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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For transition period from ____________ to___________
Commission file number 0-944
POSSIS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota
41-0783184
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9055 Evergreen Blvd, NW, Minneapolis, Minnesota 55433-8003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 763-780-4555
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, 40 Cents Par Value
Preferred Shares Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2001 was approximately $197,356,000.
The number of shares outstanding of the registrant's common stock as of
September 30, 2001: 16,868,062.
Certain responses in Part III are incorporated herein by reference to
information contained in the Company's definitive Proxy Statement for its 2001
annual meeting to be filed on or before November 28, 2001 ("The Proxy
Statement").
PART I
Item 1. Business:
General
Possis Medical, Inc. (the Company) was incorporated in 1956 and went public
in 1960 as Possis Machine Corporation. Initial operations consisted of design,
manufacturing, and sales of industrial equipment and a division that provided
temporary technical personnel. The Company's involvement with medical products
began in 1976. In 1990 the Company made the decision to focus on medical
products and subsequently divested all non-medical operations.
Products
ANGIOJET(R) RHEOLYTIC(TM) THROMBECTOMY SYSTEM. The development of blood
clots in various sites within the vascular system is common and is one of the
leading causes of morbidity and death. Blood clots may be caused by multiple
factors, including cardiovascular disease, trauma, impediment of normal flow
during invasive procedures or prolonged bed rest. If a blood clot becomes large
enough, it can block a blood vessel, preventing oxygenated blood from reaching
the organ or tissue it supplies. In addition, if a blood clot breaks off, it can
travel (embolize) through the bloodstream and block blood flow to other organs
and tissue. Conditions caused by blood clots include acute myocardial infarction
(heart attack), stroke, peripheral ischemia, which can lead to limb loss,
vascular access failure, pulmonary embolism, and deep vein obstruction.
Currently, the three primary methods of removing intravascular blood clots
are surgery, dissolution with drugs (thrombolysis) and mechanical devices.
Thrombolytic drug treatment involves the administration of a drug designed to
soften or dissolve the blood clot in an intensive or critical care setting.
Thrombolytic drugs may require prolonged infusion to be effective, may require
significant time to take effect, which is costly in an intensive or critical
care setting, and then may only partially remove the clot. In addition,
thrombolytic drugs may cause uncontrolled, life-threatening bleeding. Also,
other classes of drugs, specifically glycoprotein llb/llla inhibitors, are being
used to prevent blood clots from forming. These drugs, however, are not approved
for this use and of limited value against clots already formed. Mechanical
devices such as the Fogarty-type catheter operate by inflating a balloon past
the point of the blood clot and then dragging the blood clot out of the
patient's body through the artery. Fogarty-type catheters require surgical
intervention, which may result in overnight hospital stays, are more limited in
their applications and may cause significant vascular trauma.
The Company believes that its AngioJet System represents a rapid, safe, and
medically effective approach to the removal of blood clots from arteries, veins
and grafts and offers certain advantages over current methods of treatment. The
AngioJet System is a non-surgical, minimally invasive catheter system designed
to rapidly remove blood clots with minimal vascular trauma. The AngioJet System
consists of three major components: a reusable drive unit to power a pump and
monitor device performance, a disposable single-use pump set that delivers
pressurized saline to the catheter, and a family of disposable, single-use
catheters. The AngioJet System has demonstrated the ability to safely and
effectively remove blood clots within seconds to minutes without surgical
intervention or the risk of uncontrolled bleeding.
To operate the AngioJet System, a physician first threads a catheter down a
patient's blood vessel to the site of the blood clot. The AngioJet System's
drive unit is then activated, causing a disposable pump to pressurize sterile
saline to approximately 10,000 pounds per square inch (psi) at the source and
send it through the catheter to the tip. Saline jets spray from the catheter tip
back up the catheter at several hundred miles per hour. The operation of
high-speed jets, contained inside the catheter, creates a localized low-pressure
zone around the catheter's tip. The difference between the low pressure at the
tip and the normal blood pressure in the vessel draws the blood clot into the
catheter through openings at the tip. The jets then macerate or pulverize the
clot material into microscopic fragments, which are immediately propelled down
the catheter, out of the patient's body and into a disposable collection bag
located on the drive unit. No water is used directly on the vessel surface to
remove material.
Currently the Company is marketing the XMI(TM)135 and Xpeedior(R)
catheters. The XMI135 and Xpeedior catheters are the first catheters marketed by
the Company based upon its proprietary Cross-Stream(R) Technology. This
exclusive technology platform intensifies the action at the tip of the catheter,
which doubles the clot removal rate and triples the treatable vessel size
compared to other available mechanical thrombectomy devices on the market today.
In addition, Cross-Stream Technology has been able to deal more effectively with
"mural thrombus," the older, more organized material that adheres to vessel
walls and can complicate patient results.
The AngioJet Rheolytic Thrombectomy System is a pioneering device for the
removal of intravascular blood clots in a variety of clinical applications. It
is typically used in conjunction with other medical devices, such as angioplasty
balloons and stents, and drugs, such as thrombolytics and platelet inhibitors.
For these reasons, the market potential is not readily quantifiable through
widely published industry statistics. The approach of the Company has been to
estimate the total number of cases for a given indication in a particular
vascular territory. These statistics are available through industry sources. The
Company then estimates the number of procedures that might be amenable to
treatment with the AngioJet System, in conjunction with other therapies, both
devices and drugs. In making these estimates for the number of cases amenable to
treatment with the AngioJet System, the Company has relied on its own estimates,
as well as estimates based on data provided by physician consultants,
presentations at medical industry conferences, peer-reviewed journal articles,
security analyst publications, and publications by industry trade and consulting
groups. In cases where little or no reliable data exists, relatively simple
"rules of thumb" are used to estimate figures for statistics like worldwide
patient incidence of certain conditions. We believe that the totality of these
sources provides estimates that are directionally and relatively accurate,
although the Company cannot guarantee their accuracy.
The Company's marketing analysis indicates that the AngioJet System may be
effective for the treatment of various blood clot-induced conditions throughout
the vasculature. The following table shows the vascular territories and
indications for which the AngioJet System may be used. In addition, the table
indicates the annual incidences worldwide and the Company's estimated AngioJet
System annual market potential.
AngioJet
Estimated System
Annual Annual
Worldwide Market
Incidence Potential
Vascular Territory Indication (Patients) (Procedures)
Coronary (1) Heart Attacks & Unstable Angina 5,300,000 550,000
Legs (2) Leg Arteries & Bypass Grafts 1,300,000 220,000
A-V Access (3) Hemodialysis Graft Thrombosis 400,000 190,000
Lungs Pulmonary Embolism 1,000,000 200,000
Cerebral (4) Ischemic Stroke 1,900,000 380,000
Venous Cerebral Sinus Stroke 4,500 2,000
Cervical Carotid Stroke 6,600 1,000
Venous Deep Vein Thrombosis 2,500,000 900,000
Total 12,411,100 2,443,000
(1) Marketed under March 1999 FDA approval.
(2) Marketed under April 2000 FDA approval.
(3) Marketed under December 1996 approval.
(4) In clinical trials.
In April 2000, March 1999 and December 1996, the Company received Food and
Drug Administration (FDA) clearances to commence U.S. marketing of the AngioJet
System, for removal of blood clots in leg arteries, native coronary arteries and
coronary bypass grafts and access grafts used by patients on kidney dialysis,
respectively.
During 1996 through 1998 the Company sponsored a randomized clinical trial,
VeGAS 2, which compared the AngioJet System with the thrombolytic drug,
urokinase, in the treatment of intracoronary thrombus. The AngioJet System
proved to be medically safe and effective and cost-effective compared to
urokinase. Cost savings averaged nearly $5,000 per patient. These results have
been presented by physician investigators at major medical meetings and have
been published in the October 2001 issue of the American Heart Journal, a peer
reviewed publication.
With respect to other FDA-approved indications, such as peripheral
arteries, the Company believes that the AngioJet System offers a unique
combination of clinical benefit and cost-effectiveness, when compared with
current practices not using the AngioJet System. While the Company and some
physicians have assembled considerable data demonstrating these cost-savings, it
is noted that these savings have been documented only in non-randomized patient
sets and not in randomized, clinical trials.
In October 1999, the Company received full FDA approval for its
Investigational Device Exemption (IDE) application for the clinical trial (TIME
1) of the AngioJet System in the treatment of acute ischemic stroke. The first
patient was enrolled in May 2000. After the first five patients had been treated
in the TIME 1 clinical trial for ischemic stroke, a planned review was
conducted. This review concluded that the AngioJet NV150 neurocatheter could
access the middle cerebral artery where most ischemic strokes occur, and that
the device can effectively remove clot from this territory. The review suggested
changes to the protocol covering a variety of areas, including patient
selection, exclusion criteria, and specifications for physician technique in
deploying and moving the device in the cerebral vasculature. Physician reviewers
also suggested changes to the device, to improve the trackability, flexibility
and efficacy profile. In May 2001, the FDA approved the re-start of patient
enrollment in the TIME 1 clinical trial. TIME 1 will enroll up to 30 patients at
up to eight centers in the U.S. to determine safety of the device for this
indication.
PERMA-SEAL(R) GRAFT. The Perma-Seal Graft is a self-sealing synthetic graft
comprised of silicone elastomers, with a winding of polyester yarn encapsulated
within its wall, and is manufactured using proprietary electrostatic spinning
technology developed by the Company. The Perma-Seal Graft is implanted in kidney
dialysis patients to provide necessary vascular access. The Company believes
that its Perma-Seal Graft may offer advantages over currently used synthetic
grafts because of its needle hole sealing capability. A randomized clinical
trial comparing the Perma-Seal Graft to conventional Teflon(R) grafts showed
that the Perma-Seal Graft provides access sites with minimal compression time
and bleeding as compared to other currently available graft products and, as a
result, reduced administrative time and the associated costs per patient. In
addition, because of its ability to seal a needle puncture without depending on
tissue ingrowth, the Perma-Seal Graft may provide an option for patients who
require dialysis immediately after implant. The Company, however, recognizes
that the market potential for this product is limited by its FDA-approved
labeling, which limits it to use in dialysis patients requiring immediate access
for hemodialysis. Due to the limited market potential for this product, the
Company made a business decision to focus on the AngioJet System business. The
assets associated with this business have been written off, and prior
distribution agreements have been terminated. No additional sales are expected
for fiscal 2002 and beyond.
PERMA-FLOW(R) CORONARY BYPASS GRAFT. The Perma-Flow Graft is a synthetic
graft 5mm in diameter for use as a synthetic coronary artery bypass graft
(CABG). The Perma-Flow Graft is intended to provide a graft alternative to
patients who require bypass surgery but have insufficient or inadequate native
vessels available for such use because of repeat procedures, trauma, disease or
other factors. The market potential for this graft product was deemed smaller
than our pre-development estimates. No sales are expected for fiscal 2002 and
beyond. The assets associated with this business have been written off.
