Item 1. Business:
General
Possis Medical, Inc. (the Company) was incorporated in 1956 and went public in 1960 as Possis Machine Corporation. Initial operations consisted of design, manufacturing, and sales of industrial equipment and a division that provided temporary technical personnel. The Company's involvement with medical products began in 1976, 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. 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. These sales 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(R) RHEOLYTIC(TM) THROMBECTOMY SYSTEM. The development of blood clots in various sites within the vascular system is common and is one of the leading causes of morbidity and death. Blood clots may be caused by multiple factors, including cardiovascular disease, trauma, impediment of normal flow during 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, life-threatening 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 which is, with the aid of fluoroscopy, 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 though difficult to quantify, 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 Compan's marketing analysis indicates that the versatile AngioJet System may be effective for the treatment of various blood clot-induced conditions throughout the body. The following table shows the locations and conditions where the AngioJet System may be used. In addition, the table indicates the annual incidences worldwide and the Company's estimated AngioJet System annual market potential.
The Company's established price for the single use catheter and the pump set to the hospital (worldwide) is between $600 and $1,450. The list price for the drive unit in the U.S. is $25,000. Outside the U.S. the list price of the drive unit to the Compan'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. In contrast, 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. In October 1998, David J. Cohen, MD, of Beth Israel Deaconess Medical Center, Boston, Massachusetts, presented his preliminary cost-effectiveness study results based on the Company's 349 patient coronary clinical trial, at the Transcatheter Cardiovascular Therapeutics Symposium. The preliminary results indicate AngioJet System reduced 30-day, in-house hospital costs by $2,000 to $3,000 per patient as compared to the use of the blood clot-dissolving drug urokinase. Dr. Cohen plans to present a 12-month cost comparison, including physician costs, at the American College of Cardiology meeting in March 1999.
On December 6, 1996 the Company received FDA clearance to commence U.S. marketing of the AngioJet 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 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 1999.
In September 1998, Possis submitted to the FDA a pre-market approval ("PMA") seeking approval to market its AngioJet System to remove blood clots from coronary arteries and bypass grafts. The FDA targets completion of its review and a response to the Company within 180 days. The PMA presents the results of a 349 patient randomized trial comparing AngioJet System treatment to intracoronary infusion of the blood clot-dissolving drug urokinase for patients with demonstrated clot in native coronary arteries and saphenous vein bypass grafts. The randomized trial showed that AngioJet System treatment had significantly better outcomes than the urokinase treatment for procedure success and device success. AngioJet System treatment also had lower in-hospital major cardiac complications, including fewer bleeding complications and vascular complications. Also, the results of a cost-effectiveness trial run concurrently with the coronary AngioJet trials show that the AngioJet System treatment costs are, on average, significantly lower than those associated with the use of urokinase. Detailed clinical results will be presented for the first time by Steven Ramee, MD, at the American Heart Association meeting in November 1998.
PERMA-FLOW(R) 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 may 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 1998 approximately 700,000 CABG procedures will be performed worldwide, of which approximately 370,000 will be performed in the United States. Approximately 10% of these CABG procedures will be 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. 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 1% of those receiving CABG procedures, or approximately 7,000 annually. 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. 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 August 1998, 32 Phase 1 and 90 Phase 2 study patients have been enrolled at 20 sites. Angiographic results at 30 days following surgery have been reported on 97 patients, which confirmed 173 of 191 side-to-side anastomoses to be patent (providing blood to the coronary arteries). Within this 30-day interval, of the remaining 25 patients, angiographic results were not yet reported for 16 and nine 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 52 patients, which confirmed that 61 of 104 anastomoses were patent. The Company anticipates filing a PMA application for U.S. marketing authorization in 2003.
In April 1998, the Company received Humanitarian Device Exemption ("HDE") approval from the FDA, clearing the way for U.S. marketing of the Perma-Flow Graft for patients who require coronary bypass surgery, but who have inadequate blood vessels of their own for use in the surgery.
