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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 0-21330
AVECOR CARDIOVASCULAR INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
MINNESOTA 41-1695729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7611 NORTHLAND DRIVE
MINNEAPOLIS, MINNESOTA 55428
(Address of principal (Zip Code)
executive offices)
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Registrant's telephone number, including area code: (612) 391-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
___________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 13, 1998, 8,020,562 shares of Common Stock of the registrant
were outstanding, and the aggregate market value of the Common Stock of the
registrant as of that date (based upon the last reported sale price of the
Common Stock at that date by the Nasdaq National Market), excluding outstanding
shares owned beneficially by officers and directors, was approximately
$49,400,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of this Annual Report on Form 10-K incorporate by reference
information (to the extent specific sections are referred to herein) from the
registrant's Annual Report to Shareholders for the year ended December 31, 1997
(the "1997 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates by reference information (to the extent specific sections are
referred to herein) from the registrant's Proxy Statement for its 1998 Annual
Meeting to be held May 7, 1998 (the "1998 Proxy Statement").
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The matters discussed in this Annual Report on Form 10-K contain certain
forward-looking statements. For this purpose, any statements contained in
this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, words such as
"may," "will," "expect," "believe," "anticipate," "estimate" or "continue,"
the negative or other variations thereof, or comparable terminology, are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors, including the progress
of product development and clinical studies, the timing of and ability to
obtain regulatory approvals, the extent to which the Company's products gain
market acceptance, the introduction of competitive products by others, the
pricing related to competitive products, litigation regarding patent and
other intellectual property rights, the availability of third-party
reimbursement and other factors, as well as those set forth below under the
caption "Important Factors" on page 20.
MYOtherm-Registered Trademark- and OnCourse-Registered Trademark- are registered
trademarks of the Company. Affinity-TM-, Signature-TM-, Trillium-TM-, Myotherm
XP-TM-, Affinity XP-TM- and XP-TM- are trademarks of the Company.
Windows-Registered Trademark- is a registered trademark of Microsoft
Corporation.
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
AVECOR Cardiovascular Inc. (the "Company") develops, manufactures and
markets specialty medical devices for heart/lung bypass surgery and long-term
respiratory support. The Company's products include the AFFINITY microporous,
hollow fiber membrane oxygenator and related blood reservoirs, a line of solid
silicone membrane oxygenators and related blood reservoirs, the AFFINITY blood
pump, the MYOTHERM cardioplegia delivery system, SIGNATURE custom tubing packs
and the AFFINITY arterial filter.
The Company was incorporated in Minnesota in December 1990 and
began operations in 1991 when it purchased the surgical division of SCIMED
Life Systems, Inc. (the "Predecessor Business"). The assets purchased
included a line of solid silicone membrane oxygenators. Since the
acquisition of the Predecessor Business, the Company has engaged in extensive
product development, resulting in the introduction and receipt of regulatory
approval from the U.S. Food and Drug Administration (the "FDA") for the
following proprietary products:
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PRODUCT APPROVAL DATE
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MYOTHERM cardioplegia delivery system October 1991
SIGNATURE custom tubing packs July 1993
AFFINITY oxygenator November 1993
AFFINITY blood reservoirs July 1994
AFFINITY arterial filter October 1995
MYOTHERM XP (improved cardioplegia delivery system) July 1997
AFFINITY blood pump August 1997
AFFINITY oxygenator with TRILLIUM bio-passive surface February 1998
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In December 1992, the Company acquired Cardio Med Ltd., a
corporation organized under the laws of England and Wales ("Cardio Med").
Cardio Med had been a distributor of the Company's disposable membrane
oxygenators, cardiotomy reservoirs and cardioplegia systems and manufactured
its own proprietary line of custom tubing packs. As a result of the
acquisition, Cardio Med has become a wholly-owned subsidiary of the Company.
Cardio Med's name has since been changed to AVECOR Cardiovascular Ltd.
("AVECOR Ltd."). During 1995, the Company incorporated AVECOR Foreign Sales
Corporation as a wholly-owned subsidiary of the Company and opened a sales
office in France, organized as AVECOR Cardiovascular France S.A.R.L., a
French subsidiary of AVECOR Ltd.
As used herein, the term "Company" refers to AVECOR Cardiovascular
Inc., AVECOR Ltd., AVECOR Cardiovascular France S.A.R.L. and AVECOR Foreign
Sales Corporation. The Company's principal executive offices are located at
7611 Northland Drive, Minneapolis, Minnesota 55428, and its telephone number
is (612) 391-9000.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Since its inception, the Company has operated in the single industry
segment of developing, manufacturing and marketing medical devices.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
INDUSTRY BACKGROUND AND MARKETS
INDUSTRY BACKGROUND. The Company's products are used in surgical
procedures requiring heart/lung bypass, such as the treatment of coronary artery
disease by coronary artery bypass graft surgery ("CABG" or "coronary bypass
surgery"), heart valve replacement surgery and pediatric and neonatal congenital
heart defect surgery. There were approximately 850,000 heart/lung bypass
procedures performed worldwide in 1997, including approximately 400,000 of such
procedures performed in the United States, and approximately 265,000 of such
procedures performed in Europe. Certain of the Company's products are also used
in non-surgical applications, such as the long-term cardiopulmonary support of
premature infants, newborns and other patients with life-threatening respiratory
disorders.
The primary use of the Company's products is for heart/lung bypass
procedures during the surgical treatment of coronary artery disease. Coronary
artery disease, the leading cause of death in the United States, is the
atherosclerotic narrowing of the coronary arteries that supply blood to the
heart. Atherosclerosis is the accumulation of cholesterol and blood products on
the inner lining of an artery that causes the arterial wall to thicken and lose
elasticity, narrowing the inner diameter of the artery. According to an estimate
by the American Heart Association, approximately 13,490,000 Americans have a
history of heart attack, angina pectoris (chest pain), or both, which are
generally associated with coronary artery disease. The American Heart
Association estimated that, in the United States in 1996, coronary artery
disease would result in 1,500,000 acute myocardial infarctions, or heart
attacks, of which approximately 500,000 would result in death.
In the late 1960s, cardiovascular surgeons pioneered coronary bypass
surgery, a surgical treatment for severe cases of coronary artery disease in
which blood vessel grafts are used to bypass the site of the blocked arteries.
Several of these procedures or "grafts" may be performed during a single surgery
in order to bypass atherosclerotic lesions in more than one of the coronary
arteries, which is commonly referred to as "multi-vessel" coronary artery
disease. Coronary bypass surgery generally requires that the patient be put on a
heart/lung bypass circuit to enable the surgeon to operate on a still,
relatively bloodless heart. The
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heart/lung bypass circuit is a series of interconnected specialty medical
devices that together function as a patient's heart and lungs by temporarily
oxygenating and circulating blood while the patient's own heart and lungs are
rendered inactive. The Company believes coronary bypass surgery accounts for
approximately 75% of the total heart/lung bypass procedures performed in the
United States and over 50% of the procedures performed in Europe.
Although coronary bypass surgery is a highly invasive procedure, it
has been shown to be highly effective in treating coronary artery disease,
and the number of procedures performed annually in the United States has
grown from approximately 200,000 in 1982 to over 400,000 in 1997 (multiple
procedures may be performed during a single surgery where multi-vessel
disease is present). The annual worldwide growth rate in the number of
coronary bypass procedures has fluctuated from year to year for various
reasons.
Since the development of coronary bypass surgery, a number of
non-surgical interventional treatments for coronary artery disease have been
developed which, depending on the extent and nature of the disease as well as
physician preference, may be used as an alternative to coronary bypass
surgery. These non-surgical treatments, while generally less costly per
procedure, have limitations and to date have not resulted in reduced demand
for coronary bypass surgery.
Percutaneous transluminal coronary angioplasty ("PTCA") was
introduced in the early 1980s as a non-surgical treatment for coronary artery
disease. PTCA is performed by guiding a balloon-tipped catheter to the site
of an atherosclerotic lesion, followed by several courses of dilation under
high balloon pressure. For many patients, PTCA represents a less costly and
less traumatic alternative to bypass surgery, while for other patients it
represents a preferred alternative to drug therapy. While the number of PTCA
procedures performed grew significantly in the 1980s and early 1990s, the
number of coronary bypass procedures performed annually also continued to
grow during this period.
Although the average cost of a PTCA procedure is approximately
one-half of the average cost of coronary bypass surgery, the need for further
interventions for many patients tends to significantly reduce the long-term
cost differential between these two types of procedures. Studies have
indicated that 30% to 50% of PTCA procedures are complicated by "restenosis,"
a renarrowing, or often reclosure, of the dilated vessel within six months.
An artery complicated by restenosis often requires repeat procedures,
reducing the overall cost-effectiveness of PTCA. For a significant number of
PTCA patients, coronary bypass surgery is ultimately performed. In patients
with multi-vessel coronary artery disease, a randomized study has shown that
within three years of receiving treatment, only 14% of patients receiving
coronary bypass surgery required retreatment ("revascularization") while 60%
of patients receiving PTCA required revascularization. Additional studies
have confirmed that approximately 20% of PTCA patients with multi-vessel
disease will undergo coronary bypass surgery within one year of receiving
PTCA. Because of the higher rates of revascularization of patients receiving
PTCA rather than coronary bypass surgery, several studies have concluded that
over a three-year period the overall average cost of PTCA procedures exceeds
75% of the average cost of coronary bypass surgery.
In response to the limitations of PTCA, a variety of "second
generation" interventional devices for coronary artery disease have been
developed, including atherectomy devices (catheter devices that cut and
remove atherosclerotic materials from the arterial wall), rotational ablation
devices (catheter devices which use a rotating burr to remove material),
laser catheter devices (devices that use laser energy to reduce accumulated
materials in arteries) and coronary stents (expandable metal frames that are
positioned within the diseased area in the coronary artery to maintain the
vessel opening). Of these devices, coronary stents have demonstrated the best
potential to date to reduce restenosis in a randomized population. Recent
studies have concluded that the rate of restenosis in patients receiving
coronary stents following PTCA is
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approximately 30% lower than in patients treated only by PTCA. However, the
use of stenting in connection with PTCA greatly increases the cost of the
PTCA procedure. One study has indicated that the average cost per procedure
for elective stenting in connection with PTCA was approximately twice the
cost of PTCA without stenting (or approximately equal to the cost of coronary
bypass surgery).
In addition to the existing non-surgical treatments for coronary
artery disease, an additional treatment modality has emerged for both
coronary artery disease and heart valve replacement procedures (discussed
below), which involves "least" or "minimally" invasive surgical procedures.
These techniques involve small surgical incisions in the patient's chest in
lieu of the larger incision used in traditional CABG or valve replacement
surgeries. Specialized surgical instruments used in connection with
endoscopes enable surgeons to perform CABG or valve replacement surgeries via
these smaller incisions. In some variations of this type of procedure, only
a modified form of the heart/lung bypass circuit is required, which includes
an oxygenator and related disposables. However, in other variations of this
type of procedure a heart/lung bypass circuit is not utilized.
While this modality is in its developmental stages and currently
requires significant surgical skill and training, the potential benefits to
patients from this type of surgery are a reduced recovery period and risk of
infection as a result of the smaller incision. While some of the patients
currently eligible for treatment by these types of procedures are not
candidates for more invasive and less costly procedures, there can be no
assurance that this type of surgical procedure will not represent a
significant portion of the CABG or heart valve replacement procedures in the
future. Therefore, it cannot be determined at this time what effect, if any,
the development and acceptance of these procedures may have on the market for
the Company's disposable heart/lung bypass circuit components.
A second significant use of the Company's products in conjunction
with heart/lung bypass procedures is in heart valve replacement surgery.
Heart valve replacement surgery is also an open heart surgical procedure,
involving the replacement of valves that regulate the flow of blood between
chambers in the heart. Valve replacement may be required where the valve has
become narrowed or ineffective due to the build-up of calcium or scar tissue,
or where there is a congenital defect or some other form of physical damage
to the valve. Like coronary bypass surgery, valve replacement surgery
requires that the patient be put on a heart/lung bypass circuit. The Company
believes approximately 20% of the heart/lung bypass procedures performed in
the United States were performed in heart valve replacement surgery and
approximately 25% of the heart/lung bypass procedures performed in Europe
were performed in heart valve replacement surgery.
Pediatric and neonatal congenital heart defect surgery is another
heart/lung bypass procedure which uses several of the Company's products.
These procedures are undertaken to correct developmental defects in the heart
of a child or infant. The Company believes approximately 5% of the
heart/lung bypass procedures performed in the United States and approximately
10% of those performed in Europe were performed in connection with this type
of corrective surgery.
The primary non-surgical use of the Company's products is in
connection with a procedure known as extracorporeal membrane oxygenation
("ECMO"). ECMO is the long-term cardiopulmonary support of premature
infants, newborns and other patients with life threatening respiratory
disorders. The relatively small ECMO market served by the Company is
comprised of 118 established centers worldwide, in which approximately 1,500
neonatal ECMO procedures (procedures performed on children younger than one
year) were performed in 1997. Neonatal ECMO procedures constitute the vast
majority of all ECMO procedures performed. There has been relatively little
growth in the overall ECMO market in recent years and the Company believes
growth in this market will remain limited until technology overcomes
complications that
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are common in long-term respiratory support, such as intracranial bleeding
due to the associated long-term use of anti-coagulants. Since the Company
manufactures what it believes to be the only oxygenator that has received
clearance from the FDA for sale for long-term cardiopulmonary support for
periods greater than 24 hours, the Company believes it has a competitive
advantage in this relatively small market.
HEART/LUNG BYPASS CIRCUIT. In procedures requiring cardiopulmonary
support, the patient is connected to a series of interconnected specialty
medical devices, collectively called a heart/lung bypass circuit. The
heart/lung bypass circuit functions as the patient's heart and lungs by
temporarily oxygenating and circulating blood while the patient's own heart
and lungs are rendered inactive. The devices in the heart/lung bypass
circuit are operated by a skilled medical professional known as a
perfusionist, under the direction of a surgeon. The primary components of a
heart/lung bypass circuit, including the oxygenator, are single-use,
disposable products. Heart/lung bypass circuits are customized for the
particular practices of individual perfusionists.
In a typical heart/lung bypass procedure, blood is removed via
surgically inserted "cannulae" (hollow tubes with specifically designed tips
that facilitate the drainage or infusion of blood into or out of a patient's
body) from the patient's vena cava (the large vessels leading to the heart).
The blood flows from the patient's vena cava by gravity into a venous blood
reservoir where it is collected and "de-bubbled" (air is eliminated from the
blood). In addition, blood that is suctioned from the patient or drained
from the heart is filtered and de-bubbled through a cardiotomy reservoir.
This blood is then also added to the venous blood reservoir. From the venous
blood reservoir, the blood is mechanically pumped by a blood pump serving as
a replacement for the patient's heart through an oxygenator. The oxygenator
serves as a replacement for the patient's lungs by removing carbon dioxide
from and adding oxygen to the blood. The carbon dioxide and oxygen levels in
the blood are monitored with blood gas monitoring equipment, allowing the
perfusionist to make the proper adjustments to maintain the correct
concentrations. The oxygenator also controls the temperature of the blood by
means of an integral heat exchanger connected to a heater-cooler console.
The oxygenated blood is then returned to the patient through a final
(arterial) filter that removes any potential air or small particles. This
artificial heart/lung system is the primary component of the bypass circuit.
In addition to the artificial heart/lung system, most bypass
circuits also include a cardioplegia delivery system. During most cardiac
surgical procedures, the heart is stopped (arrested) to provide the surgeon
with a motionless field for the delicate surgery. When this occurs, the
heart muscle receives very little blood supply. A cardioplegia system
infuses specially formulated solutions (which often include oxygenated blood)
directly into the patient's coronary arteries. In addition to delivering
nutrients to the heart, these solutions are also used to arrest the heart and
maintain prescribed temperatures.
In order to salvage the patient's own blood during surgery, a
cell-saver circuit may be used to collect and concentrate the patient's blood
into washed, packed cells which can be reinfused at a later time to improve
the patient's red blood cell count without the risks associated with donated
blood. Another method of concentrating the patient's red blood cells is with
the use of a hemoconcentrator. This device removes excess fluid from the
patient's blood (concentrating the red blood cells) and also preserves the
plasma of the blood that is generally discarded with typical blood cell
salvaging.
The heart/lung bypass circuit is completed by connecting all of the
devices with tubing. Frequently, this tubing is pre-connected according to
the instructions of individual perfusionists with all or some of the devices
in the circuit and marketed as custom tubing packs. Increasingly, all of the
components in the heart/lung bypass circuit are assembled and packaged in a
complete, single container for a single heart/lung bypass procedure.
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MARKETS. The Company's products are primarily sold to hospitals
that perform heart/lung bypass surgery. There were approximately 1,000
hospitals in the United States and about 400 hospitals in Europe which
performed these procedures in 1997. Over 400,000 heart/lung bypass
procedures were performed in the United States in 1997, and approximately
265,000 heart/lung bypass procedures were performed in Europe in 1997.
Coronary bypass surgeries constitute a significant portion of the total
number of heart/lung bypass procedures performed each year. Although the
number of heart/lung bypass procedures performed may have been less than the
number of coronary bypass surgeries due to multiple grafts being performed
during some surgeries, the number of graft procedures performed in the United
States each year grew from less than 200,000 in 1982 to over 400,000 in 1997.
The current annual worldwide market for disposable products and
related hardware and accessories for heart/lung bypass surgery is estimated
by industry analysts to be approximately $800 million, over $600 million of
which is estimated to be attributable to disposable products. The two
largest individual markets for disposable products are the oxygenator market,
estimated at approximately $200 million in annual sales, and the custom
tubing pack market, estimated at approximately $100 million in annual sales.
The Company's current proprietary product offerings participate in an annual
worldwide market for disposable products estimated to be approximately $480
million, and the Company anticipates that its proprietary products under
development, including additional products coated with its new TRILLIUM
bio-passive surface, should allow the Company to pursue a greater portion of
the disposable product market.
PRODUCTS
The Company currently offers four primary product lines: the
AFFINITY line; the solid silicone membrane oxygenator line; the MYOTHERM
cardioplegia delivery system; and SIGNATURE custom tubing packs. "Other
products" include products distributed by the Company which do not represent
any of the Company's primary product lines and, combined or individually, do
not represent a primary product line within the Company's business. The
following table sets forth the amounts and percentages of the Company's
consolidated net sales attributable to these four product lines for the
periods shown.
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YEARS ENDED DECEMBER 31,
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1997 1996 1995
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(DOLLARS IN THOUSANDS)
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AFFINITY line .............................. $26,185 56% $25,488 57% $18,329 55%
SIGNATURE custom tubing packs .............. 9,803 21 7,402 17 3,459 10
Silicone membrane oxygenator line .......... 7,081 15 7,517 17 7,793 24
MYOTHERM cardioplegia deliver system ....... 3,655 8 3,994 9 3,759 11
Other products ............................. 140 0 - - - -
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TOTAL ................................. $46,864 100% $44,401 100% $33,340 100%
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AFFINITY LINE. The Company's AFFINITY line is currently comprised
of the AFFINITY oxygenator, the AFFINITY blood pump, a hardshell cardiotomy
venous reservoir and a venous reservoir bag.
The AFFINITY oxygenator is a microporous, hollow fiber membrane
oxygenator which exchanges the carbon dioxide in the patient's blood for
oxygen, returning oxygenated blood to the patient through the heart/lung
bypass circuit. This oxygenator incorporates the Company's patented radial
flow and graduated density fiber bundle, both of which were developed through
the Company's use of "computational fluid dynamics." Computational fluid
dynamics helped the Company design the AFFINITY oxygenator with features such
as a lowered blood phase pressure drop, a more uniform flow of blood through
the device's fiber
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bundle, and reduced damage to the blood as it passes through the device's
blood phase. The key features of the AFFINITY oxygenator include the
following:
- - HIGH GAS TRANSFER. The Company believes that the AFFINITY oxygenator
offers superior gas transfer performance. Studies conducted by
independent investigators have demonstrated that the AFFINITY oxygenator
has gas transfer performance equal or superior to that of most competing
oxygenators. The Company believes that most perfusionists desire
oxygenators that provide optimum gas transfer performance to assure safety
for patients requiring greater oxygen transfer capability, such as larger
patients and patients operated on under lighter anesthesia or at warmer
temperatures.
- - LOW PRESSURE DROP. Studies conducted by independent investigators have
determined the pressure drop across the blood phase of the AFFINITY
oxygenator to be as low or lower than that of other leading products. The
Company believes that perfusionists generally wish to avoid large pressure
drops during heart/lung bypass procedures due to the risk of line failures
associated with high pressure drop.
- - LOW PRIMING VOLUME. The AFFINITY oxygenator has a priming volume
which the Company believes to be one of the lowest priming volumes
among oxygenators currently available. Lower priming volume can
result in less set-up time for the perfusionist, reduced dilution
of the patient's blood with priming solutions and a reduced use of
the patient's blood for priming, which lessens the possibility
that costly and potentially dangerous donor blood products will
need to be introduced during the procedure.
- - EASE OF USE. The AFFINITY oxygenator has been designed to be
convenient to set up, prime and operate. The AFFINITY
oxygenator's relatively small size and universal adaptability
contribute to its ease of handling, and its clear case helps to
assure quick, complete priming and ongoing visual checks during
the procedure. The device's unique casing design and a
proprietary manufacturing technique result in precise alignment of
the uppermost blood port with the top of the fiber bundle,
allowing for ease in venting air during the priming procedure.
The Company believes that perfusionists have a preference for
oxygenators that permit easy removal of air during priming and
ease of monitoring for the presence of air during the procedure.
Although competing oxygenators are generally designed to maximize
one or more of these key features, the Company believes the performance of
the AFFINITY oxygenator to be equal or superior to competing products across
a broad range of performance characteristics: gas transfer capability,
pressure drop, priming volume and ease of use.
In February 1997, the Company received regulatory clearance from
the FDA to market its AFFINITY oxygenator with TRILLIUM bio-passive surface.
By adding the AFFINITY oxygenator with TRILLIUM bio-passive surface, the
Company will be able to offer a product option that certain competitors now
promote.
The TRILLIUM bio-passive surface is produced by coating all
blood-contact surfaces in the oxygenator with a non-leaching synthetic
hydrophilic polymer which contains a small amount of heparin, a widely used
anti-coagulant. This surface is designed to minimize activation of blood
constituents which otherwise occurs as a result of contact with conventional
synthetic surfaces.
In the heart/lung bypass circuit, the blood reservoir serves as a
filtering and storage device. The AFFINITY line offers two blood reservoirs,
a hardshell cardiotomy venous reservoir and a venous reservoir bag.
Computational fluid dynamics modeling was also used in the development of
these reservoirs. The hardshell reservoir can be used as a stand-alone unit
or can be integrated with the AFFINITY oxygenator in one unit. The venous
reservoir bag maintains simplicity in its design while offering optimum
priming ease,
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efficient air handling and excellent mixing characteristics. By offering
these blood reservoirs in the AFFINITY line, the Company is able to configure
systems to meet its customers' needs.
In July 1993, the Company began international marketing of the
AFFINITY oxygenator. The Company began the commercial release of the
AFFINITY oxygenator in the U.S. market in February 1994, following marketing
clearance from the FDA. The Company received U.S. marketing clearance from
the FDA for its AFFINITY blood reservoirs in July 1994 and began marketing
the devices following clearance.
The AFFINITY Blood Pump System incorporates a motor and control
console, a rotor housing, rotor assembly and a disposable pump chamber. The
Company believes that the AFFINITY Blood Pump System offers a number of
clinical safety advantages over existing centrifugal or standard roller-type
pumps. In particular, the modified roller-type design of the AFFINITY Blood
Pump System is designed to (i) prevent significant negative pressure at the
inlet, which minimizes the potential for cavitation; (ii) not permit the
draining of the venous reservoir and the resulting introduction of air into
the bypass circuit; (iii) not create high discharge pressures sufficient to
disrupt the tubing connections in the bypass circuit; and (iv) not allow
retrograde flow. The Company believes that the AFFINITY Blood Pump System is
the first and only available blood pump to combine these safety features with
performance comparable to available pumps.
There can be no assurance that the AFFINITY Blood Pump System will
be perceived as superior to currently available blood pumps, that competitors
will not introduce future products with superior performance characteristics,
or that the AFFINITY Blood Pump System will achieve market acceptance or
generate material revenues for the Company at any time in the near future, if
at all. See "Important Factors" on page 20.
In August 1997, the Company received regulatory clearance from the
FDA to market the AFFINITY Blood Pump System. By adding the AFFINITY Blood
Pump System to its product line, the Company is now able to offer a complete
line of proprietary devices comprising the major components of the heart/lung
bypass circuit.
SIGNATURE CUSTOM TUBING PACKS. The Company's SIGNATURE custom
tubing packs include the tubing and other connections used to integrate the
various components of the heart/lung bypass circuit and ECMO system. The
components to be included in each tubing pack and the manner in which they
are arranged and connected are determined by the specifications provided by
the Company's individual customers. The Company has developed computer
software that allows it to design and fully document custom tubing packs
according to individual customer specifications and to quote prices based on
these specifications within hours of a customer request. The Company
believes that this service provides it with a significant competitive
advantage. While many of the devices included in the Company's SIGNATURE
custom tubing packs are manufactured by the Company, the Company currently
does not manufacture all the devices that may be requested by customers.