A goal of the Company is to maximize the value of vascular graft products
and technologies for its shareholders. Its strategy is to seek partners to
distribute the products and possibly fund the graft product development program.
In addition, the Company will continue to pursue the possible sale of the
vascular graft products and technologies. Currently the Company has put all
graft development activities on hold as it concentrates its efforts on the
development on new AngioJet System applications.
Research and Development
The Company's research and development program for its existing products is
focused primarily on clinical testing, obtaining necessary FDA product approvals
and validating manufacturing processes for the AngioJet System.
The Company's new product development efforts are focused primarily on
developing additional designs and applications of the AngioJet Thrombectomy
System, including neurovascular and large vessel applications and related
products. The Company is also exploring AngioJet System applications for other
blood clot conditions. Research and development expenses are generally incurred
for product design, development and qualification, development and validation of
manufacturing process, conduct of clinical trials, and seeking and obtaining
governmental approvals. The Company's research and development expenses are
expected to stay at current levels or slightly increase as the Company continues
its clinical trial and current product development plans.
As of September 30, 2001, the Company employed approximately 19 full-time
employees in research and development, including 15 in new product concept
screening, prototype building, product and process development and validation,
and four in regulatory and clinical affairs. The Company performs substantially
all of its research and development activities at its headquarters in Coon
Rapids, Minnesota, a suburb of Minneapolis, Minnesota. The Company spent $4.8
million, $5.5 million and $5.7 million in fiscal 2001, 2000 and 1999,
respectively, on medical product research and development. AngioJet System
research and development expense for fiscal 2001, 2000, and 1999 were $4.8
million, $5.5 million, and $4.4 million, respectively. Vascular graft research
and development expense for fiscal 1999 was $1.3 million.
Manufacturing
We assemble and test our entire product line in-house and have vertically
integrated a number of processes in an effort to provide increased quality and
reliability of the components used in the production process. Many of the
processes are proprietary and were developed by the Company. The Company
believes that as product and process improvements are identified, our ability to
control costs and quality will improve. Raw materials, components and select
subassemblies used in our products are purchased from outside suppliers and are
generally readily available from multiple sources.
Our manufacturing facilities are subject to periodic inspections by
regulatory authorities, including Good Manufacturing Practice (GMP) compliance
inspections by the FDA and TuV Product Services. TuV is a notified body
designated by the European Union competent authorities (Ministries of Health) to
determine whether a product can display the CE mark, necessary for marketing in
the European Union. We have undergone inspections by the FDA for GMP compliance
and the TuV each year since 1998. All Possis products currently carry the CE
mark in the European Community.
FDA inspections focus on GMP as defined in federal regulation 21 CFR 820.
These regulations define standards for the manufacturing and quality systems
used to produce medical devices. The FDA has conducted inspections of Possis
Medical, Inc. at regular intervals since 1993, and prior to approval of some
Possis Medical, Inc. marketing applications. Some of these inspections have
identified deficiencies in our compliance with certain GMP requirements,
including systems to address corrective and preventive actions, complaint
processing, design and process validation, material defect trending and use of
statistical techniques. Deficiencies found during the most recent inspection
have been corrected and currently the Company is waiting for the FDA to review
the corrective actions implemented. The risk of non-compliance includes seizure,
injunction and/or civil penalties. The Company does not anticipate any adverse
FDA action.
Marketing and Sales
The Company markets its AngioJet System primarily to interventional
cardiologists, interventional radiologists and vascular surgeons and secondarily
to physician specialty groups, such as nephrologists and osteopaths. Revenue
from AngioJet System sales in the United States was approximately 99%, 93%, and
91% of fiscal 2001, 2000, and 1999 revenue, respectively.
The Company is currently marketing the AngioJet System for coronary
applications, peripheral vessel and graft applications and hemodialysis graft
thrombosis. The AngioJet System for stroke treatment will be marketed to
interventional neuroradiologists; neurologists and interventional cardiologists
as FDA marketing approvals are obtained.
The AngioJet System is currently marketed by a direct sales force in the
United States, consisting entirely of employees of Possis Medical, Inc.
The Company is currently marketing its AngioJet System outside the United
States using an independent distributor network. Generally, the distributorship
agreements provide that the distributors, at their own expense, will
investigate, negotiate and obtain regulatory approvals for the Company's
products in the specified territory. All sales made to the Company's independent
distributors are denominated in United States dollars.
In December 1998, the Company entered into an exclusive worldwide supply
and distribution agreement for its Perma-Seal Dialysis Access Graft. The
distributor defaulted under the agreement by failing to comply with
contractually obligated levels of product purchases and with payment schedules.
In November 2000, the distributor indicated its desire to terminate the
distribution agreement and return unsold product. The Company has settled all
outstanding litigation with the Perma-Seal distributor, and has terminated the
distribution relationship.
Promotional activities by the Company are designed primarily to enlist the
support of key medical opinion leaders in the United States and abroad. The
Company believes that publications in medical journals and presentations at
medical meetings are important to encourage broad acceptance of its products.
Other marketing activities include medical journal advertising, participating in
medical meetings, and supporting studies designed to gather cost effectiveness
data of the Company's products compared to conventional treatment.
Patents, Patent Applications, Licenses and Proprietary Rights
The Company's success depends and will continue to depend in part on its
ability to maintain patent protection for products and processes, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. The Company's policy is to attempt to protect its technology by,
among other things, filing patent applications for technology that it considers
important to the development of its business. The patents held and applied for
by the Company describe method and apparatus claims related to thrombectomy and
atherectomy devices, as well as method and apparatus claims related to the
design and use of synthetic vascular grafts. The Company no longer considers the
graft patents as material to its business going forward. The Company holds ten
United States patents and three foreign patents relating to the AngioJet System.
Of the ten U.S. patents, seven were filed between 1990 and 1995 and are valid
for seventeen years following issuance. Three of the AngioJet-related patents
are valid for twenty years following their 1998 filing dates. In addition, the
Company has thirteen United States and twenty-three foreign patent applications
pending relating to the AngioJet System. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurance can be given
that the Company's pending applications will result in patents being issued or,
if issued, that such patents, or the Company's existing patents, will provide a
competitive advantage, or that competitors of the Company will not design around
any patents issued to the Company. Since many competitors are better
capitalized, no assurance can be given that such competitors will not choose to
test the existing patent protection by introducing competitive products which
would then draw the Company into costly litigation, which would reduce its
market penetration and strategic advantage.
The Company requires all employees to execute non-disclosure agreements
upon commencement of employment with the Company. These agreements generally
provide that all confidential information developed or made known to the
individual by the Company during the course of the individual's employment with
the Company is to be kept confidential and not disclosed to third parties.
There can be no assurance that the Company's non-disclosure agreements and
other safeguards will protect its proprietary information and know-how or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to independently
develop such information. There has been substantial litigation regarding patent
and other intellectual property rights in the medical device industry.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, to defend the Company
against claimed infringement of the rights of others or to determine the
ownership, scope or validity of the proprietary rights of the Company and
others. An adverse determination in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company.
Competition
The Company's products will compete with a number of different products and
treatment methods for the conditions they address. The Company believes that its
AngioJet System will face intense competition from a variety of treatments for
the ablation and removal of blood clots, including thrombolytic drug therapies,
particulate capture systems, such as occlusion balloons, filters and combined
systems, direct stenting, surgical intervention, balloon embolectomy, mechanical
and laser thrombectomy devices, ultrasound ablators, and other thrombectomy
devices based on waterjet systems that may currently be under development by
other companies.
The medical products market is characterized by rapidly evolving technology
and intense competition. The future success of the Company will depend on its
ability to keep pace with advancing technology and competitive innovations. Many
potential competitors have significantly greater research and development
capabilities, experience in obtaining regulatory approvals, established
marketing and financial and managerial resources than the Company. Many
potential competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive
products, some of which may employ an entirely different approach or means of
accomplishing the desired therapeutic effect than products being developed by
the Company.
The AngioJet(R) System is a device for the rapid, safe and effective
removal of intravascular thrombus from native coronary vessels and saphenous
vein grafts, kidney dialysis access grafts, and leg arteries. The AngioJet
System has a unique profile of safety, clinical effectiveness, and
cost-effectiveness. In general, it competes against pharmacological dissolution
of the thrombus using thrombolytics or glycoprotein IIb/IIIa inhibitors,
mechanical removal using other devices, and against surgical revision of grafts.
Drugs take time, do not work in a significant number of cases, have deleterious
side effects and are expensive. Drugs are, however, easy to administer,
particularly in an emergency room setting or in a community hospital that lacks
interventional facilities. In general, drugs have the biggest market share among
the set of procedures which constitute our potential markets.
In the peripheral arteries, there is no other FDA-approved mechanical
device. In the A-V access area, there are numerous mechanical devices, under
many different trade names; no individual device has a dominant share of the
market. This market is extremely price sensitive, so devices do not necessarily
gain share because of improved performance and effectiveness alone.
Government Regulation
Government regulation in the United States and other countries is a
significant factor in both the Company's products and its activities, which are
regulated by the U.S. FDA under a number of statutes, including the Food, Drug
and Cosmetic ("FDC") Act.
FDA regulations place the Company's products in either Class II or III (the
highest level), based on the extent of both the pre-market approvals and
post-market controls deemed necessary to assure that they are safe and
effective. For example, Class II devices such as the AngioJet for AV access
graft thrombectomy are subject to pre-market notification (510(k) submission) to
the FDA, whereas AngioJet for treating coronary thrombus is subject to
pre-market approval (PMA) by the FDA, and subsequent annual and other PMA
supplement reporting requirements. While the FDA attempts to complete review of
these different types of pre-market submissions within specific timeframes (90
days for a 510(k); 180 days for a PMA), final action by the FDA may take
considerably longer. Any adverse determination or request for additional
information could delay market introduction and have a materially adverse effect
on the Company's continued operations.
In addition, either a 510(k) or PMA may require the inclusion of data and
analyses from the conduct of investigational clinical trials. Generally, such
clinical trials may be conducted only under an IDE (Investigational Device
Exemption) approved by the FDA. The FDA monitors and oversees the conduct of
clinical trials under an IDE. Such clinical trials typically take several years
to conduct, and they can cost several million dollars. Many of the Company's
products were the subject of such clinical trials in the past, and the Company
expects that some of its future products will also require investigational
clinical trials.
The AngioJet Coronary catheter is a Class III device and is marketed in the
U.S. under an approved PMA. The AngioJet AV-Access and Peripheral Arterial
Thrombus catheters are Class II devices and are marketed in the U.S. under
cleared 510(k) submissions.