PERMA-SEA(R) 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.
In September 1998, the Company received FDA marketing approval for its Perma-Seal Graft. 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 offers 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 210,000 patients in the United States undergo kidney dialysis each year, of which approximately 80,000 receive vascular access procedures utilizing either natural vessel grafts or synthetic access grafts. The Company estimates that of these patients approximately 63,000 are implanted with a synthetic graft. The Company believes that worldwide, approximately 93,000 synthetic grafts are implanted annually
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 has not been established, but is expected to fall within this range.
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 large vessel applications. 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, development and validation of manufacturing process, conduct of clinical trials, and seeking and obtaining governmental approvals. The Company's research and development expenses are expected to increase as the Company continues its clinical trials and current product development plans.
As of September 30, 1998, the Company employed approximately 52 full-time employees in research and development, including 43 in new product concept screening, prototype building, product and process development and validation, and nine 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 $5.2 million, $5.0 million and $3.2 million in fiscal 1998, 1997, and 1996, 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, 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 percutaneous transluminal angioplasty ("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 cardiovascular surgeons and thoracic surgeons. 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, Greece, Luxembourg, The Netherlands, Norway, Spain, Switzerland, Austria, France, Saudi Arabia, Israel, Australia, Russia, Japan, India, 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 once it received regulatory clearance in Europe for all of its products as 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 Rheolytic 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. However, in January 1997, the Company terminated the agreement with Bard. In September 1998, the Company received FDA approval to commence U.S. marketing of the Perma-Seal Graft.
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. However, in April 1998, the Company modified the Agreement with Baxter, under which Baxter retains non-exclusive distribution rights outside of the United States, but has no distribution rights in the United States for the remaining term of the Distribution Agreement.
In January 1998, the Company engaged Salomon Smith Barney to assist in the development and implementation of a strategic plan designed to maximize the value of the Company's vascular graft business. The Company expects to make an announcement regarding this project within the next several weeks.
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 two patent applications pending in the United States and four patent applications pending in foreign jurisdictions. The Company holds three United States patents relating to the AngioJet System. In addition, the Company has twelve United States and nine foreign patent applications pending relating to the AngioJet System. Two of the pending applications in the United States have allowed claims and will issue upon completion of final administrative requirements. Three AngioJet System patent applications have been accepted by foreign jurisdictions. 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 synthetic vascular grafts. 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 Investigational Device Exemption ("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 HDE. These regulations permit that certain devices, if intended for a small (less than 4,000 per year), medically-defined group of patients, may 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 the FDA upon approval of an appropriate HDE submission. Such submissions must establish the safety and probable benefit of the device for the proposed intended use. An HDE approval lasts 12 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 manufacturing and quality systems 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 regulatory 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 ISO 9001 compliance 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. 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, 1998, the Company had 179 full-time employees, one part-time employee and eight contract employees. Of these full-time employees, 52 are in research and development, 58 are in manufacturing and production, 10 are in quality systems, 6 are in facilities/maintenance, 36 are in sales and marketing and 17 are in management or administrative positions. None of the Company's employees are covered by a collective bargaining agreement, and management considers its relations with its employees to be good.
Item 2.
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 7 of Notes to Consolidated Financial Statements in Part II, Item 8.
Item 3.
Item 3. Legal Proceedings:
None
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders:
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Robert G. Dutcher has served as President and Chief Executive Officer and has been a director of the Company since October 1993. From June 1992 until October 1993, Mr. Dutcher served as Executive Vice President of the Company. Since 1987, he has served as President and Chief Operating Officer of Possis Holdings, Inc. (a subsidiary formerly known as Possis Medical, Inc.). 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 Vice President and General Counsel since December 1993, and as Secretary and Corporate Counsel of the Company since July 1988. 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.
