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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, 1997
[ ] 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 55433-800
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-780-4555
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, 40 Cents Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 17, 1997 was approximately $150,539,000.
The number of shares outstanding of the registrant's common stock as of
October 17, 1997:12,135,100.
Certain responses in Part III are incorporated herein by reference to
information contained in the Company's definitive Proxy Statement for its 1997
annual meeting to be filed on or before November 6, 1997 ("The Proxy").
POSSIS MEDICAL, INC.
Forward-Looking Statements
This report on Form 10-K, including the description of the Company's
business and Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance, including the submission of
applications to the FDA, revenue and expense levels and future capital
requirements, are forward-looking statements that involve risks and
uncertainties, including the Company's ability to meet its timetable for FDA
submissions, the review time at the FDA (which is largely out of the Company's
control), changes in the Company's marketing strategies, changes in
manufacturing methods, the Company's dependence on patents and proprietary
technology, the levels of sales of the Company's products that can be achieved
and other risks detailed from time to time in the Company's various Securities
and Exchange Commission filings. The Company can provide no assurance that it
will achieve significant sales or obtain the necessary FDA approvals in a timely
manner or at all.
PART I
Item 1. Business:
General
The Company was incorporated in 1956 and went public in 1960 as Possis
Machine Corporation. Initial operations consisted of design, manufacturing, and
sales of industrial equipment and a division that provided temporary technical
personnel. The Company's involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company, to St. Jude Medical,
Inc. for royalty payments based on St. Jude's valve sales (the "St. Jude
Royalties"). See Note 6 of Notes to Consolidated Financial Statements contained
in Part II, Item 8. In 1982 a subsidiary was established to focus initially on
the development of a synthetic blood vessel used to bypass blocked coronary
arteries. In the late 1980's the Company decided to leverage existing management
expertise and entered the pacemaker lead business. The strategic role of the
pacemaker lead business was to provide cash flow to fund the development of
synthetic grafts and thrombectomy systems and to give the Company access to and
name recognition within the medical device industry. In 1990 the Company made
the decision to focus on medical products and subsequently divested all
non-medical operations, beginning with its Technical Services division in
September 1991 followed by its industrial equipment subsidiary and related land
and buildings in January 1994. See Note 2 of Notes to Consolidated Financial
Statements contained in Part II, Item 8. In March 1994 the Company sold its
pacemaker lead business because it anticipated that revenues from this business
would decrease due to a pacemaker lead technology shift. In connection with this
sale, the Company received $1.1 million in cash and the right to receive royalty
payments over a twelve-month period. See Note 10 of Notes to Consolidated
Financial Statements contained in Part II, Item 8. The sale of the pacemaker
lead business has enabled Possis to focus its human and financial resources
exclusively on its other products, which are currently in clinical trials and in
early stages of commercialization.
Products
ANGIOJET RAPID THROMBECTOMY SYSTEM. The development of blood clots in
various sites within the vascular system is common and is one of the leading
causes of morbidity and death. Blood clots may be caused by multiple factors,
including cardiovascular disease, trauma, impediment of normal flow during
interventional procedures using catheters and needles or prolonged bed rest. If
a blood clot becomes large enough, it can block an artery, preventing oxygenated
blood from reaching the organ or tissue supplied by the artery. In addition, if
a blood clot breaks off it can travel through the bloodstream and block
oxygenated blood flow to other organs and tissue. Conditions caused by blood
clots include peripheral ischemia, which can lead to limb loss, vascular access
failure, pulmonary embolism, acute myocardial infarction (heart attack), stroke
and deep vein obstruction.
Currently, the two primary methods of removing intravascular blood clots
are thrombolytic drugs and mechanical devices. Thrombolytic drug treatment
involves the administration of a drug designed to dissolve the blood clot in an
intensive or critical care setting. Thrombolytic drugs may require prolonged
infusion to be effective, and then may only partially remove the clot. In
addition, thrombolytic drugs may require significant time to take effect, which
is costly in an intensive or critical care setting, and may cause uncontrolled
bleeding. Mechanical devices such as the Fogarty-type catheter operate by
inflating a balloon past the point of the blood clot and then dragging the blood
clot out of the patient's body through the artery. Fogarty-type catheters
require surgical intervention, which may result in overnight hospital stays, are
more limited in their applications and may cause significant vascular trauma.
The Company believes that its AngioJet System represents a novel approach
to the removal of blood clots from arteries, veins and grafts and offers certain
potential advantages over current methods of treatment. The AngioJet System is a
minimally invasive catheter system designed for rapidly removing blood clots
with minimal vascular trauma. The system's components include a reusable drive
unit, a high-pressure single use pump and a single use, small diameter (5F, 1.7
mm) catheter. In early stages of commercialization and in U.S. clinical trials,
the AngioJet System has demonstrated the ability to remove blood clots within
seconds to minutes without surgical intervention and without the risk of
uncontrolled bleeding.
The AngioJet System removes blood clots through the percutaneous insertion
of the catheter over a guidewire into the patient's blood vessel and then, with
the aid of fluoroscopy, the catheter is directed to the site of the blood clot.
The drive unit is activated to deliver pressurized saline through tiny holes in
the catheter tip. These waterjets create a suction effect that cleans the blood
clot from the vessel wall, breaks it into small fragments and, in order to
prevent formation of a new blood clot downstream, propels the debris down the
central lumen of the catheter and into a collection bag attached to the drive
unit, without the need for a separate suction or vacuum device. Unlike certain
other mechanical devices that are able only to create channels through blood
clots of a size similar to that of the catheter used, the AngioJet System's
waterjet technology enables it to break up large blood clots in vessels much
larger than the catheter diameter.
Because the Possis AngioJet System is unlike any existing procedure or
device, market potential is difficult to quantify, but may be estimated by
determining the number of thrombectomy and thrombolysis procedures performed
using other therapies and devices and estimating the number of procedures that
might reasonably be replaced or supplemented by using the AngioJet System.
The Company's marketing analysis indicates that the AngioJet System may
potentially be used for alternative or supplemental therapy for the 450,000
peripheral thrombosis treatments performed each year and the 108,000 (U.S.) and
67,000 (Europe) AV access thrombectomy treatments performed each year. AngioJet
may also provide a potential treatment for the 400,000 patients per year
presented with thrombosed central venous lines. More than 2.5 million people are
affected with deep vein thrombosis (DVT) each year. DVT leads to 300,000
hospitalizations and 50,000 deaths from subsequent pulmonary embolism (PE)
annually. The Company believes that approximately 300,000 DVT/PE cases per year
could be treated with AngioJet. Further, the Company estimates that more than
550,000 patients annually are candidates for AngioJet System treatment to
alleviate thrombosis and vessel occlusion resulting in unstable angina and acute
myocardial infarction. An emerging market for interventional therapy is the
treatment of thrombotic disorders resulting in strokes, and the Company believes
its technology may be suitable for the estimated 576,000 arterial occlusive
strokes occurring annually.
The Company's established price for the single use catheter and the pump
set to the hospital (worldwide) is between $900 and $1,450. The list price for
the drive unit in the U.S. is $80,000. Outside the U.S. the list price of the
drive unit to the Company's independent distributors is between $25,000 and
$40,000. The average mechanical thrombectomy procedure is performed in a
surgical setting with an overnight hospital stay and could result in charges to
the patient exceeding $20,000. Lytic drug therapy may cost $500 to $5,000 for
the drug plus hospital and procedure charges, resulting in a total patient cost
of as much as $25,000.
On December 6, 1996 the Company received FDA clearance to commence U.S.
marketing of the AngioJet Rapid Thrombectomy System with labeling claims for
removal of blood clots from grafts used by patients on kidney dialysis. In July
1997 the Company submitted a 510(k) application to the FDA seeking clearance to
expand label claims for its AngioJet Rapid Thrombectomy System to include use in
peripheral arteries and bypass grafts in the U.S. The Company expects an FDA
decision on the application early in calendar 1998.
In March 1996, Possis received FDA approval to initiate Phase 2 clinical
testing of its AngioJet System for use in removing blood clots from coronary
arteries and bypass grafts. As of October 1997, 253 patients have been enrolled
in Phase 2 comparing the performance of the AngioJet System to the drug
urokinase. The Company believes that the coronary application of the AngioJet
System will be subject to a PMA approval process and anticipates filing a PMA
application with the FDA in 1998.
PERMA-FLOW CORONARY BYPASS GRAFT. Coronary artery bypass graft ("CABG")
surgery is performed to treat impairment of blood flow to portions of the heart.
CABG surgery involves the grafting of one or more vessels to the heart to
re-route blood around blocked coronary arteries.
Autogenous grafts (using the patient's own saphenous vein or mammary
artery) have been successfully used in CABG procedures for a number of years and
have shown a relatively high patency rate (80% to 90% for saphenous veins and
over 90% for mammary arteries one year after surgery) with negligible risk of
tissue rejection. However, the surgical harvesting of vessels for autogenous
grafts involves significant patient trauma and expense. In addition, not all
patients requiring CABG surgery have sufficient native vessels as a result of
previous bypass surgeries, or their vessels may be of inferior quality due to
trauma or disease. Cryopreserved saphenous veins are available, but these veins
often deteriorate due to the body's immune system attacking the graft.
The Possis Perma-Flow Graft is a synthetic graft 5mm in diameter for use in
CABG surgery. The Perma-Flow Graft is intended initially to provide a graft
alternative to patients who require bypass surgery but have insufficient or
inadequate native vessels as a result of repeat procedures, trauma, disease or
other factors. The Company believes, however, that the Perma-Flow Graft will
ultimately be used as a substitute for native saphenous veins, thus avoiding the
trauma and expense associated with the surgical harvesting of veins.
The Perma-Flow Graft is made of ePTFE, a standard graft material, and
contains a molded silicone venturi-shaped flow resistance element approximately
2mm in diameter. The Perma-Flow Graft is designed to be implanted by initially
suturing it to the vena cava, followed by side-to-side anastomoses (connections)
of the graft to the coronary arteries beyond the blockages and then suturing the
graft to the aorta. The formation of this artery-to-vein shunt is designed to
create a continuous blood flow at a sufficiently high rate through the graft to
reduce the incidence of blood clot formation, the major reason for synthetic
graft failure in the past. The flow resistance element is designed to prevent
excessive shunting of blood to the vena cava and to maintain high arterial
pressure for effective coronary perfusion.