Once a Company product is able to be marketed in the U.S., product labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The FDA imposes other post-marketing
controls on the Company and its products, such as annual establishment
registration, annual product listings, and administration of complaint and
medical device reporting files. Failure to meet these pervasive FDA requirements
could subject the Company and/or its employees to injunction, prosecution, civil
fines, seizure or recall of products, prohibition of sales or suspension or
withdrawal of any previously granted approvals.
The AngioJet System received its first clearance for the U.S. market via a
510(k) premarket notification application approved by the FDA in December 1996,
for use in treating thrombosed AV access grafts. In March 1999, the AngioJet
System received FDA approval of a PMA for treating thrombus in coronary arteries
and saphenous vein bypass grafts. In May 2000, the AngioJet System received FDA
market clearance via another 510(k) premarket approval application for treating
thrombus in leg arteries.
The Perma-Seal Dialysis Access Graft was FDA-approved for marketing under a
PMA in September 1998. The Perma-Flow Coronary Artery Bypass Graft was
FDA-approved for marketing under an Humanitarian Device Exemption "HDE" in April
1998.
The Company's manufacturing and quality systems are also subject to FDA
regulations requiring compliance with the FDA's current Good Manufacturing
Procedures ("GMP"). The FDA conducts periodic on-site inspections of
manufacturing facilities. The Company has successfully undergone several such
inspections in the past. The Company is obliged to address any deficiency noted
during such inspections. If the FDA notices violations of applicable
regulations, the continued marketing of the Company's products may be adversely
affected. Such regulations are subject to change and depend heavily on
regulatory interpretations.
The Company conducts sales and marketing activities in various foreign
countries. The time required to obtain approval to market a product in a foreign
country may be longer or shorter than that required for FDA approval, and the
requirements may differ. The Angiojet System displays the CE Mark, allowing
import into the European Union. Approval to display the CE Mark is dependent, in
part, on annual inspections by representatives of European regulatory bodies to
successfully demonstrate compliance with the ISO 9001 Quality Standards.
There can be no assurance that future changes in regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
Employees
As of September 30, 2001, the Company had 194 full-time employees, one
part-time employee and five contract employees. Of these full-time employees, 19
are in research and development, 77 are in manufacturing and production, 12 are
in quality systems, five are in facilities/maintenance, 64 are in sales and
marketing and 17 are in management or administrative positions. None of the
Company's employees are covered by a collective bargaining agreement, and
management considers its relations with its employees to be good.
Item 2. Properties:
The Company leases approximately 51,000 square feet of office and
manufacturing space (including approximately 6,500 square feet of controlled
environment manufacturing space) at 9055 Evergreen Boulevard NW, Minneapolis,
Minnesota 55433-8003. See Note 6 of Notes to Consolidated Financial Statements
in Part II, Item 8, in this Form 10-K.
Item 3. Legal Proceedings:
None
Item 4. Submission of Matters to a Vote of Security-Holders:
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
Robert G. Dutcher 56 Director, Chief Executive Officer and President
Eapen Chacko 53 Chief Financial Officer and Vice President,
Finance and Investor/Public Relations
Irving R. Colacci 48 Vice President, Legal Affairs and Human Resources
General Counsel and Secretary
James D. Gustafson 45 Vice President, Technology, Product Development
and Quality Systems
Shawn McCarrey 43 Vice President, U.S. Sales
T. V. Rao 58 Vice President, Marketing and Worldwide Sales
Robert J. Scott 56 Vice President, Manufacturing Operations
Robert G. Dutcher served as Executive Vice President of the Company from
June 1992 until October 1993 and has served as President, Chief Executive
Officer and a director of the Company since October 1993.
Eapen Chacko has served as Vice President of Finance and Investor/Public
Relations and Chief Financial Officer since September 2000. Mr. Chacko joined
the Company in September 1999 as Vice President of Investor/Public Relations.
Before joining Possis Medical, Inc., Mr. Chacko had been Director of Investor
Relations for Fingerhut Companies, Inc., a $2 billion catalog and Internet
marketer, since March 1995.
Irving R. Colacci has served as Secretary and Corporate Counsel of the
Company since July 1988 and as Vice President, Legal Affairs and Human
Resources, and General Counsel since December 1993.
James D. Gustafson has served as Vice President of the Company since
January 1, 1994 and has been responsible for Quality Assurance and
Regulatory/Clinical Affairs for the Company since June 1993. In August of 2001,
Mr. Gustafson assumed responsibility for the Company's technology and product
development functions.
Shawn F. McCarrey joined the Company as Director of U.S. Sales in December
1998, and became Vice President of U.S. Sales in April 2001. Prior to joining
the Company, Mr. McCarrey served in a variety of sales positions with USCI, a
subsidiary of C.R. Bard, Inc.
T.V. Rao joined the Company in June 1998 as Vice President and General
Manager of the AngioJet(R) System business, and currently holds the position of
Vice President of Sales and Marketing. Prior to joining the Company, Mr. Rao
served as Vice President of Sales and Marketing for Angeion Corporation from
1995 until 1998, Vice President of Brunswick Biomedical from 1994 to 1995, and
Director of Product Management at Medtronic, Inc. from 1990 to 1994.
Robert J. Scott has served as Vice President of Manufacturing Operations of
the Company since December 1993.
PART II
Item 5. Market for the Registrant's
Common Equity and Related Stockholder Matters:
The Company had 1,510 common shareholders of record at July 31, 2001. The
common stock is traded on The Nasdaq Stock Market under the symbol POSS. High
and low closing sale prices for each quarter of fiscal years ended July 31, 2001
and 2000 are presented below:
2001 2000
High Low High Low
QUARTER:
First $ 8.88 $5.50 $12.50 $8.06
Second 8.13 3.75 11.37 7.63
Third 6.35 3.94 14.12 8.28
Fourth 13.11 6.10 8.63 6.00
The Company has not paid cash dividends on its common stock since 1983. The
Company currently intends to retain all earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future.
Item 6. Selected Financial Data:
SELECTED FINANCIAL DATA
POSSIS MEDICAL, INC. AND SUBSIDIARIES
YEARS ENDED JULY 31,
In Thousands Except per Share Data 2001 2000 1999 1998 1997
INCOME STATEMENT DATA:
Operating revenues.............................. $30,001 $ 20,552 $ 13,210 $ 6,158 $ 4,866
Net income (loss):
Continuing operations........................... (3,304) (10,590) (12,021) (11,969) (8,608)
Discontinued operations......................... -- -- -- -- 112
Net income (loss) per common share -
basic and diluted:
Continuing operations.......... (.20) (.67) (.90) (.98) (.71)
Discontinued operations......................... -- -- -- -- .01
Weighted average shares outstanding -
basic and diluted.......................... 16,739 15,697 13,356 12,191 12,099
BALANCE SHEET DATA:
Working capital................................... $14,405 $ 16,788 $13,530 $16,598 $16,840
Total assets...................................... 22,009 25,004 19,821 23,897 22,423
Long-term debt, excluding current maturities...... -- 7 100 11,493 10
Shareholders' equity.............................. 18,071 20,495 16,315 8,744 19,800
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was incorporated in 1956 and went public in 1960 as Possis
Machine Corporation. Initial operations consisted of design, manufacturing and
sales of industrial equipment and a division that provided temporary technical
personnel. The Company's involvement with medical products began in 1976. In
1990 the Company made the decision to focus on medical products and subsequently
divested all non-medical operations.
The Company operates in one business segment -- the manufacture and sale of
medical devices. Possis Medical, Inc. evaluates revenue performance based on the
worldwide revenues of each major product line and profitability based on an
enterprise-wide basis due to shared infrastructures to make operating and
strategic decisions.
The Company generates revenue from the sale of its products. The resulting
cash flow, together with the net proceeds from the Company's debt and equity
offerings, has been used to fund the Company's operations, including research
and development related to its products. Approximately 99% of fiscal 2001
revenues were from product sales in the United States. The importance of United
States revenue generation is expected to continue for the foreseeable future.
Results of Operations
Fiscal Years Ended July 31, 2001, 2000 and 1999
Total product sales for 2001 increased $9,449,000, or 46%, to $30,001,000
compared to $20,552,000 in 2000. Total product sales for 2000 increased
$7,341,000, or 56%, to $20,552,000 compared to $13,211,000 in 1999. The Company
recorded a net loss of $3,304,000, or $.20 per share, for 2001. This compared to
a net loss of $10,590,000, or $.67 per share in 2000 and a net loss of
$12,021,000, or $.90 per share in 1999.
Revenue - AngioJet System
U.S. AngioJet System revenue for 2001 increased $10,400,000, or 54%, to
$29,553,000 compared to $19,153,000 in 2000. U.S. AngioJet System revenue for
2000 increased $7,027,000 or 58%, to $19,153,000 compared to $12,126,000 in
1999. The Company markets the AngioJet(R) Rheolytic(TM) Thrombectomy System
(AngioJet System) worldwide. The AngioJet System consists of a drive unit
(capital) that powers a disposable pump and a family of disposable catheters,
each aimed at a specific indication. The main factors in the revenue increase
were increased sales resulting from the Company commencing U.S. marketing of the
AngioJet System with additional labeling claims. During fiscal 2001 and 2000 the
Company began U.S. marketing of three new catheters for the removal of blood
clots in leg (peripheral) arteries; the XMI(TM)135 in March 2001, the
Xpeedior(R)100 in May 2000 and the LF140 in April 2000. In addition, the Company
received clearance to market the Company's Xpeedior 60 catheter for removal of
blood clots from dialysis access grafts in April 2000.
As of July 31, 2001 the Company had a total of 669 domestic AngioJet System
drive units in the field, compared to 493 and 300 at the end of the previous two
years. During fiscal 2001 the Company sold approximately 25,200 catheters and
pump sets versus approximately 16,100 and 9,100 in fiscal 2000 and 1999,
respectively. This represents a 57% and 77% increase in unit catheters sales
from the previous years. During the fiscal years ended July 31, 2001, 2000 and
1999 the Company sold 160, 138 and 162 AngioJet System drive units,
respectively. The increase in AngioJet System drive unit sales in fiscal 2001
from fiscal 2000 resulted from increase market penetration and the overall
acceptance of the AngioJet System by physicians. The decrease in AngioJet System
drive unit sales in fiscal 2000 from fiscal 1999 was due to cost constraints at
U.S. hospitals related to the Balanced Budget Reform Act ("BBA") of 1997. The
BBA mandated the removal of $17 billion from hospital operating budgets by the
end of 2002 and $61 billion by 2010. Hospitals responded to this mandate by
freezing or reducing expenditures in major cost centers such as the pharmacy,
and by deferring purchases of capital equipment such as the AngioJet System
drive unit. The extent of these cost constraints across hospitals and within
departments of the same hospitals was not proportional, and depended on the
unique revenue, cost and capital budget situation of the institution in
question. The Company believes the BBA had an adverse affect on its AngioJet
System drive unit sales and its competitors sales because of the pressure it put
on hospitals to reduce expenditures. However, the Company does not have any data
that allows it to calculate the amount of the adverse affect the BBA had on its
competitors.
