SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 1999
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.
(Exact 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)
N/A
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
The number of shares of Registrant's Common Stock outstanding on June 30, 1999
was 4,112,274
Transitional Small Business Disclosure Format. Yes ___ No _X_
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MEDAMICUS, INC.
INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 1999 and December 31, 1998 3
Statements of Operations for the three and six months ended June 30, 1999 and 1998 4
Statement of Shareholders' Equity for the six months ended June 30, 1999 4
Statements of Cash Flows for the six months ended June 30, 1999 and 1998 5
Condensed Notes to the Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7-11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6(a). EXHIBITS 12
ITEM 6(b). REPORTS ON FORM 8-K 12
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BALANCE SHEETS (UNAUDITED)
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JUNE 30, 1999 DECEMBER 31, 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 822,699 $ 1,022,055
Accounts receivable 1,135,440 1,141,302
Inventories 1,448,552 1,314,726
Prepaid expenses and other assets 44,748 53,945
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TOTAL CURRENT ASSETS 3,451,439 3,532,028
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PROPERTY AND EQUIPMENT:
Equipment 2,247,752 2,130,171
Office furniture, fixtures and computers 627,864 566,191
Leasehold improvements 365,800 363,950
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3,241,416 3,060,312
Less accumulated depreciation and amortization (2,565,234) (2,382,686)
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NET PROPERTY AND EQUIPMENT 676,182 677,626
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PATENT RIGHTS, net of accumulated amortization of
$148,590 and $147,313, respectively 9,803 10,146
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TOTAL ASSETS $ 4,137,424 $ 4,219,800
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 870,836 $ 934,909
Accounts payable 347,351 394,385
Accrued expenses 287,769 273,458
Current installments of capital lease obligations 17,837 39,247
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TOTAL CURRENT LIABILITIES 1,523,793 1,641,999
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LONG-TERM LIABILITIES:
Capital lease obligations, less current installments 2,826 4,276
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TOTAL LIABILITIES 1,526,619 1,646,275
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock-undesignated, authorized 1,000,000 shares 0 0
Common stock-$.01 par value, authorized 9,000,000 shares; issued and
outstanding 4,112,274 shares in 1999 and 1998 41,123 41,123
Additional paid-in capital 8,578,142 8,578,142
Accumulated deficit (6,008,460) (6,045,740)
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TOTAL SHAREHOLDERS' EQUITY 2,610,805 2,573,525
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,137,424 $ 4,219,800
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SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
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STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
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Sales $ 2,199,197 $ 1,939,203 $ 4,486,655 $ 3,690,955
Cost of sales 1,080,230 1,125,470 2,267,943 2,179,242
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GROSS PROFIT 1,118,967 813,733 2,218,712 1,511,713
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OPERATING EXPENSES:
Research and development 226,141 128,757 443,315 251,281
Selling, general and administrative 870,206 758,717 1,710,353 1,467,433
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TOTAL OPERATING EXPENSES 1,096,347 887,474 2,153,668 1,718,714
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OPERATING LOSS 22,620 (73,741) 65,044 (207,001)
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OTHER INCOME (EXPENSE):
Interest expense (19,679) (25,680) (37,647) (49,019)
Interest income 8,907 11,192 17,786 24,520
Other (1,064) (2,113) (7,903) (8,050)
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TOTAL OTHER INCOME (EXPENSE) (11,836) (16,601) (27,764) (32,549)
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NET INCOME (LOSS) $ 10,784 $ (90,342) $ 37,280 $ (239,550)
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NET INCOME (LOSS) PER SHARE
Basic $ 0.00 $ (0.02) $ 0.01 $ (0.06)
Diluted $ 0.00 $ (0.02) $ 0.01 $ (0.06)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 4,112,274 4,112,274 4,112,274 4,112,274
Diluted 4,147,248 4,112,274 4,128,753 4,112,274
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SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
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Common Stock Additional
----------------------- Paid-In Accumulated
THREE MONTHS ENDED MARCH 31, 1999 Shares Amount Capital Deficit Total
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BALANCES AT DECEMBER 31, 1998 4,112,274 $ 41,123 $ 8,578,142 $(6,045,740) $ 2,573,525
Net income for the six month period ended 6/30/99 0 0 0 37,280 37,280
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BALANCES AT MARCH 31, 1999 4,112,274 $ 41,123 $ 8,578,142 $(6,008,460) $ 2,610,805
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SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
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STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 37,280 $ (239,550)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 183,825 237,570
Interest added to investments 0 (490)
Changes in operating assets and liabilities:
Accounts receivable 5,862 (191,060)
Inventories (133,826) (128,810)
Prepaid expenses and other assets 9,197 (86,259)
Accounts payable (47,034) (86,613)
Accrued expenses 14,311 (25,284)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 69,615 (520,496)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net of retirements (181,104) (188,701)
Additions to patent rights (934) (2,683)
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NET CASH USED IN INVESTING ACTIVITIES (182,038) (191,384)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (22,860) (20,079)
Proceeds from exercise of stock options 0 0
Proceeds from (payments on) note payable to bank (64,073) 513,180
Payments on note payable to customer 0 (2,822)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (86,933) 490,279
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NET DECREASE IN CASH AND CASH EQUIVALENTS (199,356) (221,601)
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,022,055 1,102,490
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 822,699 $ 880,889
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 37,203 $ 45,988
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SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
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CONDENSED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included in this Form 10-QSB have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, pursuant to such rules and
regulations, although management believes the disclosures are adequate to make
the information presented not misleading. These statements should be read in
conjunction with the Company's annual report on Form 10-KSB for the year ended
December 31, 1998, filed by the Company with the Securities and Exchange
Commission.