Company research indicates that in 1996 approximately 625,000 CABG
procedures were performed worldwide, of which approximately 390,000 were
performed in the United States. Approximately 20% of these CABG procedures were
performed on patients who had previously undergone bypass surgery. It is
anticipated that the number of repeat CABGs will continue to increase as a
percentage of procedures performed, as the number of patients who have the
procedure increases. Currently, approximately 70% of CABG procedures are
performed utilizing the saphenous vein. Based upon interviews with
cardiovascular surgeons, including those involved in the clinical trials, the
Company believes that patients whose native vessels are not available for use in
bypass surgery comprise approximately 4% of those receiving CABG procedures, or
approximately 25,000 annually, and that approximately 90,000 patients annually
are determined by the treating physician to have native vessels inadequate to be
used in bypass surgery. If initial use of the Perma-Flow Graft is shown to be
clinically acceptable, the Company believes that the graft may be used for these
patients. The Company further believes that if long-term clinical results are
acceptable to clinicians (generally greater than 50% patency five years after
implant), the graft may ultimately be used as a substitute for native saphenous
veins.
Currently, no synthetic coronary graft has been approved by the FDA.
Cryopreserved saphenous veins are currently not regulated by the FDA and sell to
U.S. hospitals for approximately $3,500 to $4,000 in the United States. The
Company anticipates pricing for the Perma-Flow Graft will be competitive with
cryopreserved saphenous veins.
The Company received FDA approval to initiate clinical testing of its
Perma-Flow Graft in November 1991. In July 1995, the Company received approval
to commence Phase 2 of the study comprising 150 additional patients at up to 20
U.S. sites. As of September 1997, 32 Phase 1 and 72 Phase 2 study patients have
been enrolled at 16 sites. Angiographic results at 30 days following surgery
have been reported on 82 patients, which confirmed 152 of 164 side-to-side
anastomoses to be patent (providing blood to the coronary arteries). Within this
30-day interval, of the remaining 17 patients, angiographic results were not yet
reported for nine and eight died of causes reported by the investigator to be
unrelated to the graft. In addition, angiographic follow-up was performed
approximately 12 months from implant on 25 patients, which confirmed that 35 of
52 anastomoses were patent. The Company believes this performance is
substantially equivalent to commonly-used autologous vessels. The Company
anticipates filing a PMA application for U.S. marketing authorization in 1999.
In August 1997, the Company received an HUD designation for the Perma-Flow
Graft for use in patients who require coronary bypass surgery but lack
autologous vessels with which to perform it. This designation was the first step
in the two-step HDE process. The Company intends to submit an HDE for
authorization to market the Perma-Flow for this limited indication, while
continuing its IDE clinical trials of the Graft in support of an eventual PMA
approval for Perma-Flow Graft use as an alternative to available autologous
graft sources.
PERMA-SEAL GRAFT. Patients suffering from renal disease may be required to
undergo long-term kidney dialysis. The majority of these patients require
long-term vascular access to facilitate treatment. A point of access for
dialysis needles may be created by connecting an artery and a vein in the
patient's arm. However, because kidney dialysis therapy typically requires
patients to undergo blood dialysis treatment three times per week, these
connections often become unusable over time. Other methods of vascular access
for kidney dialysis such as temporary catheters are not designed for long-term
use.
A synthetic graft may be implanted in kidney dialysis patients to provide
the necessary vascular access. The vast majority of these synthetic grafts are
made of ePTFE. The use of synthetic grafts currently available is often
accompanied by excessive bleeding when the dialysis needle is withdrawn,
requiring a nurse to apply pressure to help stop the bleeding and requiring the
patient to remain in the treatment area until the bleeding has been stopped. In
addition, to limit the risk of graft infection following implant, at least a
two-week healing period following implantation is required to allow for tissue
ingrowth into the graft before initiating dialysis.
The Possis Perma-Seal Graft is a self-sealing synthetic graft comprised of
silicone elastomers, with a winding of polyester yarn encapsulated within its
wall, and is manufactured using proprietary electrostatic spinning technology
developed by the Company. The Company believes that its Perma-Seal Graft may
offer advantages over currently used synthetic grafts because of its needle hole
sealing capability. The Company believes that this characteristic will be
effective in sealing puncture sites in the grafts with minimal compression time
and bleeding as compared with other currently available graft products and, as a
result, will reduce dialysis procedure and administrative time per patient and
the costs associated therewith. In addition, because of its ability to seal a
needle puncture without depending on tissue ingrowth, the Perma-Seal Graft may
provide an option for patients who require dialysis immediately after implant.
Approximately 170,000 patients in the United States undergo kidney dialysis
each year, of which approximately 140,000 receive vascular access procedures
utilizing either natural vessel grafts or synthetic access grafts. The Company
estimates that of these patients approximately 40,000 are implanted with a
synthetic graft. The Company believes that a comparable market exists outside
the United States as well.
The U.S. hospital prices of ePTFE and biological graft products
manufactured by certain other manufacturers currently range from $400 to $700
per unit, depending on length, style, and configuration. Final pricing of the
Company's Perma-Seal Graft will depend upon manufacturing costs, distribution
methods and competitive pressures.
In July 1992, Possis received FDA approval to initiate clinical testing of
its Perma-Seal Graft. The study was randomized on a one-to-one basis with
patients receiving either a Perma-Seal Graft or a conventional ePTFE graft. In
May 1997, the Company completed its patient enrollment in its clinical study.
There were 250 patients enrolled in the study at six clinical sites, 129 of
which received the Perma-Seal Graft. Clinical data indicates that Perma-Seal
Graft patients who have been accessed for dialysis have reduced compression
times to stop bleeding after removing the dialysis needles and the graft can be
used for dialysis the same day it is implanted. The Company filed a 510(k)
application for marketing authorization with the FDA in August 1994. In May
1995, the Company received a request for additional information from the FDA and
the Company responded to the request on August 31, 1995. In November 1995, the
FDA responded to the 510(k) with additional questions and in February 1996, the
FDA told the Company it wanted to see data on 124 study patients followed for 12
months. In August 1997, the Company resubmitted its 510(k) application and
anticipates an FDA Panel review and a final 510(k) decision in the first half of
calendar 1998.
Research and Development
The Company's product development efforts for its existing products are
focused primarily on clinical testing, obtaining necessary FDA product
registrations and validating manufacturing processes. The Company's new product
development efforts are focused primarily on developing additional applications
of the AngioJet Thrombectomy System, including carotid, neurovascular and venous
applications, and on utilizing its Perma-Flow Graft and Perma-Seal Graft
technologies to develop other graft products, including endovascular stent
grafts. The Company also believes its AngioJet technology has application beyond
thrombectomy, such as for minimally invasive tissue removal. Research and
development expenses are generally incurred for product design, development and
qualification, manufacturing process development and validation, the conduct of
clinical trials and governmental approvals. The Company's research and
development expense is expected to increase as the Company continues its
clinical trials and current product development plans.
As of September 30, 1997, the Company employed approximately 50 full-time
employees in research and development, including 42 in new product concept
screening, prototype building, product and process development and validation
and 8 in regulatory and clinical affairs. The Company performs substantially all
of its research and development activities at its headquarters in Coon Rapids,
Minnesota. The Company spent $5.0 million, $3.2 million and $3.3 million in
fiscal 1997, 1996, and 1995, respectively, on medical product research and
development.
Marketing and Sales
The Company is marketing its AngioJet System and graft products to
interventional radiologists and cardiologists and also to physician specialty
groups, including vascular surgeons, cardiovascular and thoracic surgeons. The
Company is currently marketing the AngioJet System for hemodialysis graft
thrombosis and plans to market the system for other peripheral vessel and graft
applications, targeting interventional radiologists, vascular surgeons and some
cardiologists who perform PTA and other thrombectomy or lytic procedures. The
AngioJet System for coronary applications will be marketed primarily to
interventional cardiologists and some cardiovascular surgeons. The AngioJet
System for stroke treatment will be marketed to interventional neuroradiologists
and cardiologists. The primary customer for the Perma-Flow Graft is expected to
be the cardiovascular surgeon and thoracic surgeon. The initial focus of the
Company's marketing will be for use in procedures involving patients having
inadequate native vessels. The Perma-Seal Graft will be marketed to vascular
surgeons, who typically are the primary decision makers with respect to the
placement of vascular access grafts for patients receiving dialysis for renal
failure. The Company will also target other clinicians influential in dialysis
treatment selection, including nephrologists, internists, and dialysis unit
technicians.
The Company is currently marketing its AngioJet System outside the United
States using an independent distributor network. The Company currently has
distributorship agreements with 18 distributors covering Belgium, Denmark,
Italy, Luxembourg, The Netherlands, Norway, Spain, Switzerland, Austria, France,
Saudi Arabia, Israel, Australia, New Zealand, Russia, Japan, Korea, and Taiwan.
Generally, the distributorship agreements are for an initial five-year term and
provide that the distributors, at their own expense, will investigate, negotiate
and obtain regulatory approvals for the Company's products in the specified
territory. The Company closed its European distribution center because
regulatory European clearance for all Possis products was received in July 1997
and it is now more cost-effective to ship products directly to European
customers from the United States. All sales made to the Company's independent
distributors are denominated in United States dollars.
On December 6, 1996, the Company received FDA clearance to commence U.S.
marketing of the AngioJet Rapid Thrombectomy System with labeling claims for
removal of blood clots from grafts used by patients on kidney dialysis. The
Company is marketing and distributing the AngioJet System in the United States
utilizing a direct sales force.
In early 1995, the Company entered into a 10 year distribution agreement
with C. R. Bard ("Bard") pursuant to which the Company granted Bard the
exclusive worldwide right to market, sell and distribute the Company's
Perma-Seal Graft. The initial grafts were shipped to Bard in May 1996. In
January 1997, the Company terminated the agreement with Bard. The Company is
seeking another distributor and is in discussion with several companies. Until
another distributor is selected, there will likely be no Perma-Seal Graft
product sales.
