grant options hereunder with respect to such
number of shares. Any unsold shares subject to an option under the Plan which
for any reason expires or otherwise terminates may again be made subject to
option under the Plan at the discretion of the Committee.
5. Adjustments Upon Changes in Capitalization.
In the event of a merger, consolidation, reorganization, stock
dividend, stock split, or any other change in corporate structure or
capitalization affecting the Company's common shares, appropriate adjustment
shall be made in the maximum number of shares available under the Plan or to any
one individual and in the number, kind, option, price, etc. of shares subject to
options granted under the Plan.
6. Terms and Conditions of Options.
The Committee shall have power subject to the limitations contained in
the Plan, to prescribe any terms and conditions in respect to the granting or
exercise of any option under the Plan and in particular shall prescribe the
following terms and conditions:
(a) Each option shall state the number of shares to which it
pertains.
(b) Each option shall be granted within ten years of the date the
Plan is adopted.
(c) Each option shall be exercisable only within six years of the
date of grant.
(d) The purchase price, which shall be at least 85% of the fair
market value of the shares at such time as the option is
granted and shall not be less than the par value of the shares
sold.
(e) An option may be exercised at any time after the date of grant
subject to the provisions of section 6(f) of the Plan with
respect to all or part of the shares covered by the option. An
option may not be exercised for fractional shares of stock.
In the event the Company or the stockholders of the Company
enter into an agreement to dispose of all or substantially all
of the assets or stock of the Company by means of a sale,
merger, reorganization,
<PAGE>
liquidation or otherwise, an option shall become immediately
exercisable with respect to the full number of shares.
(f) An option shall be exercised when written notice of such
exercise has been given to the Company at its principle
business office by the person entitled to exercise the option
and full payment for the shares has been received by the
Company. Until the stock certificates are issued, no right to
vote, receive dividends, or any other rights as a shareholder
shall exist with respect to optioned shares, notwithstanding
the exercise of the option.
(g) An option may be exercised by the optionee only while he is,
and has continually been, since the date of the grant of the
option, an employee of the Company or within three months
following termination of employment (for reasons other than
death, disability or termination for cause).
If the continuous employment of an optionee terminates by
reason of his death, options which the deceased employee would
be entitled to exercise as of the date of death may be
exercised within one year following the date of death by the
person to whom his rights under such option shall have passed
by will or by the laws of descent and distribution, but in no
event later than the expiration of the option.
If the continuous employment of an optionee terminates by
reason of disability, options which the disabled employee
would be entitled to exercise as of the date of termination of
employment may be exercised within one year following the date
of termination, but in no event later than the expiration of
the option.
If the continuous employment of an optionee terminates for
cause, any options which have not been exercised as of the
date of termination shall be cancelled.
7. Options Not Transferable.
No option granted under the Plan will be transferrable by the optionee,
either voluntarily or involuntarily, except by will or the laws of descent and
distribution, and then only to the extent provided in Section 6 hereof, or
pursuant to a qualified domestic relations order (as defined by the Internal
Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income
Security Act and the rules thereunder.)
<PAGE>
8. Amendment or Termination of the Plan.
The Board of Directors may amend the Plan from time to time as it deems
advisable. The Board of Directors may at any time terminate the Plan, provided
that any termination of the Plan shall not affect options already granted. The
options shall remain in full force and effect as if the Plan had not been
terminated.
9. Agreement and Representation of Employee.
As a condition to the exercise of any option or portion thereof, the
Company may require the person exercising the option to represent and warrant at
the time of any exercise that the shares are being purchased only for investment
and without any present intention to sell or distribute the shares if in the
option of counsel for the Company such representation is required under the
Securities Act of 1933, or any other applicable law, regulation or rule of any
governmental agency.
In the event legal counsel to the Company renders an option to the
Company that shares for options exercised pursuant to this Plan cannot be issued
to the optionee because such act would violate the applicable Federal or State
securities law, then and in that event, the optionee agrees that the Company
shall not be required to issue the shares to the optionee tendered to the
Company upon exercise of the option.
10. Effectiveness and Termination of the Plan.
The Plan shall become effective upon adoption by the Board of Directors
and shall be subject to approval of the stockholders of MedAmicus, Inc. within
12 months of adoption. The Plan shall terminate on the earliest of:
(a) the date when all the common shares available under the Plan
shall have been acquired through exercising the options
granted under the Plan,
(b) August 1, 1999,
(c) such other date as the Board may determine.
11. Form of Option.
Options may be issued by the execution of the MedAmicus, Inc. form
entitled "Stock Option Agreement."
EXHIBIT 23.1
Independent Auditor's Consent
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 related to the Stock Option Incentive Plan, 1991
Non-Statutory Stock Option Plan and the 1992 Non-Employee Director Plan
(Commission File No. 33-94524) and on Form S-3 relating to the registration of
1,061,734 shares of common stock, (Commission File No. 33-86292) of our report
dated January 20, 1998 with respect to the financial statements of MedAmicus,
Inc. included in this Annual Report on Form 10-KSB for the year ended December
31, 1997.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
March 9, 1998
EXHIBIT 23.2
To the Board of Directors and Shareholders of MedAmicus, Inc. Minneapolis,
Minnesota
We have audited the accompanying balance sheets of MedAmicus, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedAmicus, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
January 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,102,490
<SECURITIES> 0
<RECEIVABLES> 1,006,989
<ALLOWANCES> 2,050
<INVENTORY> 1,170,289
<CURRENT-ASSETS> 3,374,141
<PP&E> 2,808,828
<DEPRECIATION> 1,940,914
<TOTAL-ASSETS> 4,279,553
<CURRENT-LIABILITIES> 1,515,039
<BONDS> 47,190
<COMMON> 41,123
0
0
<OTHER-SE> 2,676,201
<TOTAL-LIABILITY-AND-EQUITY> 4,279,553
<SALES> 7,172,786
<TOTAL-REVENUES> 7,172,786
<CGS> 3,976,791
<TOTAL-COSTS> 3,976,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,765
<INCOME-PRETAX> (145,566)
<INCOME-TAX> 0
<INCOME-CONTINUING> (145,566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (145,566)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