The financial statements presented herein as of June 30, 1999 and for the three
and six months ended June 30, 1999 and 1998 reflect, in the opinion of
management, all material adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows for these interim periods.
2. INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out
(FIFO) basis, or market. Inventories consist of the following:
JUNE 30, 1999 DECEMBER 31, 1998
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Purchased parts and subassemblies $ 771,986 $ 737,375
Work in process 307,945 274,289
Finished goods 368,621 303,062
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TOTAL INVENTORY $ 1,448,552 $ 1,314,726
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3. NET INCOME (LOSS) PER SHARE
Basic per-share amounts are computed, generally, by dividing net income or loss
by the weighted-average number of common shares outstanding. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share.
4. SEGMENT AND RELATED INFORMATION
The Company has two primary business units that comprise the internal reporting
structure for its management. These business units are the Vascular Delivery
Systems business unit and the Fiber Optic business unit which are defined below.
The Company allocates its general and administrative expenses, as well as
interest income, interest expense and other expenses evenly across both business
units.
VASCULAR DELIVERY SYSTEMS: This business segment consists of business activities
related to the development, manufacture and sale of vascular delivery products,
on an OEM basis, primarily to Medtronic and several other contract manufacturing
customers.
FIBER OPTIC: This business segment consists of business activities related to
the development, manufacture and sale of the Company's LuMax(TM) Cystometry
System and related supplies and accessories.
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Summarized financial information concerning the Company's reportable segments is
shown in the following table.
VASCULAR DELIVERY
QUARTER ENDED 06/30/99 SYSTEMS FIBER OPTIC TOTAL
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Revenues $1,348,943 $ 850,254 $2,199,197
Segment profit (loss) 414,341 (403,557) 10,784
Total assets 1,865,380 2,272,044 4,137,424
Capital expenditures 88,094 (12,222) 75,872
Depreciation and amortization 26,668 54,918 81,586
Interest expense 9,840 9,839 19,679
Interest income 4,453 4,454 8,907
VASCULAR DELIVERY
QUARTER ENDED 06/30/98 SYSTEMS FIBER OPTIC TOTAL
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Revenues $1,254,240 $ 684,963 $1,939,203
Segment profit (loss) 440,122 (530,464) (90,342)
Total assets 1,822,741 2,595,644 4,418,385
Capital expenditures 59,990 35,013 95,003
Depreciation and amortization 34,304 86,369 120,673
Interest expense 12,840 12,840 25,680
Interest income 5,596 5,596 11,192
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the accompanying financial statements and footnotes.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
OVERVIEW
Total revenues were $4,486,655 for the six months ended June 30, 1999 compared
to $3,690,955 for the six months ended June 30, 1998, representing a 21.6%
increase. Total gross profit increased from $1,511,713 for the six months ended
June 30, 1998, to $2,218,712 for the six months ended June 30, 1999,
representing a 46.8% increase. Total gross profit as a percent of sales
increased from 41.0% to 49.5% in such periods. Total research and development
expenditures were $443,315 or 9.9% of sales for the six months ended June 30,
1999, compared to $251,281 or 6.8% of sales for the six months ended June 30,
1998. Sales and marketing expenses increased from $977,831 for the six month
period ended June 30, 1998 to $1,193,188 for the six month period ended June 30,
1999. General and administrative expenses increased from $489,602 for the six
months ended June 30, 1998 to $517,165 for the six months ended June 30, 1999.