In March 1996, the Company entered into a three year distribution agreement
with Baxter Healthcare Corporation ("Baxter") granting Baxter worldwide rights
to market, sell and distribute the Perma-Flow Graft. The initial shipment of
Perma-Flow Grafts was made in July 1996. Baxter has developed marketing material
and in October 1997 launched the product within the European market following
the receipt of CE Mark approval in July 1997.
Promotional activities by the Company are designed primarily to enlist the
support of key medical opinion leaders in the United States and abroad. The
Company believes that opinion leader publications in medical journals and
presentations at medical meetings will be especially important to encourage
broad acceptance of its products. Other marketing activities include medical
journal advertising and supporting studies designed to gather cost effectiveness
data of the Company's products compared to conventional treatment.
Patents, Patent Applications, Licenses and Proprietary Rights
The Company's success depends and will continue to depend in part on its
ability to maintain patent protection for products and processes, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. The Company's policy is to attempt to protect its technology by,
among other things, filing patent applications for technology that it considers
important to the development of its business. The Company currently holds five
United States patents and 17 foreign patents related to the Perma-Flow Graft and
has four patent applications pending in the United States and two patent
applications pending in foreign jurisdictions. The Company also holds two United
States patents relating to the AngioJet System. In addition, the Company has
eight United States and numerous foreign patent applications pending relating to
the AngioJet System. Two AngioJet System patent applications have been accepted
by the European Patent Office. In connection with the Perma-Seal Graft, two
United States patents are pending and four foreign patent applications are
pending. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. No assurance can be given that the Company's pending
applications will result in patents being issued or, if issued, that such
patents, or the Company's existing patents, will provide a competitive
advantage, or that competitors of the Company will not design around any patents
issued to the Company. In addition, no assurance can be given that third parties
will not receive patent protection on their own waterjet devices.
The Company has acquired rights through licensing agreements to patents
relating to processes used in the manufacture of the Perma-Seal Graft. Under
these agreements, Possis is required to pay certain annual fees and royalties
based on net sales of products using the technology covered by these patents.
The Company requires its employees having access to proprietary information
to execute non-disclosure agreements upon commencement of employment with the
Company. These agreements generally provide that all confidential information
developed or made known to the individual by the Company during the course of
the individual's employment with the Company is to be kept confidential and not
disclosed to third parties.
There can be no assurance that the Company's non-disclosure agreements and
other safeguards will protect its proprietary information and know-how or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to independently
develop such information. There has been substantial litigation regarding patent
and other intellectual property rights in the medical device industry.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, to defend the Company
against claimed infringement of the rights of others or to determine the
ownership, scope or validity of the proprietary rights of the Company and
others. An adverse determination in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition
The Company's products will compete with a number of different products and
treatment methods for the conditions they address. The Company believes that its
AngioJet System will face intense competition from a variety of treatments for
the ablation and removal of blood clots, including thrombolytic drug therapies,
surgical intervention, balloon embolectomy, mechanical and laser thrombectomy
devices, ultrasound ablators, and other thrombectomy devices based on waterjet
systems that are currently being developed by other companies.
The Company is not aware of any synthetic graft being developed that will
compete with the Perma-Flow Graft and believes it is the first developer to
obtain FDA approval for clinical trials with a synthetic coronary bypass graft.
The Company's Perma-Seal Graft will compete with ePTFE grafts and other
synthetic grafts with needle sealing properties.
The medical products market is characterized by rapidly evolving technology
and intense competition. The future success of the Company will depend on its
ability to keep pace with advancing technology and competitive innovations. Many
potential competitors have significantly greater research and development
capabilities, experience in obtaining regulatory approvals, established
marketing and financial and managerial resources than the Company. Many
potential competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive
products, some of which may employ an entirely different approach or means of
accomplishing the desired therapeutic effect than products being developed by
the Company.
Government Regulation
Government regulation in the United States and other countries is a
significant factor in the development and marketing of the Company's products
and in the Company's ongoing manufacturing and research and development
activities. The Company and its products are regulated by the FDA under a number
of statutes, including the Food, Drug and Cosmetic (FDC) Act.
Under the FDC Act, medical devices are classified into one of three classes
(i.e., Class I, II or III) on the basis of the controls deemed necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
the least extensive controls, as the safety and effectiveness reasonably can be
assured through general controls (e.g., labeling, premarket notification and
adherence to Good Manufacturing Practices (GMP)). For Class II devices, safety
and effectiveness can be assured through the use of special controls (e.g.,
performance standards, post market surveillance, patient registries and FDA
guidelines). Class III devices (i.e., life-sustaining or life-supporting
implantable devices, or new devices which have been found, or are determined to
be not substantially equivalent to legally marketed devices) require the highest
level of control, including premarket approval by the FDA to ensure their safety
and effectiveness.
If a manufacturer or distributor of medical devices can establish that a
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required a PMA application, the manufacturer or distributor may seek FDA
marketing clearance for the device by filing a 510(k) notification. Following
submission of the 510(k) notification, the manufacturer or distributor may not
place the device into commercial distribution in the United States until an
order has been issued by the FDA. The FDA's target for issuing such orders is
within 90 days of submission, but the process can take significantly longer. The
order may declare the FDA's determination that the device is "substantially
equivalent" to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent or may require further
information, such as additional test data, before making a determination
regarding substantial equivalence. Any adverse determination or request for
additional information could delay market introduction and have a materially
adverse effect on the Company's continued operations.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to another device via the 510(k)
process, the manufacturer or distributor must seek PMA approval of the proposed
device. A PMA application must be submitted, supported by extensive data,
including pre-clinical and clinical trial data to prove the safety and efficacy
of the device. Generally, a company is required to obtain an IDE before it
commences clinical testing in the United States in support of such a PMA. The
FDA monitors and oversees the conduct of clinical trials under IDE. Although by
statute the FDA has 180 days to review a PMA application once it has been
accepted for filing, during which time an advisory committee may also evaluate
the application and provide recommendations to the FDA, PMA reviews often extend
over a significantly protracted time period, usually 12 to 24 months or longer
from filing. Accordingly, there can be no assurance that FDA review of any PMA
application submitted by the Company will not encounter prolonged delays or that
the data collected and submitted by the Company in its PMA will support
approval.
In 1996, FDA issued regulations for Humanitarian Device Exemptions (HDE).
These regulations permit that certain devices, if intended for a small (less
than 4,000 per year), medical defined group of patients, to qualify as
Humanitarian Use Devices and be authorized for sale in the U.S. under a
temporary exemption from PMA or 510(k) requirements. An HDE is authorized by FDA
upon approval of an appropriate HDE submission. Such submissions must establish
the safety and probably benefit of the device for the proposed intended use. An
HDE approval lasts 18 months, but may be extended with subsequent submissions.
Devices marketed under an HDE may simultaneously undergo clinical trials under
an approved IDE, and be submitted for clearance or approval under a 510(k) or
PMA for a different or broader indication.
Labeling and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The FDA also imposes
post-marketing controls on the Company and its products, and registration,
listing, medical device reporting, post-market surveillance, device tracking and
other requirements on medical devices. Failure to meet these pervasive FDA
requirements or adverse FDA determinations regarding the Company's clinical and
pre-clinical trials could subject the Company and/or its employees to
injunction, prosecution, civil fines, seizure or recall of products, prohibition
of sales or suspension or withdrawal of any previously granted approvals.
The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate compliance with current GMP
as specified in published FDA regulations. The FDA monitors compliance with GMP
by requiring manufacturers to register with the FDA, which subjects them to
periodic unannounced FDA inspections of manufacturing facilities. If violations
of applicable regulations are noted during FDA inspections of the Company's
manufacturing facilities, the continued marketing of the Company's products may
be adversely affected. Such regulations are subject to change and depend heavily
on administrative interpretations.
There can be no assurance that future changes in regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
The Company has complied with GMP requirements in the past and believes it
will be able to comply with all applicable regulations regarding the manufacture
and sale of medical devices.
The export and sale of medical devices outside of the United States are
subject to United States export requirements and foreign regulatory
requirements. A device under a U.S. IDE may be exported to any country, so long
as its import to the receiving country complies with its requirements, and so
long as at least one of the industrialized countries has agreed to its import.
Legal restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
For countries in the European Union, in January 1995, CE Mark certification
procedures became available for medical devices, the successful completion of
which would allow certified devices to be placed on the market in all European
Union countries. After June 1998, medical devices may not be sold in European
Union countries unless they display the CE Mark. The Company received CE Mark
approval for its current products in July 1997.
Employees
As of September 30, 1997, the Company had 168 full-time employees and one
contract employee. Of these full-time employees, 50 are in research and
development, 60 are in manufacturing and production, 12 are in quality systems,
6 are in facilities/maintenance, 24 are in sales and marketing and 16 are in
management or administrative positions. None of the Company's employees is
covered by a collective bargaining agreement, and management considers its
relations with its employees to be good.
Item 2. Properties:
The Company leases approximately 51,000 square feet of office and
manufacturing space (including approximately 6,500 square feet of clean
manufacturing space) at 9055 Evergreen Boulevard NW, Minneapolis, Minnesota
55433-8003. See Note 8 of Notes to Consolidated Financial Statements in Part II,
Item 8.
Item 3. Legal Proceedings:
None
Item 4. Submission of Matters to a Vote of Security-Holders:
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
Robert G. Dutcher 52 Director, Chief Executive Officer and President
Joseph J. Afryl Jr 49 Vice President, Sales and Marketing
Russel E. Carlson 51 Vice President, Finance and Chief Financial Officer
Irving R. Colacci 44 Vice President, Legal Affairs and Human Resources
General Counsel and Secretary
James D. Gustafson 41 Vice President, Quality Systems and
Regulatory/Clinical Affairs
Robert J. Scott 52 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 and as President and
Chief Operating Officer of Possis Holdings, Inc. (a subsidiary formerly known as
Possis Medical, Inc.) since 1987. Prior to joining the Company, Mr. Dutcher had
served in several positions (most recently as Director of Research and
Development) at Medtronic, Inc. since 1972. Mr. Dutcher received a master's
degree in biomedical engineering from the University of Minnesota.