T. V. Rao joined the Company in June 1998 as Vice President and General Manager of AngioJet Thrombectomy business. Prior to joining the Company, Mr. Rao served as Vice President of Sales and Marketing for Angeion Corporation from July 1995 to June 1998, as Vice President of Sales and Marketing for Brunswick Biomedical Corporation from July 1994 to June 1995 and served in several positions (most recently as Director of Marketing, Tachyarrhythmia Business) at Medtronic Inc. since 1980. Mr. Rao holds a master's degree in business from the College of St. Thomas and a bachelor's degree with honors in mechanical engineering from Madras, India.
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.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters:
The Company had 1,618 common shareholders of record at July 31, 1998. 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, 1998 and 1997 are presented below:
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.
Item 6. Selected Financial Data:
SELECTED FINANCIAL DATA POSSIS MEDICAL, INC. AND SUBSIDIARIES YEARS ENDED JULY 31,
Item 7.
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. 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. This sale enables 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 and the $12.0 million from the issuance of 5% convertible subordinated debentures in 1998, has been used to fund the Company's operations, including research and development related to its products. 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, 1998, 1997 and 1996
Total revenue increased 27% and 201% in fiscal 1998 and 1997, respectively, compared to prior years. The main factor in the product sales increase in fiscal 1998 and 1997 was the December 1996 FDA clearance to commence U.S. marketing of the AngioJet(R) Rheolytic(TM) Thrombectomy System, with labeling claims for removal of blood clots from grafts used by patients on kidney dialysis. U.S. AngioJet System product revenue was $6,013,000 and $2,633,000 for fiscal 1998 and 1997, respectively. The fiscal 1998 U.S. product revenue increased by 128% over fiscal 1997.
Since the U.S. market introduction of the AngioJet System, the Company has listed its AngioJet System drive unit, considered capital equipment, at $80,000 to hospitals. Despite employing a variety of flexible drive unit acquisition programs including outright purchase, rental, lease and fee-per-procedure, the Company sold only 12 drive units to U.S. hospitals through March 31, 1998. In April 1998, the AngioJet System drive unit list price was reduced to $25,000 after a successful test of the lower price in two of the Company's 15 sales territories. A lower drive unit sales price is intended to improve the competitive position of the AngioJet System, facilitate evaluation of the technology, ease sale closure on units currently under evaluation and provide added time for the Company's direct sales force to encourage use of the systems currently in the field. Since the lowering of the retail price to $25,000 in April 1998 there have been 19 drive units sold to U.S. hospitals versus 12 drive units in the previous sixteen months. The purchasing cycle for the AngioJet System drive unit, the Company believes, will vary from purchasing the drive unit with no evaluation to an evaluation period up to twelve months depending on the customer's budget cycle.
In December 1997, the Company received approval to commence a clinical study of the AngioJet System for use in the treatment of stroke caused by blockage of the carotid arteries, the main vessels supplying blood to the brain. The Company believes that the treatment of stroke is a significant marketing opportunity for the AngioJet System. In May 1998, the Company introduced its AV60 AngioJet Catheter. The AV60 Catheter has been designed specifically to more effectively and efficiently remove blood clots from dialysis access grafts - the indication for use for which Possis received FDA marketing approval in December 1996. In September 1998, Possis submitted to the FDA a pre-market approval ("PMA") application seeking approval to market its AngioJet System to remove blood clots from coronary blood vessels. The FDA targets completion of its review and a response to the Company within 180 days. However, recent actual average elapsed time from Company submission to FDA approval is 14 months. The PMA presents the results of a 349 patient randomized trial comparing AngioJet System treatment to intracoronary infusion of the blood clot-dissolving drug urokinase for patients with demonstrated clot in native coronary arteries and saphenous vein bypass grafts. The randomized trial showed that AngioJet System treatment had significantly better outcomes than the urokinase treatment for procedure success and device success. AngioJet System treatment also had lower in-hospital major cardiac complications, including fewer bleeding complications and vascular complications. Also, the results of a cost-effectiveness trial run concurrently with the coronary AngioJet trials show that the AngioJet System treatment costs are on average significantly lower than those associated with the use of urokinase. The Company believes that the treatment of blood clots in coronary vessels is a significant marketing opportunity for the AngioJet System. The Company expects the U.S. AngioJet System sales will grow primarily through the addition of sales people, the completion of clinical trials designed to yield additional FDA label-approved product uses, the publication of clinical performance and cost effectiveness data, and the introduction of additional catheter designs.