Consequently, the Company is currently required to purchase certain
components of its SIGNATURE custom tubing packs from other medical device
manufacturers. The Company received marketing clearance from the FDA for its
SIGNATURE custom tubing packs in June 1993.
In October 1995, the Company received FDA clearance to market its
AFFINITY arterial filter. The Company began sales of this product to
customers in late 1995, with full worldwide release in the first quarter of
1996. The AFFINITY arterial filter is the final component in the circuit of
specialized medical devices used in heart/lung bypass surgery, ensuring that
the oxygenated blood is free of air or particulate emboli before re-entering
the patient's body. The Company believes that the AFFINITY arterial filter
offers low volume priming, high visibility and excellent air handling and
hemodynamics. The vast majority of
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AFFINITY arterial filter devices are sold as components of its SIGNATURE
custom tubing packs. Previously, the Company had sold filters from other
manufacturers as part of its custom tubing packs.
SILICONE MEMBRANE OXYGENATOR LINE. The Company's solid silicone
membrane oxygenator line consists of the Company's solid silicone membrane
oxygenator and associated cardiotomy reservoirs and the Company's ECMO
(extracorporeal membrane oxygenation) devices. This product line was
purchased by the Company from the Predecessor Business.
The Company's solid silicone membrane oxygenators allow gases to
pass to and from blood using proprietary silicone membrane technology, as
opposed to the most widely used oxygenators that use microporous membrane
technology (including the AFFINITY oxygenator). The solid silicone membrane
technology permits, and may be sold for, extended use applications because it
does not experience the performance deterioration over a longer period of use
that occurs in a microporous membrane oxygenator. In addition, some
perfusionists continue to prefer silicone membrane oxygenators for heart/lung
bypass procedures. The Company believes that its solid silicone membrane
oxygenator is the only oxygenator which is approved for sale for extended use
of periods greater than 24 hours, providing the Company with a competitive
advantage in this relatively small market. The Company markets a full line
of solid silicone membrane oxygenators in several models and sizes.
The Company's solid silicone membrane oxygenator is also part of
the Company's ECMO system. ECMO is the long-term cardiopulmonary support of
premature infants, newborns and other patients with life-threatening
respiratory disorders. The ECMO system includes the membrane oxygenator,
reservoir bladder bags and a heat exchanger.
MYOTHERM CARDIOPLEGIA DELIVERY SYSTEM. The Company's MYOTHERM
cardioplegia delivery system is used to infuse specially formulated
solutions, which often include oxygenated blood, directly into the patient's
coronary arteries while the heart is stopped during heart/lung bypass
surgery. In addition to delivering nutrients to the heart, these solutions
are also used to arrest the heart and maintain prescribed temperatures. The
Company believes that the MYOTHERM cardioplegia delivery system provides
superior levels of heat exchange performance for optimum temperature control
during both the cooling and warming phases of heart/lung bypass surgery. The
MYOTHERM cardioplegia delivery system also offers adaptability and
convenience for varying cardioplegia techniques used by cardiovascular
surgeons. The perfusionist is able to specify mixtures of cardioplegia
solutions and blood in the MYOTHERM cardioplegia delivery system without
changing the pump set-up. The Company released its MYOTHERM cardioplegia
delivery system worldwide in October 1991.
In July 1997, the Company received marketing clearance from the FDA
for an improved MYOTHERM cardioplegia delivery system known as the MYOTHERM
XP. The MYOTHERM XP offers lower priming volume, better air handling and a
new safety valve to prevent an air pressure induced failure of the MYOTHERM
XP while retaining all the other advantages of the predecessor MYOTHERM
cardioplegia delivery system.
ONCOURSE CONTINUOUS QUALITY CONTROL IMPROVEMENT SOFTWARE. In
addition to the Company's medical device products, the Company introduced its
ONCOURSE continuous quality improvement (CQI) manager in December 1995. This
Microsoft Windows-based software program is currently offered free of charge
to customers who make a major commitment to the Company's products. ONCOURSE
CQI Manager guides perfusionists through the necessary steps in establishing
a CQI program. In addition, it generates a
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variety of useful reports for perfusionists, including the annual American
Board of Cardiovascular Perfusion clinical activity report and several other
specialized reports.
In March 1997, the Company released ONCOURSE II, an improved
version of its original ONCOURSE CQI software. The major improvements for
ONCOURSE II include upgraded report generation capabilities, user-defined
study parameters, tracking of blood usage during procedures, and a
benchmarking utility to compare the host hospital data to aggregate data from
other hospitals via online communications. Further improvements and upgrades
are planned for 1998. Although the Company markets this product for sale to
other customers, the Company does not expect that this product will
contribute significantly to its results of operations in the foreseeable
future.
RESEARCH AND DEVELOPMENT
The Company's research and development strategy encompasses:
continuing the development of a complete line of products for the heart/lung
bypass circuit, ensuring that existing products are enhanced or replaced,
based on changing on market conditions and developing products which address
new markets and opportunities outside of the heart/lung bypass market and
which leverage the Company's core technologies and expertise.
As an integral part of both its research and development and sales
and marketing strategies, the Company strives to involve its customers to a
large extent in its product development activities. Under confidentiality
agreements, the Company consults with selected customers from time to time as
to market needs and assessments of products under development by the Company.
The Company believes that this practice allows it to receive end-user
assessments of products in development at an early stage and to better assure
market acceptance.
The Company's research and development staff currently consists of
24 full-time engineers, scientists, designers and technicians. Research and
development expenses in 1997 were $3,902,000, as compared with $3,651,000 in
1996 and $2,773,000 in 1995. The Company anticipates that 1998 research and
development costs will increase approximately 10% over 1997 levels, as the
Company moves to expand and improve its proprietary line of disposable
medical devices. This forward-looking projection is dependent on the extent
and timing of new product development and the impact of the regulatory
process in obtaining marketing clearance for new products. The need or
desire to modify the Company's existing products could also influence the
level of research and development expenses. There can be no assurance,
however, that the Company's research and development efforts will result in
any commercially successful products.
MARKETING
The Company markets its products in the United States and
internationally, with domestic sales accounting for 59%, 59% and 58% of
consolidated net sales in 1997, 1996 and 1995, respectively. The majority of
the Company's international sales are in Europe.
To serve the U.S. market, the Company has developed a sales
organization that markets its products directly to cardiovascular surgeons,
perfusionists, neonatologists and ECMO specialists. This organization
consists of a staff of 18 direct sales employees and is supplemented by seven
independent sales representative organizations, all with cardiovascular sales
experience. This network is managed by four regional sales managers and a
vice president of marketing and sales. At its inception, the Company
marketed its products primarily through distributors and independent sales
representatives. Since that time,
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the Company has shifted the composition of its distribution network in the
United States to its current direct sales organization. Approximately 93% of
the Company's U.S. sales in 1997 occurred through direct sales employees and
independent sales representatives. The Company believes that this shift to a
larger direct sales force allows better control of the sales process and
assists the Company in developing closer relationships with its customers.
During 1997, the Company terminated agreements with its last
remaining United States distributor and its only Canadian distributor. At
the time of termination, both distributors had an inventory of the Company's
products which subsequently were sold to medical institutions and were not
replenished by purchases from the Company. Sales to the territories formerly
served by these distributors decreased approximately $1,400,000 in 1997 when
compared to 1996. These markets are now being served by the Company's direct
sales force. While management believes these revenue declines are temporary
and caused by the transition to a direct sales force in these territories,
this forward-looking expectation is primarily dependent on the ability of the
direct sales personnel to maintain and develop relations and revenue levels
at the medical institutions previously served by these distributors.
Internationally, the Company sells its products through 41
cardiovascular distributors who cover most major foreign markets. The
Company's U.K. subsidiary, AVECOR Ltd., is the base of the Company's
international marketing efforts, and manufactures, assembles and distributes
the Company's products to the majority of the Company's international
distribution network. This international distribution network is managed by
an international sales director and an export sales manager, both of whom are
experienced in marketing heart/lung bypass devices in Europe. The Company's
international distribution network is supplemented by seven direct sales
employees, three in the U.K., two in France and two in Canada. In October
1995, the Company opened a sales office in France, which is organized as a
subsidiary of AVECOR Ltd. Total export sales from the U.S. to unaffiliated
entities (primarily to Europe and Asia and payable in U.S. dollars) and sales
made by AVECOR Ltd. were $4,952,000 and $14,230,000, respectively for the
year ended December 31, 1997; $4,912,000 and $13,111,000, respectively for
the year ended December 31, 1996; and $3,480,000 and $10,702,000,
respectively, for the year ended December 31, 1995.
The Company currently has written agreements with 25 of its
independent sales representatives and international distributors. These
agreements generally impose geographic exclusivity and non-competition
obligations on the Company's independent sales representatives and
distributors. The Company's sales representative agreements typically
include a provision that requires the Company to pay a commission to the
sales representative for any sales made directly by the Company to customers
within such sales representative's or distributor's territory. Distributor
agreements generally do not require the Company to pay commission. The
Company may typically terminate these agreements upon breach of the agreement
by the distributor or sales representative, including breach of the quota or
minimum sales obligations imposed by the agreement, as well as certain
extraordinary events.
The Company's products are primarily sold to hospitals that perform
heart/lung bypass procedures. In the United States, the Company believes
there are approximately 1,000 hospitals at which heart/lung bypass procedures
are performed, while in Europe approximately 400 hospitals perform such
procedures. There are approximately 118 hospitals worldwide where ECMO is
performed. The Company's products are used by perfusionists, and the Company
estimates that there are about 3,000 perfusionists practicing in the United
States.
A small portion of the Company's business is subject to longer term
(longer than one year) commitments with customers. These commitments involve
fixed pricing terms and minimum or exclusive
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purchase obligations. Many of the Company's competitors, which have greater
financial resources and broader and longer-standing product lines than the
Company, have experienced relatively greater success in establishing these
types of customer commitments. The Company anticipates that there will be
increased use of these longer term, firm commitment arrangements in its
markets due to cost concerns and other factors.
The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to
assess and satisfy their needs for products and services. The Company meets
with certain designated customers several times each year, during which ideas
are shared regarding the marketplace in general, specific products, products
under development and existing or proposed programs. In lieu of expensive
advertising and promotional materials, the Company maintains extensive
contact with its customers for the purpose of educating them in the Company's
technologies and manufacturing methods as well as to receive input and
feedback about the Company's product development and customer service
functions. The Company believes these efforts to be cost-effective in
producing awareness of, and loyalty to, the Company's products.
The Company conducts frequent training of its sales force to
facilitate response to customer needs. The Company also maintains a
24-hour/day assistance program in order to respond quickly to clinical
questions and problems encountered by its customers. The assistance services
are provided by a former certified clinical perfusionist employed by the
Company and are supplemented by other certified clinical perfusionists
employed by the Company as well as a network of perfusionist consultants
located across the country.
No single customer accounted for more than 10% of the Company's 1997
net sales.
COMPETITION
The cardiovascular device market in which the Company competes is
characterized by intense competition. This market is dominated by
established manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing, research and development staffs and facilities than the Company.
Many of these competitors offer broader product lines within the specific
heart/lung bypass product market and/or in the general field of medical
devices and supplies. Broader product lines give many of the Company's
competitors the ability to negotiate exclusive, long-term medical device
supply contracts and, consequently, the ability to offer comprehensive
pricing of their competing products. By offering a broader product line in
the general field of medical devices and supplies, competitors may also have
a significant advantage in marketing competing products to group purchasing
organizations, health maintenance organizations and other managed-care
organizations that increasingly seek to reduce costs through centralization
of purchasing functions. In addition, the Company's competitors continue to
use price reductions to preserve market share in the oxygenator and other
product markets. Therefore, the Company must present competitive product
pricing when required to protect or improve its market share in certain key
areas. There can be no assurance that the Company's competitors will not use
more significant and more prolonged price competition across the Company's
product lines in the future.
During 1995 and 1996, one of the Company's competitors, the Bentley
Division of Baxter Healthcare Corporation, purchased three companies which
provide contract perfusion services to hospitals. Although the Company
believes that it is too early to assess the long-term effect of these
acquisitions on the Company's business, sales to contract perfusion groups
controlled by one of the Company's competitor decreased $750,000 to
$1,100,000 for 1997 from $1,850,000 for 1996. The Company
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believes that control of contract perfusion groups by its competitors will
continue to have a negative impact on the Company's ability to market its
products to such groups or to hospitals or other medical providers that
contract with competitor-controlled groups for perfusion services, and could
have a material adverse effect on the Company's business, financial condition
and results of operation. This forward-looking statement is subject to the
degree of control exerted by the Company's competitors with respect to
purchasing decisions made by controlled groups of perfusionists, the extent
of future acquisitions of contract perfusion groups by the Company's
competitors, the breadth of the Company's product offerings relative to those
competitors controlling contract perfusion groups, and the degree to which
the Company's research and development and marketing efforts result in the
successful commercialization of products with enhanced or superior
performance characteristics.
The Company's primary competitors within the heart/lung bypass
market include COBE Cardiovascular Inc. (a subsidiary of Gambro, Inc.),
Medtronic, Inc., the Bentley Division of Baxter Healthcare Corporation, C.R.
Bard Inc., Sorin Biomedical, Inc. (a subsidiary of Fiat), Terumo Medical
Corporation and SARNS Inc. (a subsidiary of 3M Company).
The Company believes that the principal competitive factors in the
market for heart/lung bypass and long-term respiratory support products are
product performance, quality, price, ease of use, technical innovation,
cost-effectiveness, field sales support, customer service and breadth of
product line. The Company intends to continue to compete on the basis of its
high performance products, innovative technologies, cost-effective
manufacturing techniques, close customer relations and support and its
strategy to increase and enhance, as dictated by market conditions, its
offerings of products within the heart/lung bypass circuit and other medical
device technologies.
MANUFACTURING
The Company manufactures oxygenators and other products and
assembles custom tubing packs at its U.S. facility located in Minneapolis,
Minnesota. The Company also performs certain final manufacturing processes
with respect to its oxygenators and blood reservoirs and assembles SIGNATURE
custom tubing packs at its Bellshill, Scotland facility.
The Company's U.K. and U.S. manufacturing facilities have been
inspected by the British Standards Institute ("BSI") and, as a result, the
Company has received ISO 9001 certification. BSI is also the "Notified Body"
that has verified that the Company's quality certification procedures conform
with the essential requirements necessary for the Company to prepare a
Declaration of Conformity and therefore place the "CE" mark on its products.
See "Governmental Regulation" on page 14.
As a part of the development process for new products, the Company
simultaneously designs and develops manufacturing processes and equipment to
be used to manufacture the products. Because of the Company's ability to
design and produce its manufacturing equipment internally in conjunction with
new product development, the Company has been able to implement a highly
automated, cost-efficient manufacturing process for the products in its
AFFINITY line.
The Company manufactures its oxygenators, blood pump, blood
reservoirs and ancillary products from standard raw materials, components and
custom manufactured components presently purchased from outside suppliers.
The Company intends to continue to purchase these raw materials, components
and custom-manufactured components from outside suppliers in the future.
While the Company believes that the raw materials, components and custom
manufactured components used in the manufacture of its products are readily
available from multiple sources, certain of these items are purchased from
single
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sources. Although the Company has qualified, or is in the process of
investigating, alternate sources of supply for key components and materials,
any significant interruption in supply of these items could have a material
adverse effect on the Company's ability to manufacture its products. The
Company has not experienced shortages or significant delays in supply of
these materials and components from its suppliers.
GOVERNMENTAL REGULATION
The Company's products, development activities and manufacturing
processes are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding foreign agencies. In the United States,
the FDA administers the Federal Food, Drug and Cosmetics Act and amendments
thereto, including the Safe Medical Devices Act of 1990. The Company is
subject to the standards and procedures with respect to manufacture and
marketing of medical devices contained in the Federal Food, Drug and
Cosmetics Act and the regulations promulgated thereunder and is subject to
inspection by the FDA for compliance with such standards and procedures.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of
marketing approvals and criminal prosecution.
In the United States, medical devices are classified into one of
three classes (class I, II or III), on the basis of the controls deemed
necessary by the FDA to reasonably assure their safety and effectiveness.
Under FDA regulations, class I devices are subject to general controls (E.G.,
labeling, premarket notification and adherence to good manufacturing
practices) and class II devices are subject to general and special controls
(E.G., performance standards, postmarket surveillance, patient registries and
FDA guidelines ). In general, class III devices (E.G., life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to a legally marketed device), in addition to
being subject to general and special controls, must receive premarket
approval ("PMA") by the FDA to ensure their safety and effectiveness.
Before a new or significantly modified device can be introduced
into the market, the manufacturer must generally obtain marketing clearance
through a 510(k) notification or approval of a PMA application. A 510(k)
clearance will be granted if the proposed device is "substantially
equivalent" to a predicate device (I.E., a legally marketed class I or class
II medical device, or a class III medical device for which the FDA has not
called for the submission of a PMA application). Commercial distribution of
a device for which a 510(k) notification is required can begin only after the
FDA issues a written determination that the device is "substantially
equivalent" to a predicate device. The FDA may determine that a proposed
device is not substantially equivalent to a predicate device, or that
additional information or data are needed before a substantial equivalence
determination can be made. A request for additional data may require that
clinical studies of the device's safety and efficacy be performed. The
process of obtaining a 510(k) clearance typically can take several months to
a year or longer.
A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed class I or class II device, or
if it is a class III device for which the FDA has called for a PMA
application. Certain class III devices that were on the market before May
28, 1976 ("preamendments class III devices"), and devices that are
substantially equivalent to them, can be brought to market through the 510(k)
process until the FDA calls for the submission of PMA applications for
preamendments class III devices. The process of obtaining a PMA can be
expensive, uncertain and lengthy, frequently requiring anywhere from one to
several years from the date the PMA is submitted to the FDA, if approval is
obtained at all. Moreover, a PMA application, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed. FDA enforcement policy strictly limits the marketing of approved
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medical devices for unapproved or "off label" uses. In addition, product
approvals can be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing. All of the
Company's current products have been the subject of successful 510(k)
submissions, and the Company believes that its products currently in
development will also be eligible for the 510(k) submission process, although
there can be no assurance that the FDA will agree with this view.
Certain of the Company's products are within product categories set
forth in an FDA order dated August 14, 1995, issued to all manufacturers of
these devices, which requires all of such manufacturers to submit additional
data to the FDA regarding the safety and the efficacy of the identified
devices. The products affected include the Company's blood oxygenators,
arterial filters and defoamers, which, by current FDA interpretation, include
both cardiotomy and venous blood reservoirs. Each of these devices is
currently classified by the FDA as a class III medical device which, because
they were viewed as substantially equivalent to preamendments class III
devices, were cleared for marketing through the 510(k) premarket notification
process. Through its August 14, 1995 order, the FDA has requested data from
the Company and other manufacturers of these devices in order to make a
determination as to whether these products should be reclassified as either
class I or class II medical devices. If the FDA were to determine that such
devices should remain classified as class III medical devices, it would
require manufacturers such as the Company to submit PMA applications
concerning such devices within 90 days after the final FDA classification
order.
The Company has gathered the required data for submission to the
FDA, and is working with various industry groups and the FDA to seek
reclassification of these devices. Although the FDA order requiring the
submission of data on blood oxygenators and arterial filters has
characterized these devices as having a high potential for
down-classification, and the Company believes that the devices will be
reclassified, there can be no assurance that these devices will be
reclassified. Although the FDA order requesting data on defoamers has
characterized these devices as unlikely to be reclassified, and, therefore,
likely to require PMA submission, the Company is currently working to seek
down-classification. The Company's efforts, in conjunction with those of
other manufacturers, are based on the belief that the types of blood
reservoirs currently used in heart/lung bypass circuits are significantly
different from the defoamers used with older, bubble-type oxygenators, and,
based on safety and efficacy data, should be reclassified. While there can
be no assurance that these efforts will be successful, the Company believes
that the likelihood of reclassification of blood reservoirs is currently
greater than indicated in the FDA order. Reclassification data on all of the
affected products was submitted to the FDA for review on February 13, 1998.
In the event that any of the devices are not reclassified, the Company and
its competitors may be required to submit a PMA application. During the
gathering and submission of data for any such PMA application and throughout
the FDA review of this information, the Company and its competitors would
most likely be allowed to continue marketing their products. As discussed
above, the PMA application process can be expensive, uncertain and lengthy,
and, if required, could have a material adverse effect on the Company's
future business, financial condition or results of operations.
The Company is also subject to regulation in each of the foreign
countries in which it sells its products with regard to product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable
to the Company's products in such countries are similar to those of the FDA.
The national health or social security organizations of certain of such
countries require the Company's products to be qualified before they can be
marketed in those countries. The Company relies on its independent
distributors and Company regulatory personnel, in countries where the Company
has employed direct sales personnel, to comply with the majority of the
foreign regulatory requirements. To date, the Company has not experienced
significant difficulty in complying with these regulations.
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The Company is subject to periodic inspections by the FDA, which is
charged with auditing the Company's compliance with quality assurance systems
established by the FDA and other applicable government standards. The
Company is also subject to inspections by the United Kingdom's Medical
Devices Directorate ("MDD") and other European regulatory agencies. Strict
regulatory action may be initiated in response to audit deficiencies or to
product performance problems. The Company believes that its manufacturing
and quality control procedures are in compliance with the requirements of the
FDA and MDD regulations. The Company's manufacturing facilities and
processes are also subject to periodic inspection and review by BSI in
conjunction with the Company's ISO 9001 certification. ISO certification is
a series of standards that define the basics of establishing, documenting and
maintaining an effective production quality management system. The Company
believes that ISO certification creates value for the Company both
internally, by providing an objective criteria for measuring the Company's
quality assurance efforts, and externally, through customer recognition of,
and demand for, products manufactured by ISO certified manufacturers.
BSI is also the "Notified Body" that has verified that the
Company's quality certification procedures conform with the "essential
requirements" set forth by the MDD for the class of products produced by the
Company. Conformity with these essential requirements enables the Company to
prepare a Declaration of Conformity which supports the placement of the "CE"
mark on the Company's products. The CE mark enables the Company's products
to be marketed, sold and used throughout the European Union (the "EU"),
subject to limited "safeguard" powers of member states. Presently, the CE
mark is not required to be affixed to the Company's products (or those of its
competitors) sold in the EU, but may be affixed during a transition period
currently in effect and which began January 1, 1995. This transition period
will end in June 1998, when all of the Company's products (and those of its
competitors) will be required to comply with the essential requirements in
order to be marketed in the EU.
The financial arrangements through which the Company markets, sells
and distributes its products may be subject to certain federal and state laws
as well as regulations in the United States with respect to the provision of
services or products to patients who are Medicare or Medicaid beneficiaries.
The "fraud and abuse" laws and regulations prohibit the knowing and willful
offer, payment or receipt of anything of value to induce the referral of
Medicare or Medicaid patients for services or goods. In addition, the
physician anti-referral laws prohibit the referral of Medicare or Medicaid
patients for certain "Designated Health Services" to entities in which the
referring physician has an ownership or compensation interest. Violations of
these laws and regulations may result in civil and criminal penalties,
including substantial fines and imprisonment. In a number of states, the
scope of fraud and abuse or physician anti-referral laws and regulations, or
both, have been extended to include the provision of services or products to
all patients, regardless of the source of payment, although there is
variation from state to state as to the exact provisions of such laws or
regulations. In other states, and, on a national level, several health care
reform initiatives have been proposed which would have a similar impact. The
Company believes that its operations and its marketing, sales and
distribution practices currently comply in all respects with all current
fraud and abuse and physician anti-referral laws and regulations, to the
extent they are applicable. Although the Company does not believe that it
will need to undertake any significant expense or modification to its
operations or its marketing, sales and distribution practices to comply with
federal and state fraud and abuse and physician anti-referral regulations
currently in effect or proposed, financial arrangements between manufacturers
of medical devices and other health care providers may be subject to
increasing regulation in the future. Compliance with such regulation could
adversely affect the Company's marketing, sales and distribution practices,
and may affect the Company in other respects not presently foreseeable, but
which could have a material adverse impact on the Company's business,
financial condition and results of operations.
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THIRD-PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's products are purchased by hospitals and other users,
which then bill various third-party payors for the health care products and
services provided to the patients. These payors, which include Medicare,
Medicaid, private insurance companies and managed care organizations,
reimburse part or all of the costs and fees associated with the procedures
performed with these devices.
Medicare and Medicaid reimbursement for hospitals is based on a
fixed amount for admitting a patient with a specific diagnosis. Because of
this fixed reimbursement method, hospitals have incentives to use less costly
methods in treating Medicare and Medicaid patients, and will frequently make
capital expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique and, as a result, hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians
who perform certain procedures has been, and may in the future be, reduced in
the event of further changes in the resource-based relative value scale
method of payment calculation, physicians may seek greater cost efficiency in
treatment to minimize any negative impact of reduced reimbursement. Any
amendments to existing reimbursement rules and regulations which restrict or
terminate the reimbursement eligibility (or the extent or amount of coverage)
of medical procedures using the Company's products or the eligibility (or the
extent or amount of coverage) of the Company's products could have a material
adverse impact on the Company's business, financial condition and results of
operations.