The Company employs a variety of flexible drive unit acquisition programs
including outright purchase and various evaluation programs. The purchasing
cycle for the AngioJet System drive unit varies depending on the customer's
budget cycle. The Company has signed contracts with five purchasing groups
making it an approved vendor in order to accelerate orders and increase
marketing penetration. These purchasing groups negotiate pre-determined
discounts on the drive units and catheters for their member hospitals. Member
hospitals are required, with some exceptions, to purchase products from approved
vendors, such as the Company. The purchasing groups receive a marketing fee on
their purchases from the Company. These discounts and marketing fees have been
offset by the increase in sales with the member hospitals of the purchasing
group. There has been no material negative effect on the Company's margins or
results due to these discounts and marketing fees.
The Company expects U.S. AngioJet System sales to continue to grow
primarily through obtaining additional Food and Drug Administration
(FDA)-approved product uses, introduction of new catheter models for existing
indications, more face time selling to existing accounts, peer-to-peer selling,
and the publication of clinical performance and cost-effectiveness data.
Foreign sales of the AngioJet System during fiscal 2001, 2000 and 1999 were
$372,000, $393,000 and $491,000, respectively. The limited foreign sales are due
to cost constraints in overseas markets. In foreign markets, where public sector
funds are more crucial for hospital operation, Euro devaluations generated
higher public sector deficits, which, in turn, forced reductions in hospital
procedure and equipment budgets. In Japan, the coronary AngioJet System clinical
study was completed in April 1998 and a regulatory filing was completed in
November 1999 with the Japanese Ministry of Health and Welfare (MHW). The
Company has responded to questions from the MHW. The Company is expecting
Japanese approval for coronary use of the AngioJet System in fiscal 2002.
The Company believes that the treatment of blood clots in the coronary
vessels, peripheral arteries, and vessels in the brain, are significant
worldwide marketing opportunities for the AngioJet System.
Revenue - Vascular Grafts
During fiscal 2001, 2000 and 1999, revenue from Perma-Seal(R) Dialysis
Access Grafts was $75,000, $1,006,000 and $593,000, respectively. In September
1998 the Company received FDA marketing approval for its Perma-Seal Dialysis
Access Graft. In December 1998, the Company entered into an exclusive worldwide
supply and distribution agreement for its Perma-Seal Dialysis Access Graft. The
distributor defaulted under the agreement by failing to comply with
contractually obligated levels of product purchases and with payment schedules.
In November 2000, the distributor indicated its desire to terminate the
distribution agreement and return unsold product. The Company has settled all
outstanding litigation with the Perma-Seal distributor, and has terminated the
distribution relationship. The settlement had no impact on the financial
statements as the related accounts receivable balances had been appropriately
written down in prior periods. No additional sales of Perma-Seal Dialysis Access
Grafts are expected.
In April 1998, the Company received Humanitarian Device Exemption (HDE)
approval from the FDA, allowing U.S. marketing of the Perma-Flow(R) Coronary
Bypass Graft for patients who require coronary bypass surgery, but who have
inadequate blood vessels of their own for use in the surgery.
A goal of the Company is to maximize the value of vascular graft products
and technologies for its shareholders. Its strategy is to seek partners to
distribute the products and possibly fund the graft product development program.
In addition, the Company will continue to pursue the possible sale of the
vascular graft products and technologies. Currently the Company has put all
graft development activities on hold as it concentrates its efforts on the
development on new AngioJet System applications.
Cost of Medical Products
Cost of medical products, compared to prior years, increased 16% and 27% in
fiscal 2001 and 2000, respectively. The increases are primarily due to the
significant growth in the U.S. AngioJet System product sales. Medical product
gross margins improved by $7,852,000 and $5,172,000 in fiscal 2001 and 2000,
respectively, over the prior year. The gross margin percentage in fiscal 2001
was 61% compared to 51% and 40% in fiscal 2000 and 1999, respectively. The
improvement in gross margins was driven by higher volumes of XMI and Xpeedior
catheters that carry higher margins than the catheters they replaced and an
improvement in the XMI 135 and LF140 product catheter mix in the year ended July
31, 2001. The Company believes that gross margins will continue to improve as
product sales and related volumes continue to grow and as product and process
improvements are made.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,166,000 and
$4,442,000 in fiscal 2001 and 2000, respectively, as compared to prior periods.
The primary factors for the expense increase for fiscal 2001 were increased
sales and marketing expenses related to the expansion of the Company's U.S.
direct sales organization for the AngioJet System, increased commission expense
due to increased AngioJet System product sales, increased marketing fees for the
national purchasing contracts, and increased computer and software depreciation.
These expense increases were offset by the reduction in costs related to a work
force reduction in January 2001, a 2001 Special Equity Compensation Program,
discussed in the next paragraph, and a reduction in sales product demonstrations
and samples. The primary factors for the expense increase for fiscal 2000 were
increased sales and marketing expenses related to the establishment of a U.S.
direct sales organization to sell the AngioJet System, increased commission
expense due to increased AngioJet System product sales and increased marketing
fees for the national purchasing contracts. The Company expects that the current
U.S. sales force will be able to grow sales and service the customer base for
the Company's AngioJet System through fiscal 2002.
The Company issued stock option awards totaling 1,800,865 shares in fiscal
2001. In August 2000, stock option awards of 443,800 were issued that related to
the Company's fiscal 2000 performance, since the fiscal 2000 year ended in July.
In fiscal 2001, the Company was faced with two issues: 1) potential of
additional dilutive financing due to the prospect of continuing losses, and 2)
the hiring away of key employees by competitors. Consequently, 403,885 net stock
option awards were issued to conserve cash and reduce expenses. These stock
option awards reduced management and key employee cash compensation and sales
commission by approximately $810,000. An additional 733,800 stock option awards
were issued to retain management and key employees. Of the 733,800 stock option
awards, 539,800 relate to fiscal 2001 performance stock option awards that are
normally issued in August 2001, subsequent to fiscal 2001 year-end. Accelerating
these awards was, in the opinion of management, a necessary and effective
retention tool to ensure the continuity of business growth and the achievement
of profitability goals.
Research and Development Expenses
Research and development expense decreased 13% and 4% in fiscal 2001 and
2000, as compared to prior periods. The decrease in fiscal 2001 is due to the
timing of outlays in different stages of development of new AngioJet System
applications and related products. The decrease in 2000 was due mainly to the
shutdown of graft product development. The reduction in graft product
development was offset by an increase in development of new AngioJet System
applications. The Company believes that research and development expense for
AngioJet System applications will increase in fiscal 2002 as the Company
completes the development of its current products and invests in the development
of new AngioJet System thrombectomy applications and related products.
Interest Income and Expense
Interest income decreased $107,000 in fiscal 2001 from fiscal 2000 due to
the use of cash to fund operations. Interest income increased $110,000 in fiscal
2000 from fiscal 1999 due to investment of the proceeds from the Company's $15
million private placement offering in March 2000 offset by the use of cash to
fund operations. The Company expects interest income to decrease in fiscal 2002
due to expected declining market interest rates.
Interest expense was $8,000, $9,000 and $381,000 for fiscal 2001, 2000 and
1999 respectively. The fiscal 2000 decrease over 1999 was due to the conversion
of the Company's 5% convertible subordinated debentures into common stock in
March 1999. The Company expects interest expense to stay at low levels in fiscal
2002 unless a line of credit through a bank is obtained. If a line of credit
were obtained, the amount of increase in interest expense will be dependent upon
how much was borrowed, the interest rate, and the length of time the borrowing
was outstanding.
SELECTED QUARTERLY FINANCIAL DATA
Fiscal Year Ended July 31, 2001
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Product sales $6,578,110 $6,947,017 $7,411,418 $9,064,002
Gross profit 3,463,064 3,993,346 4,864,771 5,943,113
Net income (loss) (2,371,960) (1,598,409) 28,726 637,232
=======================================================================
Basis and diluted
income (loss) per share $ (0.14) $ (0.10) $ - $ 0.04
=======================================================================
Fiscal Year Ended July 31, 2000
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Product sales $4,513,189 $5,188,291 $4,500,184 $6,350,040
Gross profit 2,384,794 2,577,469 2,304,933 3,144,709
Net loss (2,591,980) (2,349,832) (2,906,232) (2,742,337)
=======================================================================
Basis and diluted
loss per share $ (0.17) $ (0.16) $ (0.18) $ (0.16)
=======================================================================
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities totaled
approximately $9,516,000 at July 31, 2001 versus $12,971,000 at July 31, 2000.
The primary factors in the decrease was the cash used in funding operations of
$2,755,000 and capital expenditures of $1,334,000 which was partially offset by
cash received in connection with the issuance of stock and exercise of stock
options of $638,000.
During fiscal 2001, cash used in operating activities was $2,755,000, which
resulted primarily from the $3,304,000 net loss, an expense reimbursement from a
city government of $102,000, an increase in receivables of $1,328,000, and a
decrease in trade accounts payable of $595,000, partially offset by non-cash
charges, a decrease in inventories, and a increase in accrued liabilities
totaling $2,638,000. The expense reimbursement from a city government of
$102,000 relates to debt forgiven by the city government due the Company
achieving minimum headcount employment objectives. The $1,328,000 increase in
receivables was due to increase in revenue in fiscal 2001 as compared to fiscal
2000. The $595,000 decrease in trade accounts payable was due to timing of
year-end payables, especially for software and computer upgrades. The decrease
in inventories of $218,000 was due to the record sales, implementation of lean
manufacturing initiatives and the write down of certain raw material inventories
related to the LF140 catheter during the fourth quarter of fiscal 2001. Cash
provided by investing activities was $22,545,000 of proceeds from the maturity
of marketable securities, offset by purchase of marketable securities of
$13,628,000 and the purchase of property and equipment of $1,334,000. Net cash
provided by financing activities was $633,000, which resulted from the cash
received in connection with the issuance of stock and exercise of stock options
of $638,000.