Joseph J. Afryl Jr has served as Vice President of the Company since April
1994. Prior to joining the Company, Mr. Afryl served as Vice President of Sales
and Marketing for Bio-Vascular, Inc. from July 1992 to March 1994, as Director
of Sales for Angeion Corporation from September 1991 through July 1992, and as
Director of Marketing at St. Jude Medical, Inc. from May 1987 to September 1991.
Each of these companies is a manufacturer of medical devices.
Russel E. Carlson joined the Company in September 1991 and has served as
Vice President and Chief Financial Officer of the Company since June 1992. Prior
to joining the Company, Mr. Carlson had been Chief Financial Officer of
SpectraScience, Inc. (formerly GV Medical, Inc.), a medical device company,
since September 1989 and had served in eight financial management positions with
The Pillsbury Company, a food manufacturer and processor, since 1972.
Irving R. Colacci has served as Secretary and Corporate Counsel of the
Company since July 1988 and as Vice President and General Counsel since December
1993. Prior to joining the Company, Mr. Colacci had been an attorney at Dorsey &
Whitney LLP.
James D. Gustafson has served as a Vice President of the Company since
January 1, 1994 and has been Director of Quality Systems and Regulatory/Clinical
Affairs for Possis Holdings, Inc. since June 1993. Prior to joining the Company,
Mr. Gustafson had served as a Manager of Clinical and Regulatory Affairs and of
Clinical Programs at St. Jude Medical, Inc., a medical device manufacturer,
since June 1989, and as a Senior Clinical Scientist at Shiley, Inc., Irvine,
California, since March 1985. Mr. Gustafson received a master's degree in
management from University of Redlands and a master's degree in biology from the
University of California at Irvine.
Robert J. Scott has served as Vice President of the Company since December
1993 and as Vice President of Manufacturing Operations of Possis Holdings, Inc.
since 1988 and was Director of Manufacturing Operations for Possis Holdings,
Inc. from 1984 through 1988. Prior to joining the Company, Mr. Scott had served
as a consultant to various medical and nonmedical manufacturing companies and as
Manufacturing Manager for Aequitron Medical, Inc. and Resistance Technology
Incorporated and in various positions for Daig Corporation and Medtronic, Inc.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters:
The Company had 1,725 common shareholders of record at July 31, 1997. 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, 1997
and 1996 are presented below:
1997 1996
High Low High Low
QUARTER:
First....................... 19 14-1/2 17-5/8 12-1/4
Second...................... 20-7/8 15-7/8 18-1/4 13-3/4
Third....................... 20-29/64 11-7/8 19-3/4 14-1/8
Fourth...................... 17-1/8 14 21-3/4 12-7/8
Additional information is contained in Note 5 of Notes to Consolidated
Financial Statements included in Part II, Item 8.
The Company has not paid cash dividends on its common stock since 1983. The
Company currently intends to retain all earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future.
Item 6. Selected Financial Data:
SELECTED FINANCIAL DATA
POSSIS MEDICAL, INC. AND SUBSIDIARIES
YEARS ENDED JULY 31,
In Thousands Except Earnings Per Share Data
1997 1996 1995 1994 1993
INCOME STATEMENT DATA:
Operating revenues-
Continuing operations............... $4,834 $1,606 $3,207 $6,315 $8,342
Net income (loss)
Continuing operations............... (8,608) (8,578) (5,153) (1,246) (181)
Discontinued operations............. 112 405 421 523 (1,331)
Net income (loss) per common share:
Continuing operations............... (.71) (.74) (.53) (.15) (.02)
Discontinued operations............. .01 .04 .04 .06 (.16)
Weighted average shares outstanding... 12,099 11,611 9,726 8,436 8,361
BALANCE SHEET DATA:
Working capital....................... $16,840 $24,780 $6,846 $4,007 $5,183
Total assets.......................... 22,423 29,361 10,321 8,882 11,472
Long-term debt,
excluding current maturities........ 10 39 93 80 1,279
Shareholders' equity.................. 19,800 27,597 8,648 5,684 5,947
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was incorporated in 1956 and went public in 1960 as Possis
Machine Corporation. Initial operations consisted of design, manufacturing and
sales of industrial equipment and a division that provided temporary technical
personnel. The Company's involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company, to St. Jude Medical,
Inc. for royalty payments based on St. Jude's valve sales (the "St. Jude
Royalties"). See Note 6 of Notes to Consolidated Financial Statements. In 1982 a
subsidiary was established to focus initially on the development of a synthetic
blood vessel used to bypass blocked coronary arteries. In the late 1980's the
Company decided to leverage existing management expertise and entered the
pacemaker lead business. The strategic role of the pacemaker lead business was
to provide cash flow to fund the development of synthetic grafts and
thrombectomy systems and to give the Company access to and name recognition
within the medical device industry. In 1990 the Company made the decision to
focus on medical products and subsequently divested all non-medical operations,
beginning with its Technical Services division in September 1991 followed by its
industrial equipment subsidiary and related land and buildings in January 1994.
See Note 2 of Notes to Consolidated Financial Statements. In March 1994 the
Company sold its pacemaker lead business because it anticipated that revenues
from this business would decrease due to a pacemaker lead technology shift. In
connection with this sale, the Company received $1.1 million in cash and the
right to receive royalty payments over a twelve-month period. See Note 10 of
Notes to Consolidated Financial Statements. The sale of the pacemaker lead
business in March 1994 enabled Possis to focus its human and financial resources
exclusively on its other products, which are currently in clinical trials and in
early stages of commercialization.
Over the past several fiscal years, the Company has transitioned its
revenue stream from pacemaker leads and royalty revenues to revenues from the
sale of its new products and related sales agreements. The resulting cash flow,
together with the approximately $34.0 million net proceeds from the Company's
calendar 1994 and 1995 Common Stock offerings, has been used to fund the
Company's operations, including research and development related to its
products. With the sale of its pacemaker lead business and the expiration of
royalty payments from St. Jude in March 1995, Possis does not expect to become
profitable unless it achieves significant sales in the United States and its
products receive additional United States Food and Drug Agency ("FDA") marketing
approvals. There can be no assurance that significant sales or additional
marketing approvals will occur.
Results of Operations
Fiscal Years ended July 31, 1997, 1996 and 1995
Total revenue increased 201% in fiscal 1997 and decreased 50% in fiscal
1996, compared to prior years. The main factor in the product sales increase in
fiscal 1997 was the December 1996 FDA clearance to commence U.S. marketing of
the AngioJet Rapid Thrombectomy System, with labeling claims for removal of
blood clots from grafts used by patients on kidney dialysis. The AngioJet System
drive unit is a piece of capital equipment and currently lists for $80,000 to
U.S. hospitals. The purchasing cycle for the AngioJet System drive unit, the
Company believes, will average nine to twelve months depending on the customer's
budget cycle. The Company offers an AngioJet System evaluation program lasting
up to 90 days during which, in return for free placement of the drive unit, the
hospital purchases a minimum number of disposable catheters and pumps. If the
hospital requires additional time to complete the purchase and chooses to keep
the drive unit, monthly rent is charged with a portion of rent paid applied to
the final purchase price. Drive unit rental programs are available and, through
a third party, the Company offers various drive unit financing plans including
prime interest rate capital leases, operating leases and a plan to acquire the
drive unit through the purchase of a minimum number of marked-up disposable
products. AngioJet System drive unit and disposable product sales in the U.S.
during fiscal 1997 were $283,000 and $1,543,000, respectively. Foreign sales of
the AngioJet System, drive units and disposable products, during fiscal 1997,
1996 and 1995 were $806,000, $919,000 and $195,000, respectively. The Company's
German AngioJet System distributor was terminated in February 1997 which
impacted fiscal 1997 foreign sales. The Company is evaluating its European
AngioJet System distribution options. The Company believes that U.S. AngioJet
System sales will grow through the addition of sales people, the completion of
clinical trials designed to yield additional label-approved product uses and the
introduction of additional catheter designs.
During fiscal 1997, 1996 and 1995, sales of the Perma-Flow Coronary Bypass
Graft were $58,000, $111,000 and $29,000, respectively. Baxter Healthcare
Corporation, the Company's Perma-Flow Graft worldwide distribution partner since
March 1996, has developed marketing materials and in October 1997 officially
launched the product within the European market following the receipt of CE Mark
approval for the Perma-Flow Graft in July 1997. The Perma-Flow Graft was the
first synthetic coronary bypass graft to clear this significant European
regulatory milestone. In addition, the Company plans to submit an application to
the FDA by December 1997 requesting that the Perma-Flow Graft be given
Humanitarian Device Exemption status, thereby allowing the Company to market the
product in the U.S. for a limited indication as it completes the U.S. clinical
study and PMA registration designed to provide broad marketing approval.
Due to the termination of the Company's worldwide Perma-Seal Dialysis
Access Graft distributor in January 1997, sales of this product in fiscal 1997
were only $124,000. Perma-Seal Graft sales in fiscal 1996 and 1995 were $163,000
and $3,000, respectively. Until another distributor is selected, there will
likely be no Perma-Seal Graft product sales. The Company is seeking another
distributor for this product and is in discussion with several potential
companies. The Company submitted a 510(k) application to the FDA in August 1997
seeking clearance to market the Perma-Seal Graft in the United States.
Sales agreement and other revenue includes $200,000 per year for fiscal
1997 and 1996 from Baxter Healthcare Corporation due the Company under a supply
and distribution agreement for the Perma-Flow Coronary Bypass Graft. In
addition, fiscal 1997 sales agreement and other revenue includes $1,799,000 in
cash and returned unused product due to the termination of the Company's
Perma-Seal Graft supply and distribution agreement. The Company received
$1,000,000 through July 31, 1996 from it's Perma-Seal Graft distributor. See
Note 11 of Notes to Consolidated Financial Statements.
The Company is planning for continued growth in product sales for fiscal
1998 and beyond and believes that for the next several years most of this growth
will come from AngioJet System sales in the U.S. marketplace.