In response to the focus of national attention on rising health
care costs, a number of changes to reduce costs have been proposed or have
begun to emerge. There have been, and may continue to be, proposals by
legislators and regulators and third-party payors to curb these costs. There
has also been a significant increase in the number of Americans enrolling in
some form of managed care plan, and over 80% of hospitals participate in or
have agreements with HMOs. It has become a typical practice for hospitals to
affiliate themselves with as many managed care plans as possible. Higher
managed care penetration typically drives down the prices of health care
procedures, which in turn places pressure on medical supply prices. This
causes hospitals to implement tighter vendor selection and certification
processes, by reducing the number of vendors used, purchasing more products
from fewer vendors and trading discounts on price for guaranteed higher
volumes to vendors. Hospitals have also sought to control and reduce costs
over the last decade by joining group purchasing organizations or purchasing
alliances. The Company cannot predict what continuing or future impact
existing or proposed legislation, regulation or such third-party payor
measures may have on its future business, financial condition or results of
operations.
Because the primary application of the Company's products is in
coronary bypass procedures, changes in reimbursement policies and practices
of third-party payors with respect to coronary bypass surgery could have a
substantial and material adverse impact on sales of the Company's heart/lung
bypass products. The development or increased use of more cost-effective
treatments for coronary artery disease could cause such payors to decrease or
deny reimbursement for coronary bypass surgery or to favor these other
treatments.
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PATENTS AND PROPRIETARY RIGHTS
The Company protects its technology by filing patent applications
for the patentable technologies that it considers important to the
development of its business. The Company also relies upon trade secrets,
know-how and continuing technological innovations to develop and maintain its
competitive position.
The Company currently holds eight U.S. patents and has three
pending U.S. patent applications. In addition, the Company has six pending
foreign patent applications. Four of the Company's present U.S. patents
cover significant design features of the AFFINITY oxygenator, including the
AFFINITY oxygenator's winding mandrel, graduated density fiber bundle and
heat exchanger water diverter. The Company's other issued U.S. Patents cover
the designs of the AFFINITY venous blood reservoirs and AFFINITY arterial
filter. Also, the Company owns a patent relating to the use of its silicone
membrane for cell culture applications. The Company has pending U.S. Patent
applications relating to additional features of the AFFINITY venous blood
reservoir, the AFFINITY arterial filter and its improved MYOTHERM XP
cardioplegia heat exchanger. The Company's pending foreign patent
applications consist of selected overseas filings addressing the same
intellectual property addressed by the Company's issued and pending U.S.
Patents.
The three U.S. patents acquired by the Company from the Predecessor
Business cover the Company's solid silicone membrane oxygenator product line
and have expired. The Company believes that the market for solid silicone
membrane oxygenators might not be large enough to justify the expenses
associated with market entry by a competitor, and therefore, the effect of
the expiration of these patents on the revenues of the Company will not be
material.
The Company, like other firms that engage in the development and
marketing of medical technology products, must address issues and risks
relating to patents and trade secrets. There can be no assurance that any of
the Company's pending or future U.S. or foreign patent applications will
result in issued patents, that any current or future U.S. or foreign patents
of the Company will not be challenged or circumvented by competitors or
others, or that such patents will be found to be valid or sufficiently broad
to protect the Company's technology or provide the Company with its desired
competitive advantage. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions and therefore
may be highly uncertain. The Company may be required to institute litigation
to enforce patents issued to the Company or to determine the enforceability,
scope and validity of the proprietary rights of others.
The Company also relies on trade secrets and proprietary know-how
which it seeks to protect, in part, through confidentiality agreements with
employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors.
Claims by competitors and other third parties that the Company's
products allegedly infringe the patent rights of others could have a material
adverse effect on the Company. The medical device industry is characterized
by frequent and substantial intellectual property litigation. Intellectual
property litigation is complex and expensive, and the outcome of such
litigation is difficult to predict.
In March 1997, the Company filed a suit in U.S. District Court for
the District of Minnesota, seeking to invalidate a newly issued U.S. patent
held by Minntech Corporation ("Minntech"), a competing manufacturer of blood
oxygenators and other medical devices, and requesting a determination that
the Company's AFFINITY oxygenator does not infringe the Minntech patent. The
Company filed the
18
<PAGE>
suit in response to a December 1996 letter from Minntech, alleging that the
AFFINITY oxygenator infringes certain claims under Minntech's patent, and
requesting discussion regarding a possible license agreement. On October 6,
1997, the Magistrate Judge of the United States District Court vacated a
previous order and granted a stay in the proceedings, including the
suspension of discovery, pending the outcome of Minntech's request for
re-issuance of the aforementioned patent. See "Legal Proceedings" on
page 25.
The Company's action against Minntech and any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and
management personnel. In addition, if Minntech were successfully to bring an
infringement counterclaim against the Company, or if the Company were to be
subject to an adverse determination in any other legal proceeding in the
future alleging patent infringement, the Company could become subject to an
injunction preventing the manufacture and sale of the infringing products and
to monetary damages, or might be forced to seek a license from the party
alleging patent infringement in order to continue to manufacture and sell any
infringing products, which it might not be able to obtain. The outcome of
any such legal action, including the possibility of entering into such a
license, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Pursuant to an Asset Purchase Agreement dated June 7, 1991 ("Asset
Purchase Agreement"), for approximately $1 million in cash and a $2.5 million
note, the Company acquired the business and assets, and assumed certain
liabilities, of the Predecessor Business. In addition, under the terms of a
Royalty Agreement dated June 7, 1991 ("Royalty Agreement"), the Company is
obligated to pay to SCIMED Life Systems, Inc. ("SCIMED") specified royalties
based on a percentage of net sales (as defined) of products previously
manufactured by the Predecessor Business and future products developed from
then-existing technology if the Company achieves certain net sales thresholds
with those products. The Royalty Agreement also provides for royalty
payments on certain new generations of developed products, if any, which use
certain technology embodied in the then-existing models of such products.
In June 1996, the Royalty Agreement expired with respect to products
previously manufactured by the Predecessor Business and expires with respect
to current products under development at the time of the acquisition and
certain new generation products in June 2001. The Company has charged
$95,000 in 1996 and $178,000 in 1995 to operations for royalties due under
the Royalty Agreement for sales of products previously manufactured by the
Predecessor Business. No related royalty amounts accrued in 1997. The
Company believes that none of the products in the AFFINITY line nor any of
the Company's products currently under development (including the products
with the TRILLIUM coating applied) will require royalty payments under the
Royalty Agreement.
In connection with the Asset Purchase Agreement, SCIMED also
assigned to the Company ten trademarks (one of which is registered) related
to the Company's current line of products previously manufactured by the
Predecessor Business.
The Company entered into a royalty agreement in connection with the
Company's acquisition of an exclusive license to market the AFFINITY blood
pump. The agreement requires the Company to make payments based on net sales
of the pump chamber (the disposable portion of the AFFINITY blood pump
system) and net profits of the pump console (the equipment portion of the
AFFINITY blood pump system) through August 2002. The term of the agreement
may be extended by the Company until the expiration of the last to expire of
the patents covered by this agreement or the useful life of the know-how (as
defined) licensed, whichever is longer. Under the terms of the agreement,
the Company is required to pay minimum royalties each year. The Company
incurred royalties of $55,000 for the year ended December 31, 1997 exceeded
the minimum royalty related to the first year of the royalty agreement.
19
<PAGE>
The Company also has use of an exclusive license allowing it to
apply its TRILLIUM bio-passive surface to its products. The agreement
requires the Company to make quarterly payments based on a percentage of net
sales of products utilizing the bio-passive surface. The Company can retain
exclusivity of the license if it pays minimum annual royalties. The Company
incurred royalties of $35,000 for the year ended December 31, 1997 under this
agreement.
EMPLOYEES
As of December 31, 1997, the Company employed 339 persons full-time
including 29 in research and development, 223 in manufacturing, 53 in sales
and marketing and 34 in general and administrative functions. The Company's
employees are not represented by a union, and the Company considers its
relationship with its employees to be good.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES.
Financial information about the Company's foreign and domestic
operations and export sales is contained in Note 6 to the Company's
Consolidated Financial Statements on page 18 of the Company's 1997 Annual
Report and is incorporated herein by reference.
ITEM 1A IMPORTANT FACTORS.
The following factors are important and should be considered carefully in
connection with any evaluation of the Company's business, financial condition,
results of operations and prospects. Additionally, the following factors could
cause the Company's actual results to differ materially from those reflected in
any forward-looking statements of the Company.
HIGHLY COMPETITIVE INDUSTRY
The cardiovascular device market in which the Company competes is
characterized by intense competition. This market is dominated by
established manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing, research and development staffs and facilities than the Company.
Many of these competitors offer broader product lines than the Company within
the specific heart/lung bypass product market and/or in the general field of
medical devices and supplies, giving these competitors advantages in
marketing and pricing their competing products. In addition, the Company's
competitors will continue to use price reductions to preserve market share in
the oxygenator and other product markets. There can be no assurance that the
Company's competitors will not use more significant and more prolonged price
competition across the Company's product lines in the future. Although with
the addition of the Affinity blood pump the Company now offers a complete
line of proprietary devices comprising the major components of the heart/lung
bypass circuit, in order to compete more effectively with competitors the
Company will continue working toward a more complete line of devices for the
heart/lung bypass circuit with superior product performance at a competitive
price. Even if the Company is able to develop or is thought to have
developed such a line of products, there can be no assurance that the Company
will be able to compete effectively.
During 1995 and 1996, one of the Company's competitors, the Bentley
Division of Baxter Healthcare Corporation ("Baxter"), purchased three
companies that provide contract perfusion services to hospitals. Although
the Company believes that it is too early to assess the long-term effect of
these acquisitions on the Company's business, sales to contract perfusion
groups controlled by one of the
20
<PAGE>
Company's competitor decreased $750,000 to $1,100,000 for 1997 from
$1,850,000 for 1996. The Company believes that control of contract perfusion
groups by its competitors will continue to have a negative impact on the
Company's ability to market its products to such groups or to hospitals or
other medical providers that contract with competitor-controlled groups for
perfusion services. These acquisitions, or other acquisitions by the
Company's competitors of other companies providing contract perfusion
services, could have a material adverse effect on the Company's future
business, financial condition and results of operations.
DEPENDENCE ON MARKET ACCEPTANCE
The Company's products are intended to replace products currently
being sold by its competitors. The success of the Company will depend, among
other things, on the acceptance by the market of the Company's current
products and the products it develops and introduces in the future. The
Company believes it has developed and intends to further develop
cost-competitive products that provide clinical performance advantages and
convenience benefits to achieve more of a competitive advantage. Product
development is expensive, and there can be no assurance that the Company's
future product development efforts will further result in technologically
superior products that can be manufactured at a reasonable cost. In
addition, there is no assurance that the market will accept the Company's
product offerings as superior to those currently available or that, if
accepted as superior, the Company's product offerings will achieve
significant sales due to the broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing
staffs of the Company's competitors. Also, there can be no assurance that
the Company's competitors will not succeed in developing or marketing
products that are viewed by the marketplace as providing superior clinical
performance or are less expensive as compared to the products currently
marketed or to be developed by the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company protects its technology through patents and trade
secrets. There can be no assurance that any pending or future patent
applications will result in issued patents or that any current or future
patents will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide any competitive advantage to the
Company. There can also be no assurance that the Company's trade secrets or
confidentiality agreements will provide meaningful protection of the
Company's proprietary information or, in the event of a breach of any
confidentiality agreement, that the Company will have adequate remedies.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by the
Company or that the Company's technology will not infringe patents or other
rights owned by others.
Claims by competitors and other third parties alleging that the
Company's products infringe the patent rights of others could have a material
adverse effect on the Company. The medical device industry is characterized
by frequent and substantial intellectual property litigation. Intellectual
property litigation is complex and expensive, and the outcome of such
litigation is difficult to predict. In March 1997, the Company filed a
lawsuit seeking to invalidate a newly issued U.S. patent held by Minntech
Corporation ("Minntech"), a competing manufacturer of blood oxygenators and
other medical devices, and requesting a determination that the Company's
AFFINITY oxygenator does not infringe the Minntech patent. The Company filed
the suit in response to a December 1996 letter from Minntech, alleging that
the AFFINITY oxygenator infringes certain claims under Minntech's patent, and
requesting discussion regarding a possible license agreement. The Company's
action against Minntech and any future litigation, regardless of outcome,
could result in substantial expense to the Company and significant diversion
of the efforts of the Company's technical and management personnel. In
addition, if Minntech
21
<PAGE>
were successful in bringing an infringement counterclaim against the Company,
or if the Company were to be subject to an adverse determination in any other
future legal proceeding alleging patent infringement, the Company could
become subject to an injunction preventing the manufacture and sale of the
infringing products and to monetary damages, or might be forced to seek a
license from the party alleging patent infringement in order to continue to
manufacture and sell any infringing products, which it might not be able to
obtain. The outcome of any such legal action, including the possibility of
entering into such a license, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Legal Proceedings" on page 25.
RISK OF TECHNOLOGICAL OBSOLESCENCE
The markets for the Company's current and future products are
highly dependent on the number of surgical procedures performed each year
requiring heart/lung bypass. The number of surgical procedures requiring
heart/lung bypass is dependent on a range of factors, including the incidence
of coronary artery disease, the effectiveness of alternative treatments for
coronary artery disease and the availability of third-party reimbursement for
heart/lung bypass procedures and other treatments. In addition, new surgical
and other interventional procedures and/or drugs may be developed and become
accepted in the future which could reduce the importance of procedures that
use the Company's products. Accordingly, the Company's success will depend in
large part on the continued importance of surgical procedures that use the
Company's products and on the Company's ability to respond quickly to medical
and technological changes through the development and introduction of new,
cost-effective products. There can be no assurance that the Company's
existing products or products in development will offer the same benefits at
comparable prices as competing products, or that the Company's competitors
will not develop new technologies that render the Company's products obsolete
or not cost-competitive.
DEPENDENCE ON INTERNATIONAL DISTRIBUTOR SALES
Sales to distributors constitute a significant portion of the
Company's business in foreign markets. With the exception of employing
direct sales forces in the United Kingdom, France and Canada, all other
international markets are served by distributors. The Company is dependent
on these distributors to generate revenues from these foreign markets. There
can be no assurance that such distributors will devote adequate resources to
selling the Company's products. There can also be no assurance that the
Company will be able to maintain its relationships with significant
distributors, or, in the event of termination of such relationships, that new
distributors will be found. The loss of a significant distributor could
materially adversely affect the Company's future business, financial
condition and results of operations if a new distributor or other suitable
sales organization could not be found on a timely basis in the relevant
geographic market.
Changes in international economic conditions, including currency
exchange rates, could also have a material adverse effect on the Company's
business, financial condition and results of operations. Substantially all
of the international transactions handled by the Company's distributors are
denominated in U.S. dollars. Fluctuations in currency exchange rates may
therefore reduce demand for the Company's products by increasing the price of
the Company's products in the currency of the countries in which the products
are sold. This situation will also reduce the distributors profitability and
may cause the distributor to seek pricing concessions from the Company thus
potentially reducing the Company's revenues and gross margins.
22
<PAGE>
GOVERNMENTAL REGULATION
Company's products, development activities and manufacturing
processes are subject to extensive and rigorous regulation by the FDA and by
comparable agencies in foreign countries. In the United States, the FDA
regulates the introduction of medical devices as well as manufacturing,
labeling and recordkeeping procedures for such products. The process of
obtaining marketing clearance from the FDA for new products can be time
consuming and expensive, and there is no assurance that such clearances will
be granted or that FDA review will not involve delays that would adversely
affect the Company's ability to commercialize additional products. Even if
regulatory approvals to market a product are obtained from the FDA, these
approvals may entail limitations on the indicated uses of the product.
Marketing clearances by the FDA can also be withdrawn due to failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial approval. The FDA could also limit or prevent the
manufacture or distribution of the Company's products and has the power to
require the recall of such products. The FDA, various state agencies and
foreign regulatory agencies inspect the Company and its facilities from time
to time to determine whether the Company is in compliance with various
regulations relating to manufacturing practices, validation, testing, quality
control and product labeling. A determination that the Company is in
violation of such regulations could lead to imposition of civil penalties,
including fines, product recalls or product seizures and, in extreme cases,
criminal sanctions.
A significant portion of the Company's revenues are dependent upon
sales of its products outside the United States through indpeendent
distributors. International regulatory bodies have established varying
regulations governing product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. The Company relies on its independent distributors and Company
regulatory personnel, in countries where the Company has employed direct
sales personnel, to comply with the majority of the foreign regulatory
requirements. The inability or failure of independent distributors to comply
with the varying regulations or the imposition of new regulations could
retrict such distributors' ability to sell the Company's products
internationally and thereby adversely effect the Company's future business,
financial condition and results of operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company's products are purchased by hospitals and other users,
which bill various third-party payors, such as government health programs,
private health insurance plans, managed care organizations and other similar
programs, for the health care goods and services provided to their patients.
Third-party payors are increasingly challenging the prices charged for
medical products and services and, in some instances, have put pressure on
medical suppliers to lower their prices. The Company is unable to predict
what changes will be made in the reimbursement methods used by third-party
health care payors. There can be no assurance that the treatment of coronary
artery disease using coronary artery bypass graft surgery will be considered
cost-effective by third-party payors, that reimbursement for such surgery
will be available or, if available, that payors' reimbursement levels will
not adversely affect the Company's ability to sell its products on a
profitable basis. In addition, the cost of health care has risen
significantly over the past decade, and there have been, and may continue to
be, proposals by legislators and regulators to curb these costs. Legislative
action limiting reimbursement for certain procedures could have a material
adverse effect on the Company's future business, financial condition and
results of operations.
23
<PAGE>
EXPOSURE TO PRODUCT LIABILITY CLAIMS; RISK OF PRODUCT RECALL
The medical device industry historically has been litigious, and
the manufacture and sale of the Company's products inherently entails a risk
of product liability claims. Although the Company maintains product
liability insurance in amounts believed to be adequate based upon the nature
and risks of its business in general and its actual experience to date, there
can be no assurance that one or more liability claims will not exceed the
coverage limits of such policies or that such insurance will continue to be
available on commercially reasonable terms, if at all. Further, the Company
does not expect to be able to obtain insurance covering its costs and losses
as the result of any recall of its products due to alleged defects, whether
or not such a recall is instituted by the Company or required by a regulatory
agency. While the Company has not experienced any product liability claims or
recalls to date, a product liability claim, recall or other claim with
respect to uninsured liabilities or in excess of insured limits could have a
material adverse effect on the future business, financial condition and
results of operations of the Company.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is dependent in large part upon its ability to attract
and retain qualified scientific, technical and key management personnel due
to the specialized scientific nature of the Company's business. There is
intense competition for qualified personnel in the Company's industry and
there can be no assurance that the Company will be able to continue to
attract and retain qualified personnel for the development of its business.
INTERRUPTION IN SOURCES OF SUPPLY
The Company currently purchases, and will continue to purchase, raw
materials and components for its products from outside vendors. Certain of
the components used in the Company's products are purchased from single
sources. Although the Company has qualified, or is in the process of
investigating, alternate sources of supply for key components, any
significant interruption in supply could have a material adverse effect on
the Company's future business, financial condition and results of operations.
ITEM 2. PROPERTIES.
The Company's principal executive offices, research and development
facilities and U.S. manufacturing facilities are located at 7611 Northland
Drive, Minneapolis, Minnesota, consisting of approximately 100,000 square
feet.
The Company's United Kingdom manufacturing facility is located at
Phoenix Crescent, Strathclyde Business Park, Bellshill, Scotland, U.K.
ML43NJ, consisting of approximately 15,000 square feet. The Company leases
such space through its AVECOR Ltd. subsidiary pursuant to a lease expiring in
2003. The lease provides for monthly rent of approximately $10,000 (based on
current exchange rates) until mid-1998 when the monthly rent is subject to
adjustment based upon current Scotland rental market rates. The Company also
pays a pro rata share of operating expenses and real estate taxes.
In July 1996, the Minnesota Pollution Control Agency granted the
Company a five-year air emission facility permit for the Company's
manufacturing operations at its facility located at 7611 Northland Drive,
Minneapolis, Minnesota 55428. The Company believes that it has been in
compliance with this permit since its issuance and that it is in compliance
in all material aspects with federal and state
24
<PAGE>
laws relating to environmental matters. However, expected future changes in
federal or state regulations relating to air emissions could require the
Company to install air emission control equipment or modify its manufacturing
operations, which the Company believes would not have a material adverse
effect on its business.
ITEM 3. LEGAL PROCEEDINGS.
In March 1997, the Company filed suit in U.S. District Court for
the District of Minnesota, seeking to invalidate a newly issued U.S. patent
held by Minntech Corporation ("Minntech"), a competing manufacturer of blood
oxygenators and other medical devices, and requesting a determination that
the Company's AFFINITY oxygenator does not infringe the Minntech patent. The
Company filed the suit in response to a December 1996 letter from Minntech,
alleging that the AFFINITY oxygenator infringes certain claims under
Minntech's patent, and requesting discussion regarding a possible license
agreement. The Company reviewed the subject patent and concluded, based on
an opinion from its patent counsel, that none of the claims in the patent are
infringed by the AFFINITY oxygenator, and that the patent is, in any event,
invalid. On October 6, 1997, the Magistrate Judge of the United States
District Court vacated a previous order and granted a stay in the
proceedings, including the suspension of discovery, pending the outcome of
Minntech's request for re-issuance of the aforementioned patent. The expense
and effort potentially required to bring this action, as well as the outcome
of any counterclaim successfully brought against the Company by Minntech,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted for a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers as of March 13, 1998, are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Anthony Badolato 60 Chairman and Chief Executive Officer
Gregory J. Melsen 45 Vice President-Finance, Treasurer and Chief
Financial Officer
Allan R. Seck 52 Vice President-Marketing and Sales
William S. Haworth 54 Vice President-Engineering
</TABLE>
ANTHONY BADOLATO. Mr. Badolato is a founder of the Company and has
served as a director and Chief Executive Officer of the Company since April
1991. In May 1996, Mr. Badolato was named Chairman of the Company's Board of
Directors. From April 1991 through January 1996, Mr. Badolato also served as
President of the Company. From January 1989 through September 1990, Mr.
Badolato was Vice President - Research and Development and Manufacturing of
Bio-Medicus, Inc. ("Bio-Medicus"), a specialty cardiovascular products
company. From 1969 to December 1988, Mr. Badolato was employed by Johnson &
Johnson, a global health care company. While employed by Johnson & Johnson,
Mr. Badolato
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<PAGE>
was employed by the Cardiovascular Division in various research and
development and manufacturing positions over a period of 12 years, including
Director of Research and Development from 1979 to 1988.
GREGORY J. MELSEN. Mr. Melsen has served as Vice
President-Finance, Treasurer and Chief Financial Officer of the Company since
January 1996. From March 1994 through December 1995, Mr. Melsen was Chief
Financial Officer of PACE Incorporated ("PACE"), a Minnesota-based
environmental testing company that provided services through a national
network of laboratories. Mr. Melsen served as a consultant from June 1993
through February 1994. From September 1984 to June 1993, Mr. Melsen was an
audit partner with the Minnesota office of Deloitte & Touche. Mr. Melsen is
a certified public accountant.
ALLAN R. SECK. Mr. Seck is a founder of the Company and has been
Vice President-Marketing and Sales of the Company since October 1995, and
Vice President - Marketing from April 1991 to September 1995. From October
1988 to September 1990, Mr. Seck was Vice President-Marketing of Bio-Medicus.
From 1968 to 1988, he was employed by Johnson & Johnson, primarily in its
Cardiovascular Division (and, after September 1987 by Medtronic Inc., its
successor by acquisition), in various marketing positions, including Group
Product Director and Director of Sales.
WILLIAM S. HAWORTH. Mr. Haworth has served as Vice President -
Engineering since March 1997, Vice President-Research and Development of the
Company from August 1993 to February 1997, and Director of Research and
Development from August 1991 to July 1993. From September 1983 to August
1991, Mr. Haworth was employed by 3M Company in various research and
development positions, including Technical Manager, Biosciences Laboratory
from June 1988 to August 1991. From August 1982 to August 1983, Mr. Haworth
worked as an independent consultant to manufacturers in the medical device
industry. Prior to August 1982, Mr. Haworth was a College Lecturer in
Engineering Science at Magdalen College, Oxford, working in a
multidisciplinary team to develop heart valves, blood pumps, oxygenators and
artificial kidneys. Mr. Haworth is the author of numerous publications in
scientific and technical journals.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information under the caption "Common Stock Information" in the
Company's 1997 Annual Report is incorporated herein by reference.
On July 31, 1997, the Company sold 4,500 shares of its Common Stock
pursuant to the exercise of underwriter's warrants issued in March 1992 in
connection with the Company's initial public offering. All of such shares
were sold to an individual formerly associated with the underwriter of that
offering, and were sold at a price of $6.60 per share for a total
consideration of $29,700. This sale was conducted without a registration
under the Securities Act of 1933, as amended, in reliance on the exemptions
provided by Section 4(2) and Regulation D.