During fiscal 2000, cash used in operating activities was $8.8 million,
which resulted primarily from the $10.6 million net loss and a $1.2 million
increase in inventory, partially offset by non-cash charges, a decrease in
receivables, and an increase in accounts payable totaling $3.0 million. The $1.2
million increase in inventories was due to the increase in the number of
evaluation drive units in the field as of July 31, 2000 as compared to July 31,
1999 and due to the expected increase in future AngioJet System revenue. The
$100,000 decrease in receivables was due to reduction in days sales outstanding
for U.S. AngioJet System receivables as of July 31, 2000 as compared to July 31,
1999. The $1.0 million increase in accounts payable was due to the purchasing of
software and computers toward the end of fiscal 2000. The capital expenditures
were paid in August 2000. Cash used in investing activities was $10.8 million,
which resulted from the purchase of marketable securities of $24.1 million and
the purchase of property and equipment of $1.9 million, partially offset by the
proceeds from the maturity of marketable securities of $15.2 million. Net cash
provided by financing activities was $14.5 million, which resulted from the net
proceeds of the $14 million private placement offering and the exercise of stock
options of approximately $500,000.
During fiscal 1999, cash used in operating activities was $11.9 million,
which resulted primarily from the $12.0 million net loss, a $1.9 million
increase in receivables and $366,000 decrease in accounts payable, partially
offset by depreciation, amortization, stock compensation and an increase in
accrued liabilities totaling $2.4 million. The $1.9 million increase in
receivables was due to the significant increase in revenue in fiscal 1999 as
compared to fiscal 1998. The $366,000 reduction in accounts payable was due to
the timing of when payables are paid. The $788,000 increase in accrued
liabilities was primarily due to the increase in accrued salaries, wages and
commissions. The increase in accrued salaries, wages and commissions was due to
the increase in personnel and in revenue in fiscal 1999 as compared to fiscal
1998. Cash used in investing activities was $700,000 which was used to purchase
property and equipment. Net cash provided by financing activities was $7.9
million, which resulted from the net proceeds of a $6.7 million private
placement offering, the exercise of stock warrants of $828,000 and the exercise
of stock options of $417,000. As of March 1999, all of the 5% convertible
subordinated debentures and related accrued interest totaling $12.3 million were
converted into approximately 1.7 million shares of the Company's common stock at
an average conversion price of $7.12 per share.
The Company expects that revenue from the AngioJet System, primarily in the
United States, will be in the range of $39 million to $44 million in fiscal
2002. Gross margin for fiscal 2002 is expected to be between 65% and 75% of
total sales. The Company expects selling, general and administrative expenses to
increase in fiscal 2002 due to anticipated growth in revenue. Research and
development expenditures are expected to increase from the fiscal 2001 level as
the Company completes development of projects and invests in development of new
AngioJet System thrombectomy applications and related products. The Company
expects diluted earnings per share for fiscal 2002 in the range of $0.18-0.23,
which is consistent with its previous guidance of basic earnings per share in
the range of $0.20-0.25. The quarterly revenue progression should build steadily
through the year, from a seasonal low in the first quarter, with the profile
being affected by the timing of new product introductions as well as the timing
of expenses related to marketing and clinical trials. In addition, the Company
expects that increasing working capital investments in trade receivables and
inventory will be required to support growing product sales. The Company expects
to achieve these growth objectives without the need for external equity funding
in fiscal 2002, although there can be no assurance that additional capital will
not be obtained during that time.
Change of Control Plan
On September 15, 1999, the Company's Board of Directors approved a Change
in Control Termination Pay Plan that provides, at the discretion of the Board,
salary and benefit continuation payments to executive officers and selected key
management and technical personnel in the event they are terminated within 24
months of a change in control. At this time, the Board of Directors has
committed to a three-year salary and benefit continuation for the Company's CEO
and two-year salary and benefit continuations for certain other executive
officers. In addition, the Company's other officers, key management and
technical personnel are entitled to salary and benefit continuation benefits
ranging in duration from six to 24 months. The Board of Directors has also
recognized the potential for additional payments upon a change in control
notwithstanding employment status following a change in control. These payments
are described as Cash Bonus payments that are strictly at the discretion of the
Board, are only to be awarded if the Company achieves "substantial growth" as
determined by the Board in its discretion, and are based on the value of the
Company at the time of the Change in Control and the Board's assessment of
Company performance and growth. Cash awards are limited to senior executive
officers and other key management personnel. The amount of the pool available
for such payments is limited, in aggregate, to between one and four percent of
the value of the Company at the time of the Change in Control, as measured based
on revenue.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and certain other sections of this Form 10-K, contain certain
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements relate to future events and financial
performance, including future revenue, expense and earnings levels, and
statements relating to the Company's ability to increase utilization rates of
the AngioJet(R) System at existing customer accounts by increasing disposable
sales, the ability to maintain manufacturing yields at acceptable levels,
customer responses to the Company's marketing strategies, the ability to
maintain and grow sales by effectively managing a U.S. sales force, the ability
to achieve growing acceptance of the AngioJet System by selling more drive
units, the ability to develop new products and bring them to market in a timely
manner, the ability to protect its intellectual property, the ability to raise
additional capital on acceptable terms, the ability to manage clinical and
marketing trials which result in greater customer acceptance of the products and
the ability to balance limited resources against an aggressive growth program.
These statements involve risks and uncertainties, and consequently, actual
results may vary materially from those projected in the forward-looking
statements. It is not possible to foresee or identify all factors affecting the
Company's future results and investors therefore should not consider any list of
such factors to be an exhaustive statement of all risks and uncertainties. A
partial list of factors that may cause actual results to differ from the
Company's forward-looking statements would include trends toward managed health
care, health care cost containment, the trend of consolidation in the medical
device industry, difficulties and uncertainties associated with the lengthy and
costly new product development and regulatory clearance processes, changes in
government laws and regulations and the enforcement thereof that may be adverse
to the Company, the development of new products and compounds by competitors
that may make our products obsolete, sudden restrictions in supply of key
materials, and economic factors over which the Company has no control, including
changes in inflation and interest rates. The Company competes against many
larger, better capitalized competitors, both in the medical device and
pharmaceutical industries. These and other risk factors set forth in the risk
factors included in Exhibit 99 to the Company's Form 10-K for the year ended
July 31, 2001 are filed with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
The Company invests its excess cash in money market mutual funds and short
term commercial paper. The market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of July 2001, the amount of currency held in foreign
exchange was approximately $1,000 USD. The market risk on the Company's foreign
subsidiary operations is minimal.
At July 31, 2001, all of the Company's outstanding long-term debt carries
interest at a fixed rate. There is no material market risk relating to the
Company's long-term debt.
Item 8. Financial Statements and Supplementary Data:
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Possis Medical, Inc.:
We have audited the accompanying consolidated balance sheets of Possis
Medical, Inc. and subsidiaries (the Company) as of July 31, 2001 and 2000 and
the related consolidated statements of operations, cash flows, and changes in
shareholders' equity for each of the three years in the period ended July 31,
2001. Our audits also included the financial statement schedule listed in the
Index at Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Possis Medical, Inc. and
subsidiaries as of July 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
2001, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
August 31, 2001
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2001 July 31, 2000
ASSETS
CURRENT ASSETS:..............................................
Cash and cash equivalents (Note 1)...................... $ 9,515,751 $ 4,053,429
Marketable securities................................... -- 8,917,251
Trade receivables (less allowance for doubtful
accounts and returns of $659,000 and
$672,000, respectively)............................ 4,268,114 2,940,497
Inventories (Note 1):................................... 4,216,629 5,100,338
Prepaid expenses and other assets....................... 342,995 278,491
Total current assets.......................... 18,343,489 21,290,006
PROPERTY AND EQUIPMENT, net (Notes 1 and 2).................. 3,665,751 3,713,940
TOTAL ASSETS................................................. $22,009,240 $25,003,946
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:.........................................
Trade accounts payable.................................. $ 1,321,485 $ 1,916,063
Accrued salaries, wages, and commissions................ 1,532,912 1,603,061
Current portion of long-term debt (Note 2).............. 94,310 179,949
Other liabilities....................................... 989,556 802,989
Total current liabilities...................... 3,938,263 4,502,062
LONG-TERM DEBT (Notes 1 and 2)............................... -- 7,279
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 4):
Common stock-authorized, 100,000,000 shares
of $0.40 par value each; issued and outstanding,
16,822,023 and 16,700,942 shares, respectively..... 6,728,809 6,680,377
Additional paid-in capital.............................. 75,411,387 74,581,145
Unearned compensation................................... (22,700) (24,809)
Retained deficit........................................ (64,046,519) (60,742,108)
Total shareholders' equity..................... 18,070,977 20,494,605
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $22,009,240 $25,003,946
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
2001 2000 1999
Products sales (Note 8)........................................... $30,000,547 $20,551,704 $13,210,479
Cost of sales and other expenses:
Cost of medical products ...................................... 11,736,253 10,139,799 7,970,865
Selling, general and administrative............................ 17,218,924 16,052,830 11,611,113
Research and development....................................... 4,820,037 5,525,431 5,743,866
Interest ..................................................... 8,240 9,377 381,179
Total cost of sales and other expenses................... 33,783,454 31,727,437 25,707,023
Operating loss.................................................... (3,782,907) (11,175,733) (12,496,544)
Interest income................................................... 478,496 585,352 475,113
Net loss ......................................................... $(3,304,411) $(10,590,381) $(12,021,431)
Weighted assumed number of common shares
outstanding - basic and diluted.............................. 16,739,277 15,697,135 13,355,822
Net loss per common share - basic and diluted .................... $(.20) $(.67) $(.90)
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
2001 2000 1999
OPERATING ACTIVITIES:
Net loss .............................................................. $(3,304,411) $(10,590,381) $(12,021,431)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................................................... 1,950,533 1,195,848 1,035,105
Stock compensation expense............................................. 196,199 271,534 341,462
Expense reimbursement from city government............................. (101,938) -- --
Writedown due to impairment of assets.................................. 87,582 338,922 --
Loss on disposal of assets............................................. 8,564 6,345 4,312
Amortization........................................................... -- 72,000 204,077
(Increase) decrease in trade receivables............................... (1,327,617) 122,814 (1,915,748)
Decrease (increase) in inventories..................................... 217,959 (1,230,513) (58,002)
(Increase) decrease in other current assets............................ (64,504) (30,584) 65,251
(Decrease) increase in trade accounts payable.......................... (594,578) 1,036,890 (366,379)
Increase (decrease) in accrued and other current liabilities........... 177,499 (10,489) 787,795