The increase in general and administrative expenses was primarily due to
increased spending on MIS and investor-relations activities. Interest income,
interest expense and other expenses remained relatively unchanged in total
during the comparable periods.
As a result, the Company had net income of $37,280 or $.01 per share for the six
months ended June 30, 1999, compared to a net loss of $239,550 or $.06 per share
for the six months ended June 30, 1998.
VASCULAR DELIVERY SYSTEMS
Sales of vessel introducers, primarily to Medtronic under an exclusive
distribution arrangement, were $2,621,666 for the six months ended June 30,
1999, compared to $1,984,364 for the six months ended June 30, 1998,
representing a 32.1% increase. This increase was primarily due to Medtronic
building their inventories during the
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first four months of 1999 compared to 1998. Medtronic introducer kit orders have
moderated to a more normal sell-through rate and the Company expects kit orders
to stay at that level during the third quarter.
Contract manufacturing sales were $275,083 for the six months ended June 30,
1999, compared to $330,901 for the six months ended June 30, 1998. This decrease
was due to the Company's existing customer ordering lower quantities of product
during the comparable periods. The Company expects contract manufacturing sales
in the third quarter to be consistent with those in the second quarter. The
Company also does some contract research and development work periodically for
Medtronic and realized sales of $35,746 for the six months ended June 30, 1999
compared to $40,786 for the six months ended June 30, 1998.
The gross profit percentage on vessel introducers and contract manufacturing
totaled 52.9% for the six months ended June 30, 1999, compared to 48.4% for the
six months ended June 30, 1998. The increase in the gross profit percentage on
vessel introducers and contract manufacturing was primarily due to the Company
absorbing its existing overhead costs with the larger volume of product during
the first half of 1999.
Total research and development expenditures were $208,796 or 7.1% of sales for
the six months ended June 30, 1999, compared to $44,894 or 1.9% of sales for the
six months ended June 30, 1998. The Company increased its engineering staff and
has been working on a number of projects for Medtronic and is also working on
several new introducer product concepts. The Company expects research and
development expenditures in the third quarter to approximate the second quarter.
Selling expenses increased from $21,515 for the six months ended June 30, 1998
to $70,590 for the six months ended June 30, 1999. This increase was primarily
due to two factors. First, commission expense has increased due to the increase
in sales. Second, the Company attended more trade shows in 1999 and has
developed a brochure to help increase awareness of its product offerings. The
Company is intending to expand its customer base for these products and has
received a number of inquiries from customers attending these shows. Any
revenues related to these potential new customers would be minimal in 1999.
FIBER OPTIC
Sales of the Company's fiber optic pressure sensing products were $1,554,160 for
the six months ended June 30, 1999, compared to $1,334,904 for the six months
ended June 30, 1998, representing an 16.4% increase. Monitor sales decreased
5.7% or $44,983 and catheter sales increased 45.3% or $230,457 over the
comparable period. The Company also saw increases in its accessory and service
sales totaling $33,782. The decrease in monitor sales was primarily due to the
fact that the Company terminated its relationships with its indirect sales force
on December 31, 1998 and started selling with a new ten person direct sales
force in January 1999. The Company had anticipated a drop in monitor sales
during the first half of the year due to the learning curve for the new sales
force. The Company anticipates that monitor sales will accelerate more rapidly
as the direct sales force continues to gain knowledge about the products and the
marketplace. Catheter sales continue to increase as the Company's installed base
of monitors grows.
The gross profit percentage on fiber optic products totaled 43.0% or $668,987
for the six month period ended June 30, 1999 compared to 27.8% or $371,074 for
the six month period ended June 30, 1998. The percentage increase was primarily
due to a higher average selling price on the LuMax System, as well as better
catheter yields compared to the same period in 1998. The Company expects gross
profit in the fiber optic business to improve in the future as the Company
increases sales, improves catheter yields, and better utilizes its capacity.
Total research and development expenditures were $234,519 or 15.1% of sales for
the six months ended June 30, 1999, compared to $206,387 or 15.5% of sales for
the six months ended June 30, 1998. The Company is near completion on the
development of the LuMax Interface System, as well as a new lower cost catheter.