Foreign sales of the AngioJet System during fiscal 1998, 1997 and 1996 were $351,000, $806,000 and $919,000, respectively. The Company's German AngioJet System distributor was terminated in February 1997 which impacted fiscal 1998 and 1997 foreign sales. The Company is evaluating its European AngioJet System distribution options. Actions the Company is taking to improve AngioJet System sales in Europe include conducting European cost effectiveness studies, a carotid artery study in Germany, a deep vein thrombosis study in Italy and developing European physician advocates for the AngioJet System. In Japan, the coronary AngioJet System clinical study enrollment was completed in April 1998 and a regulatory filing with the Japanese Ministry of Health and Welfare is planned in 1998.
During fiscal 1998, 1997 and 1996, sales of Perma-Flow(R) Coronary Bypass Graft were $105,000, $58,000 and $111,000, respectively. In March 1996, the Company entered into a Distribution Agreement with Baxter Healthcare Corporation ("Baxter"). This Agreement granted Baxter exclusive worldwide distribution rights to the Perma-Flow Coronary Bypass Graft for a three-year term. In April 1998, this Distribution Agreement was modified with Baxter retaining non-exclusive distribution rights outside the United States but having no distribution rights in the United States for the remaining term of the Distribution Agreement. In April 1998, the Company received Humanitarian Device Exemption ("HDE") approval from the FDA, clearing the way for U.S. marketing of the Perma-Flow Coronary Bypass Graft for patients who require coronary bypass surgery but who have inadequate blood vessels of their own for use in the surgery.
During fiscal 1997 and 1996, sales of Perma-Seal(R) Dialysis Access Graft were $124,000 and $163,000, respectively. There were no sales in fiscal 1998. The decrease is due to the termination of the Company's worldwide Perma-Seal Dialysis Access Graft distributor in January 1997. In September 1998 the Company received FDA marketing approval for its Perma-Seal Graft.
In January 1998, the Company engaged Salomon Smith Barney to assist in the development and implementation of a strategic plan designed to maximize the value of the Company's vascular graft business. The Company expects to make an announcement regarding this project within the next several weeks.
Sales agreement and other revenue includes $200,000 per year for fiscal 1997 and 1996 from Baxter Healthcare Corporation paid to 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 its Perma-Seal Graft distributor. See Note 9 of Notes to Consolidated Financial Statements.
The Company is planning for continued growth in product sales for fiscal 1999 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 increased 17% in fiscal 1998 and decreased 6% in fiscal 1997, compared to prior years. Production expenses relating to vascular grafts were $304,000, $299,000 and $1,555,000 for fiscal years 1998, 1997 and 1996, respectively. During most of fiscal 1998 and 1997, the Company 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 1998, 1997 and 1996 were $5,491,000, $4,636,000 and $3,701,000, respectively. The increase is primarily due to significant growth in AngioJet System product sales. Medical product gross margins improved by $2,443,000 and $1,980,000 in fiscal 1998 and 1997, respectively, compared to prior years. 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 $3,010,000 and $1,494,000 in fiscal 1998 and 1997, respectively, as compared to prior periods. The primary factor in fiscal 1998 and 1997 are increased sales and marketing expenses related to the establishment of a direct sales organization to sell the AngioJet 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 36 employees in July 1998. The Company plans on increasing its sales and marketing expenditures in fiscal 1999 in order to maintain its existing direct U.S. sales force at its present level and to expand its marketing efforts. Subsequent to the AngioJet System receiving FDA approval for coronary use, the Company plans to increase the direct U.S. sales force to meet the expected demand for the Company's AngioJet System.