Net cash used in operating activities............................... (2,754,712) (8,817,614) (11,923,558)
INVESTING ACTIVITIES:
Proceeds from sale/maturity of marketable securities................... 22,545,000 15,205,000 --
Purchase of marketable securities...................................... (13,627,749) (24,122,251) --
Additions to property and equipment.................................... (1,334,142) (1,851,510) (693,398)
Proceeds from sale of fixed assets..................................... 1,402 13,192 16,656
Net cash provided by (used in) investing activities.................... 7,584,511 (10,755,569) (676,742)
FINANCING ACTIVITIES:
Proceeds from issuance of stock and exercise
of options and warrants.............................................. 637,941 14,480,598 7,926,761
Proceeds from notes payable and long-term debt......................... -- -- 21,074
Repayment of long-term debt............................................ (5,418) (4,990) (14,069)
Deferred debt issue costs.............................................. -- -- (24,255)
Net cash provided by financing activities............................ 632,523 14,475,608 7,909,511
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 5,462,322 (5,097,575) (4,690,789)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 4,053,429 9,151,004 13,841,793
CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $9,515,751 $ 4,053,429 $ 9,151,004
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid............................................................ $ 1,677 $ 1,235 $ 1,643
Accrued payroll taxes related to restricted stock........................ 46,643 18,080 83,230
Issuance of restricted stock............................................. 23,900 59,000 20,250
Inventory transferred to fixed assets.................................... -- 23,280 32,201
Cancellation of restricted stock......................................... -- 1,977 40,381
Conversion of subordinated debentures and accrued--
interest into common stock............................................. -- -- 12,346,174
Deferred debt issue costs and original issue discount
netted against conversion of subordinated debentures................... -- -- 1,371,122
Issuance of stock to settle litigation................................... -- -- 225,000
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Unearned
Common Stock Additional Stock
Number of Paid-in Compen- Retained
Shares Amount Capital sation Deficit Total
BALANCE AT JULY 31, 1998........... 12,218,622 $4,887,449 $42,476,257 $(489,060) $(38,130,296) $ 8,744,350
Employee stock purchase plan... 19,881 7,952 106,181 -- -- 114,133
Stock options issued to
directors and physicians
(Note 4)..................... -- -- 54,349 -- -- 54,349
Stock options exercised........ 66,200 26,480 276,687 -- -- 303,167
Stock grants................... 2,500 1,000 11,250 (20,250) -- (8,000)
Unearned stock compensation
amortization................. -- -- -- 327,462 -- 327,462
Litigation settlement.......... 22,785 9,114 215,886 -- -- 225,000
Stock retired.................. (12,814) (5,126) 55,976 40,381 -- 91,231
Warrants exercised............. 120,000 48,000 780,000 -- -- 828,000
Debentures converted........... 1,733,334 693,334 10,281,718 -- -- 10,975,052
Private placement
stock offering.............. 827,852 331,141 6,350,319 -- -- 6,681,460
Net loss....................... -- -- -- -- (12,021,431) (12,021,431)
BALANCE AT JULY 31, 1999........... 14,998,360 5,999,344 60,608,623 (141,467) (50,151,727) 16,314,773
Employee stock purchase plan... 51,999 20,800 270,180 -- -- 290,980
Stock options issued to
directors and physicians
(Note 4) -- -- 97,853 -- -- 97,853
Stock options exercised 58,682 23,473 147,634 -- -- 171,107
Stock grants................... 5,000 2,000 37,000 (59,000) -- (20,000)
Unearned stock compensation
amortization................. -- -- -- 173,681 -- 173,681
Stock retired.................. (7,148) (2,860) 38,963 1,977 -- 38,080
Private placement
stock offering.............. 1,594,049 637,620 13,380,892 -- -- 14,018,512
Net loss....................... -- -- -- -- (10,590,381) (10,590,381)
BALANCE AT JULY 31, 2000........... 16,700,942 6,680,377 74,581,145 (24,809) (60,742,108) 20,494,605
Employee stock purchase plan... 52,493 20,997 160,128 -- -- 181,125
Stock options issued to
directors and physicians
(Note 4)..................... -- -- 170,190 -- -- 170,190
Stock options exercised........ 72,127 28,851 427,965 -- -- 456,816
Stock grants................... 5,000 2,000 13,500 (23,900) -- (8,400)
Unearned stock compensation
amortization................. -- -- -- 26,009 -- 26,009
Stock retired.................. (8,539) (3,416) 58,459 -- -- 55,043
Net loss....................... -- -- -- -- (3,304,411) (3,304,411)
BALANCE AT JULY 31, 2001........... 16,822,023 $6,728,809 $75,411,387 $(22,700) $(64,046,519) $18,070,977
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Possis Medical, Inc. is a developer, manufacturer and
marketer of medical devices, operating in one business segment. The Company was
incorporated in 1956 and has operated several businesses over the last 45 years.
In 1990 the Company decided to focus on medical products and changed its name to
Possis Medical, Inc. in 1993. In January 1995, the Company established a 100%
owned subsidiary, Possis Medical Europe B.V., in the Netherlands to support
international product distribution. Possis Medical received AngioJet Rheolytic
Thrombectomy System U.S. marketing approval for use in arterio-venous (AV)
access hemodialysis grafts in December 1996, for use in native coronary arteries
and coronary bypass grafts in March 1999, and for use in leg arteries in April
2000.
The Company's thrombectomy products utilize new technology and the
production processes, and production equipment used to manufacture them are
unique and have been designed and constructed by Company employees. In addition,
the medical device industry is subject to the laws and oversight of the United
States Food and Drug Administration as well as non-U.S. regulatory bodies in
countries where the Company does business.
Basis of Consolidation The consolidated financial statements include the
accounts of Possis Medical, Inc. (the Company) and its wholly-owned
subsidiaries, Possis Holdings, Inc., JEI Liquidation, Inc. (Jet Edge) and Possis
Medical Europe B.V., after elimination of intercompany accounts and
transactions.
Use of Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
Cash Equivalents The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
Marketable Securities During 2001 and 2000 the Company invested in
commercial paper with original maturities of less than six months. These
instruments are classified as held to maturity and carried at amortized cost,
which approximates fair value.
Inventories Inventories are stated at the lower of cost (on the first-in,
first-out basis) or market. Inventory balances at July 31 were as follows:
2001 2000
Finished goods $1,935,590 $2,107,677
Work-in-process 1,432,536 1,551,524
Raw materials 848,503 1,441,137
$4,216,629 $5,100,338
Property and Equipment Property is carried at cost and depreciated using
the straight-line method over the estimated useful lives of the various assets.
Property and equipment balances and corresponding lives at July 31 were as
follows:
2001 2000 Life
Leasehold improvements $1,454,833 $1,363,902 10 years
Equipment 6,814,596 5,688,540 3-10 years
Assets in construction 255,502 305,474 N/A
8,524,931 7,357,916
Less accumulated depreciation 4,859,180 3,643,976
Property and equipment - net $3,665,751 $3,713,940
Deferred Debt Issue Costs Deferred debt issue costs were being amortized on
a straight-line basis over six years, based on the term of the 5% convertible
subordinated debentures due 2004. In fiscal 1999, all of the 5% convertible
subordinated debentures were converted into the Company's common stock. All
unamortized deferred debt issue costs were offset against equity.
Goodwill Goodwill was being amortized on a straight-line basis over 13-1/2
years, based on the remaining life of patent rights related to the Perma-Flow
Graft acquired in 1988. As of July 31, 2000, the value of goodwill was
determined to be impaired, and the remaining balance of $125,922 was written off
as of July 31, 2000.
Impairment of Long-Lived Assets Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. An impairment loss
is recognized, based on the difference between the carrying value and the
discounted cash flows of an asset, when the estimated future undiscounted cash
flows from the asset are less than the carrying value of the asset. In fiscal
2001, the Company wrote down $87,582 of a fixed asset (included in selling,
general and administrative expense). The value of this fixed asset was
determined to be impaired due to the unlikely continued use of this fixed asset.
The Company wrote the asset down to net realizable value. In fiscal 2000, the
Company wrote down $213,000 of fixed assets (included in cost of goods sold) and
$125,922 of goodwill (included in selling, general and administrative expense)
related to the Company's vascular graft business. The value of these vascular
assets was determined to be impaired due to the reduction of sales by the
Company's vascular graft distributor.
Income Taxes The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on an asset and
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss or tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the variances between the amounts of assets and
liabilities recorded for income tax and financial reporting purposes. Deferred
tax assets are reduced by a valuation allowance to reflect the possibility that
some portion or all of the deferred tax assets may not be realized.
Original Issue Discount Original issue discount was being amortized on a
straight-line basis over six years, based on the term of the 5% convertible
subordinated debentures due 2004. The original amount of $600,000 was the value
associated with the detachable stock warrants issued in conjunction with the
convertible subordinated debentures. In fiscal 1999, all of the 5% convertible
subordinated debentures were converted into the Company's common stock. All
unamortized original issue discount was offset against equity.
Revenue Recognition Revenues associated with products that are already
maintained at customer locations are recognized when the Company receives a
valid purchase order from the customer. At this time ownership and risk of loss
is transferred to the customer. Revenues associated with products that are not
maintained at the customer locations are recognized when a valid purchase order
is received and the products are received at the customer's location. At this
time title and risk of loss is transferred to the customer. Provisions for
returns are provided for in the same period the related revenues are recorded.
Shipping and Handling For fiscal 2001, the Company adopted Emerging Issues
Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Costs." EITF
00-10 requires all amounts billed to customers in a sales transaction related to
shipping and handling to be classified as product sales. The Company records
costs related to shipping and handling in cost of medical products. Prior period
product sales and cost of medical products have been adjusted for this change,
which had no effect on previously reported net losses.
Fair Value of Financial Instruments Marketable securities are carried at
fair value. The carrying value of all other financial instruments, except
long-term debt, approximates fair value due to the short-term nature of the
instrument. The carrying value of long-term debt approximates fair value due to
the fixed interest rates being consistent with current market rates of interest.
Loss Per Share Loss per share for 2001, 2000 and 1999 is computed by
dividing the net loss by the weighted average number of common shares
outstanding. Warrants and options representing 3,826,089, 2,549,264 and
1,882,288 shares of common stock at July 31, 2001, 2000 and 1999, respectively,
have been excluded from the computations because their effect is antidilutive.
Reclassifications Certain reclassifications have been made to the fiscal
2000 and 1999 financial statements to conform to the presentation used in the
fiscal 2001 financial statements. The reclassifications had no effect on
shareholders' equity or net losses as previously reported.
Derivative Instruments and Hedging Activities In fiscal 2000, the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that all derivatives, including those embedded in other contracts,
be recognized as either assets or liabilities and that those financial
instruments be measured at fair value. The accounting for changes in the fair
value of derivatives depends on their intended use and designation. Management
has reviewed the requirements of SFAS No. 133 and has determined that they have
no free-standing or embedded derivatives. All contracts that contain provisions
meeting the definition of a derivative also meet the requirements of, and have
been designated as, normal purchases and sales. The Company's policy is to not
use free-standing derivatives and to not enter into contracts with terms that
cannot be designated as normal purchases or sales.
2. LONG-TERM DEBT
Long-term debt at July 31, 2001 and 2000 is as follows:
2001 2000
Note payable, interest at 4.5%, interest and principal due June
1999 and August 2001, collateralized by the Company's equipment................ $ 87,500 $ 175,000
Notes payable - other ............................................................. 6,810 12,228
94,310 187,228
Less current maturities............................................................ 94,310 179,949
$ -- $ 7,279
In fiscal 2001, the Company's note payable and accrued interest to a city
government in the amount of $101,938 was forgiven. The note payable and accrued
interest were forgiven due to achieving minimum headcount employment objectives
with the city government.