However, the Company continues to explore product enhancements and new
technologies and expects research and development expenditures in the third
quarter to approximate the second quarter.
Selling expenses increased from $956,316 for the six months ended June 30, 1998
to $1,122,598 for the six months ended June 30, 1999. The increase was primarily
due to salaries and travel for the direct sales force of
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approximately $258,282. Commissions expense decreased approximately $92,000 due
to the direct sales force receiving a lower commission percentage on sales than
the indirect sales force.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
OVERVIEW
Total revenues were $2,199,197 for the three months ended June 30, 1999 compared
to $1,939,203 for the three months ended June 30, 1998, representing a 13.4%
increase. Total gross profit increased from $813,733 for the three months ended
June 30, 1998 to $1,118,967 for the three months ended June 30, 1999,
representing a 37.5% increase. Total gross profit as a percent of sales
increased from 42.0% to 50.9% in such periods. Total research and development
expenditures were $226,141 or 10.3% of sales for the three months ended June 30,
1999, compared to $128,757 or 6.6% of sales for the three months ended June 30,
1998. Sales and marketing expenses increased from $518,793 for the three month
period ended June 30, 1998 to $613,655 for the three month period ended June 30,
1999. General and administrative expenses increased from $239,924 for the three
months ended June 30, 1998 to $256,551 for the three months ended June 30, 1999,
primarily due to the factors discussed above. Interest income, interest expense
and other expenses remained relatively unchanged during the comparable periods.
As a result, the Company had net income of $10,784 or $.00 per share for the
three months ended June 30, 1999, compared to a net loss of $90,342 or $.02 per
share for the three months ended June 30, 1998.
VASCULAR DELIVERY SYSTEMS
Sales of vessel introducers, primarily to Medtronic under an exclusive
distribution arrangement, were $1,169,865 for the three months ended June 30,
1999, compared to $1,023,107 for the three months ended June 30, 1998,
representing a 14.3% increase. The Company benefited from the Medtronic
inventory build in April and then saw introducer kit orders moderate to a more
normal sell-through rate for the balance of the quarter. The Company expects
introducer sales in the third quarter to be consistent with the second quarter.
Contract manufacturing sales were $164,921 for the three months ended June 30,
1999, compared to $215,896 for the three months ended June 30, 1998, due to the
factors stated above. The Company expects contract manufacturing sales in the
third quarter to be consistent with those in the second quarter. The Company
also does some contract research and development work periodically for Medtronic
and realized sales of $14,157 for the three months ended June 30, 1999 compared
to $15,237 for the three months ended June 30, 1998.
The gross profit percentage on vessel introducers and contract manufacturing
totaled 51.7% for the three months ended June 30, 1999, compared to 48.0% for
the three months ended June 30, 1998, due to the factors discussed above.
Total research and development expenditures were $113,263 or 8.4% of sales for
the three months ended June 30, 1999, compared to $21,281 or 1.7% of sales for
the three months ended June 30, 1998, due to the factors discussed above.
Selling expenses increased from $23,288 for the three months ended June 30, 1998
to $36,016 for the three months ended June 30, 1999, due to the factors
discussed above.
FIBER OPTIC
Sales of the Company's fiber optic pressure sensing products were $850,254 for
the three months ended June 30, 1999, compared to $684,963 for the three months
ended June 30, 1998, representing an 24.1% increase. Monitor sales increased
4.8% or $19,335 and catheter sales increased 54.0% or $139,577 over the
comparable period. The Company also saw increases in its accessory and service
sales totaling $6,379. The increase in monitor sales was primarily driven by a
higher average selling price. The Company anticipates that monitor sales will
accelerate more rapidly as the direct sales force continues to gain knowledge
about the products and the marketplace.
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The gross profit percentage on fiber optic products totaled 49.5% or $421,152
for the three month period ended June 30, 1999 compared to 31.0% or $212,071 for
the three month period ended June 30, 1998, due to the factors discussed above.
Total research and development expenditures were $112,878 or 13.2% of sales for
the three months ended June 30, 1999, compared to $107,476 or 15.7% of sales for
the three months ended June 30, 1998, due to the factors discussed above.