ITEM 6. SELECTED FINANCIAL DATA.
The financial information in the table under the caption "Financial
Highlights" in the Company's 1997 Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Company's
1997 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and related notes
thereto and the Report of Independent Accountants in the Company's 1997
Annual Report are incorporated herein by reference, as is the unaudited
information set forth under the caption "Quarterly Operating Data" in the
Company's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) DIRECTORS OF THE REGISTRANT.
The information under the captions "Election of Directors -
Information About Nominees" and "Election of Directors - Other Information
About Nominees" in the Company's 1998 Proxy Statement is incorporated herein
by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company is
included in this Annual Report on Form 10-K under Item 4a, "Executive
Officers of the Registrant."
(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors -
Director Compensation" and "Executive Compensation" in the Company's 1998
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements, Related Notes, and Report of
Independent Accountants:
The following items are incorporated herein by reference from the
pages indicated in the Company's 1997 Annual Report:
<TABLE>
<CAPTION>
PAGE(S)
---------
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and 1996 .. 10
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 .............................. 11
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995 .............. 12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 .............................. 13
Notes to Consolidated Financial Statements .................... 14 to 19
Report of Independent Accountants ............................. 20
</TABLE>
2. Financial Statement Schedules:
The unaudited selected quarterly financial data
included under the caption Quarterly Operating Data on page 20 of
the Company's 1997 Annual Report is incorporated herein by
reference.
The following financial statement schedule and report
of independent accountants thereon are included herein and should
be read in conjunction with the financial statements referred to
above (page numbers refer to pages in this Annual Report on
Form 10-K):
<TABLE>
<S> <C>
Report of Independent Accountants on Financial
Statement Schedule ........................................... 32
Financial Statement Schedule:
II - Valuation and Qualifying Accounts ........................ 33
</TABLE>
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
3. Exhibits:
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index on pages E-1 to E-4 of this Report.
29
<PAGE>
A copy of any of the exhibits listed or referred to above will be
furnished at $5.00 per exhibit to any person who was a
shareholder of the Company as of March 13, 1998, upon receipt
from any such person of a written request for any such exhibit.
Such request should be sent to AVECOR Cardiovascular Inc., 7611
Northland Drive, Minneapolis, Minnesota 55428, Attention: Chief
Financial Officer.
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an
exhibit to this Annual Report on Form 10-K pursuant to
Item 14(c):
A. 1991 Stock Incentive Plan, as amended (Incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No.0-21330)).
B. AVECOR Cardiovascular Inc. Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 28.1 to the Company's
Registration Statement on Form S-8 (File No.0-21330)).
C. 1995 Non-Employee Director Option Plan (Incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No.0-21330)).
D. Confidentiality Agreement dated November 13, 1991 between
the Company and Anthony Badolato (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1
(File No. 33-45731)).
E. Confidentiality Agreement dated November 13, 1991 between
the Company and Allan R. Seck (Incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-1
(File No. 33-45731)).
F. Form of Change in Control Agreement between the Company and
each of Anthony Badolato, Gregory J. Melsen, Allan R. Seck and
William S. Haworth (Incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No.0-21330)).
G. Form of Confidentiality Agreement between the Company and
each of Gregory J. Melsen and William S. Haworth (Incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No.0-21330)).
(b) Reports on Form 8-K:
None.
(c) Exhibits:
The response to this portion of Item 14 is included as a separate
section of this Annual Report on Form 10-K.
30
<PAGE>
(d) Financial Statement Schedules:
The response to this portion of Item 14 is included as a
separate section of this Annual Report on Form 10-K.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of AVECOR Cardiovascular Inc.
Our report on the consolidated financial statements of AVECOR
Cardiovascular Inc. has been incorporated by reference in this Form 10-K from
the 1997 Annual Report to Shareholders of AVECOR Cardiovascular Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule referred to in Item 14(a)(2) of this
Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to
be included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 16, 1998
32
<PAGE>
AVECOR CARDIOVASCULAR INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------------------- -------- --------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
deducted from accounts
receivable:
For the year ended:
December 31, 1997 $120,000 $240,000 - $ 26,000(1) $334,000
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
December 31, 1996 $ 93,000 $104,000 - $ 77,000(1) $120,000
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
December 31, 1995 $ 50,000 $ 43,000 - - $ 93,000
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
Valuation allowance deducted
from inventories:
For the year ended:
December 31, 1997 $100,000 $167,000 - $140,000(2) $127,000
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
December 31, 1996 $ 50,000 $ 50,000 - - $100,000
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
December 31, 1995 $100,000 - - $ 50,000(2) $ 50,000
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
</TABLE>
(1) Deductions from allowance resulting from write-off of bad debts.
(2) Deductions from allowance resulting from disposal of inventories and other
deductions to better estimate inventory reserve exposure.
33
<PAGE>
SIGNATURES
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.
Dated: March 27, 1998 AVECOR CARDIOVASCULAR INC.
By /s/ ANTHONY BADOLATO
-------------------------------------
Anthony Badolato
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on March 27, 1998 by the following
persons on behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ ANTHONY BADOLATO Director and Chief Executive Officer
- -------------------------------- (Principal Executive Officer)
Anthony Badolato
/s/ GREGORY J. MELSEN Vice President -- Finance, Treasurer
- -------------------------------- and Chief Financial Officer (Principal
Gregory J. Melsen Financial and Accounting Officer)
/s/ EDWARD E. STRICKLAND
- -------------------------------- Director
Edward E. Strickland
/s/ DAVID W. STASSEN
- -------------------------------- Director
David W. Stassen
/s/ J. GORDON WRIGHT
- -------------------------------- Director
J. Gordon Wright
</TABLE>
34
<PAGE>
AVECOR CARDIOVASCULAR INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
For the Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
ITEM NO. METHOD OF FILING
- -------- ----------------
<S> <C>
3.1 Second Restated Articles of Incorporation of
the Company, as amended July 3, 1996 .................. Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (File No. 0-21330).
3.2 Bylaws of the Company, as amended May 3, 1996 ......... Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 (File No. 0-21330).
4.1 Specimen form of the Company's Common
Stock Certificate .................................... Incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 0-21330).
4.2 Second Restated Articles of Incorporation of
the Company, as amended July 3, 1996 ................. See Exhibit 3.1.
4.3 Bylaws of the Company, as amended May 3, 1996 ........ See Exhibit 3.2.
4.4 Certificate of Designation, Preferences and Rights
of the Company's Series A Junior Preferred Stock ..... Included in Exhibit 3.1
4.5 Rights Agreement dated June 26, 1996 between
the Company and Norwest Bank Minnesota, N.A.,
which includes the form of Rights Certificate as
Exhibit B ............................................ Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated June 26,
1996 (File No. 0-21330).
4.6 Amendment to Rights Agreement between the
Company and Norwest Bank Minnesota, N.A., dated
July 22, 1997 ........................................ Incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 0-21330).
E-1
<PAGE>
10.1 1991 Stock Incentive Plan, as amended ................ Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.2 AVECOR Cardiovascular Inc. Employee Stock
Purchase Plan ........................................ Incorporated by reference to Exhibit 28.1 to the
Company's Registration Statement on Form S-8 (File
No. 33-55184).
10.3 1995 Non-Employee Director
Option Plan .......................................... Incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.4 Confidentiality Agreement dated November 13, 1991
between the Company and Anthony Badolato.............. Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File
No. 33-45731).
10.5 Confidentiality Agreement dated November 13, 1991
between the Company and Allan Seck .................... Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File
No. 33-45731).
10.6 Form of Change in Control Agreement between the
Company and each of Anthony Badolato, Gregory J.
Melsen, Allan R. Seck and William S. Haworth........... Incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.7 Form of Confidentiality Agreement between
the Company and each of Gregory J. Melsen and
William S. Haworth .................................... Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.8 Missives of Let dated October 4, 7 and 8, 1993
and Lease Agreement between AVECOR Cardiovascular,
Ltd. and Euromed Business Park Limited ................ Incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-21330).
E-2
<PAGE>
10.9 Settlement Agreement between Cobe Laboratories Inc.
and the Company dated June 30, 1996.................... Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (File No. 0-21330).
10.10 Cobe Patent License To Avecor between Cobe
Laboratories Inc. and the Company dated June 30, 1996.. Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (File No. 0-21330).
10.11 Avecor Patent License To Cobe between Cobe
Laboratories Inc. and the Company dated June 30, 1996.. Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (File No. 0-21330).
10.12 Loan Agreement dated January 30, 1997 between the
Company and First Bank National Association............ Incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.13 Note dated January 30, 1997 between the Company
and First Bank National Association.................... Incorporated by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.14 Mortgage, Security Agreement, Assignment of Leases
and Rents and Fixture Financing Statement dated
January 30, 1997 between the Company and First Bank
National Association................................... Incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
E-3
<PAGE>
10.15 Tax Increment Revenue Note dated February 1, 1997
issued to the Company by the Brooklyn Park Economic
Development Authority.................................. Incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-21330).
10.16 Distribution Agreement dated April 2, 1997 between
the Company and Cardiovascular Diagnostics, Inc....... Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 (File No.0-21330).
10.17 License Agreement dated January 16, 1995 between
the Company and Michigan Critical Care Consultants,
Inc. including Amendment dated November 7, 1997........ Filed herewith electronically.*
13.1 Portions of the Company's 1997 Annual Report to
Shareholders incorporated herein by reference ......... Filed herewith electronically.
21.1 List of Subsidiaries of the Company ................... Incorporated by reference to Exhibit 21.1 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-21330).
23.1 Consent of Coopers & Lybrand L.L.P..................... Filed herewith electronically.
27.1 Financial Data Schedule ............................... Filed herewith electronically.
</TABLE>
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
E-4
<PAGE>
LICENSE AGREEMENT
NOTE: PORTIONS OF THIS EXHIBIT MARKED WITH "*'S" HAVE BEEN OMITTED PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A COPY OF THIS EXHIBIT
IN ITS ENTIRETY HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
THIS AGREEMENT, entered into this 16th day of January, 1995, by and
between Michigan Critical Care Consultants, Inc., a Michigan corporation with
its principal place of business at 245 Jackson Industrial Drive, Suite J, Ann
Arbor, Michigan 48103 (hereinafter "MC3") and AVECOR Cardiovascular Inc., a
Minnesota corporation with its principal place of business at 13010 County Road
6, Plymouth, Minnesota 55441 (hereinafter "AVECOR").
WHEREAS, the Regents of the University of Michigan, a constitutional
corporation of the State of Michigan (hereinafter "Michigan"), owns, controls
or has rights with respect to certain technology relating to the design of
passively filling blood pumps for use in connection with respiratory and/or
circulatory support;
WHEREAS, MC3 and Michigan have entered into a license agreement dated as
of August 8, 1991 (hereinafter, the "Michigan License Agreement"), a copy of
which is attached hereto as Exhibit I, under which Michigan has granted MC3 an
exclusive license to such technology, including the right to sublicense such
technology;
WHEREAS, MC3 has developed and owns certain technology which is or may be
useful in connection with AVECOR's manufacture, use, or sale of passively
filling blood pumps;
WHEREAS, MC3 is willing to grant to AVECOR a license to the Michigan
technology and certain of MC3's technology, and AVECOR is willing to accept
such license upon and subject to the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth below, the parties mutually agree as follows:
<PAGE>
ARTICLE
1.
DEFINITIONS
The parties agree that the following words, terms and phrases where
written with an initial capital letter shall, unless the context otherwise
indicates, have the following meanings for purposes of this Agreement:
(a) "Michigan Technology" shall mean Patents and Know-how licensed to MC3
under the Michigan License Agreement and relating to passively filling blood
pumps for use in connection with respiratory and/or circulatory support,
including specifically technology covered by U.S. Patents 5,222,880, 5,281,112
and 5,342,182 together with any reissues, continuations, extensions,
divisionals, foreign patents and patent applications based thereon and more
fully described in Michigan's Intellectual Property Office File Numbers 584 and
585.
(b) "MC3 Technology" shall mean Patents and Know-how developed, owned or
otherwise licensable by MC3 which are or may be useful in connection with the
manufacture, use or sale of passively filling blood pumps and more specifically
described in Exhibit II hereto, as such Exhibit may be amended form time to
time by the parties in writing.
(c) "Technology" shall mean the Michigan Technology and the MC3
Technology.
(d) "Product" shall mean that certain blood pump for use in connection
with respiratory and/or circulatory support (exclusive of applications relating
to pumping breathable liquids) and more specifically described in Exhibit III
attached hereto, including Improvements as defined below, and specifically
encompassing both Disposables and Hardware, as such terms are defined below.
(e) "Patents" shall mean all patents or applications therefor or
reissues, continuations or extensions thereof relating to Products and which
are owned, controlled, acquired or otherwise licensable by a party hereto
during the term of this Agreement, including specifically the Licensed Patents
as defined in the Michigan License Agreement.
(f) "Know-how" shall mean all trade secrets and non-patented information,
such as confidential information, inventions, intellectual property,
discoveries, improvements, modifications, and enhancements, techniques,
concepts, data, technical information and specifications (including
engineering, testing and manufacturing specifications), diagrams,
2
<PAGE>
schematics, charts and lists relating to Products or the Technology and
owned, controlled, acquired or otherwise licensable by a party hereto during
the term of this Agreement.
(g) "Improvements" shall mean Know-How or Patents relating to
modifications of or enhancements to Products developed by either party during
the term of this Agreement which serve to improve, correct, update, adjust or
change the design, performance characteristics, specifications or manufacturing
processes of Products.
(h) "Documentation" shall mean those elements of Know-how and other items
of relevant information which are in writing or other tangible form including,
without limitation, drawings, diagrams, blueprints, computer programs,
technical publications, manuals, designs and artwork which relate to the
manufacture, inspection, quality control, installation, maintenance, testing,
operation and/or repair of Products.
(i) "Subsidiary" shall mean any corporation more than fifty percent (50%)
of whose securities having ordinary voting power for the election of directors
are owned or controlled directly or indirectly by either party hereto.
(j) "Unit" shall mean any individual Disposable or Hardware unit.
(k) "Disposables" shall mean, with respect to Products, the disposable
pump chamber.
(l) "Hardware" shall mean, with respect to Products, the control console
together with the pump rotor, rollers, motor, chamber supports, tensioning
mechanism and related parts and equipment.
(m) "Net Sales Price" shall mean the price received by AVECOR or its
sublicensees from customers for the sale of Products only, expressly excluding
revenue derived from other value added products or treatments, and less
freight, duties, taxes, royalties paid to other licensors on treatment
technologies applied to Products, discounts, returns and refunds; provided,
such deductions are separately identified in customer invoices or specifically
documented in the books and records of AVECOR kept pursuant to Article 4.7
hereof and set forth in the reports provided by AVECOR to MC3 pursuant to
Article 4.6 hereof. Provided however that when the Disposable Products are
packaged as a system and sold with other disposable medical devices and at a
discounted sales price, then the net sales price assignable to
3
<PAGE>
the Disposable Products shall be discounted at a rate not to exceed the
discount rate applied to the other disposable medical devices included in the
packaged system.
(n) "Effective Date" shall mean the date set forth on the first page of
this Agreement, being the date as of which the parties have duly executed this
Agreement.
ARTICLE
2.
LICENSE GRANTS
2.1 MC3'S GRANT. MC3 hereby grants to AVECOR, subject to all the terms of
this Agreement, an exclusive, non-transferable, royalty-bearing and worldwide
right and license under Technology, Patents and Know-how owned, controlled,
acquired or otherwise licensable by MC3 during the term of this Agreement to
make, have made, use, lease, sell or otherwise transfer the Products in
connection with respiratory and/or circulatory support applications, subject
to:
(a) those rights reserved to Michigan, the United States Government
and/or third parties under Articles 3.3 and 3.4 of the Michigan License
Agreement;
(b) the right of MC3 to utilize the Technology in connection with
applications relating to breathable fluids or to make, have made, use,
lease and sell products relating to breathable fluids;
(c) the right of MC3 to utilize the Technology in connection with
applications other than respiratory and/or circulatory support and to
make, have made, use, lease and sell products other than products in
connection with respiratory and/or circulatory support applications; and
(d) the right of MC3 to utilize the Technology in connection with
its continued internal research, development and testing of the Products.
2.2 AVECOR'S GRANT. In the event AVECOR develops any Improvements to the
Technology or Products during the term of this Agreement, AVECOR shall and
hereby does grant to MC3, subject to all the terms of this Agreement, a non-
exclusive, non-transferable, and worldwide right and license under Patents and
Know-how owned, controlled, acquired or
4
<PAGE>
otherwise licensable by AVECOR during the term of this Agreement to make,
have made, use, lease, sell or otherwise transfer the Products incorporating
any or all such Improvements for all purposes (including specifically for
applications to breathable fluids) other than in connection with respiratory
and/or circulatory support applications. The license granted by AVECOR under
this Article 2.2 shall include the right to grant sublicenses to third
parties; provided, that AVECOR shall receive the benefit of any Improvements
developed by MC3's sublicensees with respect to Products, and AVECOR shall
further receive a proportionate and commercially reasonable royalty to be
mutually agreed upon by MC3 and AVECOR payable out of royalties received by
MC3 from its sublicensees related to such Improvements.
2.3 SUBLICENSES. AVECOR shall not grant sublicenses under rights obtained
hereunder from MC3 without the prior written consent of both MC3 and Michigan;
provided, that MC3 hereby agrees that AVECOR may grant sublicenses under rights
received pursuant to Article 2.1 above to any of its Subsidiaries for so long
as they shall remain Subsidiaries of AVECOR, and AVECOR shall be entitled to
sublicense third party contractors for the limited purpose of manufacturing
parts and components of Products for sale by AVECOR, provided such third party
contractors agree in writing to maintain the confidentiality of MC3's Know-how
in accordance with the terms of Article 5 hereof and to promptly return all
Documentation provided to them upon termination of their contracts with AVECOR.
2.4 SCOPE OF GRANT. No license is granted by either party to the other,
either directly or by implication, estoppel or otherwise, under any Patents or
Know-how other than specifically granted in Articles 2.1, 2.2 and 2.3 above.
Nothing herein shall require either party to disclose to the other proprietary
or confidential information received by such party from third parties which
confidential information such party is precluded from disclosing to others. No
right, license or privilege is granted hereunder by either party to the other
to use such party's names, logos, trademarks or service marks, whether
registered or not.
ARTICLE
3.
KNOW-HOW AND DOCUMENTATION TRANSFER
5
<PAGE>
3.1 INITIAL DOCUMENTATION. Within thirty (30) days of the written request by
AVECOR, MC3 shall provide AVECOR with all Documentation within the scope of the
license grant contained in Article 2.1 above in reproducible form.
3.2 SUBSEQUENT DOCUMENTATION. In addition to the Documentation to be
delivered pursuant to Article 3.1 above and within a reasonable time after it
becomes available, each party shall deliver to the other party all
Documentation within the scope of the license grants contained in Articles 2.1
and 2.2 above relating to Improvements to the Products developed by the
delivering party during the term of this Agreement. Such Documentation shall
likewise be in reproducible form.
3.3 STANDARDS OF MEASUREMENT. All Documentation provided by one party to the
other in accordance with this Agreement shall be in the English language and
shall conform to the standards of measurement then in use by the party
delivering the Documentation.
3.4 TECHNICAL ASSISTANCE. In partial consideration for the technical
assistance and license fee set forth in Article 4.1 below and at the request of
AVECOR, MC3 shall provide AVECOR at AVECOR's facilities with up to eighty (80)
hours of technical assistance through salaried employees of MC3 during a period
of twelve (12) months from the date of this Agreement. All travel time of such
MC3 employees to and from AVECOR's facilities shall count against the above
eighty (80) hours of technical assistance. All requests for such technical
assistance by AVECOR at its facilities must require no less than six (6) hours
of scheduled services per request. Thereafter, each party shall provide the
other party with a reasonable amount of technical assistance as requested by
the other party in order to enable such other party to reduce to practical
application Know-how transferred to it hereunder. The party receiving such
technical assistance shall pay the party providing assistance at the providing
party's then current rates for such services billed in one-half hour
increments, plus reasonable travel and living expenses actually incurred in the
course of providing such technical assistance. The party receiving technical
assistance shall have the right to approve the individual or individuals
providing such technical assistance prior to the initial rendering of such
services.
6
<PAGE>
3.5 GOVERNMENT LICENSES AND APPROVALS. MC3 shall assist AVECOR in obtaining
any governmental licenses or approvals which may be required for the
manufacture, use and/or sale of the Products as contemplated by this Agreement.
All such assistance provided by MC3 shall count against the eighty (80) hours
of technical assistance to be provided by MC3 under Article 3.4 above. MC3
acknowledges and agrees that AVECOR shall have the right to make all filings
and obtain all licenses and approvals in AVECOR's name from the Food and Drug
Administration (the "FDA") under the Federal Food, Drug and Cosmetic Act (the
"Act") and regulations promulgated thereunder, and all other U.S. and foreign
governmental determinations which are necessary to permit the commercial
distribution of the Products within the United States and abroad. The cost of
obtaining any requisite U.S. or foreign governmental approvals, licenses or
permits shall be borne by AVECOR.
ARTICLE
4.
CONSIDERATION
4.1 TECHNICAL ASSISTANCE AND LICENSE FEE. In consideration for the
Documentation delivered under Article 3.1 above, AVECOR shall pay to MC3 a
technical assistance and license fee of ********************************. Such
fee shall be payable by certified or cashier's check in two (2) equal
installments. One-half of such fee shall be due within ten (10) days of the
execution of this Agreement, and one-half shall be due upon submission by
AVECOR to the FDA of a request for approval under Section 510(K) of the Act and
the regulations thereunder.
4.2 ROYALTIES. In consideration for the rights and licenses granted to AVECOR
by MC3 under Article 2.1 hereof, AVECOR shall pay to MC3 royalties as follows:
(a) ****************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
7
<PAGE>
**************************************************************************
******************************************.
(b) ****************************************************************
**************************************************************************
******************************************.
4.3 MINIMUM ROYALTIES. AVECOR agrees to pay to MC3 a minimum annual royalty
as set forth below. AVECOR's obligation to pay minimum annual royalties shall
commence when AVECOR receives FDA approval with respect to a submission by
AVECOR under Section 510(K) of the Act for U.S. marketing clearance of a
Product developed under the Technology. Annual minimum royalties for each year
commencing with FDA approval under this Article 4.3 shall be as follows:
***** ********
***** ********
***** ********
***** ********
In the event AVECOR exercises its option pursuant to Article 9.1 to extend
the term of this Agreement in accordance with such Article 9.1, the
minimum annual royalty for the ********************** during the term of
this Agreement shall be **************************************************
**************************************************************************
***************.
4.4 PAYMENTS. Royalties on Disposables shall become due and payable upon the
delivery of the Disposables by AVECOR or its sublicensees to the customer, and
AVECOR shall pay all such royalties due and payable to MC3 within thirty (30)
days of the close of the calendar quarter during the term of this Agreement in
which the Products are delivered. Royalties on Hardware shall become due and
payable from and after the first calendar year in which AVECOR realizes
8
<PAGE>
a net profit from the sale of Hardware. Such royalties shall be due and
payable within sixty (60) days after the close of such year and every
calendar year thereafter during the term of this agreement in which AVECOR
realizes a net profit on the sale of Hardware during such year. All payments
for technical assistance provided by one party to the other pursuant to
Article 3.4 hereof shall be payable within thirty (30) days of the date of
the providing party's invoice therefor. All payments shall be made by bank
transfer to the bank or banks designated in writing by MC3 or AVECOR as
applicable from time to time during the term of this Agreement. All payments
shall be made in United States dollars. All amounts not paid when due and
payable hereunder shall bear interest from the date such amounts are due and
payable at a rate of two (2) points above the prime lending rate as
established by the Chase Manhattan Bank, N.A. in New York City, New York, or
at such lower rate as may be required by law. Any royalties due hereunder
based on sales in currencies other than United States dollars shall be
determined by converting such foreign currencies into their equivalent in
United States dollars at the exchange rate of such currency as reported in
the WALL STREET JOURNAL on the last business day of the quarter during which
such payments accrue.
4.5 TAXES. Except as provided in the definition of Net Sales Price, all fees
and royalty payments due to MC3 under Articles 4.1, 4.2 and 4.3 above shall be
without deduction for sales, use, excise, personal property or other similar
taxes or other duties imposed on such payments by the government of any country
or any political subdivision thereof and any and all such taxes shall be
assumed by and paid by AVECOR.
4.6 REPORTS. No later than forty-five (45) days after the close of each
calendar quarter during each year of this Agreement, AVECOR shall provide MC3
with a report relating to the prior calendar quarter setting forth the gross
sales and total Net Sales Price of Products sold, the number of Units shipped,
the amounts payable as royalties for the calendar quarter just ended, and the
various calculations used to arrive at all such amounts, including the
quantity, description (nomenclature and type designation), country of
manufacture and, to the extent reasonably available, country of sale of
Products. In case no royalties are due for any calendar quarter, AVECOR shall
so report. The reports provided for hereunder shall be certified by an
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authorized representative of AVECOR to be correct to the best of AVECOR's
knowledge and information.
4.7 BOOKS AND RECORDS. AVECOR shall keep at its expense full and accurate
books and records as may be necessary for the purpose of determining the
amounts of royalties payable to MC3 pursuant to Articles 4.2 and 4.3 above.