Research and development expenses increased 5% and 57% in fiscal 1998 and 1997, respectively, as compared to prior periods. The fiscal 1998 increase was due primarily to increased expenses relating to the Coronary AngioJet System clinical trial and the development of new AngioJet System thrombectomy applications. This increase was offset by a reduction of expenses relating to the Perma-Flow Graft and Perma-Seal Graft clinical trials and development expenses. The fiscal 1997 increases were 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 System thrombectomy applications and new AngioJet technology-based products.
Interest income decreased in fiscal 1998 and 1997 from the previous years due to the use of the Company's cash reserves to fund the Company's operations. The $12,000,000 received from the issuance of 5% convertible subordinated debentures had a modest impact on interest income in fiscal 1998 due to receiving it in July 1998.
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 $13.8 million at July 31, 1998, a decrease of $1.0 million from the prior year. The primary factors in the reduction of the Company's cash position was the net loss of $12.0 million and the issuance of $12.0 million of 5% convertible subordinated debentures in July 1998.
During fiscal 1998, cash used in operating activities was $11.8 million, which resulted primarily from an $12.0 million net loss and a $1.8 million increase in receivables, inventories and other current assets, offset by depreciation, amortization, stock compensation and an increase in trade accounts payable and accrued liabilities totaling $2.0 million. Cash provided by investing activities was $10.4 million, which resulted from the net proceeds from the sale/maturity of marketable securities of $11.0 million, offset by additions to plant and equipment of $614,000. Net cash provided by financing activities was $11.4 million, which resulted from the net proceeds from the issuance of 5% convertible subordinated debentures of $11.1 million, proceeds from long-term debt of $175,000 and the exercise of stock options of $142,000.
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 of 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 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.
The Company believes that product sales of the AngioJet System, primarily in the U.S., will yield meaningful sales growth going forward. Concurrently, sales and marketing expenditures are planned 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 1999. In addition, the Company expects that increasing working capital investments in trade receivables and inventory will be required to support growing product sales.
The Company is currently evaluating its capital needs and the options available for raising cash, including monies that may be forthcoming from the Company's graft business project. Additional capital will likely be sought in fiscal 1999.
Year 2000 ("Y2K")
The Company established a team in May 1998 to assess and address the possible exposures related to the Y2K issue. The areas under investigation include product issues, business computer systems, production equipment, vendor readiness and contingency plans. Products currently sold by the Company are Y2K compliant. The Company does not use internally developed computer software and is therefore not anticipating major reprogramming efforts. The Company's primary financial and operational system has been assessed and is certified "Y2K Compliant." There are several personal productivity applications that are not currently Y2K compliant. The Company expects them to be compliant by mid-calendar 1999. Various personal computers are not currently Y2K compliant. These computers are planned to be replaced as part of the Company's technology update strategy. None of these replacements have been accelerated and they have no material effect on the Company consolidated financial statements. Equipment used for production or quality control does not use dates to control operations.
The Company mailed questionnaires to each of its significant vendors in October 1998 to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Y2K issues. This assessment will be completed by the end of calendar 1998. In addition, the Company has investigated its utility providers and believes they will be Y2K compliant. The Company anticipates developing a contingency plan once it has completed its assessment of significant vendor compliance which will be no later than the first quarter of calendar 1999. A contingency plan will be developed to minimize the Company's exposure to work slowdowns or business disruptions. In the event any vendors are not Y2K compliant the Company will seek new vendors to meet its production needs.
The Company has budgeted approximately $50,000 for expenses directly related to Y2K identification and remediation of internal systems. It has also purchased continuation of business and director's liability related to the Y2K issue.
Although the Company does not at this time expect a significant impact on its consolidated financial position, results of operations and cash flows, our internal review has not been completed and there can be no assurance that the systems of other companies or the systems of the Company itself will be converted on a timely basis and will not have a corresponding adverse effect on the Company.