Cost of medical products decreased 6% in fiscal 1997 and increased 58% in
fiscal 1996, compared to prior years. Production expenses relating to vascular
grafts were $299,000, $1,555,000 and $1,449,000 for fiscal years 1997, 1996, and
1995, respectively. During most of fiscal 1997 the Company has worked to
validate the vascular graft production processes and was not producing graft
products. The cost of product and process validation is reported as research and
development expense. AngioJet System production costs for fiscal 1997, 1996 and
1995 were $4,540,000, $3,680,000 and $1,889,000, respectively. The increase is
primarily due to significant growth in AngioJet System product sales. The
Company believes that manufacturing costs per unit will be reduced as product
sales and related production volumes grow and as identified product and process
improvements are made. In April 1997 the Company received full ISO 9001 quality
system certification. ISO certification is issued by the International Standards
Organization and incorporates standards of quality and excellence recognized
worldwide in design, development, production, installation and service.
Selling, general and administrative expenses increased 49% in fiscal 1997
and 44% in fiscal 1996, compared to prior years. The primary factor in fiscal
1997 is increased sales and marketing expense related to the establishment of a
direct U.S. sales organization to sell the AngioJet Rapid Thrombectomy System
and expenses of marketing the product in the United States. Based upon early
physician interest, the Company has grown the U.S. AngioJet System sales and
marketing organization from eight employees in January 1997 to 23 employees in
July 1997. The Company plans to at least double its field sales organization
during fiscal 1998 and sales and marketing expenditures are expected to grow
significantly in the current year and beyond. In fiscal 1996, the primary factor
in the growth in selling, general and administrative expense was increased sales
and marketing expenditures necessary to broaden non-U.S. distribution and to
prepare for FDA marketing clearance of the AngioJet System.
Research and development expenses increased 57% in fiscal 1997 and
decreased 4% in fiscal 1996, as compared to prior periods. Fiscal 1997 increases
are due primarily to vascular graft product and production process validation
expenses and increased expenses of conducting the Perma-Flow Graft and Coronary
AngioJet System clinical trials. The Company believes that research and
development expenses will continue to increase as it completes the development
of its current products, invests in development of new AngioJet Rapid
Thrombectomy System applications, new vascular grafts and new AngioJet
technology-based products.
Interest income has decreased in fiscal 1997 from the previous year due to
use of the Company's cash reserves to fund the Company's operations.
The Company recorded the final income relating to the sale of its Technical
Service division during the first quarter of fiscal 1997.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities totaled
approximately $14.8 million at July 31, 1997, a decrease of $8.7 million from
the prior year. The primary factor in the reduction of the Company's cash
position was the net loss of approximately $8.5 million.
During fiscal 1997, cash used in operating activities was $8.6 million,
which resulted primarily from an $8.5 million net loss and a $1.7 million
increase in receivables, inventories and other current assets, offset by
depreciation, amortization of goodwill, stock compensation and an increase in
trade accounts payable and accrued liabilities totaling $1.6 million. Cash
provided by investing activities was $4.4 million, which resulted from the net
proceeds from the sale/maturity of marketable securities of $5.0 million, offset
by additions to plant and equipment of $613,000. Net cash provided by financing
activities was $332,000, which resulted primarily from the exercise of stock
options of $405,000.
During fiscal 1996, cash used in operating activities was $8.8 million,
which resulted primarily from an $8.2 million net loss and a $1.9 million
increase in receivables, inventories and other current assets, offset by
depreciation, amortization of goodwill, stock compensation and an increase in
trade accounts payable totaling $1.1 million. Cash used in investing activities
was $15.6 million, which resulted primarily from net purchases of marketable
securities of $14.8 million and additions to plant and equipment of $1.5
million, offset by the proceeds from the sale of discontinued operations of
$589,000. Fiscal 1996 additions to plant include approximately $1.2 million
associated with the Company's April 1996 relocation to a larger leased facility.
Proceeds from discontinued operations increased $240,000 in fiscal 1996 as a
result of the prepayment by Advanced Technical Services, Inc. ("ATS") of the
notes receivable and estimated remaining royalty payments in connection with the
sale of ATS. See Note 2 of Notes to Consolidated Financial Statements. Net cash
provided by financing activities resulted primarily from the Company's October
1996 common stock offering netting approximately $26.7 million.
During fiscal 1995, cash used in operating activities was $1.9 million,
which resulted principally from the net loss of $4.7 million and a decrease in
accrued and other current liabilities of $1.1 million, offset by depreciation,
amortization of goodwill and stock compensation totaling $546,000 and a decrease
in accounts receivable of $3.2 million. Cash used in investing activities was
$1.5 million, which resulted primarily from net purchases of marketable
securities of $1.3 million and additions to plant and equipment of $562,000,
offset by proceeds from the sale of discontinued operations of $350,000. Net
cash provided by financing activities of $7.1 million resulted principally from
the September 1994 common stock offering of $7.2 million, the exercise of stock
options of $297,000 and proceeds from notes payable of $116,000, offset by the
repayment of long-term debt of $595,000.
The Company believes that product sales of the AngioJet System in the U.S.
and internationally will yield meaningful sales growth going forward. At the
same time, sales and marketing expenditures will continue to increase with the
sales growth. Research and development expenditures are expected to grow as
well. The Company expects to report a loss for fiscal 1998. In addition, the
Company expects that increasing working capital investments in trade accounts
receivable and inventory will be required to support growing product sales. The
Company is currently evaluating its capital needs and the options available for
raising cash. Additional capital will likely be sought in fiscal 1998.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and certain other sections of this 10-K, contain certain
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements relating to future events and financial
performance, including the submission of applications to the FDA, revenue and
expense levels and future capital requirements, are forward-looking statements
that involve risks and uncertainties, including the Company's ability to meet
its timetable for FDA submissions, the review time at the FDA which is out of
the Company's control, changes in the Company's marketing strategies, the
Company's ability to establish product distribution channels, changes in
manufacturing methods, market acceptance of the AngioJet System, changes in the
levels of capital expenditures by hospitals, the levels of sales of the
Company's products that can be achieved and other risks detailed from time to
time in the Company's various Securities and Exchange Commission filings.
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, 1997 and 1996 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,
1997. Our audits also included the financial statement schedule listed in the
Index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1997 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
August 29, 1997
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 1997 July 31, 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1)............................ $ 3,849,194 $ 7,688,507
Marketable securities (Note 1)................................ 10,964,170 15,838,543
Receivables:
Trade (less allowance for doubtful accounts:
$80,000 and $60,000, respectively)...................... 878,893 389,983
Other....................................................... 120,558 218,154
Inventories (Note 1):
Parts....................................................... 1,242,580 755,081
Work-in-process............................................. 940,918 898,721
Finished goods.............................................. 1,191,870 466,985
Prepaid expenses and other assets............................. 264,117 207,156
Total current assets................................... 19,452,300 26,463,130
PROPERTY (Notes 1 and 3):
Leasehold improvements........................................ 1,166,306 1,090,935
Machinery and equipment....................................... 3,317,391 2,782,287
Assets in construction........................................ 51,753 92,743
4,535,450 3,965,965
Less accumulated depreciation................................. 1,906,500 1,482,233
Property - net........................................... 2,628,950 2,483,732
OTHER ASSETS:
Goodwill (Note 1)............................................. 341,922 413,922
TOTAL ASSETS...................................................... $22,423,172 $29,360,784
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
July 31, 1997 July 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................. $ 648,502 $ 317,905
Accrued salaries, wages, and commissions........................... 762,587 725,988
Current portion of long-term debt (Note 3)......................... 28,356 73,386
Clinical trials accrual............................................ 879,166 378,638
Other liabilities (Note 3).................................. 294,002 187,675
Total current liabilities.............................................. 2,612,613 1,683,592
DEFERRED REVENUE (Note 2).............................................. -- 41,768
LONG-TERM DEBT (Note 3)................................................ 10,213 38,569
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 5):
Common stock-authorized 100,000,000 shares,
of $ .40 par value each; issued and outstanding,
12,121,312 and 12,052,644 shares, respectively................. 4,848,525 4,821,058
Additional paid-in capital......................................... 41,118,611 40,688,535
Unearned compensation.............................................. -- (102,690)
Unrealized loss on investments..................................... (5,836) (145,276)
Retained deficit................................................... (26,160,954) (17,664,772)
Total shareholders' equity................................... 19,800,346 27,596,855
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $22,423,172 $29,360,784
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
1997 1996 1995
REVENUES:
Medical products sales (Note 9)......................... $2,814,646 $1,156,170 $229,984
Net heart valve patent payments (Note 6)................ -- -- 1,817,388
Royalty payments relating to
pacemaker lead business (Note 10)................... -- -- 410,118
Sales agreement and other (Note 11)..................... 2,019,431 450,000 750,000
Total revenues...................................... 4,834,077 1,606,170 3,207,490
COST OF SALES AND OTHER EXPENSES:
Cost of medical products ............................... 4,934,887 5,256,179 3,334,589
Selling, general and administrative..................... 4,545,937 3,052,422 2,116,251
Research and development ............................... 4,964,239 3,167,013 3,297,524
Interest................................................ 5,422 14,296 23,568
Total cost of sales and other expenses.............. 14,450,485 11,489,910 8,771,932
Operating loss............................................... (9,616,408) (9,883,740) (5,564,442)
Interest income.............................................. 1,001,578 1,369,453 411,696