Selling expenses increased from $506,796 for the three months ended June 30,
1998 to $577,639 for the three months ended June 30, 1999. The increase is
primarily due to salaries and travel for the direct sales force of approximately
$107,000. Commissions expense decreased approximately $36,000, due to the direct
sales force receiving a lower commission percentage on sales than the indirect
sales force.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 1999
was $69,615, consisting of net income of $37,280, adjusted for non-cash items of
depreciation and amortization of $183,825, plus a net change in operating assets
and liabilities of $151,490. The Company saw an increase in inventory during the
first six months of 1999 primarily due to larger catheter inventories as the
Company begins its transition to its S-series catheter.
Net cash used in investing activities for the six months ended June 30, 1999 was
$182,038. Equipment was purchased totaling $181,104 and the Company had
additions to patent rights totaling $934 during the period.
Net cash used in financing activities for the six months ended June 30, 1999 was
$86,933. The Company made principal debt payments of $22,860 and paid down
$64,073 on its line of credit in order to reduce interest expense.
As a result, the Company's cash and cash equivalents were $822,699 as of June
30, 1999 compared to $1,022,055 at December 31, 1998. Working capital increased
from $1,890,029 as of December 31, 1998 to $1,927,646 as of June 30, 1999.
On April 29, 1999, the Company signed an extension through June 30, 2000 on its
revolving line of credit with a financial institution. The line was increased
from $1,500,000 to $2,000,000 and the agreement calls for interest at the rate
of 1.00% over the financial institution's base rate with no minimum interest
due. The availability under the line is subject to borrowing base requirements,
and advances are at the discretion of the lender. The line is secured by
substantially all of the Company's assets.
If sales and working capital needs meet the Company's estimates, the Company
believes its available cash and investments, along with borrowing availability
under its line of credit, will be sufficient to meet the Company's anticipated
operating expenses and cash requirements for the foreseeable future. If the
sales estimates are not realized or working capital requirements exceed those
anticipated, the Company may need to secure additional capital or, if capital is
not available, to curtail its marketing efforts.
YEAR 2000 DISCLOSURE
The Company has investigated the Year 2000 (Y2K) issue and how it will impact
the Company. The following is a summary of the investigation and progress to
date.
INFORMATION TECHNOLOGY SYSTEMS
* During 1997, the Company purchased, from a worldwide supplier and developer
of information systems, an enterprise-wide software information system with
written assurance from the developer that the system will correctly
function across the year 2000. The system cost $115,000 and was purchased
primarily because the Company needed a much stronger information system to
run its business. Y2K compliance was a required criteria of the decision
making process.
* The Company regularly budgets 10-15 new computer purchases each year in
order to keep its computers current. The new computers typically replace
the oldest computers and the old computers are discarded. The
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Company has purchased 10 new computers at a total cost of approximately
$25,000. The Company believes that with the purchase of these 10 computers,
substantially all of its computers will be Y2K compliant. To the extent
that one or several computers are not Y2K compliant, the Company believes
that it will not have a material adverse effect on operations.
* The Company upgraded all of its computer users to Microsoft Office 97 in
1998. According to Microsoft, the Microsoft Office 97 products are all Y2K
compliant. The total cost of this upgrade was approximately $3,000.
INTERNAL EQUIPMENT/MACHINES
* The Company has compiled a list of internal equipment and machines that may
have embedded chips which could be subject to the Y2K problem. As of July
12, 1999, approximately 75% of the list has been investigated and no Y2K
issues were discovered. The remaining portion of the list should be
completed by the middle of August and if any Y2K issues are identified, the
Company plans to work towards bringing these pieces of equipment into
compliance by September 30, 1999. The estimated total cost of bringing this
equipment into Y2K compliance is $15,000.
COMPANY PRODUCTS
* During 1998, the Company reviewed all of the products it develops, markets
and sells and believes that its products are Y2K compliant.
MATERIAL THIRD PARTIES
* The Company has sent out Y2K compliance letters to all of its suppliers.
The Company does not conduct any business with its suppliers using EDI
technology, so the primary risk associated with its suppliers is in their
ability to deliver materials to the Company in a timely manner. Because of
the diversity of sources available for the Company's raw materials and
subassemblies, the Company believes that any Y2K issues will not have a
material impact. If the Company's suppliers have difficulty overcoming the
Y2K issue and are unable to ship supplies in a timely manner, the Company
may have to build higher inventories at the end of the year or risk slower
deliveries in the first quarter of 2000.