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is required to be adopted for the fiscal year beginning August 1, 1998. At that time, the Company will be required to disclose certain financial and descriptive information about its operating segments as redefined by SFAS No. 131. The Company is in the process of assessing the impact of SFAS No. 131 on its footnote disclosures.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations and certain other sections of this 10-K, including the discussion regarding Year 2000 compliance, 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, 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, ability to raise additional capital and other risks set forth in the cautionary statements included in Exhibit 99 to the Company's report on Form 10-Q dated April 30, 1998, filed with the Securities and Exchange Commission.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
The Company invests its excess cash in money market mutual funds. The market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars ("USD"). At the end of fiscal 1998, the amount of currency held in foreign exchange was approximately $1,000 USD. The market risk on the Compan's foreign subsidiary operations is minimal.
At July 31, 1998, all of the Compan's outstanding long-term debt carry interest at a fixed rate. There is no material market risk relating to the Compan's long-term debt. The Company's 5% convertible subordinated debentures, issued July 15, 1998, carry a fixed interest rate of 5%; are due July 15, 2004; and are convertible into common stock at a price calculated per predetermined formulas based on the market price of the Company's common stock over a specified period of time.
Item 8.
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, 1998 and 1997 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, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1998, 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 28, 1998
POSSIS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
POSSIS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
POSSIS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 31
POSSIS MEDICAL, INC. AND SUBSIDIARIES POSSIS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31
POSSIS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements include the accounts of Possis Medical, Inc. (the Company) and its wholly-owned subsidiaries, Possis Holdings, Inc., JEI Liquidation, Inc. (Jet Edge) and Possis Medical Europe B.V., after elimination of intercompany accounts and transactions.
Possis Medical, Inc. is a developer, manufacturer and marketer of medical devices. The Company was incorporated in 1956 and has operated several businesses over the last 42 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. In December 1996, Possis Medical received its first AngioJet(R) Rheolytic(TM) Thrombectomy System U.S. marketing approval.
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 the estimated useful lives of the assets at the following annual rates:
Leasehold improvements................................ 10% Machinery and equipment............................... 10-33%
Deferred Debt Issue Costs Deferred debt issue costs are being amortized on a straight-line basis over six years, based on the term of the 5% convertible subordinated debentures due 2004. Accumulated amortization at July 31, 1998 was $7,671.
Original Issue Discount Original issue discount is being amortized on a straight-line basis over six years, based on the term of the 5% convertible subordinated debentures due 2004.
The original amount of $600,000 was the value associated with the detachable stock warrants issued in conjunction with the convertible subordinated debentures. Accumulated amortization at July 31, 1998 was $5,161.
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(TM) Graft acquired in 1988. Accumulated amortization at July 31, 1998 and 1997 was $717,500 and $645,500, 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. 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 has adopted SFAS No. 128, "Earnings per Share," effective December 31, 1997. SFAS No. 128 requires the Company to report both basic and diluted earnings per share (EPS). The change in methodology of the basic and diluted EPS calculations had no effect on the Company's EPS as previously reported. Loss per share for 1998, 1997 and 1996 is computed by dividing the net loss by the weighted average number of common shares outstanding. Warrants, options, and convertible debentures representing 2,511,762, 1,359,344 and 1,046,187 shares of common stock at July 31, 1998, 1997 and 1996, respectively, have been excluded from the computations because the effect is antidilutive.
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 are classified as available-for-sale and consisted primarily of U.S. government securities. These investments are reported at fair value with a net unrealized loss of $5,836 included in shareholders' equity as of July 31, 1997. During 1998 and 1997, the Company sold available-for-sale securities aggregating approximately $5,992,000 and $1,012,000, realizing a gain of $8,101 and $7,109 in 1998 and 1997, respectively.
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.