AVECOR shall make such books and records available to MC3 or its accountants or
other representatives upon written request by MC3 during normal business hours
throughout the term of this Agreement and for a period of six (6) years after
the date of origination of any such books or records for the limited purpose of
verifying AVECOR's payments of royalties. The rights and obligations of this
Article 4.7 shall survive termination of this Agreement.
4.8 BEST EFFORTS OBLIGATION. During the term of this Agreement, AVECOR agrees
to use its best efforts to develop, test, manufacture, market, sell and
technically support the Products and further agrees to use its best efforts to
obtain all necessary approvals from the FDA and all other governmental agencies
whose approval is necessary to manufacture, market or sell the Products.
AVECOR agrees that its best efforts shall include, at a minimum, the obligation
to use at least the same level of effort in connection with the Products as it
uses in connection with its other products. In the event of an assignment by
AVECOR of this Agreement pursuant to Article 11.2(i) hereof to any successor in
interest to the business of AVECOR, in addition to the requirements of Article
11.2 with respect to minimum royalties, AVECOR agrees to secure, as a condition
of such assignment, that the assignee shall expressly agree in writing to the
fulfillment of the terms of this Article 4.8.
ARTICLE
5.
CONFIDENTIALITY
5.1 PROTECTION OF KNOW-HOW. Each party shall, and shall require its
employees, agents and sublicensees to, protect all Know-how, and other
proprietary information, delivered or disclosed to it pursuant to this
Agreement against unauthorized disclosure to third parties during the term of
this Agreement and for three (3) years thereafter by maintaining all such Know-
how in confidence with at least the same degree of care as it uses to maintain
the confidentiality of its
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<PAGE>
own information of a confidential nature. Each party shall not divulge and
shall cause its employees, agents and sublicensees not to divulge, in whole
or in part, such Know-how to any third party or to any of its own personnel
not having a need to know during the term of this Agreement and for a period
of three (3) years thereafter; provided, that neither party shall be liable
for the use or disclosure of Know-how which:
(a) was in the possession of the receiving party prior to its
receipt from the disclosing party;
(b) is or becomes part of the public knowledge or literature through
no fault of the receiving party;
(c) is or becomes available to the receiving party from a source
other than the disclosing party and having no obligation to the disclosing
party in respect thereof; or
(d) is made available by the disclosing party to a third party
unaffiliated with the disclosing party on an unrestricted basis.
5.2 SURVIVING OBLIGATION. The obligation of each party to protect against the
unauthorized use or disclosure of Know-how or other proprietary information
shall survive any termination of this Agreement.
5.3 MARKETING DISCLOSURES. Notwithstanding Article 5.1 above, AVECOR shall be
entitled to make such limited and reasonable disclosures of information
concerning the Products as are customary and necessary to market the Products
to its customers.
ARTICLE
6.
WARRANTY AND LIABILITY
6.1 WARRANTY. Each party warrants and represents that it has the legal power
to extend and receive the rights granted hereunder with respect to its Patents
and Know-how. EXCEPT AS PROVIDED ABOVE, MC3, INCLUDING ITS OFFICERS AND
EMPLOYEES, MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND,
EITHER
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EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND ASSUMES NO
RESPONSIBILITIES WHATEVER WITH RESPECT TO THE DESIGN, DEVELOPMENT,
MANUFACTURE, USE, SALE OR OTHER DISPOSITION BY AVECOR OR ITS SUBLICENSEES OF
THE PRODUCTS.
6.2 QUALITY CONTROL. AVECOR warrants and covenants that it will follow the
same quality control standards which AVECOR has adopted or shall in the future
adopt for itself, provided they are reasonably required to maintain Product
quality.
6.3 AVECOR'S INDEMNITY. AVECOR hereby agrees to indemnify and hold harmless
MC3 and Michigan, and their respective officers, employees and agents, from and
against any claim, demand, liability, damages, loss or costs arising out of any
claims of third parties against MC3 or Michigan which arise out of the
manufacture, sale, use or operation of any Products sold or otherwise
transferred by AVECOR, or the use by AVECOR of any invention related to the
Technology. MC3 or Michigan, as appropriate, shall promptly notify AVECOR in
writing of any such claim and shall permit AVECOR through its counsel to defend
the same and shall give AVECOR all available information, assistance and
authority (at AVECOR's expense) to assume such defense. AVECOR shall have
control of the defense of any such claim, including appeals from any judgment
and any negotiations for settlement or compromise of such claim with full
authority to enter into a binding settlement or compromise. MC3 shall be
entitled to participate at its option and expense through counsel of its own
selection, and may join in any legal actions related to any such claims,
demands, damages, losses and expenses.
6.4 INDIRECT OR CONSEQUENTIAL DAMAGES. THE ENTIRE RISK AS TO PERFORMANCE OF
THE PRODUCTS IS ASSUMED BY AVECOR AND ITS SUBLICENSEES. In no event shall MC3,
including its officers and employees, be responsible or liable for any
indirect, special, incidental, or consequential damages or lost profits of
AVECOR or its sublicensees, users or any other individual or entity regardless
or legal theory. The above limitations on liability apply even though MC3, its
officers or employees may have been advised of the possibility thereof.
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6.5 PRODUCT LIABILITY INSURANCE. AVECOR shall purchase and maintain in effect
during the term of this Agreement a policy of product liability insurance which
adequately covers claims that may reasonably arise with respect to any Products
manufactured, sold, licensed or otherwise distributed by AVECOR and which
specifies MC3 and Michigan, including their officers and employees, as
additional insured parties.
6.6 NO REPRESENTATIONS. AVECOR shall not, and shall require that its
sublicensees do not, make any statements, representations or warranties or
accept any liabilities or responsibilities whatsoever to or with regard to any
person or entity which are inconsistent with any disclaimer or limitation
included in this Article 6, except for normal and customary warranties with
respect to the Products for which AVECOR and its sublicensees will be fully and
solely liable.
6.7 MICHIGAN DISCLAIMERS. AVECOR acknowledges the terms of Article 12,
Disclaimer of Warranty and Limitations on Liability, contained in the Michigan
License Agreement and expressly agrees to the disclaimers of warranty made
therein by Michigan, to the limitations on liability set forth therein for the
benefit of Michigan and that the risk of performance of the Products
manufactured by AVECOR hereunder rests solely with AVECOR and not with MC3, all
as more specifically set forth in such Article 12.
ARTICLE
7.
INTELLECTUAL PROPERTY RIGHTS
7.1 NO WARRANTY. Neither party, including its respective officers and
employees, makes any representations or warranties that any Patent is or will
be held valid, or that the manufacture, use, sale or other distribution of any
Products will not infringe upon any patent or other rights not vested in either
party.
7.2 PATENT PROSECUTION, MAINTENANCE. Each party shall control all aspects of
filing, prosecuting, and maintaining its Patents, including foreign filings and
Patent Cooperation Treaty filings. Each Party shall notify the other party of
all information received by it relating to the filing, prosecution and
maintenance of Patents, including any lapse, revocation, surrender,
invalidation or abandonment of any of its Patents. AVECOR shall, at its own
expense, perform all actions
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<PAGE>
and execute or cause to be executed all documents necessary to support such
filing, prosecution, or maintenance of both the MC3 and AVECOR Patents..
7.3 SUBSTITUTION RIGHTS. Either party may in its sole discretion decide to
refrain from or to cease prosecuting or maintaining any of its Patents,
including any foreign filing or any Patent Cooperation Treaty filing. In the
event that a party makes such decision with respect to a U.S. patent or patent
application, or with respect to a foreign filing or Patent Cooperation Treaty
filing which has been requested in writing by the other party, such party shall
notify the other party promptly and in sufficient time to permit the other
party at its sole discretion to continue such prosecution or maintenance at the
other party's expense. If the other party elects to continue such prosecution
or maintenance, the party who has elected to cease prosecuting or maintaining
the Patent shall execute such documents and perform such acts at the other
party's expense as may be reasonably necessary for the other party to so
continue such prosecution or maintenance.
ARTICLE
8.
ADDITIONAL COVENANTS
8.1 COMPLIANCE WITH LAWS. AVECOR shall comply with all provisions of any
applicable laws, regulations, rules and orders relating to the licenses granted
hereunder and to the testing, production, transportation, export, packaging,
labeling, sale or use of Products, or otherwise applicable to AVECOR's
activities hereunder. AVECOR shall obtain such written assurances regarding
export and re-export of technical data contained in the Technology as may be
required by U.S. Office of Export Administration regulations, and AVECOR hereby
gives such written assurances to MC3 as may be required under those
regulations.
8.2 PUBLICITY. AVECOR agrees to refrain from using the name of Michigan in
publicity or advertising without the prior written approval of Michigan's
Director of the Intellectual Properties Office. Reports in scientific
literature and presentations of joint research and development work are not
considered publicity.
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8.3 PRODUCT MARKING. AVECOR agrees to mark Products with appropriate patent
notices if and when applicable, as approved by MC3, which approval will not be
unreasonably withheld.
8.4 MANUFACTURE IN THE UNITED STATES. AVECOR agrees to substantially
manufacture all Products in the United States.
8.5 GOVERNMENT APPROVALS. It is understood that AVECOR has the responsibility
to do all that is reasonably necessary to obtain any governmental approvals to
manufacture and/or sell the Products.
8.6 REGISTRATION OR RECORDATION. If the terms of this Agreement, or any
assignment or license under this Agreement, are or become such as to require
that this Agreement or license or any part hereof be registered with or
reported to a national or supranational agency in any country or area in which
AVECOR or its sublicensees do business, AVECOR will, at its expense, undertake
such registration or report. Prompt notice and appropriate verification of the
act of registration or report of any agency ruling resulting from such filing
or notice will be supplied by AVECOR to MC3. Any formal recordation of this
Agreement or any license herein granted which is required by the law of any
country as a prerequisite to enforceability of this Agreement or license in the
courts of any such country or for any other reason shall also be carried out by
AVECOR at its expense, and appropriately verified proof of recordation shall be
promptly furnished to MC3.
ARTICLE
9.
TERMINATION
9.1 TERM. This Agreement shall enter into force upon the date first above
written and shall continue in force for an initial term of five (5) years from
the date on which AVECOR receives approval from the FDA with respect to the
submission of a request for the Products under Section 510(K) of the Act and
its regulations. Upon the expiration of such initial term, AVECOR may, at its
sole option, upon written notice to MC3, extend the term of this Agreement
until the expiration of the last to expire of the Patents then covered by this
Agreement or the useful life of the Know-how licensed hereunder, whichever is
longer.
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9.2 TERMINATION. Notwithstanding the provisions of Article 9.1 above, this
Agreement may be terminated in accordance with the following provisions:
(a) By either party immediately upon written notice in the event:
(i) the other party is adjudicated bankrupt, files for
bankruptcy, goes into liquidation, makes an assignment for the
benefit of creditors or otherwise loses control of its business; or
(ii) the other party breaches any material term, condition
or obligation of this Agreement and fails to cure such breach within
sixty (60) days of receiving written notice thereof from the non-
breaching party.
(b) By AVECOR immediately upon written notice in the event that any
of the Technology is adjudicated by a court of competent jurisdiction to
be invalid and such adjudication is final and unappealable; provided that
such Technology is material to the Products and provided further that, in
the event such Technology is adjudicated invalid by a lower court and MC3
appeals from such judgment, MC3 shall indemnify and hold harmless AVECOR
from and against all costs, damages and liabilities incurred by AVECOR and
arising out of the continued use of the Technology and the manufacture,
use, sale and/or lease of Products between the date of the judgment of the
lower court and the final, unappealable adjudication referred to above.
(c) By the party whose performance is not prevented by an event of
Force Majeure on written notice to the other party should an event of
Force Majeure continue for more than six (6) months as provided in Article
10.3 below.
(d) Automatically upon the expiration of sixty (60) days after the
termination of the Michigan License Agreement, subject to AVECOR's rights
pursuant to Article 9.3(e) below.
9.3 CONSEQUENCES OF TERMINATION. The rights and obligations of the parties in
the event of termination shall be as follows:
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(a) event of termination by either party under Article 9.2(a)(i)
above, all licenses granted hereunder shall continue and all obligations
of AVECOR to make payments hereunder in accordance with the terms of this
Agreement shall likewise continue. In addition, in the event of the
commencement of an insolvency or bankruptcy proceeding or reorganization
involving MC3 or if MC3 makes an assignment for the benefit of creditors,
AVECOR shall be entitled to complete access to all Patents, Know-how and
Documentation of MC3 and all embodiments thereof and any Documentation or
Know-how not in AVECOR's possession will promptly be delivered to AVECOR
upon AVECOR's request. In the event of the commencement of an insolvency
or bankruptcy proceeding or reorganization involving AVECOR, MC3 shall
have all of the remedies available to it at law in the event AVECOR is
unable to carry out its obligations under this Agreement. The
representations, warranties and covenants set forth in this Article 9.3(a)
shall survive the execution, delivery, termination or expiration of this
Agreement.
(b) In the event of termination of this Agreement by MC3 under
Article 9.2(a)(ii) or Article 9.2(c) above, the license granted by MC3 to
AVECOR pursuant to Article 2.1 hereof shall terminate. AVECOR shall
cease using all Technology licensed to it hereunder by MC3 for any
purpose, including specifically the manufacture and sale of Products, and
shall return to MC3 all Documentation transferred to AVECOR and shall
destroy all other copies of such Documentation; provided, however, that
AVECOR shall not be so obligated to the extent that such Documentation and
Know-how pertains to the maintenance or repair of Products for which
royalties have been paid and which AVECOR normally provides to its
customers in the ordinary course of business for the purpose of permitting
adequate technical support of the Products. In the event of such
termination, the license granted to MC3 by AVECOR pursuant to Article 2.2
hereof shall survive termination of this Agreement and continue in full
force and effect.
(c) In the event of termination of this Agreement by AVECOR under
Article 9.2(a)(ii) above and in the event AVECOR secures a judgment of a
court of competent jurisdiction which judgment is final and unappealable
and which holds that MC3 is in material breach of this Agreement, the
license granted by MC3 to AVECOR pursuant to
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Article 2.1 hereof shall continue for a period of five years from the
date such final judgment is issued; provided, that, in such case, AVECOR
shall have no further obligation to pay royalties to MC3 pursuant to
Articles 4.2 and 4.3 hereof. Further, in the event of such termination,
the license granted by AVECOR to MC3 pursuant to Article 2.2 hereof
shall terminate forthwith, and MC3 shall cease using any AVECOR Patents
and Know-How relating to improvements for any purpose. Additionally,
notwithstanding anything else in this section, termination by AVECOR
does not affect any sublicenses of AVECOR technology that may have been
lawfully granted by MC3. MC3 shall promptly return all Documentation
provided to it by AVECOR, and shall destroy all copies of such
Documentation. Notwithstanding the termination of this Agreement by
AVECOR pursuant to Article 9.2(a)(ii) above, until such time as AVECOR
shall have secured the final and unappealable judgment referred to
above, the license grants contained in Articles 2.1 and 2.2 hereof shall
continue and AVECOR shall be obligated to continue paying royalties to
MC3 pursuant to Articles 4.2 and 4.3 hereof and to otherwise observe and
comply with its obligations contained herein.
(d) In the event of termination of this Agreement by AVECOR pursuant
to Article 9.2(b) above, all licenses granted hereunder shall terminate
forthwith, and each party shall cease using any of the other party's
Patents and Know-How for any purpose. Each party shall promptly return to
the other party all Documentation provided to it by the other party, and
shall destroy all copies of such Documentation.
(e) In the event of the termination of this Agreement pursuant to
Article 9.2(d) above, MC3 shall be obligated to immediately notify AVECOR
in writing of the termination of the Michigan License Agreement. Within
sixty (60) days of receipt of such notice of termination of the Michigan
License Agreement, AVECOR may by written notice to Michigan elect to
continue in force this Agreement on and subject to the terms and
conditions set forth herein and, for all purposes of this Agreement,
Michigan shall be substituted for MC3 and shall assume all obligations and
acquire all rights of MC3 hereunder.
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ARTICLE
10.
FORCE MAJEURE
10.1 DEFINITION AND NOTICE. Force Majeure shall mean any event, not existing
as of the date of this Agreement and not reasonably foreseeable or within the
control of the parties as of such date, which prevents in whole or part the
performance by one of the parties of its obligations hereunder, including,
without limitation the following: acts of State or governmental action,
(including, without limitation, failure to grant any license or approval
required for performance hereunder), crisis, war, strikes, natural catastrophe,
and prolonged shortage of energy supplies. Any party affected by an event of
Force Majeure shall promptly provide the other party with written notice
describing such event, its cause and possible consequences. Upon giving such
notice, the party whose performance is prevented by the event of Force Majeure
shall be relieved of any liability hereunder, except for the obligation to pay
amounts due and owing, but only to the extent and only for so long as its
performance is prevented by the event of Force Majeure.
10.2 SUSPENSION OF PERFORMANCE. During the period the performance of one of
the parties has been suspended by reason of Force Majeure, the other party may
likewise suspend performance of all or part of its obligations, except for the
obligation to pay amounts due and owing, to the extent commercially reasonable.
10.3 TERMINATION. If the event of Force Majeure preventing performance shall
continue for more than six (6) consecutive months, the party whose performance
is not prevented by such event of Force Majeure may terminate this Agreement on
written notice to the other party without any liability hereunder, except the
obligation to make payments due to such date.
ARTICLE
11.
GENERAL PROVISIONS
11.1 COMPLETE AGREEMENT. This Agreement, including the Recitals and the
Exhibits attached hereto, constitutes the complete agreement of the parties
with respect to the subject matter hereof and there are no representations,
agreements, or conditions not expressly set forth herein.
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11.2 ASSIGNMENT. This Agreement may not be assigned by either party without
the prior written consent of the other party and, in the absence of such
consent, any attempted assignment will be null and void; provided, however,
that (i) subject to the terms set forth below in this Article 11.2, either
party may assign its rights and obligations under this Agreement to any
successor in interest of all or substantially all of the business of such party
by merger, purchase or operation of law; and (ii) MC3 may assign its rights and
obligations hereunder to Michigan. In the event of an assignment by AVECOR
pursuant to Article 11.2(i) above to any successor in interest to the business
of AVECOR, whether by way of merger, purchase or operation of law, the minimum
annual royalty payable by AVECOR under Article 4.3 hereof shall, for the three
(3) years immediately following the year of such assignment, be an amount equal
to the minimum royalty otherwise provided for each of such three (3) years
pursuant to Article 4.3 or the amount of royalties actually paid by AVECOR
under Article 4.2 in the complete calendar year immediately prior to such
assignment, whichever is greater. All terms and conditions of this Agreement
will be binding on and inure to the benefit of the successors and permitted
assigns of the parties.
11.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan.
11.4 AMENDMENT. Any change, extension, revision, or waiver of or under this
Agreement will be valid and binding only if in writing and duly executed by the
party agreeing to be bound thereby.
11.5 SECRECY. The parties hereto expressly agree that the financial terms of
this Agreement are strictly confidential. Each party shall, and shall cause
its employees, agents and sublicensees to, maintain in absolute secrecy the
financial terms of this Agreement, and shall not disclose any of such
information to any third party or to any of its own personnel not having a need
to know without the prior written authorization of the other party; provided,
that neither party shall be liable for the disclosure of the above information
to the extent such disclosure is required to comply with any state or federal
securities laws.
20
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11.6 INVALIDITY. In the event that any term, provision, or covenant of this
Agreement shall be determined by a court of competent jurisdiction to be
invalid, illegal, or unenforceable, that term will be curtailed, limited, or
deleted, but only to the extent necessary to remove such invalidity,
illegality, or unenforceability, and the remaining terms, provisions, and
covenants shall not in any way be affected or impaired thereby. In the event
that the time period of any covenant shall be held unenforceable as a matter of
law, said covenant will be interpreted to be effective for an enforceable time
period.
11.7 NOTICES. Any notice, demand, or request given to, made, or required to be
made hereunder shall be deemed sufficiently made if given in writing, and sent
by registered mail, return receipt requested, to the parties at the following
addresses:
If to AVECOR: AVECOR Cardiovascular, Inc.
13010 County Road 6
Plymouth, MN 55441
Attention: Mr. Allan R. Seck
If to MC3: Michigan Critical Care Consultants, Inc.
245 Jackson Industrial Drive, Suite J
Ann Arbor, MI 48105
Attention: Mr. Patrick Montoya
or to such other addresses as the parties may from time to time specify by
written notice in compliance with this Article 11.6. Any such notice
shall be deemed to have been served on the fifth (5th) day after the day
on which the letter was posted.
11.8 AVECOR agrees that all terms of the Michigan License Agreement, attached
as Exhibit I, which, by their nature, apply to MC3 sublicensees, shall apply to
AVECOR, whether such terms are expressly restated in this Agreement.
11.9 INTERPRETATION. AVECOR agrees that the terms of the Michigan License
Agreement, which by their nature apply to MC3 sublicensees, shall apply to
AVECOR, whether or not such terms are expressly restated in this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
Michigan Critical Care AVECOR Cardiovascular Inc.
Consultants, Inc. (MC3) (AVECOR)
By: /S/ Patrick Montoya By: /S/ Norman C. McGibbon
---------------------------------- -----------------------------------
Its: President Its:Treasurer
---------------------------------- ----------------------------------
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EXHIBIT II
PRODUCTS
23
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AMENDMENT TO LICENSE AGREEMENT
This Amendment to License Agreement (this "Amendment"), effective as of
November 7, 1997, is made by and between Michigan Critical Care Consultants,
Inc. ("MC3") and AVECOR Cardiovascular Inc. ("AVECOR").
A. AVECOR and MC3 have entered into a License Agreement, dated as
of January 16, 1995 (the "License Agreement").
B. Section 4.2(b) of the License Agreement requires AVECOR to pay
royalties to MC3 out of AVECOR's "net profit" for Hardware from and after the
first calendar year in which AVECOR generates a net profit on the sale of
Hardware.
C. The term "net profit" is presently not defined in the License
Agreement and the parties wish to define such term for the purposes of Section
4.2(b) of the License Agreement.
In consideration of the foregoing premises and intending to be legally
bound, AVECOR and MC3 agree as follows:
1. AMENDMENT OF SECTION 4.2(b). Section 4.2(b) of the license
agreement is amended by adding the following to the end of such section:
For the purposes of this Section 4.2(b), the definition of "net profit"
with respect to Hardware sold during a given period ("NET PROFIT") will be
defined as the Net Sales Price of such Hardware, less its Cost, which is
defined as the sum of the Material, Labor and Overhead used to produce the
Hardware. For this purpose:
(i) "Material" is defined as the sum of the standard cost of the
parts used to produce the Hardware, as determined by AVECOR's
standard bill of materials for the Hardware (as the same may be
changed from time to time) and accumulated by AVECOR's manufacturing
software for the Hardware produced.
(ii) "Labor" is defined as the sum of the standard cost of the direct
labor hours used to produce the Hardware, as determined by AVECOR's
standard parts' routings (as the same may be changed from time to
time) and accumulated by AVECOR's manufacturing software for the
Hardware produced.
(iii) "Overhead" is defined as the sum of the actual manufacturing
and quality expenses used to produce the Hardware, excluding Material
and Labor, as currently assigned by AVECOR's monthly product costing
system in the course of its normal financial reporting. Subject to
the foregoing sentence, "actual manufacturing and quality expenses"
include department expenses, manufacturing labor variances, material
purchase price variances, warranty expenses and other material
adjustments, where "department expenses" include production supplies
and other indirect expenses, production administration,
<PAGE>
warehousing, production engineering, quality administration, raw
material receiving inspection, sterilization, quality engineering,
product testing and other necessary departmental expenses as
required by AVECOR's quality processes.
Provided, however, that all of the above calculations will be determined
in accordance with Generally Accepted Accounting Principles at the time of
calculation, applied on a consistent basis. AVECOR's calculation of Cost
and Net Profit will be included in each report required by Section 4.6
below for each period in which royalties are due under Section 4.2(b).
AVECOR will keep and maintain records of its calculations of Cost and Net
Profit on Hardware pursuant to Section 4.7 below, and MC3 will have the
right to inspect such records as provided in such Section.
2. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used in this Amendment will have the meanings given in the License Agreement.
3. EFFECTIVE DATE. Notwithstanding the later execution of this
Addendum, the parties hereby agree that this Addendum will be deemed to be
effective as of the effective date of the License Agreement.
4. PRIORITY. In the event of any conflict or inconsistency between the
terms of this Amendment and the License Agreement, the terms of this
Amendment will be controlling.
5. NO OTHER CHANGES. Except as specifically amended by this Amendment, all
other provisions of the License Agreement remain in full force and effect.
AVECOR and MC3 have caused this Amendment to be duly executed on their
behalf by their respective duly authorized representatives as of the date first
written above.
MICHIGAN CRITICAL CARE AVECOR CARDIOVASCULAR INC.
CONSULTANTS, INC.