* The Company conducts all of its banking (disbursements, lockbox,
investments, credit line) with Norwest Bank Minnesota, N.A. The Company has
contacted Norwest Bank to determine its Y2K readiness. The Company was
informed that Norwest is ready for the year 2000 and that it will be
confirming this in writing. If Norwest is not Y2K compliant by the year
2000, the Company would have difficulty in transacting business with its
customers and its vendors.
Overall the Company believes that Y2K issues will not have a material adverse
effect on the Company's financial position, operations or cash flow; however,
there can be no assurance that such will be the case.
Forward-looking statements herein 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: inability to
attract and retain key personnel; delays in new product launches; lack of market
acceptance of the Company's products; failure of the interface box to perform as
expected; introduction of competitive products; patent and government regulatory
matters; inability to attract effective sales representatives and/or
unsatisfactory performance by sales representatives; and the Risk Factors
included in Form 8-K filed with the Securities and Exchange Commission on
November 13, 1996.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a). The Company held its annual meeting of shareholders on April
29, 1999.
(b). The Company solicited proxies from its shareholders to vote on
the following two items:
* To set the number of directors at four and elect four
directors for a term of one year
* To ratify the appointment of independent auditors for
the current fiscal year
The vote counts were as follows (4,112,274 shares outstanding):
<TABLE>
<CAPTION>
- -------------------------- ------------ ------------ ----------- ----------- -----------
FOR WITHHOLD AGAINST ABSTAIN NO VOTE
- -------------------------- ------------ ------------ ----------- ----------- -----------
ELECTION OF DIRECTORS
- -------------------------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
James D. Hartman 2,981,147 31,750
- -------------------------- ------------ ------------ ----------- ----------- -----------
Richard W. Kramp 2,981,147 31,750
- -------------------------- ------------ ------------ ----------- ----------- -----------
Richard L. Little 2,981,147 31,750
- -------------------------- ------------ ------------ ----------- ----------- -----------
Richard F. Sauter 2,981,147 31,750
- -------------------------- ------------ ------------ ----------- ----------- -----------
- -------------------------- ------------ ------------ ----------- ----------- -----------
RATIFY AUDITORS 2,969,022 18,350 25,525
- -------------------------- ------------ ------------ ----------- ----------- -----------
</TABLE>
ITEM 6(a) - EXHIBITS
10.1 Fourth Amendment to Credit and Security Agreement
10.2 Revolving Note Agreement
27 Financial Data Schedule
ITEM 6(b) - REPORTS ON FORM 8-K
None
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized:
MEDAMICUS, INC.
Date: July 22, 1999 By: /s/ James D. Hartman
President, Chief Executive Officer
and Chief Financial Officer
EXHIBIT INDEX
- ------------- ------------------------------------------------------ ----------
EXHIBIT # DESCRIPTION PAGE
- ------------- ------------------------------------------------------ ----------
10.1 Fourth amendment to Credit and Security Agreement,
dated April 29, 1999, between the Company and Norwest
Credit, Inc.
- ------------- ------------------------------------------------------ ----------
10.2 Revolving Note Agreement, dated April 29, 1999,
between the Company and Norwest Credit, Inc.
- ------------- ------------------------------------------------------ ----------
27 Financial Data Schedule
- ------------- ------------------------------------------------------ ----------
12
EXHIBIT 10.1
FOURTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Fourth Amendment, dated as of April 29, 1999, is made by and
between MEDAMICUS, INC., a Minnesota corporation (the "Borrower"), and WELLS
FARGO CREDIT, INC. f/k/a NORWEST CREDIT, INC., a Minnesota corporation (the
"Lender").
Recitals
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of March 5, 1996, as amended by First Amendment to Credit and
Security Agreement dated as of June 27, 1997 and by Second Amendment to Credit
and Security Agreement dated as of May __, 1998 and by Third Amendment to Credit
and Security Agreement dated as of June 17, 1998 (as amended, the "Credit
Agreement"). Capitalized terms used in these recitals have the meanings given to
them in the Credit Agreement unless otherwise specified.
The Borrower has requested that certain amendments be made to the
Credit Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case may be, the following
definitions:
"'Borrowing Base' means, at any time and subject to change from time
to time in the Lender's sole discretion, the lesser of:
(a) the Maximum Line; or
(b) the sum of
(i) 85% of Eligible Accounts;
(ii) the lesser of (A) 25% of Eligible Inventory, or (B)
$350,000; and
(iii) the lesser of (A) the Fixed Asset Percentage of Eligible
Fixed Assets or (B) $233,000."