Segment Reporting In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is required to be adopted for the fiscal year beginning August 1, 1998. At that time, the Company will be required to disclose certain financial and descriptive information about its operating segments as redefined by SFAS No. 131. The Company is in the process of assessing the impact of SFAS No. 131 on its footnote disclosures.
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 and 1996:
In July 1998, the Company received $12,000,000 from the issuance of 5% convertible subordinated debentures due 2004 and 110,640 warrants valued at $600,000. The debentures are convertible into common stock at a price equal to $14.79 for a period of six months; thereafter, the conversion price and the maximum number of shares available for conversion will be calculated per predetermined formulas based on the market price of Company's common stock over a specified period of time. The warrants are exercisable for common stock at $15.58 per share.
4. INCOME TAXES At July 31, 1998, the Company has net operating loss carryforwards of approximately $34,167,000 for federal tax purposes which expire in 2003 through 2013 and $11,053,000 for Minnesota tax purposes which expire in 2003 through 2013. In addition, at July 31, 1998 the Company has approximately $1,909,000 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 2013, and a $65,182 AMT credit which does not expire.
Deferred tax assets and liabilities as of July 31, 1998 and 1997 are described in the table below. The Company has not recorded any net deferred tax assets due to the uncertainty of realizing such assets:
The effective income tax rate differed from the U.S. federal statutory rate for each of the three years ended July 31, 1998, 1997 and 1996 as follows:
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. In 1997, the Company amended the 1992 Stock Compensation Plan by increasing the number of shares issuable under the Plan each year from 2% to 3% of the total number of shares outstanding at July 31 of the prior fiscal year. At July 31, 1998, there were 1,443,571 shares reserved for outstanding options and 278,956 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 1998, 1997 and 1996, the Company granted 8,874, 5,207 and 4,760 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, 1998 follows:
Stock option weighted average exercise prices during 1998 and 1997 are summarized below:
The following table summarizes information concerning options outstanding and exercisable options as of July 31, 1998:
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 $265,500 was recorded at the date of grant and was recognized over the vesting period.
In fiscal 1998, the Company granted 65,559 shares of restricted stock to employees under the terms of the 1992 Plan, which vested 21,853 shares each year in fiscal years 1999, 2000 and 2001. Approximately $325,000 was accrued to pay the estimated withholding taxes on those shares as management believes that the employees will elect to receive fewer shares in lieu of paying the withholding taxes. In case of termination of the employees, unvested shares are forfeited. Unearned compensation of $919,106 was recorded at the date of grant and is being recognized over the vesting period.
In fiscal 1998, 1997 and 1996, total compensation expense of $430,046, $102,690 and $213,197, 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 1998, 1997 and 1996, consistent with the method provided in SFAS No. 123, the Company's net loss and loss per share would have been as follows:
The fair value of options granted under the various option plans during 1998 and 1997 was estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted average assumptions and results:
Stock Warrants Stock purchase warrants held by unrelated parties representing the right to purchase 26,400 shares of the Company's common stock at $8.52 a share were outstanding
as of July 31, 1998. These warrants do not have an expiration date and must be exercised if the market value of the Company's common stock exceeds $22.73 per share for any sixty consecutive calendar days.
On September 15, 1994, warrants to purchase 120,000 shares of common stock at $6.90 per share were issued to John G. Kinnard & Company in conjunction with the Company's September 1994 public stock offering. As of July 31, 1997, all such warrants were outstanding.
In July 1998, the Company issued to various investors 110,640 stock purchase warrants in conjunction with a July 1998 private placement of convertible debentures (See Note 3). These warrants expire on July 15, 2002 and are exercisable into common stock at $15.58 per share.
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 7,811 shares in 1998, 8,537 shares in 1997 and 17,194 shares in 1996 under this plan.
6. 401 K PLAN The Company has an employees' savings and profit sharing plan for all qualified employees who have completed six months of service. Company contributions are made at the discretion of the Board of Directors subject to the maximum amount allowed under the Internal Revenue Code. Contributions for the years ended July 31, 1998, 1997 and 1996 were $154,863, $97,765 and $90,114, respectively.