In August 2002, the Company's note payable and accrued interest to a city
government in the amount of $83,538 was forgiven. The note payable and accrued
interest were forgiven due to maintaining minimum headcount employment
objectives with the city government.
3. INCOME TAXES
At July 31, 2001, the Company had net operating loss carryforwards of
approximately $58,510,000 for federal tax purposes, which expire in 2003 through
2021, and $16,785,000 for Minnesota tax purposes, which expire in 2003 through
2016.
In addition, at July 31, 2001, the Company has approximately $2,450,000 and
$663,000 in federal and state tax credits, respectively, substantially all of
which are research and development tax credits, which expire from 2002 through
2016, and a $65,182 AMT credit which does not expire.
Deferred tax assets and liabilities as of July 31, 2001 and 2000 are
described in the table below. The Company has reduced its net deferred tax
assets to zero through a valuation allowance due to the uncertainty of realizing
such assets:
2001 2000
Current assets (liabilities):
Allowance for doubtful accounts and returns......................... $ 337,000 $ 262,000
Inventory........................................................... 220,000 365,000
Employee compensation and benefits.................................. 119,000 286,000
Other ............................................................. 82,000 35,000
758,000 948,000
Valuation allowance................................................. (758,000) (948,000)
Net ............................................................. $ -- $ --
Long-term assets:
Net operating losses................................................ $ 21,133,000 $ 19,917,000
Amortization of patents............................................. 502,000 407,000
Tax credits......................................................... 3,048,000 2,674,000
Depreciation........................................................ (132,000) ( 208,000)
24,551,000 22,790,000
Valuation allowance................................................. (24,551,000) (22,790,000)
Net ............................................................. $ -- $ --
The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 2001, 2000 and 1999 as follows:
2001 2000 1999
Tax benefit on loss from
continuing operations computed at
statutory rate of 34%................................ $(1,123,000) $(3,601,000) $(4,087,000)
Decrease in tax benefit due to non-recognizable
benefits of net operating loss
carry-forwards and others............................ 1,123,000 3,601,000 4,087,000
Total income tax expense................................ $ -- $ -- $ --
4. COMMON STOCK
Private Placement Offerings In March 2000, in conjunction with a private
placement offering, the Company issued 1,594,049 shares of its common stock to
various investors and received $15,000,000 in gross proceeds. The Company
incurred issuance costs of $981,488. In addition, the Company issued 318,810
warrants to purchase shares of its common stock. The exercise price is $12.67
per share. These warrants expire in March 2004.
In May and June 1999, in conjunction with a private placement offering, the
Company issued 827,852 shares of its common stock to various investors and
received $7,000,000 in gross proceeds. The Company incurred issuance costs of
$300,000. In addition, the Company issued 124,178 warrants to purchase shares of
its common stock. The exercise price is $11.43 per share for 106,509 warrants
and $11.69 per share for 17,669 warrants. These warrants expire in May and June
2003.
During the year ended July 31, 1999, all of the 5% convertible subordinated
debentures and related accrued interest totaling $12,346,174 were converted into
1,733,334 shares of the Company's common stock at an average conversion price of
$7.12 per share.
Stock Options In December 1999, the Company established the 1999 Stock
Compensation Plan (the 1999 Plan), which replaced the 1992 Stock Compensation
Plan (the 1992 Plan). The 1992 Plan replaced the 1985 and 1983 plans. Although
the 1992, 1985 and 1983 plans remain in effect for options outstanding, no new
options may be granted under these plans.
The 1999 Plan authorizes awards of the following type of equity-based
compensation: incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, deferred stock, annual grants of stock
options to directors, stock options to directors in lieu of compensation for
services rendered as directors, and other stock-based awards valued in whole or
in part by reference to stock of the Company. No incentive stock options may be
granted on or after December 16, 2009, nor shall such options remain valid
beyond ten years following the date of grant.
The total number of shares of stock reserved and available for distribution
under the 1999 Plan originally was 2,000,000 shares, a maximum of 2,000,000 of
which may be issued as incentive stock options. The total number of shares of
stock reserved and available for distribution under the 1999 Plan are being
increased annually beginning on August 1, 2000 by 2% of the number of shares of
the Company's common stock outstanding on July 31 of the prior fiscal year.
At July 31, 2001, there were 3,246,061 shares reserved for outstanding
options under all plans and 491,819 shares available for granting of options
under the 1999 Plan.
In fiscal 2001, 2000 and 1999, the Company granted 40,289, 13,609 and
11,477 compensatory options, respectively, to its outside directors in lieu of
cash payments for directors fees. Fiscal 2001 and 2000 options were granted
under the 1999 Plan. Fiscal 1999 options were granted under the 1992 Plan. These
options vest six months after date of grant and expire not more than ten years
from date of grant. The expense associated with compensatory options to outside
directors were approximately $89,000, $55,000, and $40,000 for the years ended
July 31, 2001, 2000, and 1999, respectively.
In fiscal 2001, 2000 and 1999, the Company granted 13,000, 5,000 and 6,000
compensatory options, respectively, to various physicians in lieu of cash
payments for services. The Company's policy is to treat these options under
variable plan accounting in accordance with SFAS No. 123 and related Emergency
Issues Task Force Issues. These options were granted under the 1999 and 1992
Plans and vest ratably over a six month to a four year period and expire not
more than ten years from date of grant. The expense associated with non-employee
options was approximately $81,000, $43,000 and $14,000 for the years ended July
31, 2001, 2000 and 1999, respectively.
A summary of changes in outstanding options for each of the three years
ended July 31, 2001 follows:
2001 2000 1999
Shares under option at
beginning of year.............................. 1,969,236 1,621,070 1,443,571
Options granted................................... 1,800,865 586,109 460,877
Options exercised................................. (72,127) (58,682) (66,200)
Options canceled.................................. (451,913) (179,261) (217,178)
Shares under option at end of year................ 3,246,061 1,969,236 1,621,070
Shares exercisable at end of year................. 1,009,283 1,011,298 859,866
Stock option weighted average exercise prices during fiscal 2001, 2000 and
1999 are summarized below:
2001 2000 1999
Outstanding at beginning of year..................... $10.43 $10.89 $12.10
Granted.............................................. 5.19 8.97 7.79
Exercised............................................ 6.33 3.53 5.72
Canceled............................................. 10.27 12.56 13.98
Outstanding at end of year........................... 7.54 10.43 10.89
The following table summarizes information concerning options outstanding
and exercisable options as of July 31, 2001:
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Shares Contractual Life Average Shares Average
Price Outstanding in Years Exercise Price Exercisable Exercise Price
$ 1 - 6 1,293,816 9.04 $ 4.27 259,013 $ 4.84
6 - 12 1,433,983 7.69 7.73 289,644 9.35
12 - 17 383,962 5.68 14.13 326,341 14.15
17 - 21 134,300 5.15 18.18 134,285 18.18
In fiscal 1999, the Company granted 2,500 shares of restricted stock to
employees under the terms of the 1992 Plan, which vest 1,250 shares each year in
fiscal 2000 and 2001. Approximately $8,000 was accrued to pay the estimated
withholding taxes on those shares as management believes that the employees will
elect to receive fewer shares in lieu of paying the withholding taxes. In case
of termination of the employees, unvested shares are forfeited. Unearned
compensation of $20,250 was recorded at the date of grant and is being
recognized over the vesting period.
In fiscal 2000, the Company granted 3,000 shares of restricted stock to an
employee under the terms of the 1992 Plan, which vest 1,500 shares each year in
fiscal 2000 and 2001 and 2,000 shares of restricted stock to an employee under
the terms of the 1999 Plan which vest in fiscal 2001. Approximately $20,000 was
accrued to pay the estimated withholding taxes on those shares as management
believes that the employees will elect to receive fewer shares in lieu of paying
the withholding taxes. In case of termination of the employees, unvested shares
are forfeited. Unearned compensation of $59,000 was recorded at the date of
grant and is being recognized over the vesting period.
In fiscal 2001, the Company granted 5,000 shares of restricted stock to an
employee under the terms of the 1999 Plan, which vest 2,500 shares each year in
fiscal years 2002 and 2003. The fair market value of the restricted shares was
approximately $61,000 as of July 31, 2001. Approximately $8,000 was accrued to
pay the estimated withholding taxes on those shares as management believes that
the employee will elect to receive fewer shares in lieu of paying the
withholding taxes. In case of termination of the employee, unvested shares are
forfeited. Unearned compensation of approximately $24,000 was recorded at the
date of grant and is being recognized over the vesting period.
In fiscal 2001, 2000 and 1999, total compensation expense of $26,009,
$173,681 and $327,462, respectively, were recognized on these restricted stock
grants.
Effective August 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected
to continue following the guidance of APB No. 25 for measurement and recognition
of stock-based transactions with employees. No compensation cost has been
recognized for stock options issued under the 1999 and 1992 Plans because the
exercise price for all options granted was at least equal to the fair value of
the common stock at the date of grant except as noted previously in this note.
If compensation cost for the Company's stock option and employee purchase plans
had been determined based on the fair value at the grant dates for grants during
fiscal 2001, 2000 and 1999, consistent with the method provided in SFAS No. 123,
the Company's net loss and loss per share would have been as follows:
2001 2000 1999
Net loss:
As reported.................................. $(3,304,411) $(10,590,381) $(12,021,431)
Pro forma.................................... (7,184,411) (13,283,866) (14,312,062)
Loss per share - basic and diluted:
As reported.................................. $ (.20) $ (.67) $ (.90)
Pro forma.................................... (.43) (.85) (1.07)
The fair value of options granted under the various option plans during
fiscal 2001, 2000, and 1999 was estimated on the date of grant using the
Black-Sholes option-pricing model with the following weighted average
assumptions and results:
2001 2000 1999
Dividend yield....................................... None None None
Expected volatility.................................. 82% 85% 78%
Risk-free interest rate.............................. 3% 6.0% 5.5%
Expected life of option.............................. 120 mo. 120 mo. 120 mo.
Fair value of options on grant date.................. $8,647,857 $4,362,357 $2,964,817
Stock Warrants Stock purchase warrants held by unrelated parties
representing the right to purchase 26,400 shares of the Company's common stock
at $8.52 a share were outstanding as of July 31, 2001. These warrants do not
have an expiration date and must be exercised if the market value of the
Company's common stock exceeds $22.73 per share for any sixty consecutive
calendar days.