"'Eligible Inventory' means all Inventory of the Borrower, at the
lower of cost or market value as determined in accordance with GAAP;
provided, however, that the following shall not in any event be deemed
Eligible Inventory:
"(i) Inventory that is: in-transit; located at any warehouse,
job site or other premises not approved by the Lender in writing;
located outside of the states, or localities, as applicable, in
which the Lender has filed financing statements to perfect a first
priority security interest in such Inventory; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or
other document of title; on consignment from any Person; on
consignment to any Person or subject to any bailment unless such
consignee or bailee has executed an agreement with the Lender;
"(ii) Supplies, packaging, maintenance parts or sample
Inventory;
"(iii) Work-in-process Inventory, including subassemblies;
provided however, that Medtronic introducer kits including
'Medtronic Subassembly' and Medtronic work-in-process consisting of
assembled kits needing only sterilization and shrink-wrapping may be
included in Eligible Inventory if not otherwise ineligible;
"(iv) Inventory that is damaged, obsolete, slow moving or not
currently saleable in the normal course of the Borrower's
operations;
<PAGE>
"(v) Inventory that the Borrower has returned, has attempted
to return, is in the process of returning or intends to return to
the vendor thereof;
"(vi) Inventory that is perishable or live;
"(vii) Inventory manufactured by the Borrower pursuant to a
license unless the applicable licensor has agreed in writing to
permit the Lender to exercise its rights and remedies against such
Inventory;
"(viii) Inventory that is contract Inventory;
"(ix) Inventory that is subject to a security interest in
favor of any Person other than the Lender; and
"(x) Inventory otherwise deemed ineligible by the Lender in
its sole discretion."
"'Fourth Amendment' means that certain Fourth Amendment to Credit
and Security Agreement, dated as of April 29, 1999, by and between the
Borrower and the Lender."
"'Maturity Date' means June 30, 2000."
"'Maximum Line' means $2,000,000."
"'Net Income' means fiscal year-to-date after-tax net income from
continuing operations as determined in accordance with GAAP."
"'Note' means the Borrower's Revolving Note dated as of the date of
the Fourth Amendment, in the form attached as Exhibit A to the Fourth
Amendment."
2. Reporting Requirements. Section 6.1 of the Credit Agreement is
hereby amended by adding the following new subsection (f):
"(f) promptly upon knowledge thereof, notice of termination,
non-renewal or threatened termination or non-renewal of the Medtronic
Distribution Agreement."
3. Book Net Worth Covenant. Section 6.7 of the Credit Agreement is
hereby amended in its entirety and replaced with the following:
"Section 6.7 Minimum Book Net Worth. The Borrower will at all times
maintain during each period described below, its Book Net Worth (on an
unconsolidated, Borrower-only basis), determined as of the end of each
month, of at least the amount set forth opposite such period:
--------------------------- ----------------------------
Period Minimum Book Net Worth
--------------------------- ----------------------------
January 1, 1999 through
August 31, 1999 $2,000,000
--------------------------- ----------------------------
September 1, 1999 and
thereafter $2,200,000
--------------------------- ----------------------------
4. Liquid Asset Requirement. Section 6.10(a) of the Credit Agreement
is hereby amended in its entirety and replaced with the following:
"Section 6.10 Liquid Asset Requirement.
(a) The Borrower shall at all times own and maintain in an account
or accounts with Norwest Investment Services, Inc. ("NISI"), unencumbered
Liquid Assets, free and clear of any right of set off and of any related
margin account debt. The fair market value of such Liquid Assets must be
at least 25% of the outstanding Advances."
-2-
<PAGE>
5. No Other Changes. Except as explicitly amended by this Amendment,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any advance or letter of credit thereunder.
6. Conditions Precedent. This Amendment shall be effective when the
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) The replacement note substantially in the form of Exhibit A
hereto, duly executed on behalf of the Borrower (the "Replacement Note").
(b) A Certificate of the Secretary of the Borrower certifying as to
(1) the resolutions of the board of directors of the Borrower approving
the execution and delivery of this Fourth Amendment and the Replacement
Note, (2) the fact that the Articles of Incorporation and Bylaws of the
Borrower, which were certified and delivered to the Lender pursuant to the
Certificate of the Borrower's Secretary dated as of March 26, 1996,
continue in full force and effect and have not been amended or otherwise
modified except as set forth in Certificates previously delivered or the
Certificate to be delivered, and (3) certifying that the officers and
agents of the Borrower who have been certified to the Lender, pursuant to
the Certificate of Authority of the Borrower's Secretary dated as of March
26, 1996, as being authorized to sign and to act on behalf of the Borrower
continue to be so authorized or setting forth the sample signatures of
each of the officers and agents of the Borrower authorized to execute and
deliver this Fourth Amendment and all other documents, agreements and
certificates on behalf of the Borrower.