Gain (loss) on sale of investments.......................... 7,109 (64,007) --
Loss from continuing operations.............................. (8,607,721) (8,578,294) (5,152,746)
Income from discontinued operations - net (Note 2)........... 111,539 405,416 420,901
Net loss .................................................... $(8,496,182) $(8,172,878) $(4,731,845)
Weighted average number
of common shares outstanding............................ 12,099,217 11,611,070 9,726,105
Earnings (loss) per common share:
Continuing operations ............................... $(.71) $(.74) $(.53)
Discontinued operations ............................... 01 .04 .04
Net loss .................................................... $(.70) $(.70) $(.49)
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
1997 1996 1995
OPERATING ACTIVITIES:
Net loss ......................................................... $(8,496,182) $(8,172,878) $(4,731,845)
Adjustments to reconcile net loss to net
cash used in operating activities:
(Gain) loss on sale of marketable securities...................... (7,109) 64,007 --
Loss on disposal of assets............................................. 4,932 24,239 5,631
Depreciation........................................................... 473,816 395,132 361,024
Amortization of goodwill............................................... 72,000 72,000 72,000
Stock compensation................................................ 155,083 505,432 113,298
(Increase) decrease in receivables................................ (391,314) (741,886) 3,157,870
(Increase) decrease in inventories................................ (1,286,860) (1,109,773) 32,610
(Increase) decrease in other current assets....................... (56,961) (19,968) 56,493
Increase in trade accounts payable................................ 330,597 158,540 44,006
Increase (decrease) in accrued and other current liabilities...... 601,686 (4,225) (1,059,792)
Net cash used in operating activities......................... (8,600,312) (8,829,380) (1,948,705)
INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations..................... -- 589,441 349,679
Additions to plant and equipment....................................... (612,641) (1,453,379) (561,817)
Proceeds from sale of fixed assets................................ 20,954 10,945 2,728
Purchase of marketable securities................................. (1,990,718) (17,992,853) (11,431,373)
Proceeds from sale/maturity of marketable securities.............. 7,011,640 3,215,681 10,160,719
Net cash provided by (used in)
investing activities.......................................... 4,429,235 (15,630,165) (1,480,064)
FINANCING ACTIVITIES:
Proceeds from notes payable....................................... -- 19,000 115,673
Repayment of long-term debt....................................... (73,386) (82,925) (594,530)
Proceeds from issuance of stock and exercise
of options and warrants....................................... 405,150 26,761,920 7,588,335
Net cash provided by financing activities..................... 331,764 26,697,995 7,109,478
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................................................... (3,839,313) 2,238,450 3,680,709
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD........................................................... 7,688,507 5,450,057 1,769,348
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $3,849,194 $ 7,688,507 $5,450,057
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest............................................ $ 5,422 $14,296 $23,568
Inventory transferred to fixed assets.................................. 32,279 19,983 30,473
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Unearned Unrealized
Common Stock Additional Stock Loss on
Number of Paid-in Compen- Invest- Retained
Shares Amount Capital sation ments Deficit Total
BALANCE AT JULY 31, 1994........ 8,456,252 $3,382,501 $ 7,180,089 $ (118,836) $ -- $ (4,760,049) $ 5,683,705
Employee stock purchase
plan..................... 10,932 4,373 65,319 -- -- -- 69,692
Stock options issued to
directors (Note 5)........ -- -- 44,849 -- -- -- 44,849
Stock options exercised..... 147,000 58,800 640,021 698,821
Stock retired............... (58,281) (23,312) (378,229) -- -- -- (401,541)
Stock bonus................. 11,628 4,651 59,303 -- -- -- 63,954
Stock offering.............. 1,402,500 561,000 6,590,573 -- -- -- 7,151,573
Unearned stock compensation
amortization.............. -- -- -- 68,449 -- -- 68,449
Net loss.................... -- -- -- -- -- (4,731,845) (4,731,845)
BALANCE AT JULY 31, 1995........ 9,970,031 3,988,013 14,201,925 (50,387) -- (9,491,894) 8,647,657
Employee stock purchase
plan................... 17,194 6,878 106,537 -- -- -- 113,415
Stock options issued to
directors and distributors
(Note 5)................ -- -- 292,240 -- -- -- 292,240
Stock options exercised..... 123,800 49,520 858,030 -- -- -- 907,550
Stock retired.............. (47,639) (19,056) (857,074) -- -- -- (876,130)
Stock grants................ 18,000 7,200 206,015 (265,500) -- -- (52,285)
Stock offering.............. 1,971,258 788,503 25,880,862 -- -- -- 26,669,365
Unearned stock compensation
amortization............ -- -- -- 213,197 -- -- 213,197
Unrealized loss on investments -- -- -- -- (145,276) -- (145,276)
Net loss.................... -- -- -- -- -- (8,172,878) (8,172,878)
BALANCE AT JULY 31, 1996........ 12,052,644 $4,821,058 $40,688,535 $ (102,690) $(145,276) $(17,664,772) $27,596,855
Employee stock purchase
plan................... 8,537 3,415 123,616 -- -- -- 127,031
Stock options issued to
directors (Note 5)...... -- -- 52,393 -- -- -- 52,393
Stock options exercised..... 68,109 27,243 276,391 -- -- -- 303,634
Stock retired.............. (7,978) (3,191) (22,324) -- -- -- (25,515)
.Unearned stock compensation
amortization............ -- -- -- 102,690 -- -- 102,690
Unrealized gain on investments -- -- -- -- 139,440 -- 139,440
Net loss.................... -- -- -- -- -- (8,496,182) (8,496,182)
BALANCE AT JULY 31, 1997........ 12,121,312 $4,848,525 $41,118,611 $ -- $ (5,836) $(26,160,954) $19,800,346
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation The accompanying 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) (Note 2)
and Possis Medical Europe B.V., after elimination of intercompany accounts and
transactions.
The Company is a developer, manufacturer and marketer of medical devices.
The Company was incorporated in 1956 and has operated several businesses over
the last 41 years. In 1990 the Board of Directors decided to focus on medical
products, which led to the sale of the Technical Services Division in 1991 and
the Jet Edge industrial waterjet business in 1994. In March 1994 the Company
sold its pacemaker lead business because it anticipated that revenues from this
business would decline due to a pacemaker lead technology shift. The name of the
Company was changed to Possis Medical, Inc. in 1993. In January 1995, the
Company established a 100% owned subsidiary (Possis Medical Europe B.V.) in the
Netherlands to support international product distribution.
The Company's thrombectomy and graft products utilize new technology and
the production processes, and production equipment used to manufacture them are
unique and have been designed and constructed by Company employees. In addition,
the medical device industry is subject to the laws and oversight of the United
States Food and Drug Administration ("FDA") as well as non-U.S. regulatory
bodies in countries where the Company does business.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories Inventories are stated at the lower of cost (on the first-in,
first-out basis) or market.
Property, Depreciation, and Amortization Property is carried at cost and
depreciated using the straight-line method over estimated useful lives of the
assets at the following annual rates:
Leasehold improvements................... 10%
Machinery and equipment.................. 10-25%
Goodwill Goodwill is being amortized on a straight-line basis over 13-1/2
years, based on the remaining life of patent rights related to the Perma-Flow
Graft acquired in 1988. Accumulated amortization at July 31, 1997 and 1996 was
$645,500 and $573,500, respectively.
Income Taxes The Company accounts for income taxes under Statement of
Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes."
Certain items are accounted for tax purposes in a different period than for
financial statement purposes.
Revenue Recognition Revenue associated with medical products sales is
recognized when products are shipped. Heart valve patent revenue and royalty
payments related to the pacemaker leads business sale were accrued based on
estimated sales of the companies making the royalty payments. Revenue under
product supply and distribution agreements is recognized when the required
milestones have been achieved.
Fair Value of Financial Instruments Marketable securities are carried at
fair value. The carrying value of all other financial instruments, except
long-term debt, approximates fair value due to the short-term nature of the
instrument. The carrying value of long-term debt approximates fair value due to
the fixed interest rates being consistent with current market rates of interest.
Earnings (Loss) Per Share The Company's outstanding stock options and stock
warrants are not considered in the computation of earnings per share because the
impact would be antidilutive because of the net loss. The difference between
primary and fully diluted earnings per share was not significant in any period.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which is effective for interim and annual reporting
periods ending December 1997. SFAS No. 128 supersedes Accounting Principles
Board Opinion ("APB") No. 15, "Earnings per Share," and replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation for all entities with complex
capital structures and provides guidance on other computational changes. The
implementation of SFAS No. 128 is not expected to have a material impact on loss
per share.
Cash Equivalents The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
Marketable Securities All Company securities as of July 31, 1997 and 1996
are classified as available-for-sale and consist primarily of U.S. government
securities. These investments are reported at fair value with a net unrealized
loss of $5,836 and $145,276 included in shareholders' equity as of July 31, 1997
and 1996, respectively. These securities have maturity dates ranging from
October 31, 1997 to March 5, 2001. The Company utilizes the specific
identification method in computing gains or losses. During 1997 and 1996, the
Company sold available-for-sale securities aggregating approximately $1,012,000
and $1,941,000, realizing a gain of $7,109 in 1997 and a loss of $64,007 in
1996. There was no material difference between amortized cost and fair value for
the marketable securities at July 31, 1995.
Impairment of Long-Lived Assets SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss is recognized, based on the difference between
the carrying value and the discounted cash flows of an asset, when the estimated
future undiscounted cash flows from the asset are less than the carrying value
of the asset. The adoption of SFAS No. 121 had no material effect on the
consolidated financial statements.
2. DISCONTINUED OPERATIONS
Technical Services Division On September 29, 1991, the Company sold its
Technical Services division to Advance Technical Services, Inc. (ATS), which is
51% owned by a former officer of the Company. Under the terms of the sale, the
Company received approximately $550,000 in cash and a note of $250,000 for the
net assets of the business and realized a gain of $66,517. In addition, the
Company received a percentage of ATS's annual revenues in excess of a specified
amount through September 1996. As part of the sale, the Company also received
$200,000 in cash and a note of $500,000 for an agreement not to compete for a
five-year period; income from the now complete agreement was recognized ratably
over the period of the agreement.
During 1996, ATS prepaid the notes receivable and the estimated remaining
royalty payments in connection with the sale of ATS. At July 31, 1997, all
amounts related to the Company's sale of ATS were paid in full.