By: /s/ Patrick Montoya By: /s/ Gregory J. Melsen
---------------------------------------- ----------------------------
Its: President Its: Treasurer
--------------------------------------- ---------------------------
2
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AVECOR-TM-
CARDIOVASCULAR
ANNUAL REPORT 1997
<PAGE>
ABOUT THE COMPANY
AVECOR Cardiovascular Inc. is a worldwide leader in the development,
manufacture and marketing of specialty medical devices for heart/lung bypass
surgery and long-term respiratory support. The Company's product line
includes hollow fiber and silicone membrane oxygenators, a blood pump,
blood reservoirs, cardioplegia systems, arterial filters, custom tubing packs
and blood monitoring devices.
ON THE COVER
AVECOR's revolutionary new blood pump is shown at the right
in a typical perfusion set-up with the AFFINITY oxygenator
and hardshell cardiotomy reservoir at the left.
Except for the historical financial information contained herein, the matters
discussed in this annual report contain certain forward-looking statements.
For this purpose, any statements contained in this annual report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue," the negative or other
variations thereof, or comparable terminology, are intended to identify
forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially
depending on a variety of factors, including the progress of product
development and clinical studies, the timing of and ability to obtain
regulatory approvals, the extent to which the Company's products gain market
acceptance, the introduction of competitive products by others, the pricing
related to competitive products, litigation regarding patent and other
intellectual property rights, the availability of third-party reimbursement
and other factors, as well as those set forth from time to time in the
Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
MYOtherm-Registered Trademark- and OnCourse-Registered Trademark- are
registered trademarks of the Company. Affinity-TM-, Signature-TM-,
Trillium-TM-, Myotherm XP-TM-, Affinity XP-TM- and XP-TM- are trademarks of
the Company. Windows-Registered Trademark- is a registered trademark of
Microsoft Corporation.
<PAGE>
<TABLE>
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FINANCIAL HIGHLIGHTS AVECOR CARDIOVASCULAR, INC.
AVECOR CARDIOVASCULAR INC.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $46,864,000 $44,401,000 $33,340,000 $21,486,000 $14,125,000
Cost of sales 27,574,000 25,986,000 18,180,000 12,556,000 9,067,000
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Gross profit 19,290,000 18,415,000 15,160,000 8,930,000 5,058,000
Operating Expenses:
Selling, general and administrative 13,428,000 11,885,000 8,727,000 6,779,000 5,044,000
Litigation expense -- 4,205,000 170,000 -- --
Research and development 3,902,000 3,651,000 2,773,000 2,309,000 1,891,000
-------------------------------------------------------------------------------------
Operating income (loss) 1,960,000 (1,326,000) 3,490,000 (158,000) (1,877,000)
Interest income 495,000 725,000 586,000 143,000 204,000
Interest expense 383,000 -- -- -- --
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Income (loss) before income taxes 2,072,000 (601,000) 4,076,000 (15,000) (1,673,000)
Income tax provision (benefit) 745,000 (34,000) 780,000 24,000 (23,000)
-------------------------------------------------------------------------------------
Net income (loss) $ 1,327,000 $ (567,000) $ 3,296,000 $ (39,000) $(1,650,000)
-------------------------------------------------------------------------------------
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Diluted earnings (loss) per share $ .17 $ (.07) $ .45 $ (.01) $ (.26)
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Weighted average common and common
equivalent shares outstanding(1) 7,990,000 7,767,000 7,353,000 6,390,000 6,361,000
-------------------------------------------------------------------------------------
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BALANCE SHEET DATA:
Working capital $20,204,000 $20,563,000 $26,247,000 $10,150,000 $ 9,725,000
Total assets 42,759,000 37,161,000 33,519,000 15,877,000 15,031,000
Long-term debt 4,694,000 -- -- -- --
Shareholders' equity 32,618,000 29,938,000 29,322,000 13,145,000 12,970,000
</TABLE>
(1) WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING ARE
CALCULATED ACCORDING TO THE DEFINITION OF "DILUTED EARNINGS PER SHARE" AS
DEFINED BY THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) IN STATEMENT ON
FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE. ALL PERIODS
PRESENTED WERE PREPARED UNDER THIS NEW STANDARD FOR COMPUTING EARNINGS PER
SHARE.
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TO OUR SHAREHOLDERS:
A little over six years ago, we set out to build a major medical
device company -- one that would be a leader in the cardiopulmonary market. Our
strategy emphasized the creation of innovative products that could be
manufactured cost-effectively. Building on the base of an aging $9 million
product line acquired from another manufacturer, we have launched a steady
stream of new products that have enabled AVECOR Cardiovascular to grow at a
compounded 35% annual rate over the last five years.
A MARKET LEADER. Today, AVECOR Cardiovascular is a $47 million
company. After only three years on the market, our AFFINITY oxygenator has set
new records for rapid growth, achieving a 15% market share to rank third in
industry sales. Our arterial filter has a 10% market share after two years.
THE TECHNOLOGY LEADER. The AFFINITY oxygenator is recognized as the
technology leader in its field and has become the standard against which new
products are judged. Our AFFINITY pump system provides patients, surgeons and
perfusionists with unprecedented safety and high performance. Products under
development will help us maintain our position on the leading edge of
technology.
MANUFACTURING STRENGTH. Our state-of-the-art manufacturing facility
uses a completely paperless process for the documentation required by
regulators. Our products are designed for manufacturing ease, and we believe
that our manufacturing costs on leading product lines are the lowest in the
industry.
STRONG DISTRIBUTION. In 1997, we completed our transition to a
direct sales force in North America. With 24 direct sales personnel and seven
manufacturers representatives, we have built strong distribution capabilities
that we plan to leverage with the acquisition of complementary technologies and
products. We have an extensive international distributor network, augmented by a
new agreement with St. Jude Medical to handle sales of AVECOR products in
Central America, South America and Mexico.
OUR RESULTS FOR 1997 reflected continued growth, with net sales
increasing to $46,864,000, up 6% from 1996. Net income was $1,327,000, equal to
17 cents per share. In the previous year, the Company reported a loss of
$567,000, or 7 cents per share, after non-recurring charges for litigation
expense that amounted to $2.6 million after taxes.
Sales growth was led by SIGNATURE custom tubing packs, up 32%, and
the AFFINITY oxygenator line, which increased 3%. These gains were offset by
declines in the Company's older silicone membrane oxygenator line, down 6%, and
the MYOtherm cardioplegia system, which was down 8%.
Results in the second half of the year were held down by three
factors -- the strength of the U.S. dollar, which reduced international sales;
inventory reduction by two former distributors who were replaced by the direct
sales force; and lower gross margin resulting from both lower average selling
prices and higher product costs due to reduced production volumes.
We continued to invest in research and development during 1997,
spending $3.9 million to pursue a number of new product opportunities. R&D
spending rose 7% over 1996 and is anticipated to increase approximately 10% in
1998 as we continue to expand and improve our product line. Selling, general and
administrative expenses also increased in 1997, mainly reflecting costs of
developing the direct sales force and introducing new products.
NEW PRODUCTS. We are excited by the reception given our new
AFFINITY PUMP SYSTEM by perfusionists and surgeons. Early users have praised
the pump's safety features and performance, and we are on plan in terms of the
number of hospitals that have ordered the pump or are evaluating the system.
The pump is the safest on the market. It will not drain the
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blood reservoir, cannot overpressurize the perfusion circuit, and prevents
hazardous retrograde flow. We began selling the pump in Europe during the second
quarter of 1997 and began U.S. introduction late in the third quarter after
receiving clearance from the Food and Drug Administration in August.
Our new MYOTHERM-Registered Trademark- XP CARDIOPLEGIA SYSTEM was
also introduced late in the year and has been enthusiastically received by
customers. It employs second-generation technology for superior heat exchange
and ease of use.
We received marketing clearance from the FDA in late February of
1998 for the AFFINITY oxygenator with TRILLIUM-TM- BIO-PASSIVE SURFACE. All
blood-contact surfaces in the oxygenator are coated with a non-leaching
synthetic hydrophilic polymer which contains a small amount of heparin. The
special surface is designed to minimize activation of blood constituents which
otherwise occurs as a result of contact with conventional synthetic surfaces.
Many of our customers prefer circuit components which have been
coated to enhance bio-compatibility. We will offer the coating as an option on
the AFFINITY oxygenator and plan to file additional 510(k) applications during
1998 for coated versions of other components in the heart-lung bypass circuit.
RESEARCH AND DEVELOPMENT activities during 1998 will focus heavily
on additional applications of the blood pump, including a vacuum-assisted
version for the small but growing segment of the market that uses
vacuum-assisted venous drainage. This potential product could also become a key
component in a simplified circuit used to support minimally invasive surgery,
and could be used as a ventricular assist pump -- a high-profile market which
could stimulate further interest in the AFFINITY pump for cardiac surgery.
We anticipate filing a 510(k) application with the FDA in the second
quarter of 1998 for our SATURATION/HEMATOCRIT monitoring device. We are
completing work on this innovative product, which uses a spectrometer for
improved accuracy and can read oxygen saturation in the patient's blood through
the walls of tubing used in the perfusion circuit. Because there is no
disposable component, it reduces costs for the hospital. We believe the
technology will serve as a platform for the development of additional monitoring
applications in cardiac surgery and in intensive care units.
Another focus of our research will be to conduct studies intended to
demonstrate improved patient care through the use of our technology. This will
both help us compete and also command premium pricing for our products. Early
animal and in vitro studies, for example, indicate that our bio-passive surface
preserves platelet numbers and function and maintains bleeding time at base-line
levels during two- or three-hour perfusions. This could reduce blood loss and
the need for a transfusion during and after surgery.
We are continuing to diversify our product offerings, and believe
that our newest products will advance our multiple goals of improving patient
care, lowering costs and fueling revenue growth. All of us at AVECOR are excited
about what we have accomplished in a very short period of time. We appreciate
the continued support and encouragement of our shareholders.
Sincerely,
/s/ ANTHONY BADOLATO
ANTHONY BADOLATO
CHIEF EXECUTIVE OFFICER
MARCH 12, 1998
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PRODUCT REVIEW
The products of AVECOR Cardiovascular Inc. are used primarily in heart/lung
bypass surgery and for long-term respiratory support. The annual worldwide
market for specialty medical devices used in bypass surgery is estimated at $800
million, of which more than $600 million is attributable to disposable products.
The Company's current products include:
THE AFFINITY-TM- OXYGENATOR. The AFFINITY is a microporous, hollow
fiber membrane oxygenator that quickly became one of the market leaders
nationally following its U.S. introduction in 1994. During a bypass procedure,
the oxygenator takes the place of the patient's lungs, removing carbon dioxide
and adding oxygen to the blood. The AFFINITY is a state-of-the-art device that
studies have shown to be one of the most efficient oxygenators on the market. It
combines high gas transfer with low pressure drop. Its compact size provides low
priming volumes; its clear polycarbonate case permits high visibility of all
phases of the unit's operation. The AFFINITY oxygenator was estimated to be the
third best-selling oxygenator in the U.S. for 1997, with a market share of
approximately 15%.
SOLID SILICONE MEMBRANE OXYGENATORS. The Company markets a
complete line of these oxygenators in several models and sizes. This technology
permits extended use of the oxygenator for certain applications without the
deterioration of performance that microporous membrane oxygenators may
experience. This is particularly important for procedures that entail long-term
support.
AFFINITY-TM- BLOOD PUMP SYSTEM. The AFFINITY blood pump
incorporates an innovative design that offers superior blood-handling
characteristics and cost advantages over the centrifugal pumps and roller pumps
that are widely used in heart/lung bypass surgery today. AVECOR introduced the
pump in the U.S. late in the third quarter of 1997 following clearance from the
FDA in August. European distribution began late in the second quarter following
clinical trials at multiple sites. A study* published in THE JOURNAL OF
EXTRA-CORPOREAL TECHNOLOGY reported that the inherent physical characteristics
of the design used in the AFFINITY pump make it impossible for the pump to
produce dangerous positive or negative pressures, and that the design "possesses
important safety advantages over roller and centrifugal pumps for
cardiopulmonary bypass applications."
BLOOD RESERVOIRS. The Company produces a hardshell cardiotomy
reservoir and venous reservoir bags. These devices are used to filter and store
blood during bypass surgery. The Company began marketing two new reservoirs in
mid-1994.
MYOTHERM-TM- XP CARDIOPLEGIA DELIVERY SYSTEM. AVECOR introduced
this new generation of the MYOtherm product line following FDA clearance in
July 1997. The system is
4
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used to infuse specially formulated solutions, which often include oxygenated
blood, directly into the patient's coronary arteries while the heart is stopped
during bypass surgery. In addition to delivering nutrients to the heart, these
solutions are also used to arrest the heart and maintain prescribed
temperatures. The MYOtherm XP cardioplegia system was designed for superior
performance and ease of use while incorporating improved manufacturing
efficiencies.
ECMO SYSTEM. The Company produces a system for extracorporeal
membrane oxygenation (ECMO), which is the long-term cardiopulmonary support of
premature infants, newborns and other patients with life-threatening respiratory
disorders. The system includes reservoir bags, heat exchangers and a range of
different-sized membrane oxygenators.
SIGNATURE-TM- CUSTOM TUBING PACKS. All or some of the devices used
in a heart/lung bypass procedure can be pre-connected and sold in a custom
tubing pack. The components to be included in the pack and the exact way they
are arranged and connected are determined by the specifications provided by our
customer. The Company has developed computer software that allows it to design
custom tubing packs according to these individual specifications and to quote
prices within hours of a customer request. AVECOR began assembling and selling
custom tubing packs in Europe in 1992 and in the United States in mid-1993.
AFFINITY-TM- ARTERIAL FILTER. The AFFINITY filter is the final
safety component in the circuit of specialized medical devices used in
heart/lung bypass surgery, ensuring that the oxygenated blood is free of air
or particulate emboli before reentering the patient's body. The filter offers
low-volume priming, high visibility, excellent air handling and excellent
hemodynamics. The Company introduced this product for evaluation by customers
late in 1995, with full release worldwide in the first quarter of 1996. The
Company previously sold filters from other manufacturers as part of its
custom tubing packs.
ONCOURSE-TM- CONTINUOUS QUALITY CONTROL (CQI) MANAGER. OnCourse
CQI Manager is a Windows-Registered Trademark--based software program that
guides perfusionists through the necessary steps in establishing a CQI
program. In addition, it generates a variety of useful reports for
perfusionists, including the annual American Board of Cardiovascular
Perfusion clinical activity report and several custom reports which address
non-compliance, standards of perfusion and equipment preventative
maintenance. Introduced in late 1995, the software is currently offered to
AVECOR customers who make a major commitment to AVECOR products -- another
important product line differentiation for AVECOR in the marketplace.
*J. Patrick Montoya, Ph.D., Scott I. Merz, Ph.D., and Robert H. Bartlett, M.D.,
"Significant Safety Advantages Gained with an Improved Pressure Regulated Blood
Pump," THE JOURNAL OF EXTRA-CORPOREAL TECHNOLOGY, June 1996, pp. 71-78.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion of the Company's results of operations and financial
condition should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
OVERVIEW
AVECOR Cardiovascular Inc. (the "Company") develops, manufactures and markets
specialty medical devices for heart/lung bypass surgery and long-term
respiratory support. The Company was incorporated on December 13, 1990, and
in June 1991, acquired the business and assets and assumed certain
liabilities of the surgical division of SCIMED Life Systems, Inc. (the
"Predecessor Business"). On December 1, 1992, the Company acquired AVECOR
Cardiovascular Ltd. (formerly Cardio Med Ltd.) pursuant to which AVECOR
Cardiovascular Ltd. became a wholly-owned subsidiary of the Company. AVECOR
Cardiovascular Ltd. had formerly been a distributor for the Company in the
United Kingdom. In October 1995, the Company opened a sales office in France
which is organized as a wholly-owned subsidiary of AVECOR Cardiovascular Ltd.
The assets acquired by the Company from the Predecessor Business included
the Company's line of solid silicone membrane oxygenators. Since that time, the
Company has engaged in extensive product development, resulting in the
introduction and receipt of regulatory approval from the U.S. Food and Drug
Administration (the "FDA") for the following proprietary products:
<TABLE>
<CAPTION>
PRODUCT APPROVAL DATE
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<S> <C>
MYOtherm cardioplegia delivery system October 1991
Signature custom tubing packs July 1993
Affinity oxygenator November 1993
Affinity blood reservoirs July 1994
Affinity arterial filter October 1995
MYOtherm XP
(improved cardioplegia delivery system) July 1997
Affinity blood pump August 1997
Affinity oxygenator with
Trillium bio-passive surface February 1998
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 WITH THE YEAR ENDED
DECEMBER 31, 1996
NET SALES. Net sales increased 6% to $46,864,000 for 1997 from $44,401,000
for 1996. This increase was principally the result of a higher volume of product
shipments of the Company's Signature custom tubing packs and Affinity product
line. Overall, average prices of product shipments declined slightly when
compared to 1996.
Signature custom tubing pack and the Affinity product line net sales
increased $2,401,000 and $697,000 from 1996, respectively. A significant portion
of the Affinity revenue increase was attributed to the Affinity blood pump which
the Company began marketing internationally in June 1997. The Company received
FDA marketing approval for this product in August 1997. These increases were
partially offset by decreases in the silicone membrane oxygenator line which
decreased by $436,000 and the Myotherm cardioplegia line which decreased by
$339,000. Management believes the decline in net sales of the Myotherm
cardioplegia line to be temporary as customers delayed their purchasing
decisions in anticipation of the Company's launch of its new version of the
Myotherm cardioplegia system (Myotherm XP) which received marketing clearance
from the FDA in July 1997. The Myotherm XP was launched both in the United
States and internationally in early 1998.
Sales to customers located outside of the United States were approximately
41% of consolidated net sales for 1997 and 1996.
During the third quarter of 1997, the Company terminated agreements with
its last remaining United States distributor and its only Canadian distributor.
Sales in the territories formerly represented by these distributors decreased
approximately $1,400,000 in 1997 when compared to 1996. These markets are now
being served by the Company's direct sales force. While management believes
these revenue declines are temporary and caused by the transition to a direct
sales force in these territories and the depletion of product inventories of the
former distributors, this forward-looking expectation is primarily dependent on
the ability of the direct sales personnel to maintain and develop relations and
revenue levels at the medical institutions previously served by these
distributors.
Although revenues from distributors in the continental European countries
and Asia increased about $800,000 during the twelve months ended December 31,
1997 when compared to the corresponding period in 1996, these distributors'
sales for the six-month period ended December 31, 1997 decreased approximately
$690,000 when compared to the six-month period ended December 31, 1996 and
decreased about $983,000 when compared to the six-month period ended June 30,
1997. During the latter half of 1997, currencies in Europe and Asia
substantially weakened relative to the U.S. dollar and the U.K. pound sterling.
The Company believes that these types of fluctuations in currency exchange rates
reduce demand for the Company's products by increasing the price of the
Company's products in the currency of the countries in which the product is
sold. Given the inherent uncertainty of exchange rates, the Company cannot
predict if these exchange rate variances will remain constant, reverse or
worsen.
Sales to the Company's formerly exclusive Mexican distributor declined
about $340,000 in 1997 when compared to 1996. On October 9, 1997, the Company
entered into an agreement with St. Jude Medical to distribute the Company's
products in Mexico and in Central and South America. Previous sales in these
countries have not been significant to the Company. The formerly exclusive
Mexican distributor will continue to market the Company's silicone membrane
product line in Mexico.
The aforementioned factors impacted sales within all of the Company's
product lines. The revenue declines discussed above were exceeded by revenue
growth in the Company's other domestic and foreign markets.
The Company has continued to experience decreased sales to contract
perfusion groups controlled by certain of its competitors. Sales to contract
perfusion groups controlled by one of the Company's competitors decreased
$750,000 to $1,100,000 for 1997 from $1,850,000 for 1996. The Company believes
that control of contract perfusion groups by its competitors will continue to
have a negative impact on the Company's ability to market its products to such
groups or to
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hospitals or other medical providers that contract with competitor-controlled
groups for perfusion services, and could have a material adverse effect on the
Company's business, financial condition and results of operation. This
forward-looking statement is subject to the degree of control exerted by the
Company's competitors with respect to purchasing decisions made by controlled
groups of perfusionists, the extent of future acquisitions of contract perfusion
groups by the Company's competitors, the breadth of the Company's product
offerings relative to those competitors controlling contract perfusion groups,
and the degree to which the Company's research and development and marketing
efforts result in the successful commercialization of products with enhanced or
superior performance characteristics.
COST OF SALES/GROSS PROFIT. Gross profit as a percentage of net sales
decreased to 41.2% for 1997 from 41.5% for 1996. The cost of sales percentage
for 1997 was unfavorably impacted by significant increases in sales of the
Company's lower-margin Signature custom tubing pack line, as well as competitive
pricing pressures in the marketplace. The mix of products sold in any period
will influence the cost of sales and gross profit for the period.
Affinity oxygenator costs continued to improve due to material cost and
efficiency improvements, although these improvements were largely offset by an
ongoing decrease in average selling prices and reduced production volume,
primarily in the fourth quarter, due to lower-than-expected sales volume. The
Company believes the gross profits in early 1998 will continue to be negatively
influenced because of these reduced production levels.
The Company's future gross profit margin percentages will be influenced by
the ongoing pressures of the competitive pricing environment, changes in the
sales mix, the required levels of production, new product introductions and the
extent of further manufacturing efficiencies or improved material costs, if any.
Given the uncertainty associated with new product introductions, the ultimate
realization of any such manufacturing efficiencies or material cost
improvements, and the continuing price pressures characteristic in the Company's
markets, the Company cannot be certain if its gross profit margin will be
maintained, improve or decline.
SELLING, GENERAL AND ADMINISTRATIVE AND LITIGATION EXPENSE. Selling,
general and administrative expenses increased 13% to $13,428,000 for 1997 from
$11,885,000 for 1996. This increase is primarily attributed to costs associated
with the continuing development of a direct sales force in certain of the
Company's territories formerly served by distributors and independent sales
representatives and costs incurred for the introduction of new products,
including the Affinity blood pump. As a percent of sales, selling, general and
administrative expenses increased to 28.7% for 1997 from 26.8% for 1996.
Management anticipates that selling, general and administrative expenses
for the year ended December 31, 1998 will be higher than the year ended December
31, 1997 and will approximate 1997 as a percentage of sales dollars. This
forward-looking statement will be influenced by revenue levels achieved by the
Company, its ability to attract and retain qualified sales personnel as the
Company continues to develop its direct sales force, and the timing and extent
of promotional activities associated with the introduction of the MYOtherm XP,
Affinity oxygenator with Trillium bio-passive surface and other new product
introductions, if any.
On July 17, 1996, the Company reached an agreement with COBE Laboratories
Inc. (COBE) to settle COBE's patent suit against the Company. The terms of the
settlement with COBE provided for the Company to make net payments totaling
$2,200,000. Two net payments of $1,100,000 were made in August 1996 and August
1997, respectively. The Company recorded settlement costs and professional
expenses of approximately $4,205,000 in 1996 in connection with the COBE suit.
No related expenses were incurred for the COBE matter in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 7% to $3,902,000 for 1997 from $3,651,000 for 1996. This increased
research and development spending is a result of the Company's ongoing efforts
to pursue a number of potential and realized product opportunities including the
Myotherm XP, Affinity blood pump, the Affinity oxygenator with Trillium
bio-passive surface and new oxygen saturation/hematocrit technology. The Company
received the appropriate marketing clearances from the FDA for the Myotherm XP,
Affinity blood pump and Affinity oxygenator with Trillium bio-passive surface in
July 1997, August 1997 and February 1998, respectively. There can be no
assurance that the Myotherm XP, Affinity blood pump or Affinity oxygenator with
Trillium bio-passive surface will become commercially successful.
The Company anticipates that research and development expenses for 1998
will increase approximately 10% over 1997 levels, as the Company moves to expand
and improve its proprietary line of disposable medical devices. This
forward-looking projection is dependent upon the extent and timing of new
product development and the impact of the regulatory process in obtaining
marketing clearance for new products, including a new oxygen
saturation/hematocrit device which is expected to be submitted to the FDA in the
second quarter of 1998. The need or desire to modify the Company's existing
products could also influence the level of research and development expenses.
There can be no assurance, however, that the Company's research and development
efforts will result in regulatory submissions to the FDA as set forth above, if
at all, or will result in any commercially successful products. The
forward-looking statements regarding anticipated regulatory submissions
contained in this paragraph will be impacted by the results of the Company's
development efforts, the availability of any required clinical data, any changes
in the regulatory scheme for such products, and the Company's assessment of the
cost and anticipated benefit of such submissions.
INTEREST. Interest income decreased to $495,000 for 1997 from $725,000 for
1996. This decrease in interest income is primarily due to the use of cash and
cash equivalents and investments for the Company's new facility, the purchase of
manufacturing molds and equipment, additional inventories needed to support the
Company's new product lines and revenue growth, and the costs associated with
the COBE matter. Interest income during 1997 and 1996 was earned primarily from
the investment of the remaining net proceeds from the Company's June 1995 stock
offering. At December 31, 1997, the majority of these remaining net proceeds
were invested with two investment portfolio managers who invested in bank
certificates of deposit, U.S. government securities, agency paper, money
markets, commercial paper and corporate obligations.
Interest expense for 1997 was $383,000 and exclusively due to the mortgage
on the new facility. The closing on the facility purchase occurred in late
January 1997.