(c) Such other matters as the Lender may require.
7. Representations and Warranties. The Borrower hereby represents
and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and the Replacement Note and to perform all of its
obligations hereunder, and this Amendment and the Replacement Note have
been duly executed and delivered by the Borrower and constitute the legal,
valid and binding obligation of the Borrower, enforceable in accordance
with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment and the Replacement Note have been duly authorized by all
necessary corporate action and do not (i) require any authorization,
consent or approval by any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) violate any
provision of any law, rule or regulation or of any order, writ, injunction
or decree presently in effect, having applicability to the Borrower, or
the articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or
affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
8. References. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby. Upon the
satisfaction of each of the conditions set forth in paragraph 6 hereof, the
definition of "Note" and all references thereto in the Credit Agreement shall be
deemed amended to describe the Replacement Note, which Note shall be issued by
the Borrower to the Lender in replacement, renewal and amendment, but not in
repayment, of the Note.
9. No Waiver. The execution of this Amendment and acceptance of the
Replacement Note and any documents related hereto shall not be deemed to be a
waiver of any Default or Event of Default under the Credit Agreement or breach,
default or event of default under any Security Document or other document held
by the Lender, whether or not known to the Lender and whether or not existing on
the date of this Amendment.
10. Release. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors,
-3-
<PAGE>
successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and
all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made claim
to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.
11. Costs and Expenses. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
12. Miscellaneous. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed as of the date first written above.
WELLS FARGO CREDIT, INC. f/k/a NORWEST CREDIT, MEDAMICUS, INC.
INC.
By By
----------------------------------------- ----------------------------
Diane G. Conley James D. Hartman
Its Officer Its President
-4-
EXHIBIT 10.2
Exhibit A to
Fourth Amendment to
Credit and Security Agreement
REVOLVING NOTE
$2,000,000
Minneapolis, Minnesota
April 29, 1999
For value received, the undersigned, MEDAMICUS, INC., an Minnesota
corporation (the "Borrower"), hereby promises to pay ON DEMAND, or if demand is
not sooner made, as provided under the Credit Agreement (defined below) to the
order of NORWEST CREDIT, INC., a Minnesota corporation (the "Lender"), at its
main office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Two Million Dollars
($2,000,000) or, if less, the aggregate unpaid principal amount of all Advances
made by the Lender to the Borrower under the Credit and Security Agreement dated
as of March 5, 1996 by and between the Lender and the Borrower (as the same may
be amended, supplemented or restated from time to time, the "Credit Agreement")
together with interest on the principal amount hereunder remaining unpaid from
time to time (computed on the basis of actual days elapsed in a 360-day year)
from the date of the initial Advance until this Note is fully paid at the rate
from time to time in effect under the Credit Agreement.
This Note is issued in replacement of and in substitution for, but
not in payment of, that certain Revolving Note of the Borrower dated June 17,
1998, payable to the order of the Lender in the principal amount of $1,500,000.
This Note is the Revolving Note as defined in the Credit Agreement
and is subject to the Credit Agreement.
MEDAMICUS, INC.
By
--------------------------------------
James D. Hartman
Its President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 822,699
<SECURITIES> 0
<RECEIVABLES> 1,160,671
<ALLOWANCES> 25,231
<INVENTORY> 1,448,552
<CURRENT-ASSETS> 3,451,439
<PP&E> 3,241,416
<DEPRECIATION> 2,565,234
<TOTAL-ASSETS> 4,137,424
<CURRENT-LIABILITIES> 1,523,793
<BONDS> 2,826
0
0
<COMMON> 41,123
<OTHER-SE> 2,569,682
<TOTAL-LIABILITY-AND-EQUITY> 4,137,424
<SALES> 4,486,655
<TOTAL-REVENUES> 4,486,655
<CGS> 2,267,943
<TOTAL-COSTS> 2,267,943
<OTHER-EXPENSES> 443,315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,647
<INCOME-PRETAX> 37,280
<INCOME-TAX> 0
<INCOME-CONTINUING> 37,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,280
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