Income from Discontinued Operations Operating results of the Technical
Services division were as follows for the years ended July 31, 1997, 1996 and
1995:
1997 1996 1995
Sales ................................. $ -- $ -- $ --
Income from operations.................. $ -- $ 225 $ 87,306
Amortization of not-to-compete
agreement.............................. 41,768 154,647 113,916
Percentage of ATS's revenues............ 69,771 250,544 219,679
Income from discontinued operations .... $111,539 $405,416 $420,901
3. LONG-TERM DEBT
Long-term debt at July 31, 1997 and 1996 is as follows: 1997 1996
Notes payable, interest at 9.75%-10.15%,
principal and interest payable monthly, final
payments due between November 1997 and
December 1998, collateralized by
the Company's equipment............................. $25,269 $ 92,955
Noninterest bearing note payable, principal payable
in 10 equal quarterly payments beginning
January 1997, final payment due April 1999,
unsecured........................................... 13,300 19,000
38,569 111,955
Less current maturities.............................. 28,356 73,386
$10,213 $ 38,569
4. INCOME TAXES
At July 31, 1997, the Company has net operating loss carryforwards of
approximately $22,935,000 for federal tax purposes which expire in 2003 through
2012 and $7,683,000 for Minnesota tax purposes which expire in 2003 through
2012.
In addition, at July 31, 1997 the Company has approximately $1,653,000 and
$455,000 in federal and state tax credits, respectively, substantially all of
which are research and development tax credits, which expire from 2000 through
2012, and a $65,182 AMT credit which does not expire.
Deferred tax assets and liabilities as of July 31, 1997 and 1996 are
described in the table below. The Company has not recorded any net deferred tax
assets due to the uncertainty of realizing such assets:
1997 1996
Current assets (liabilities):
Allowance for doubtful accounts.............. $ 28,000 $ 20,000
Inventory.................................... 284,000 302,000
Accrued vacation............................. 34,000 34,000
Other ...................................... 57,000 80,000
403,000 436,000
Valuation allowance.......................... (403,000) (436,000)
Net ...................................... $ -- $ --
Long-term assets:
Net operating losses......................... $ 8,551,000 $ 5,647,000
Amortization of patents...................... 187,000 142,000
Tax credits.................................. 1,687,000 1,506,000
Depreciation................................. (133,000) (74,000)
10,292,000 7,221,000
Valuation allowance.......................... (10,292,000) (7,221,000)
Net ...................................... $ -- $ --
The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1997, 1996 and 1995 as follows:
1997 1996 1995
Tax benefit on loss from
continuing operations computed at
statutory rate of 34%..................... $(2,889,000) $(2,778,000) $(1,608,000)
Decrease in tax benefit due to
nonrecognizable benefits of net
operating loss carryforwards and others... 2,889,000 2,778,000 1,608,000
Total income tax expense
continuing operations..................... $ -- $ -- $ --
5. COMMON STOCK
Stock Options Certain officers, directors, key employees, and certain other
individuals may purchase common stock of the Company under stock option plans.
In 1992, the Company established the 1992 Stock Compensation Plan (the 1992
Plan), which replaced the 1983 and 1985 plans. Although the 1983 and 1985 plans
remain in effect for options outstanding, no new options may be granted under
these plans.
The 1992 Plan authorizes awards of the following types of equity-based
compensation: Incentive Stock Options, Nonqualified Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Annual Grants of Stock
Options to Directors, Stock Options to Directors in Lieu of Compensation for
Services rendered as Directors, and Other Stock-Based Awards valued in whole or
in part by reference to stock of the Company. No Incentive Stock Options may be
granted on or after August 1, 2002, nor shall such options remain valid beyond
ten years following the date of grant.
The total number of shares of stock reserved and available for distribution
under the 1992 Plan originally was 600,000 shares, a maximum of 350,000 of which
may be issued as Incentive Stock Options. The total number of shares reserved
and available for distribution under the plan was increased annually on January
2, 1993, 1994 and 1995, by 1% of the number of shares of the Company's common
stock outstanding at July 31 of the prior fiscal year. In 1995 the Company
amended the 1992 Stock Compensation Plan by increasing the number of common
shares issuable under the plan each year from 1% to 2% of the total number of
shares outstanding at July 31 of the prior fiscal year. In addition, the number
of common shares issuable as Incentive Stock Options under the plan was
increased to 1,000,000. At July 31, 1997, there were 1,291,775 shares reserved
for outstanding options and 242,902 shares available for granting of options
under the 1992 Plan.
In 1983, the Company established an Incentive Stock Option Plan. A maximum
of 545,000 shares were authorized under the plan at an option price of at least
100% of the fair market value at date of grant. The options become exercisable
at date of grant, except for those options granted after March 17, 1985, which
vest ratably over a three or four year period. All options expire ten years from
date of grant.
In 1985, the Company established a Nonqualified Stock Option Plan under
which a maximum of 200,000 shares were authorized to be granted at a price of at
least 100% of the fair market value at date of grant. The options vest ratably
over a three or four year period and expire not more than ten years from date of
grant.
In fiscal 1997, 1996 and 1995, the Company granted 5,207, 4,760 and 11,574
compensatory options, respectively, to its outside directors in lieu of cash
payments for directors fees. These options were granted under the 1992 Plan.
A summary of changes in outstanding options for each of the three years
ended July 31, 1997 follows:
1997 1996 1995
Shares under option at
beginning of year............................ 899,787 728,102 880,478
Options granted - 1992 plan..................... 460,557 254,660 33,374
Options granted - Non plan...................... -- 55,000 --
Options exercised............................... (68,109) (123,800) (147,000)
Options canceled................................ (79,291) (14,175) (38,750)
Shares under option at end of year........... 1,212,944 899,787 728,102
Shares exercisable at end of year............... 581,238 348,204 497,841
Exercise price of options granted............... $10.62-20.45 $8.75-17.50 $3.875-7.75
Exercise price of options exercised............. $1.00-14.625 $2.75-14.625 $2.625-11.38
Market price of options exercised 16.75-19.625 $13.75-21.25 $6.25-13.625
Aggregate market value of options
exercised.................................... $1,241,296 $2,245,906 $1,180,469
Stock option weighted average exercise prices during 1997 and 1996 are
summarized below:
1997 1996
Outstanding at beginning of year.......... $ 9.15 $ 6.73
Granted ................................. 15.81 14.71
Exercised................................. 4.46 7.33
Canceled ................................. 12.40 14.08
Outstanding at end of year................ $11.63 9.15
The following table summarizes information concerning options outstanding
and exercisable options as of July 31, 1997:
Weighted
Average
Range of Remaining Weighted- Weighted
Exercise Shares Contractual Life Average Shares Average
Price Outstanding in Years Exercise Price Exercisable Exercise Price
$1 - $6 250,427 4.2 $ 4.54 225,615 $4.41
$6 - $11 265,367 5.5 8.55 248,117 8.62
$11 - $16 465,150 9.0 13.98 97,006 14.08
$16 - $21 232,000 9.2 18.08 10,500 18.25
In 1993, the Company granted 37,000 shares of restricted stock to employees
under the terms of the 1992 Plan, which vested 7,400 shares each on December 2,
1993 and on June 3, 1994, 1995, 1996 and 1997. Approximately $128,000 was
accrued to pay the estimated withholding taxes on those shares as management
believes that the employees would elect to receive fewer shares in lieu of
paying the withholding taxes. In case of termination of the employees, with the
exception of those shares vesting December 2, 1993, unvested shares were
forfeited. Unearned compensation of $342,250 was recorded at the date of grant
and was recognized over the vesting period. In 1996, the Company granted 18,000
shares of restricted stock to employees which vested 9,000 shares each on June
3, 1996 and 1997, under terms similar to the 1993 grants. Approximately $112,000
was accrued to pay the estimated withholding taxes on those shares as management
believed that the employees would elect to receive fewer shares in lieu of
paying the withholding taxes. Unearned compensation of $265,540 was recorded at
the date of grant and is being recognized over the vesting period. In fiscal
1997, 1996 and 1995, total compensation expense of $102,690, $213,197 and
$68,449, respectively, was recognized on these restricted stock grants.
During 1996, the Company issued options to purchase 55,000 shares of common
stock to various distributors of the Company's products. The options are
exercisable at $12.56 - $14.39 per share and expire in 2001. Selling, general
and administrative expense of approximately $251,000 was recorded in connection
with these transactions.
Effective August 1, 1996, the Company adopted SFAS No. 123,"Accounting for
Stock-Based Compensation." As permitted by SFAS 123, the Company has elected to
continue following the guidance of APB No. 25 for measurement and recognition of
stock-based transactions with employees. No compensation cost has been
recognized for stock options issued under the 1992 Plan because the exercise
price for all options granted was at least equal to the fair value of the common
stock at the date of grant except as noted previously in this note. If
compensation cost for the Company's stock option and employee purchase plans had
been determined based on the fair value at the grant dates for grants during
1996 and 1997, consistent with the method provided in SFAS No. 123, the
Company's net loss and loss per share would have been as follows:
1997 1996
Net Loss:
As reported................. $(8,496,182) $(8,172,878)
Pro forma................... (9,752,401) (8,617,407)
Loss per Share:
As reported................. $ (.70) $ (.70)
Pro forma................... (.81) (.74)
The fair value of options granted under the various option plans during
1997 and 1996 was estimated on the date of grant using the Black-Sholes
option-pricing model with the following weighted average assumptions and
results:
1997 1996
Dividend yield............................. None None
Expected volatility........................ 40% 42%
Risk-free interest rate.................... 6.5% 6.5%
Expected life of option.................... 120 mo. 120 mo.
Fair value of options on grant date........ $4,353,803 $2,803,806
Stock Warrants Stock purchase warrants held by unrelated parties
representing the right to purchase an aggregate of 26,400 shares of the
Company's common stock at $8.52 a share were outstanding at July 31, 1997. 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 a specified
period.
On September 15, 1994, warrants to purchase 120,000 shares of common stock
at $6.90 per share were issued to John G. Kinnard & Company in conjunction with
the Company's September 1994 public stock offering. As of July 31, 1997, all
such warrants were outstanding.
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 8,537 shares in 1997,
17,194 shares in 1996 and 10,932 shares in 1995 under this plan.