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INCOME TAX PROVISION. For 1997, a tax provision of $745,000 was recorded
as compared to a tax benefit of $34,000 for 1996. The 1997 and 1996 effective
tax rates differ from the normal U.S. statutory tax rate primarily due to losses
incurred by the Company's French subsidiary for which no tax benefit has been
recognized because of uncertainty of realization, offset by the generation of
research and experimentation credits.
NET INCOME (LOSS). Net income was $1,327,000 or $.17 per share, on a
diluted basis, for 1997 compared to a net loss of $567,000 or $.07 per share, on
a diluted basis, for 1996. The 1996 loss is primarily due to litigation and
settlement expense incurred during 1996 in connection with the COBE lawsuit,
which resulted in a charge to operations of $4,205,000.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 WITH THE YEAR ENDED
DECEMBER 31, 1995
NET SALES. Net sales increased 33% to $44,401,000 for 1996 from
$33,340,000 for 1995. This increase was principally the result of a higher
volume of product shipments of the Company's Affinity product line and Signature
custom tubing packs. Overall, average prices associated with 1996 product
shipments declined slightly from those of 1995 in response to competitive
pricing in the market place. Selective price increases were implemented in the
last half of 1996.
Sales from the Affinity product line and Signature custom tubing packs
increased $7,159,000 and $3,943,000 from 1995, respectively. The favorable
impact of increased net sales of these product lines was partially offset by a
decrease of $276,000 in net sales of the Company's older solid silicone membrane
oxygenator product line.
COST OF SALES/GROSS PROFIT. Gross profit as a percentage of net sales
decreased to 41.5% for 1996 from 45.5% for 1995. The cost of sales percentage
for 1996 was unfavorably impacted by significant increases in sales of the
Company's lower-margin Signature custom tubing pack line, as well as competitive
pricing pressures in the marketplace.
Higher production volumes continued to improve Affinity oxygenator product
costs, although these improvements were offset, primarily by an ongoing decrease
in average selling prices due to the Company being in a competitive pricing
environment. Also, optimal volume-related manufacturing efficiencies were not
achieved throughout 1996 for production of the Company's Affinity arterial
filter. Production of the Affinity arterial filter began on or about December
31, 1995.
SELLING, GENERAL AND ADMINISTRATIVE AND LITIGATION EXPENSE. Selling,
general and administrative expenses increased 36% to $11,885,000 for 1996
from $8,727,000 for 1995. This increase is attributed to costs associated
with the continuing development of a direct sales force in certain of the
Company's territories formerly served by distributors and independent sales
representatives and the overall increase in support needed to achieve the
Company's sales levels. In connection with the Company's development of a
direct sales force, in October 1995, the Company opened a sales office in
France from which it fields a direct sales force to serve the French market.
The Company recorded non-recurring charges in the fourth quarter of 1996
associated with relocation and lease abandonment expenses in connection with
the consolidation of the Company's U.S. operations from four leased
facilities into one owned property and the addition and subsequent
resignation of a Chief Operating Officer.
Additionally, the Company recorded settlement costs and professional fees
of $4,205,000 in 1996, in connection with the COBE suit, compared to $170,000 in
1995 (see Note 9).
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 32% to $3,651,000 for 1996 from $2,773,000 for 1995. This increased
research and development spending was a result of the Company's efforts to
pursue a number of potential product opportunities, including the Affinity blood
pump.
INTEREST INCOME. Interest income increased to $725,000 for 1996 from
$586,000 for 1995. Interest income during 1996 and 1995 was earned primarily
from the investment of the remaining net proceeds from the Company's June 1995
stock offering. At December 31, 1996, the majority of these remaining net
proceeds were invested with two investment portfolio managers who invested in
U.S. government securities, agency paper, money markets, commercial paper and
corporate obligations.
INCOME TAX PROVISION. For 1996, a tax benefit of $34,000 was recorded as
compared to a tax provision of $780,000 for 1995. The 1996 effective tax rate
differs from the normal statutory tax rate primarily due to losses incurred by
the Company's French subsidiary for which no tax benefit has been recognized
because of uncertainty of realization, offset by the generation of research and
experimentation credits. The 1995 tax provision reflects an effective rate which
benefited from use of previously generated net operating loss carryforwards and
research and experimentation credits.
NET INCOME (LOSS). Net loss was $567,000 or $.07 per share, on a diluted
basis, for 1996 compared to net income of $3,296,000 or $.45 per share, on a
diluted basis, for 1995. The 1996 loss was primarily due to litigation and
settlement expense incurred during 1996 in connection with the COBE lawsuit,
which resulted in a charge to operations of $4,205,000.
LIQUIDITY AND CAPITAL RESOURCES
For 1997, the Company used $891,000 in operating activities compared to
$2,470,000 used for operating activities in 1996. The net change of $1,579,000
is primarily the result of $3,100,000 of cash usages during 1996 related to the
COBE litigation compared to $1,100,000 of cash usages during 1997, smaller
increases in levels of inventories and reduced prepaid expenses. These operating
provisions for cash were partially offset by a smaller increase in accrued
expenses in 1997 when compared to 1996, reduced accounts payable and increased
accounts receivable balances in 1997 when compared to 1996. The Company's
inventories have continued to increase as a result of inventories needed to
support the Company's new product lines, revenue growth and, in part, as a
result of lower than anticipated shipments of the Affinity product line
primarily in the third and fourth quarters of 1997.
The Company believes that its existing cash and cash equivalents and
short-term investments, as well as anticipated cash generated from operations,
will be sufficient to satisfy the Company's cash requirements for the
foreseeable future.
Cash expenditures for capital additions, other than the purchase of the
new facility and related furniture, fixtures and equipment, totaled $4,628,000
in 1997 compared to $1,979,000 in 1996. These expenditures were primarily
related to equipment, molds and tooling necessary to begin the production and
marketing of the Affinity blood pump and MYOtherm XP, and to increase production
efficiencies and reduce raw material
8
<PAGE>
costs of the Affinity oxygenator and related blood reservoirs. The 1997
investment in equipment includes $1,494,000 related to the Affinity blood pump.
This pump equipment is placed with customers in exchange for a long-term
commitment to purchase disposable products from the Company. During 1997, the
expenditures for furniture, fixtures and equipment additions related to the
Company's new U.S. manufacturing, research and development and administrative
facility were approximately $760,000.
Leases for the Company's U.S. manufacturing, research and development and
administrative facilities expired on December 31, 1996. In January 1997, the
Company consolidated its four separate facilities into a newly constructed
facility, which the Company has purchased. The cost of this facility and related
additions was approximately $9,650,000. To finance the total cost of this
project, the Company entered into a $5,167,000 bank note payable agreement in
January 1997 and, in addition, expended $4,483,000 out of corporate funds,
including $650,000 paid in 1996.
The note payable agreement bears interest at 8.11% and requires monthly
principal payments of $21,531, plus interest, through January 2002 with the
remaining principal and interest due February 2002. The note payable is
collateralized by the new corporate headquarters and manufacturing facility and,
among other things, requires the Company to meet certain ratios related to
leverage, debt service and cash flow. Additionally, the bank note payable
agreement prohibits the Company from distributing dividends to its shareholders.
At December 31, 1997, the Company had no restricted cash or investments.
Of the $4,450,000 which was restricted at December 31, 1996 for purchase of the
new facility, $1,000,000 was used in payment of the facility and $3,450,000
became unrestricted, was reinvested and is being used for general corporate
purposes, research and development and working capital.
The Company's capital expenditures for 1998 are expected to approximate
those of 1997, excluding the amounts paid in 1997 for the new facility and
related additions. This estimate includes additional equipment, molds and
tooling for new oxygen saturation/hematocrit technology, the Affinity blood
pump, the MYOtherm XP and for furthering the production of the Affinity
oxygenator line.
The foregoing forward-looking statements relating to the amount of capital
expenditures and ultimate cash usage are dependent on the progress of the
Company's product development efforts, the outcome of certain patent matters
(see Note 9), the timing of the receipt of FDA marketing clearances for any
future products and the investment in opportunities to further existing
products' production related to improved production efficiencies and quality,
and reduced cost.
FOREIGN CURRENCY TRANSACTIONS
Transactions by the Company's international subsidiaries are negotiated,
invoiced and paid in various foreign currencies, primarily pounds sterling and
U.S. dollars. Accordingly, the Company is currently subject to risks associated
with fluctuations in exchange rates between the various currencies.
Substantially all of the Company's other international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates in other
countries may therefore reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of the countries
in which the products are sold.
YEAR 2000 ISSUES
Computer programs have historically been written to abbreviate dates by using
two digits instead of four digits to identify a particular year. The so-called
"Year 2000" problem or "millennium bug" is the inability of computer software or
hardware to recognize or properly process dates ending in "00." As the year 2000
approaches, significant attention is being focused on updating or replacing such
software and hardware in order to avoid system failures, miscalculations or
business interruptions that might otherwise result.
The Company has reviewed its internal information systems and believes
that the costs and effort to address the Year 2000 problem will not be material
to its business, financial condition or results of operations, and, to the
extent necessary, may be resolved through replacement and upgrades to the
software it licenses from third parties. The Company has also reviewed its
OnCourse software product, the software embedded in its Affinity blood pump
console and the software for its saturation/hematocrit monitor under development
and believes them to be Year 2000 compliant. However, the Year 2000 problem may
also adversely impact the Company by affecting the business and operations of
parties with which the Company transacts business. The Company has not initiated
any formal communication with such parties regarding the Year 2000 problem, and
is unable to determine the likelihood or potential impact of any such event.
There can be no assurance that the Company will be able to effectively address
Year 2000 issues internally in a cost-efficient manner and without interruption
to its business, or that Year 2000 difficulties encountered by its suppliers,
customers or other parties will not have a material impact on the Company's
business, financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement 131,
"Disclosures About Segments of an Enterprise and Related Information," a new
standard of reporting information about operating or business segments in
financial statements. The new standard will be effective for the Company's
annual financial statements in 1998. Although the Company has not specifically
evaluated what impact, if any, this new standard will have on the Company's
current reporting of operating and business segments, the Company believes it
will continue reporting as one operating and business segment.
In June 1997, the Financial Accounting Standards Board issued Statement
130, "Reporting Comprehensive Income," a new standard requiring the reporting
and display of "comprehensive income" (defined as the change in equity of a
business enterprise during a period from sources other than those resulting from
investments by owners and distributors to owners) and its components in a full
set of general purpose financial statements. The new standard will be effective
for the Company's annual financial statements in 1998. The Company's cumulative
translation adjustment is considered a component of "comprehensive income,"
however the Company has not evaluated what other components of its changes in
equity would be components of "comprehensive income."
9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS AVECOR CARDIOVASCULAR, INC.
AS OF DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,215,000 $ 6,114,000
Short-term investments 3,727,000 2,638,000
Accounts receivable, net 8,277,000 7,298,000
Inventories 10,634,000 9,476,000
Deferred taxes 1,315,000 1,274,000
Other current assets 330,000 744,000
-----------------------------
Total current assets 25,498,000 27,544,000
Restricted cash and investments -- 4,450,000
Property, plant and equipment, net 16,689,000 4,808,000
Other assets 572,000 359,000
-----------------------------
Total assets $42,759,000 $37,161,000
-----------------------------
-----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,978,000 $ 2,790,000
Accrued expenses 3,058,000 3,091,000
Current maturities of long-term debt 258,000 --
Accrued litigation settlement -- 1,100,000
-----------------------------
Total current liabilities 5,294,000 6,981,000
Deferred grant 153,000 205,000
Deferred taxes -- 37,000
Long-term debt 4,694,000 --
Commitments and contingencies (Notes 5 and 9)
Shareholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none issued
Common stock, par value $.01 per share; authorized 20,000,000 shares;
issued and outstanding shares 8,021,000 and 7,812,000 shares at
December 31, 1997 and 1996, respectively 80,000 78,000
Additional paid-in capital 30,482,000 29,024,000
Retained earnings 1,936,000 609,000
Cumulative translation adjustments 120,000 227,000
-----------------------------
Total shareholders' equity 32,618,000 29,938,000
-----------------------------
Total liabilities and shareholders' equity $42,759,000 $37,161,000
-----------------------------
-----------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS AVECOR CARDIOVASCULAR, INC.
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $46,864,000 $44,401,000 $33,340,000
Cost of sales 27,574,000 25,986,000 18,180,000
-----------------------------------------------
Gross profit 19,290,000 18,415,000 15,160,000
Operating expenses:
Selling, general and administrative 13,428,000 11,885,000 8,727,000
Litigation expense -- 4,205,000 170,000
Research and development 3,902,000 3,651,000 2,773,000
-----------------------------------------------
Operating income (loss) 1,960,000 (1,326,000) 3,490,000
Interest income 495,000 725,000 586,000
Interest expense 383,000 -- --
-----------------------------------------------
Income (loss) before income taxes 2,072,000 (601,000) 4,076,000
Income tax provision (benefit) 745,000 (34,000) 780,000
-----------------------------------------------
Net income (loss) $ 1,327,000 $ (567,000) $ 3,296,000
-----------------------------------------------
-----------------------------------------------
Earnings per share:
Basic $ 0.17 $ (0.07) $ 0.47
-----------------------------------------------
-----------------------------------------------
Diluted $ 0.17 $(0.07) $ 0.45
-----------------------------------------------
-----------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AVECOR CARDIOVASCULAR, INC.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK ADDITIONAL CUMULATIVE
------------ PAID-IN RETAINED TRANSLATION
SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENTS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 6,414,000 $64,000 $15,205,000 $(2,120,000) $ (4,000) 13,145,000
Sale of share pursuant to
public stock offering, net of
expenses of $1,283,000 1,161,000 12,000 12,641,000 -- -- 12,653,000
Sale of shares for cash
pursuant to Employee
Stock Purchase Plan 18,000 -- 178,000 -- -- 178,000
Exercise of stock options 71,000 1,000 (155,000) -- -- (154,000)
Tax benefit realized upon exercise
of stock options -- -- 255,000 -- -- 255,000
Net income for 1995 -- -- -- 3,296,000 -- 3,296,000
Cumulative translation adjustments -- -- -- -- (51,000) (51,000)
---------------------------------------------------------------------------------
Balances at December 31, 1995 7,664,000 77,000 28,124,000 1,176,000 (55,000) 29,322,000
Exercise of stock warrants,
net of expenses of $35,000 85,000 1,000 528,000 -- -- 529,000
Sale of shares for cash
pursuant to Employee
Stock Purchase Plan 23,000 -- 250,000 -- -- 250,000
Exercise of stock options 40,000 -- (70,000) -- -- (70,000)
Tax benefit realized upon exercise
of stock options -- -- 192,000 -- -- 192,000
Net loss for 1996 -- -- -- (567,000) -- (567,000)
Cumulative translation adjustments -- -- -- -- 282,000 282,000
---------------------------------------------------------------------------------
Balances at December 31, 1996 7,812,000 78,000 29,024,000 609,000 227,000 29,938,000
Exercise of stock warrants 5,000 -- 28,000 -- -- 28,000
Sale of shares for cash
pursuant to Employee
Stock Purchase Plan 34,000 -- 283,000 -- -- 283,000
Exercise of stock options 168,000 2,000 975,000 -- -- 977,000
Shares issued pursuant to Medical
Advisory Board agreement 2,000 -- 29,000 -- -- 29,000
Tax benefit realized upon exercise
of stock options -- -- 143,000 -- -- 143,000
Net income for 1997 -- -- -- 1,327,000 -- 1,327,000
Cumulative translation adjustments -- -- -- -- (107,000) (107,000)
---------------------------------------------------------------------------------
Balances at December 31, 1997 8,021,000 $80,000 $30,482,000 $ 1,936,000 $ 120,000 $32,618,000
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS AVECOR CARDIOVASCULAR, INC.
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,327,000 $ (567,000) $ 3,296,000
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 1,748,000 1,375,000 1,063,000
Accretion of discount on investments (280,000) (508,000) (189,000)
Provision for bad debts 214,000 104,000 42,000
Deferred income taxes (78,000) (867,000) (370,000)
Stock compensation 29,000 -- --
Deferred grant (52,000) (67,000) (19,000)
Changes in operating assets and liabilities:
Accounts receivable (1,292,000) (958,000) (2,088,000)
Inventories (1,185,000) (3,547,000) (1,696,000)
Other current assets 401,000 (199,000) (127,000)
Accounts payable (762,000) 122,000 946,000
Accrued expenses 139,000 1,542,000 623,000
Accrued litigation settlement (1,100,000) 1,100,000 --
---------------------------------------------------
Net cash (used in) provided by operating activities (891,000) (2,470,000) 1,481,000
---------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (12,628,000) (2,629,000) (1,146,000)
Purchase of short-term investments (6,891,000) (6,183,000) (7,666,000)
Proceeds upon sale or maturity of short-term investments 6,082,000 11,810,000 2,000,000
Restricted cash and investments 3,450,000 (4,450,000) --
Increase in other assets (222,000) (53,000) (162,000)
---------------------------------------------------
Net cash used in investing activities (10,209,000) (1,505,000) (6,974,000)
---------------------------------------------------
Cash flows from financing activities:
Net proceeds from sales of common stock 283,000 250,000 12,831,000
Net proceeds from options exercised 977,000 (70,000) (154,000)
Net proceeds from warrants exercised 28,000 529,000 --
Borrowings on long-term debt 5,167,000 -- --
Principal payments on long-term debt (215,000) -- --
Grant proceeds -- 102,000 --
---------------------------------------------------
Net cash provided by financing activities 6,240,000 811,000 12,677,000
---------------------------------------------------
Effect of exchange rates on cash (39,000) 100,000 (41,000)
---------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,899,000) (3,064,000) 7,143,000
---------------------------------------------------
Cash and cash equivalents at beginning of year 6,114,000 9,178,000 2,035,000
---------------------------------------------------
Cash and cash equivalents at end of year $ 1,215,000 $ 6,114,000 $ 9,178,000
---------------------------------------------------
---------------------------------------------------
Supplemental disclosure:
Significant non-cash investing and financing transaction:
Use of restricted funds for purchase of the U.S. facility $ 1,000,000 -- --
Accounts payable recorded for the purchase of property,
plant and equipment -- $ 387,000 --
Cash paid for income taxes $ 235,000 $ 57,000 $ 654,000
Cash paid for interest $ 348,000 -- --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION: AVECOR Cardiovascular Inc. (the "Company") was
incorporated on December 13, 1990. The Company develops, manufactures and
markets specialty medical devices for heart/lung bypass surgery and long-term
respiratory support.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of AVECOR Cardiovascular Inc. and its wholly-owned
subsidiaries, AVECOR Cardiovascular Ltd. and AVECOR Foreign Sales
Corporation, after elimination of all significant intercompany transactions
and accounts.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: For financial
reporting purposes, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. The Company's cash and cash equivalent balances are concentrated
primarily with two investment managers, the majority of which is invested in
daily money market funds.
Short-term investments consist of bank certificates of deposit, U.S.
government securities, agency paper, commercial paper and other corporate
obligations, and money market instruments and are classified as short-term in
the balance sheet based on their maturity date. All of the Company's short-term
investments mature in 1998 and are considered by management to be "available for
sale." At December 31, 1997 and 1996, the estimated fair value of the short-term
investments approximated their cost. Unrealized gains and losses were not
significant.
At December 31, 1997, the Company had no restricted cash or investments.
At December 31, 1996, cash and short-term investements totaling $4,450,000 were
restricted as to their use.
CONCENTRATIONS OF CREDIT RISK: The Company's accounts receivable are
primarily due from hospitals and independent foreign distributors located mainly
in the U.S. and Western Europe. Although the Company does not require collateral
from its customers, concentrations of credit risk in the U.S. are somewhat
mitigated by a large number of geographically dispersed customers. The Company
does not presently anticipate credit risk associated with foreign trade
receivables (see Note 6), although collection could be impacted by the
underlying economies of the respective countries.
INVENTORIES: Inventories are stated at the lower of cost or market,
with cost determined on the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried
at cost less accumulated depreciation and amortization. Depreciation and
amortization are generally recorded using the straight-line method over
estimated useful asset lives. The Company's new U.S. facility carries asset
lives of forty, fifteen and seven years for the building and shell,
improvements, and equipment and furniture, respectively. The cost of molds,
tooling and dies is capitalized and depreciated generally over periods of three
to five years using straight-line or units of production methods. Other
equipment and leasehold improvements are generally carry estimated useful lives
of five years or less (shorter of asset life or lease term for leasehold
improvements). See "REVENUE RECOGNITION" below for the Company's policy with
regards to its blood pump equipment placed with customers.
Maintenance, repairs and minor improvements are charged to expense as
incurred while major betterments and renewals are capitalized. When assets are
sold or retired, the cost and related accumulated depreciation and amortization
are removed from the accounts and the resulting gain or loss is included in
operations.
LONG-LIVED ASSETS: The recoverability of long-lived assets is assessed
annually or whenever adverse events or changes in circumstances or business
climate indicate that the expected cash flows previously anticipated warrant
reassessment. When such reassessments indicate the potential of impairment, all
business factors are considered and, if the carrying values of long-lived assets
are not likely to be recovered from future net operating cash flows, they will
be written down for financial reporting purposes.
REVENUE RECOGNITION: For all products, other than when the equipment
portion of the Affinity blood pump system is shipped to the customer but title
remains with the Company, the Company recognizes sales upon product shipment.
During 1997, the Company began marketing the Affinity blood pump system.
This blood pump system has both equipment and disposable products which are
manufactured and marketed by the Company. Typically, when the equipment portion
of the system is shipped, title to the equipment remains with the Company.
Subsequently, the total cost of this equipment is realized through ongoing sales
of disposable products to the customer, and accordingly is amortized and
recorded as a charge to operations over the life of the equipment, generally
using an asset life of three to five years.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed
as incurred.
INCOME TAXES: The Company accounts for income taxes using the liability
method. The liability method provides that deferred tax assets and liabilities
are recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
("temporary differences") using enacted tax rates in effect in the years in
which the differences are expected to reverse. Temporary differences relate
primarily to the allowance for doubtful accounts, obsolete inventory allowances,
and accruals for vacation, product liability and warranty costs.
14
<PAGE>
NET INCOME (LOSS) PER SHARE: In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, a new standard for computing and
presenting earnings per share. As required, the Company adopted this new
standard in the fourth quarter of 1997. Net income (loss) per share for all
periods presented have been computed by dividing net income (loss) by the
weighted average number of common shares outstanding ("basic EPS") and by the
weighted average number of common and common equivalent shares outstanding
("diluted EPS"). Common equivalent shares relate to stock options and stock
warrants when their effect is not antidilutive.
For all periods presented, the weighted average common and common
equivalent shares outstanding are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average
common shares
outstanding 7,921,000 7,767,000 7,046,000
Common equivalent
shares outstanding:
Option equivalents 68,000 -- 262,000
Warrant equivalents 1,000 -- 45,000
-----------------------------------------
Weighted average common
and common equivalent
shares outstanding 7,990,000 7,767,000 7,353,000
-----------------------------------------
-----------------------------------------
</TABLE>
FOREIGN CURRENCY TRANSLATION: All assets and liabilities of the Company's
international subsidiaries are translated to U.S. dollars at year-end exchange
rates, while elements of the statement of operations are translated at average
exchange rates in effect during the year. Translation adjustments arising from
the use of differing exchange rates are included in cumulative translation
adjustments in shareholders' equity.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant areas which require the use of management's estimates
relate to the determination of the allowances for doubtful accounts receivable
and obsolete inventories, the need for a valuation allowance on deferred tax
assets and the determination related to the probability of the patent
contingency matter.
2. BALANCE SHEET INFORMATION:
The following provides additional information concerning selected balance sheet
accounts as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 8,611,000 $ 7,418,000
Allowance for doubtful accounts (334,000) (120,000)
---------------------------
$ 8,277,000 $ 7,298,000
---------------------------
---------------------------
Inventories:
Raw materials $ 3,758,000 $ 3,424,000
Work-in-progress 2,189,000 2,343,000
Finished goods 4,687,000 3,709,000
---------------------------
$10,634,000 $ 9,476,000
---------------------------
---------------------------
Property, plant and equipment, net:
Land $ 1,409,000 $ --
Building 7,413,000 557,000
Machinery and equipment 5,181,000 3,324,000
Office and laboratory equipment 3,448,000 2,430,000
Molds, tooling and dies 3,011,000 2,183,000
Leasehold improvements 829,000 786,000
Equipment placed with customers 1,494,000 --
---------------------------
22,785,000 9,280,000
Accumulated depreciation
and amortization (6,096,000) (4,472,000)
---------------------------
$16,689,000 $ 4,808,000
---------------------------
---------------------------
Accrued expenses:
Payroll $ 150,000 $ 472,000
Vacation 319,000 288,000
Commissions 290,000 447,000
Income taxes 709,000 616,000
Real estate taxes 355,000 --
Other 1,235,000 1,268,000
---------------------------
$ 3,058,000 $ 3,091,000
---------------------------
---------------------------
</TABLE>
3. SHAREHOLDERS' EQUITY:
SERIAL PREFERRED STOCK: The Company's Second Restated Articles of Incorporation,
as amended, provide for 2,000,000 shares of preferred stock, par value $.01 per
share, issuable in series ("Serial Preferred Stock"). The Board of Directors is
empowered to authorize the issuance and establish the terms of any shares of the
Serial Preferred Stock without shareholder approval. In 1996, the Board of
Directors authorized 200,000 shares for issuance as Series A Junior Preferred
Stock under the Shareholder Rights Plan.