On September 15, 1994, warrants to purchase 120,000 shares of common stock
at $6.90 per share were issued to John G. Kinnard & Company in conjunction with
the Company's September 1994 public stock offering. In November 1998, these
warrants were exercised.
In July 1998, the Company issued to various investors 110,640 stock
purchase warrants in conjunction with a private placement of convertible
debentures. These warrants expire on July 15, 2002 and are exercisable into
common stock at $15.58 per share. As of July 31, 2001, all such warrants were
outstanding and unexercised.
In May and June 1999, the Company issued 106,509 and 17,669 warrants,
respectively, to various investors in conjunction with the Company's private
placement offering. These warrants expire in May and June 2003 and are
exercisable into common stock at $11.43 and $11.69, respectively. As of July 31,
2001, all such warrants were outstanding and unexercised.
In March 2000, the Company issued 318,810 warrants to various investors in
conjunction with the Company's private placement offering. These warrants expire
in March 2004 and are exercisable into common stock at $12.67. As of July 31,
2001, all such warrants were outstanding and unexercised.
Employee Stock Purchase Plan The Employee Stock Purchase Plan, effective
January 1, 1991, enables eligible employees, through payroll deduction, to
purchase the Company's common stock at the end of each calendar year. The
purchase price is the lower of 85% of the fair market value of the stock on the
first or last day of the calendar year. The Company issued 52,493 shares in
fiscal 2001, 51,999 shares in fiscal 2000 and 19,881 shares in fiscal 1999 under
this Plan.
5. 401 K PLAN
The Company has an employees' savings and profit sharing plan for all
qualified employees who have completed six months of service. Company
contributions are made at the discretion of the Board of Directors subject to
the maximum amount allowed under the Internal Revenue Code. Contributions for
the years ended July 31, 2001, 2000 and 1999 were $250,179, $260,482 and
$208,563, respectively.
6. RELATED PARTY TRANSACTIONS
A Director of the Company at times performs outside legal services for the
Company. During fiscal 2001, 2000 and 1999 the amount of these services were
approximately $74,000, $1,000 and $9,000, respectively. A Director of the
Company is a Principal of an investment banking firm that performed services for
the Company and which received fees of $925,000 during fiscal year 2000 in
connection with a private placement financing by the Company.
7. COMMITMENTS AND CONTINGENCIES
The Company's medical products operation is conducted from a leased
facility under an operating lease which expires in 2006. The lease can be
canceled by either party with notice and payment of a termination fee.
The Company is also leasing a sales office under an operating lease that
expires in 2002. The future annual rentals on this operating lease are
approximately $14,000 per year through 2002.
Total rental expense charged to operations was $257,574, $259,969 and
$242,824 for the years ended July 31, 2001, 2000, and 1999, respectively.
Future minimum payments under the non-cancelable operating leases at July
31, 2001 were:
Year Ended
July 31 Amount
2002 $ 256,000
2003 242,000
2004 242,000
2005 242,000
2006 242,000
Total minimum lease payments $1,224,000
8. SEGMENT AND GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company's operations are in one business segment, the design,
manufacture and distribution of cardiovascular and vascular medical devices. The
Company evaluates revenue performance based on the worldwide revenues of each
major product line and profitability based on an enterprise-wide basis due to
shared infrastructures to make operating and strategic decisions.
Total revenues from sales in the United States and outside the United
States for each of the three years ended July 31, 2001, 2000 and 1999 are as
follows:
2001 2000 1999
United States................ $29,628,777 $20,158,934 $12,719,300
Outside the United States.... 371,770 392,770 491,179
Total revenues............... $30,000,547 $20,551,704 $13,210,479
In fiscal 2001, 2000 and 1999 there were no individual customers with sales
exceeding 10% of total revenues.
9. PRODUCT SUPPLY AND DISTRIBUTION AGREEMENTS
In December 1998, the Company entered into an exclusive worldwide supply
and distribution agreement for its Perma-Seal Dialysis Access Graft. The
distributor defaulted under the agreement by failing to comply with
contractually obligated levels of product purchases and with payment schedules.
In November 2000, the distributor indicated its desire to terminate the
distribution agreement and return unsold product. The Company has settled all
outstanding litigation with the Perma-Seal distributor, and has terminated the
distribution relationship. The settlement had no impact on the financial
statements.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure:
During fiscal 2000 and 2001, there were no changes in or disagreements with
the Company's independent certified public accountants on accounting procedures
or accounting and financial disclosures.
PART III
Item 10. Directors and Executive Officers of the Registrant:
Information under the heading "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement is
incorporated herein by reference. The information regarding executive officers
is included in Part I of this report under the caption "Executive Officers of
the Registrant."
Item 11. Executive Compensation:
Information regarding compensation of directors and officers for the fiscal
year ended July 31, 2001 is in the Proxy Statement under the heading "Election
of Directors" and "Executive Compensation" and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
The security ownership of certain beneficial owners and management is
contained in the Proxy Statement under the heading "Common Stock Ownership" and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions:
Information regarding related party transactions is contained under the
heading "Certain Relationships and Related Transactions" in the Proxy Statement
and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) 1. Financial Statements
The following financial statements of the Company, accompanied by an
Independent Auditors' Report, are contained in Part II, Item 8:
Consolidated Balance Sheets, July 31, 2001 and 2000
Consolidated Statements of Operations for each of the three years in the
period ended July 31, 2001
Consolidated Statements of Cash Flows for each of the three years in the
period ended July 31, 2001.
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended July 31, 2001.
Notes to Consolidated Financial Statements
2. Schedules
The following financial statement schedules are submitted herewith:
SCHEDULE II - Valuation Accounts
Other schedules are omitted because they are not required or are not
applicable or because the required information is included in the financial
statements listed above.
3. Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated on the following three pages.
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as amended
July 31, 1994 and restated to date
3.2 10-K Fiscal year ended Bylaws as amended and restated
July 31, 1999 to date
4.1 8-A December 13, Rights agreement, dated December 12,
1996 1996, between the Company and
Norwest Bank Minnesota N.A., as
rights agent
4.2 8-K July 24, 1998 Form of Redeemable Warrant to
purchasers of the Convertible
Debt dated July 15, 1998
4.3 10-K November 23, Debenture Agreement with St. Paul
1966 Fire and Marine Company and
Western Life Insurance Company
and form of debenture rates and warrants
4.4 8-K May 12, 1999 Form of Warrant to investors of the
Purchase Agreement dated May 11, 1999
4.5 8-K March 14, 2000 Private placement Purchase Agreement
dated March 6, 2000 between the Company
and the investors listed therein.
4.6 8-K March 14, 2000 Registration Rights Agreement between the
Company and the investors in the Purchase
Agreement dated March 6, 2000.
4.7 8-K March 14, 2000 Form of Warrant to investors of the
Purchase Agreement dated March 6, 2000
10.1 S-2 Amendment No.1 License agreement with Imperial
August 9, 1994 Chemical Industries Plc., dated
April 15, 1991
10.2 S-2 Amendment No. 1 License agreement with the University
August 9, 1994 of Liverpool, dated May 10, 1990
10.3 S-1 June 30, 1988 Form of indemnification agreement with
officers and directors of Registrant
* 10.4 S-8 February 7, 1990 1983 Incentive Stock Option Plan as
amended to date
Exhibit Form Date Filed Description
* 10.5 S-1 June 30, 1988 1985 Nonqualified Stock Option
Plan as amended to date
* 10.6 10-K Fiscal year ended Form of incentive stock option
July 31, 1989 agreement for officers
* 10.7 10-K Fiscal year ended Form of stock option agreement for
July 31, 1989 directors
* 10.8 S-8 June 16, 1998 1992 Stock Compensation Plan
* 10.9 10-K Fiscal year ended Form of restricted stock agreement
July 31, 1993 for officers (1992 Plan)
* 10.10 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for officers (1992 Plan)
* 10.11 10-K Fiscal year ended Form of incentive stock option
July 31, 1993 agreement for officers (1992 Plan)
* 10.12 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1992 directors' fees
(1992 Plan)
10.13 10-Q Quarter ended Lease agreement for corporate
January 31, 1996 headquarters and manufacturing
facility dated December 15, 1995
* 10.14 10-K Fiscal Year ended Change in Control Termination
July 31, 2001 Pay Plan - Amended effective April
3, 2001
* 10.15 10-K Fiscal year ended 1999 Stock Compensation Plan
July 31, 1999
21 10-K Fiscal year ended Subsidiaries of registrant
July 31, 1995
23 10-K Fiscal year ended Consent of independent certified
July 31, 2001 public accountants
99 10-K Fiscal year ended Investment risk factors
July 31, 2001
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
July 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POSSIS MEDICAL, INC.
by: /s/ Eapen Chacko
Eapen Chacko
Vice President of Finance and
Chief Financial Officer
Dated: October 26, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ Donald C. Wegmiller Chairman of the Board October 26, 2001
Donald C. Wegmiller
/s/ Robert G. Dutcher Director, President and October 26, 2001
Robert G. Dutcher Chief Executive Officer
/s/ Eapen Chacko Vice President of Finance October 26, 2001
Eapen Chacko Chief Financial Officer
/s/ Dean Belbas Director October 26, 2001
Dean Belbas
/s/ Seymour J. Mansfield Director October 26, 2001
Seymour J. Mansfield
/s/ Whitney A. McFarlin Director October 26, 2001
Whitney A. McFarlin
/s/ William C. Mattison, Jr. Director October 26, 2001
William C. Mattison, Jr.
/s/ Rodney A. Young Director October 26, 2001
Rodney A. Young
/s/ Mary K. Brainerd Director October 26, 2001
Mary K. Brainerd
SCHEDULE II
POSSIS MEDICAL, INC.
VALUATION ACCOUNTS
YEARS ENDED JULY 31, 2001, 2000 AND 1999
Column A Column B Column C Column D Column E
Additions
Balance at Charged to
Beginning Costs and Deductions Balance at
Description of Year Expenses Write-offs End of Year
Allowance for doubtful accounts
and returns - deducted from trade
receivables in the balance sheet:
Year ended July 31, 2001 $ 672,000 $1,297,000 $1,310,000 $ 659,000
Year ended July 31, 2000 489,000 502,000 319,000 672,000
Year ended July 31, 1999 150,000 584,000 245,000 489,000
Valuation allowance on
deferred tax asset:
Year ended July 31, 2001 $23,738,000 $1,571,000 $ -- $25,309,000
Year ended July 31, 2000 20,003,000 3,735,000 -- 23,738,000
Year ended July 31, 1999 14,915,000 5,088,000 -- 20,003,000
POSSIS MEDICAL, INC.
FORM 10-K - ITEM 14(a)3
EXHIBIT INDEX
Exhibit
Number Description
10.14 Change in Control Termination Pay Plan - Amended effective April 3, 2001
23 Consent of independent certified public accountants
99 Investment risk factors