6. RELATED-PARTY TRANSACTIONS
The Company and St. Jude Medical, Inc. (St. Jude), an unrelated
corporation, entered into an agreement under which the Company transferred to
St. Jude its entire right, title, and interest in the patents relating to a
prosthetic heart valve developed by Z. C. Possis, former Chief Executive Officer
of the Company, on his own time and without consideration. Under the terms of
the agreement, St. Jude remitted royalty payments to the Company through March
14, 1995 equal to 2% of St. Jude's total net sales of heart valves in excess of
$4,052,000 per year. The Company paid 25% of such payments to a group of
individuals including a shareholder of the Company, three relatives of Z. C.
Possis and four unrelated persons and 11.25% (7.5% through February 1992) to Z.
C. Possis or his estate.
7. 401 K PLAN
The Company has an employees' savings and profit sharing plan for all
qualified employees who have completed one year 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, 1997, 1996 and 1995 were $97,765, $90,114 and $77,907,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company's medical products operation is conducted from a leased
facility under an operating lease which expires in 2006. Rental payments under
the lease are guaranteed by a letter of credit in the amount of $20,000 at July
31, 1997. Rental expense charged against earnings was $237,742 in fiscal 1997,
$329,340 in fiscal 1996, and $379,706 in fiscal 1995. The future annual rentals
on this operating lease are $242,000 per year through 2006. The lease is
noncancelable before April 2001, after which it can be canceled with notice and
payment of a termination fee.
The Company is a defendant in various lawsuits relating to business, some
of which involve claims for unspecified amounts. Although the ultimate outcome
of these matters cannot be predicted with certainty, management believes that
the outcome will not have a material adverse effect on the financial statements
of the Company.
9. SALES TO MAJOR CUSTOMERS
The Company's continuing operations are in one segment, the design,
manufacture and distribution of cardiovascular and vascular medical devices.
Approximately 29% of 1997's medical product sales are to foreign customers. This
is down from 80% in 1996 and 100% in 1995. In 1997 there were no individual
customers that sales exceeded 10%. In 1996, sales to four customers amounted to
21%, 17%, 14% and 12% of medical products revenues, and the receivables related
to these customers were 21%, 2%, 0%, and 6% of total receivables, respectively.
In 1995, sales to two customers amounted to 62% and 15% of medical products
revenues.
10. SALE OF PACEMAKER LEADS BUSINESS
On March 18, 1994, the Company sold the assets of the pacemaker lead
product line to Innovex, Inc. The Company received $1,100,000 in cash in
exchange for $451,786 in inventories and fixed assets, recording a gain of
$647,816 in fiscal 1994. In addition, the Company received a 75% royalty on
gross sales of certain leads and related services for one year. The pacemaker
lead business was a product line and component of the medical products segment.
Since other components of this segment (research and development activities and
initial production of new products) were continuing, the sale of the lead
business was not reported as a discontinued operation.
11. PRODUCT SUPPLY AND DISTRIBUTION AGREEMENTS
On December 30, 1994, the Company executed a Supply and Distribution
Agreement with Bard Vascular Systems Division, C.R. Bard, Inc. ("Bard"). This
Agreement granted to Bard exclusive worldwide sales and marketing rights to the
Possis Perma-Seal Dialysis Access graft for an initial 10-year term, renewable
for the life of applicable patents. Under this Agreement, through July 31, 1996,
the Company had received $1,000,000. In January 1997, the Company terminated the
Agreement with Bard. Upon termination, the Company received $1,750,000 in cash
and approximately $49,000 in returned unused product.
On March 15, 1996 the Company entered into a Distribution Agreement with
Baxter Healthcare Corporation ("Baxter"). This Agreement grants Baxter exclusive
worldwide distribution rights to the Possis Perma-Flow Coronary Bypass Graft for
a three-year term. Under this Agreement, through July 31, 1997, the Company
received $400,000 and will receive up to an additional $200,000, on the second
anniversary date of agreement signing, as long as the agreement is still in
effect.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure:
During fiscal 1996 and 1997, 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" 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, 1997 is in the Proxy Statement and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
The security ownership of certain beneficial owners and management is in
the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions:
Information regarding related party transactions is contained in Note 6 of
Notes to Consolidated Financial Statements in Part II, Item 8 of this report and
in "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, 1997 and 1996
Consolidated Statements of Operations for each of the three years in the period
ended July 31, 1997
Consolidated Statements of Cash Flows for each of the three years in the
period ended July 31, 1997.
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended July 31, 1997.
Notes to Consolidated Financial Statements
2. Schedules
The following financial statement schedules are submitted herewith:
Consent of independent certified public accountants.
SCHEDULE II - Valuation Accounts
Other schedules are omitted because they are not required or are not
applicableor because the required information is included in the financial
statements listed above.
3. Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated on the following three pages.
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as amended
July 31, 1994 and restated to date
3.2 S-2 Amendment No.1 Bylaws as amended and restated
August 9, 1994 to date
4.1 10-K Fiscal year ended Norwest Equipment Finance, Inc.
July 31, 1994 loan agreement, dated January 12,
1994
4.2 8-A December 13, 1996 Rights agreement, dated December 12,
1996, between the Company and
Norwest Bank Minnesota N.A., as
rights agent
4.3 S-2 Amendment No. 1 Form of Warrant to John G. Kinnard
August 9, 1994 and Company, Incorporated, included in
underwriting agreement entered into
between the Company and John G.
Kinnard and Company
10.1 S-1 June 30, 1988 Agreement with St. Jude Medical,
Inc., dated August 2, 1983
10.2 10-Q Quarter ended Asset purchase agreement with
January 31, 1994 Innovex, Inc., dated March 11, 1994
10. 3 8-K Quarter ended Settlement agreement and mutual
January 31, 1997 release relating to the termination
of the Perma-Seal supply and
distribution agreement with C.R.Bard,
Inc.
10.4 S-2 Amendment No.1 License agreement with Imperial
August 9, 1994 Chemical Industries Plc., dated
April 15, 1991
10.5 S-2 Amendment No.1 License agreement with the
August 9, 1994 University of Liverpool, dated
May 10, 1990
10.6 S-1 June 30, 1988 Form of indemnification agreement
with officers and directors of
Registrant
Exhibit Form Date Filed Description
* 10.7 S-8 February 7, 1990 1983 Incentive Stock Option Plan as
amended to date
* 10.8 S-1 June 30, 1988 1985 Nonqualified Stock Option
Plan as amended to date
* 10.9 10-K Fiscal year ended Form of incentive stock option
July 31, 1989 agreement for officers
* 10.10 10-K Fiscal year ended Form of stock option agreement for
July 31, 1989 directors
* 10.11 S-8 December 30, 1992 1992 Stock Compensation Plan
* 10.12 10-K Fiscal year ended Form of restricted stock agreement
July 31, 1993 for officers (1992 Plan)
* 10.13 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for officers (1992 Plan)
* 10.14 10-K Fiscal year ended Form of incentive stock option
July 31, 1993 agreement for officers (1992 Plan)
* 10.15 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1992 directors' fees
(1992 Plan)
* 10.16 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1990 directors' fees
* 10.17 10-K Fiscal year ended Form of nonqualified stock option
July 31, 1993 agreement for 1989 directors' fees
10.18 10-Q Quarter ended Supply & distribution agreement
January 31, 1995 with Bard Vascular Systems
Division, C.R.Bard, Inc.
10.19 10-Q Quarter ended Lease agreement for corporate
January 31, 1996 headquarters and manufacturing
facility dated December 15, 1995.
10.20 8-K March 28, 1996 Supply and distribution agreement
with Edwards CVS Division, Baxter
Healthcare Corporation
Exhibit Form Date Filed Description
21 10-K Fiscal year ended Subsidiaries of registrant
July 31, 1995
23 Consent of independent certified
public accountants
27 Financial data schedule
* 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, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POSSIS MEDICAL, INC.
by: /s/ Russel E. Carlson
Russel E. Carlson
Vice President of Finance
Chief Financial and Accounting Officer
Dated: October 24, 1997
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 24, 1997
Donald C. Wegmiller
/s/ Robert G. Dutcher Director, President and October 24, 1997
Robert G. Dutcher Chief Executive Officer
/s/ Dean Belbas Director October 24, 1997
Dean Belbas
/s/ Seymour J. Mansfield Director October 24, 1997
Seymour J. Mansfield
/s/ Demetre Nicoloff, MD Director October 24, 1997
Demetre Nicoloff, MD
/s/ Ann M. Possis Director October 24, 1997
Ann M. Possis
/s/ Joe A. Walters Director October 24, 1997
Joe A. Walters
SCHEDULE II
POSSIS MEDICAL, INC.
VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
Column A Column BColumn 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 -
deducted from trade receivables
in the balance sheet:
Year ended July 31, 1997 $ 60,000 $ 96,530 $ 76,530 $ 80,000
Year ended July 31, 1996 27,019 50,000 17,019 60,000
Year ended July 31, 1995 120,000 (76,375) 16,606 27,019
Valuation allowance on
deferred tax asset:
Year ended July 31, 1997 $7,657,000 $3,038,000 $ -- $10,695,000
Year ended July 31, 1996 4,898,000 2,759,000 -- 7,657,000
Year ended July 31, 1995 2,556,000 2,342,000 -- 4,898,000
Reserve for inventory
obsolescence:
Year ended July 31, 1997 $ 150,000 $ 86,000 $136,427 $ 99,573
Year ended July 31, 1996 125,000 38,795 13,795 150,000
Year ended July 31, 1995 150,000 136,086 161,086 125,000
POSSIS MEDICAL, INC.
FORM 10-K - ITEM 14(a)3
EXHIBIT INDEX
Exhibit
Number Description
23 Consent of independent certified public accountants
27 Financial data schedule
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Possis Medical, Inc.:
We consent to the incorporation by reference in Post-Effective Amendment
No. 1 to Registration Statement No. 33-5467 on Form S-8, Post-Effective
Amendment No. 1 to Registration Statement No. 33-33416 on Form S-8, Registration
Statement No. 33-39987 on Form S-8, and Registration Statement No. 33-56728 on
Form S-8 of our report, dated August 29, 1997, appearing in this Annual Report
on Form 10-K of Possis Medical, Inc. for the year ended July 31, 1997.
Deloitte & Touche LLP
Minneapolis, Minnesota
October 24, 1997