STOCK INCENTIVE PLAN: The Company's 1991 Stock Incentive Plan ("Plan")
provides for granting to eligible employees and certain other individuals
nonqualified and incentive options. The Company has reserved 1,050,000 shares of
common stock for issuance under the Plan. At December 31, 1997 there were 20,000
shares remaining for grant under the Plan. In December 1997, the Company's Board
of Directors authorized, subject to shareholder approval, an additional 450,000
shares of common stock to be reserved for issuance under the Plan. Also, in
December 1997, the Company's Board of Directors authorized 50,000 stock option
grants under the Plan, subject to shareholder approval of the increase in shares
reserved under the Plan. Options granted under the Plan are generally
exercisable beginning one year from the date of grant in cumulative yearly
amounts of 25% of the shares under option and expire, if not exercised, five to
ten years after the date of grant.
Pursuant to the terms of the Plan, optionees may use cash, tender
previously owned shares, or be credited for a portion of the shares exercised to
reimburse the Company for the cost of excercising the options and the taxes due
on
15
<PAGE>
the recognized gain. The shares tendered from the optionee or credited at time
of exercise are at the fair market value of the stock on the transaction date.
No common shares were credited to optionees to satisfy such obligations in 1997.
In 1996, 19,000 common shares valued at $278,000 and, in 1995, 33,000 shares
valued at $486,000 were credited the optionees at the exercise date to satisfy
such obligations.
Upon the occurrence of a change of control (as defined), all outstanding
options become immediately exercisable in full and all restrictions with respect
to outstanding restricted stock awards immediately lapse.
The Plan also provides for stock bonuses and awards of restricted shares
of the Company's common stock to eligible recipients. Restricted shares awarded
may not be sold, assigned, or otherwise transferred by the recipient until the
shares awarded become free of restrictions on transferability. All shares still
subject to restrictions will be forfeited and returned to the Plan if
affiliation with the Company terminates. Plan administrators may waive or
accelerate the lapsing of restrictions.
There were no stock bonuses and no restricted shares issued under the Plan
for the years ended December 31, 1997, 1996 and 1995.
A summary of option transactions under the Plan for 1997, 1996 and 1995
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OPTION
EXERCISE PRICE RANGE
SHARES PRICE PER SHARE PER SHARE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, December 31, 1994 570,000 $6.65 $1.00 - $9.94
Options granted 42,000 $10.63 $8.38 - $12.63
Options exercised (104,000) $3.20 $1.00 - $9.88
Options cancelled (3,000) $9.88 $9.88
--------
Balances, December 31, 1995 505,000 $7.67 $1.00 - $12.63
Options granted 309,000 $12.32 $10.88 - $14.75
Options exercised (58,000) $3.58 $1.00 - $12.00
Options cancelled (113,000) $11.99 $9.88 - $12.00
--------
Balances, December 31, 1996 643,000 $9.51 $2.00 - $14.75
Options granted 286,000 $8.28 $7.00 - $12.00
Options exercised (168,000) $5.81 $2.00 - $9.94
Options cancelled (77,000) $11.16 $6.38 - $14.00
--------
Balances, December 31, 1997 684,000 $9.72 $5.13 - $14.75
--------
--------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------
WEIGHTED-
AVG. WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVG. AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.13 - $7.00 29,000 2.0 years $6.72 19,000 $6.57
$7.13 182,000 9.9 years $7.13 -- --
$7.63 - $10.00 222,000 3.1 years $9.74 114,000 $9.70
$10.13 - $14.75 251,000 3.4 years $11.94 56,000 $12.00
------- -------
684,000 5.0 years $9.72 189,000 $10.08
------- -------
------- -------
</TABLE>
1995 NON-EMPLOYEE DIRECTOR PLAN: In 1995, the Company's Board of Directors
authorized, and in 1996, the Company's shareholders approved, a reserve of
250,000 shares of the Company's common stock for issuance to Non-Employee
Directors of the Company, pursuant to the 1995 Non-Employee Director Plan (the
"1995 Director Plan"). Options granted under the 1995 Director Plan vest on a
cumulative basis, with one third exercisable as of the date of grant and the
remainder becoming exercisable in equal installments on each of the first and
second anniversaries of the date of grant. Each option expires and is no longer
exercisable on the date ten years from its date of grant. Options to purchase
42,000 shares at $13.38 and 10,500 shares at $12.25 per share were granted
during 1995 and 1996, respectively. At December 31, 1997, there were 197,500
options available for grant under the 1995 Director Plan.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------
WEIGHTED-
AVG. WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVG. AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$12.25-$13.38 52,500 7.7 years $13.15 49,000 $13.21
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company adopted Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation", in 1996. The Company has continued to measure compensation cost
for its stock-based compensation plans using the intrinsic value-based method of
accounting and, therefore, the new standard has had no effect on the Company's
operating results.
Had the Company used the fair value-based method of accounting for its
1991 Stock Incentive Plan and 1995 Non-Employee Director Plan beginning with
options granted in 1995 and charged this compensation cost along with the value
of the shares granted through the Employee Stock Purchase Plan against income,
over the plans' vesting periods, based on the fair value of options at the date
of grant, net income (loss) and diluted earnings (loss) per share for 1997, 1996
and 1995 would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $1,327,000 $(567,000) $3,296,000
Pro forma $1,011,000 $(845,000) $3,117,000
Diluted earnings (loss)
per share
As reported $ 0.17 $ (0.07) $ 0.45
Pro forma $ 0.13 $ (0.11) $ 0.42
</TABLE>
The pro forma information above includes stock options granted and stock
purchased under the Employee Stock Purchase Plan in 1995, 1996 and 1997.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model for the 1991 Stock Incentive Plan
and the 1995 Non-Employee Director Plan. The assumptions for 1997, 1996 and 1995
were as follows:
16
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
1991 1995 1991 1995 1991 1995
INCENTIVE DIRECTOR INCENTIVE DIRECTOR INCENTIVE DIRECTOR
PLAN PLAN PLAN PLAN PLAN PLAN
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-free
interest
rates 5.8%-6.6% 6.2% 5.2%-6.8% 6.2% 6.2%-7.8% 6.6%
Expected life 4.3-8 years 8 years 4.3 years 8 years 4.3 years 8 years
Expected
volatility 50% 50% 50% 50% 50% 50%
Expected
dividends 0% 0% 0% 0% 0% 0%
</TABLE>
WARRANTS: In connection with the completion of its initial public offering
of common shares in 1992, the Company granted to the representatives of the
underwriters warrants for 90,000 shares of common stock at an exercise price of
$6.60 per share. During 1997 and 1996, the Company issued 5,000 and 85,000
shares of common stock, respectively, pursuant to the exercise of these
warrants. At December 31, 1997, there are no outstanding warrants.
EMPLOYEE STOCK PURCHASE PLAN: The AVECOR Cardiovascular Inc. Employee
Stock Purchase Plan ("Stock Purchase Plan"), which is available to substantially
all employees, enables eligible employees to contribute up to 10% of their wages
toward quarterly purchases of the Company's common stock at 85% of market value
on the first or last day of each calendar quarter, whichever had the lower stock
price. The Company has reserved 100,000 shares of common stock for issuance
under the Stock Purchase Plan. Employees purchased 34,000 shares at an average
price of $7.72 per share in 1997, 23,000 shares at an average price of $11.00
per share in 1996, and 18,000 shares at an average price of $10.17 per share in
1995. In 1997, the Company's Board of Directors authorized, subject to
shareholder approval, an additional 125,000 shares of common stock to be
reserved for issuance under the Stock Purchase Plan. At December 31, 1997, there
were no shares of common stock available for purchase under this plan.
SHAREHOLDER RIGHTS PLAN: In June 1996, the Company adopted a shareholder
rights plan, pursuant to which the Company declared a dividend distribution of
one Preferred Share Purchase Right on each share of the Company's Common Stock
outstanding on August 2, 1996. Each Right entitles the holder to buy
one-thousandth of a share of the Company's Series A Junior Preferred Stock, or a
combination of securities and assets of equivalent value, at an exercise price
of $80.00, subject to adjustment. The description and terms of the Rights are
set forth in a Rights Agreement dated June 26, 1996, between the Company and
Norwest Bank Minnesota, N.A., as Rights Agent.
4. LONG-TERM DEBT:
In January 1997, the Company purchased a new corporate headquarters and
manufacturing facility for $9,650,000 and consolidated its former four separate
U.S. facilities. In connection with this purchase, the Company entered into a
$5,167,000 bank note payable agreement in January 1997 and, in addition,
utilizing restricted cash and investments, funded the remaining cost of the new
building.
The bank note payable agreement bears interest at 8.11% and requires
monthly principal payments of $21,531, plus interest, through January 2002 with
the remaining principal and interest due February 2002. The bank note payable is
collateralized by the new corporate headquarters and manufacturing facility and,
among other things, requires the Company to meet certain ratios related to
leverage, debt service and cash flow. Additionally, the bank note payable
agreement prohibits the Company from distributing dividends to its shareholders.
The Company believes the fair value of this debt approximates its carrying value
at December 31, 1997.
At December 31, 1997, remaining principal payments on the bank note
payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -------------------------------------------------------------------------
<S> <C>
1998 $ 258,000
1999 258,000
2000 258,000
2001 258,000
2002 3,920,000
----------
$4,952,000
----------
----------
</TABLE>
5. COMMITMENTS
LEASES: In 1996 and years prior, the Company leased all of its facilities and
certain equipment pursuant to operating leases. The leases for the Company's
United States operating facilities expired in December 1996, at which time the
Company occupied its new corporate headquarters. The Company's facility near
Glasgow, Scotland is leased for a period of ten years ending in October 2003.
This lease agreement provides for adjustment of minimum rentals based upon
market rates in 1998 and requires minimum monthly rental payments plus real
estate taxes and applicable common facility operating expenses.
Rent expense, including allocated real estate taxes and operating
expenses, under all rental agreements was $325,000, $725,000 and $596,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The following is a schedule of future minimum lease payments pursuant to
the terms of the non-cancellable leases for the Glasgow, Scotland facility
described above:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -------------------------------------------------------------------------
<S> <C>
1998 $147,000
1999 147,000
2000 147,000
2001 147,000
2002 147,000
2003 112,000
--------
$847,000
--------
--------
</TABLE>
ROYALTY AGREEMENTS: SILICONE PRODUCTS -- In connection with the Company's
June 1991 acquisition of the Surgical Division of SCIMED Life Systems, Inc. (the
Predecessor Business), the Company entered into a royalty agreement with SCIMED.
The agreement required the Company to make payments to SCIMED primarily based on
net sales (as defined), through June 1996, of products previously manufactured
by the Predecessor Business as of the acquisition date. The Company incurred
royalties of $95,000 and $178,000 for the years ended December 31, 1996 and
1995, respectively, under this agreement.
17
<PAGE>
The agreement also provides for royalty payments should the Company
develop and sell new products (new generation products) using certain technology
embodied in product models developed by the Predecessor Business. This element
of the agreement expires in June 2001. The Company has not paid or incurred any
such royalties through December 31, 1997.
AFFINITY BLOOD PUMP -- The Company also entered into a royalty agreement
in connection with the Company's acquisition of an exclusive license to market
the Affinity blood pump. This agreement requires the Company to make payments
based on net sales of the pump chamber (the disposable portion of the Affinity
blood pump system) and net profits of the pump console (the equipment portion of
the Affinity blood pump system) through August 2002. The term of the agreement
may be extended by the Company until the expiration of the last-to-expire of the
patents covered by this agreement or the useful life of the know-how (as
defined) licensed, whichever is longer. Under the terms of the royalty
agreement, the Company must pay minimum royalties each year. The Company's
royalties incurred of $55,000 for the year ended December 31, 1997 exceeded the
minimum royalty related to the first year of the royalty agreement.
BIO-PASSIVE SURFACE -- The Company also has use of an exclusive license
allowing it to apply a bio-passive surface to its products. The agreement
requires the Company to make quarterly payments based on a percentage of net
sales of products utilizing the bio-passive surface. The Company can retain
exclusivity of the license if it pays minimum annual royalties. The Company
incurred royalties of $35,000 for the year ended December 31, 1997 under this
agreement.
PRODUCT LIABILITY: The Company is self-insured on product liability claims
below a certain dollar limitation and maintains product liability insurance
above this limitation per claim and in the aggregate.
CONFIDENTIALITY AND NON-COMPETE AGREEMENTS: The Company has entered into
confidentiality and non-compete agreements with certain employees. If any of
these employees are terminated, the Company is conditionally required to pay the
employee 75% of his or her base salary, as defined, during the non-compete
period (one to two years) if the employee remains unemployed during this period.
6. INDUSTRY SEGMENT INFORMATION:
Since its inception, the Company has operated in the single industry segment of
developing, manufacturing and marketing medical devices.
The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, the United
Kingdom and France. Additionally, the Company distributes its products through
foreign independent distributors, primarily in Europe and Asia, who then market
the products directly to medical institutions. During 1997, the Company
terminated agreements with its last remaining domestic distributor and its only
Canadian distributor. A direct sales force now serves the markets formerly
assigned to these distributors. Management does not believe the Company is
significantly dependent upon any one distributor for the ultimate sale of
products to medical institutions. Sales to distributors accounting for 10% or
more of the Company's net sales were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributor #1 (1) (1) $3,503,000
</TABLE>
(1) Accounted for less than 10% of the Company's net sales.
Total export sales from the U.S. to unaffiliated entities (primarily to
Europe and payable in U.S. dollars) were $4,952,000, $4,912,000 and $3,480,000,
respectively, for the years ended December 31, 1997, 1996 and 1995.
At December 31, 1997 and 1996, consolidated accounts receivable include
$4,366,000 and $3,738,000, respectively, due from customers located outside of
the U.S.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------
AVECOR AVECOR
CARDIOVASCULAR CARDIOVASCULAR
INC. LTD. CONSOLIDATED
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Sales to unaffiliated
customers $32,634,000 $14,230,000 $46,864,000
Operating income 1,640,000 320,000 1,960,000
Identifiable assets 36,705,000 6,054,000 42,759,000
1996
Sales to unaffiliated
customers 31,290,000 13,111,000 44,401,000
Operating income (loss) (1,738,000) 412,000 (1,326,000)
Identifiable assets 30,699,000 6,462,000 37,161,000
1995
Sales to unaffiliated
customers 22,638,000 10,702,000 33,340,000
Operating income 2,806,000 684,000 3,490,000
Identifiable assets 27,902,000 5,617,000 33,519,000
</TABLE>
During the years ended December 31, 1997, 1996, and 1995, AVECOR
Cardiovascular Ltd. made capital expenditures of approximately $393,000,
$146,000 and $57,000, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement
131, "Disclosures About Segments of an Enterprise and Related Information," a
new standard of reporting information about operating or business segments in
financial statements. The new standard will be effective for the Company's
annual financial statements in 1998. Although the Company has not specifically
evaluated what impact, if any, this new standard will have on the Company's
current reporting of operating and business segments, the Company believes it
will continue reporting as one operating and business segment.
7. RETIREMENT SAVINGS PLAN:
The AVECOR Cardiovascular Inc. Retirement Savings Plan (the "Savings Plan") is a
profit sharing plan which provides for voluntary pre-tax employee contributions
and discretionary employer matching and profit sharing contributions and is
intended to satisfy the requirements of Section 401(k) of the Internal Revenue
Code. Generally, all employees of the Company who are over 21 years of age and
who have completed one year of service with the Company are eligible to
participate in the Savings Plan. The Company did not make any contributions to
the Savings Plan in 1997, and
18
<PAGE>
made contributions of $23,000 and $10,000 to the Savings Plan related to 1996
and 1995, respectively.
8. INCOME TAXES:
The components of the Company's income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
U.S. federal $585,000 $484,000 $875,000
U.S. state 15,000 57,000 5,000
International 223,000 292,000 270,000
Deferred (78,000) (867,000) (370,000)
---------------------------------------------
$745,000 $ (34,000) $780,000
---------------------------------------------
---------------------------------------------
</TABLE>
The variance of the 1997 and 1996 effective tax rate from the U.S.
statutory tax rate was primarily due to losses incurred by the Company's French
subsidiary for which no tax benefit has been recorded because of the uncertainty
of their realization, offset by the generation of research and experimentation
credits. The variance of the 1995 effective tax rate from the U.S. statutory tax
rate was primarily due to utilization of $1,730,000 of net operating loss
carryforwards ("NOLs") and $26,000 of state research and experimentation
credits.
Components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Patent settlement $ -- $ 418,000
Research and experimentation
credits 881,000 560,000
French subsidiary NOL
carryforwards 226,000 119,000
AMT carryforwards 195,000 --
Other, primarily certain
accrued expenses 239,000 296,000
Valuation allowance (226,000) (119,000)
-------------------------
1,315,000 1,274,000
Deferred tax liabilities:
Depreciation -- (37,000)
-------------------------
Net deferred tax assets $1,315,000 $1,237,000
-------------------------
-------------------------
</TABLE>
The Company has established a valuation allowance to offset its deferred
tax asset related to its French subsidiary's NOL carryforwards due to the
uncertainty of their realization. The NOL carryforwards expire from 2000 to
2002. The Company expects its future taxable income will be sufficient to
realize its other deferred tax assets, therefore there is no valuation allowance
offsetting them.
Available research and experimentation credits at December 31, 1997,
represent federal and state amounts of approximately $632,000 and $249,000,
respectively, with expiration dates ranging from 2007 to 2012. The Company's AMT
credit carryforwards do not expire.
Domestic and international components of income (loss) before income taxes
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
AVECOR Cardiovascular Inc. $1,663,000 $(1,088,000) $3,351,000
AVECOR Cardiovascular Ltd. 409,000 487,000 725,000
----------------------------------------------
$2,072,000 $ (601,000) $4,076,000
----------------------------------------------
----------------------------------------------
</TABLE>
Undistributed earnings of the Company's foreign subsidiary are
indefinitely reinvested in foreign operations. Accordingly, no provision has
been made for income taxes that might be payable upon remittance.
9. PATENT MATTERS:
In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held by
a competing manufacturer of blood oxygenators and other medical devices, and
requesting a determination that the Company's Affinity oxygenator does not
infringe the competitor's patent. The Company filed suit in response to a
December 1996 letter from the competitor, alleging that the Affinity oxygenator
infringes certain claims under the competitor's patent, and requesting
discussion regarding a possible license agreement. The Company reviewed the
subject patent and concluded, based on an opinion from its patent counsel, that
none of the claims in the patent are infringed by the Affinity oxygenator, and
that the patent is, in any event, invalid. On October 6, 1997, the Magistrate
Judge of the United States District Court vacated a previous order and granted a
stay in the proceedings, including the suspension of discovery, pending the
outcome of the competitor's request for re-issuance of the aforementioned
patent. The expense and effort potentially required to bring this action, as
well as the outcome of any counterclaim successfully brought against the Company
by the competitor, could have a material adverse effect on the Company's
business, financial condition and results of operations.
In 1996, the Company reached an agreement with COBE Laboratories Inc.
(COBE) to settle COBE's patent suit against the Company. The terms of the
settlement with COBE provided for the Company to make net payments totaling
$2,200,000. Two net payments of $1,100,000 were made in August 1996 and August
1997, respectively. The net settlement costs of $2,200,000 and the associated
legal costs were recognized as a charge to operations in 1996.
10. QUARTERLY DATA (UNAUDITED):
Quarterly net sales, gross profit, net income (loss) and net income (loss) per
share data are presented on page 20.
11. NEW ACCOUNTING STANDARD:
In June 1997, the Financial Accounting Standards Board issued Statement 130,
"Reporting Comprehensive Income," a new standard requiring the reporting and
display of "comprehensive income" (defined as the change in equity of a business
enterprise during a period from sources other than those resulting from
investments by owners and distributors to owners) and its components in a full
set of general purpose financial statements. The new standard will be effective
for the Company's annual financial statements in 1998. The Company's cumulative
translation adjustment is considered a component of "comprehensive income,"
however the Company has not evaluated what other components of its changes in
equity would be components of "comprehensive income."
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
AVECOR Cardiovascular Inc.:
We have audited the accompanying consolidated balance sheets of AVECOR
Cardiovascular Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of AVECOR
Cardiovascular Inc. as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P
MINNEAPOLIS, MINNESOTA
MARCH 16, 1998
QUARTERLY OPERATING DATA
The following table sets forth certain unaudited operating data for the four
quarters in 1997 and 1996. In the opinion of management, the data include all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the information set forth therein.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(UNAUDITED) QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Net sales $12,043 $11,961 $11,273 $11,587
Gross profit 4,983 5,061 4,785 4,461
Net income 387 403 365 172
Diluted earnings per share $.05 $.05 $.05 $.02
1996
Net sales $10,293 $11,145 $11,315 $11,648
Gross profit 4,342 4,702 4,534 4,837
Net income (loss) 211 (1,876) 628 470
Diluted earnings (loss)
per share $.03 $(.24) $.08 $.06
</TABLE>
The summation of quarterly diluted earnings (loss) per share may not equate to
the calculation for the year as quarterly calculations are prepared on a
discrete basis. All earnings per share calculations are presented per the
definition of "diluted earnings per share" from FASB Statement No. 128.
COMMON STOCK INFORMATION
The Company's Common Stock is currently traded on the Nasdaq National Market
under the symbol AVEC. The quotations set forth below reflect the high and low
closing prices for the Company's Common Stock on the Nasdaq National Market for
each of the identified periods, excluding adjustments for retail mark-ups,
mark-downs or commissions.
<TABLE>
<CAPTION>
1997 HIGH LOW
- -----------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $13 3/8 $10 3/4
Second Quarter 12 1/4 8 3/4
Third Quarter 12 3/8 9 7/8
Fourth Quarter 12 6
1996 HIGH LOW
- ------------------------------------------------------------------------------------
First Quarter $17 1/4 $10 1/2
Second Quarter 14 1/8 12
Third Quarter 15 7/8 11 5/8
Fourth Quarter 14 7/8 10 7/8
</TABLE>
SHAREHOLDERS. As of March 1, 1998, there were approximately 300 holders of
record and approximately 3,800 beneficial shareholders of the Company's
Common Stock.
DIVIDENDS. The Company has not declared or paid any cash dividends on its Common
Stock since its inception, and the Board of Directors currently intends to
retain all earnings for use in the business for the foreseeable future. Under
terms of the note payable used to finance the Company's U.S. manufacturing
facility in January 1997, no dividends may be paid to shareholders while the
note payable is outstanding. The bank note payable will fully mature in February
2002.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CORPORATE INFORMATION AVECOR CARDIOVASCULAR, INC.
CORPORATE HEADQUARTERS
AVECOR Cardiovascular Inc.
7611 Northland Drive
Minneapolis, Minnesota 55428
(612) 391-9000
FORM 10-K
Shareholders may receive a copy of the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, without charge by writing to:
Investor Relations
AVECOR Cardiovascular Inc.
7611 Northland Drive
Minneapolis, Minnesota 55428
STOCK TRANSFER AGENT
For change of name, address, or to replace lost stock certificates, contact:
Norwest Bank Minnesota, N.A.
P.O. Box 738
161 N. Concord Exchange
South St. Paul, Minnesota 55075-0738
(612) 450-4064
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
GENERAL COUNSEL
Oppenheimer Wolff & Donnelly LLP
Minneapolis, Minnesota
INVESTOR RELATIONS COUNSEL
Swenson NHB Investor Relations
Minneapolis, Minnesota
(612) 371-0000
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Thursday, May 7, 1998, at
3:30 p.m. at the Minneapolis Marriott City Center Hotel, 30 South Seventh
Street, Minneapolis, Minnesota.
DIRECTORS
ANTHONY BADOLATO
Chairman of the Board and
Chief Executive Officer
EDWARD E. STRICKLAND
Independent Financial Consultant
DAVID W. STASSEN
President
Sulzer Spine-Tech, Inc.
J. GORDON WRIGHT
Founder and Managing Director
Caledonian Medical Limited
OFFICERS
ANTHONY BADOLATO
Chairman of the Board and
Chief Executive Officer
WILLIAM S. HAWORTH
Vice President - Engineering
GREGORY J. MELSEN
Vice President - Finance, Treasurer and
Chief Financial Officer
ALLAN R. SECK
Vice President - Marketing and Sales
</TABLE>
<PAGE>
AVECOR CARDIOVASCULAR INC.
7611 NORTHLAND DRIVE
MINNEAPOLIS, MINNESOTA 55428
(612) 391-9000
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
AVECOR Cardiovascular Inc. on Form S-8 (File Nos. 33-55184, 33-55166, 33-90460,
333-29143 and 333-29145) of our reports dated March 16, 1998, or our audits of
the consolidated financial statements and financial statement schedule of AVECOR
Cardiovascular Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995, which reports are included or incorporated by
reference in this Annual Report on Form 10-K. We also consent to the reference
to our firm as "experts" in the above-mentioned registration statements on Form
S-8.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,215,000
<SECURITIES> 3,727,000
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80,000
0
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<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