7. 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, 1998. Rental expense charged to operations was $241,674 in fiscal 1998, $237,742 in fiscal 1997, and $329,340 in fiscal 1996. The future annual rentals on this operating lease are approximately $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.
8. 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 5% of 1998, 29% of 1997, and 80% of 1996's medical product sales were to foreign customers. In 1998 and 1997 there were no individual customers with sales exceeding 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.
9. 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 granted 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 was scheduled to receive up to an additional $200,000, on the second anniversary date of agreement signing, as long as the agreement was still in effect. In April 1998, this Distribution Agreement was modified with Baxter retaining non-exclusive distribution rights outside of the United States but has no distribution rights in the United States for the remaining term of the Distribution Agreement. In conjunction with the modification, the Company waived the $200,000 second anniversary payment.
Item 9.
Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure:
During fiscal 1997 and 1998, 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.
Item 10. Directors and Executive Officers of the Registrant:
Information under the heading "Election of Directors" and"Compliance with Section 16(a) of the Exchange Act" 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.
Item 11. Executive Compensation:
Information regarding compensation of directors and officers for the fiscal year ended July 31, 1998 is in the Proxy Statement and is incorporated herein by reference.
Item 12.
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.
Item 13. Certain Relationships and Related Transactions:
Information regarding related party transactions is contained in "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
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, 1998 and 1997
Consolidated Statements of Operations for each of the three years in the period ended July 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the period ended July 31, 1998.
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended July 31, 1998.
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 8-A December 13, 1996 Rights agreement, dated December 12, 1996, between the Company and Norwest Bank Minnesota N.A., as rights agent
4.2 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
4.3 8-K July 24, 1998 Convertible Debenture Purchase Agreement dated July 14, 1998
4.4 8-K July 24, 1998 Form of Series A 5% Convertible Debenture due July 15, 2004, dated July 14, 1998
4.5 8-K July 24, 1998 Registration Rights Agreement between the Company and purchasers of the Convertible Debt dated July 14, 1998
4.6 8-K July 24, 1998 Form of Redeemable Warrant to purchasers of the Convertible Debt dated July 15, 1998
4.7 10-K November 23, 1966 Debenture Agreement with St. Paul Fire and Marine Company and Western Life Insurance Company and form of debenture rates and warrants
10.1 8-K December 6, 1996 Settlement agreement and mutual release relating to the termination of the Perma-Seal supply and distribution agreement with C.R.Bard,Inc.
Exhibit Form Date Filed Description
10.2 S-2 Amendment No.1 License agreement with Imperial August 9, 1994 Chemical Industries Plc., dated April 15, 1991
10.3 S-2 Amendment No.1 License agreement with the August 9, 1994 University of Liverpool, dated May 10, 1990
10.4 S-1 June 30, 1988 Form of indemnification agreement with officers and directors of Registrant
* 10.5 S-8 February 7, 1990 1983 Incentive Stock Option Plan as amended to date
* 10.6 S-1 June 30, 1988 1985 Nonqualified Stock Option Plan as amended to date
* 10.7 10-K Fiscal year ended Form of incentive stock option July 31, 1989 agreement for officers
* 10.8 10-K Fiscal year ended Form of stock option agreement for July 31, 1989 directors
* 10.9 S-8 June 16, 1998 1992 Stock Compensation Plan
* 10.10 10-K Fiscal year ended Form of restricted stock agreement July 31, 1993 for officers (1992 Plan)
* 10.11 10-K Fiscal year ended Form of nonqualified stock option July 31, 1993 agreement for officers (1992 Plan)
* 10.12 10-K Fiscal year ended Form of incentive stock option July 31, 1993 agreement for officers (1992 Plan)
* 10.13 10-K Fiscal year ended Form of nonqualified stock option July 31, 1993 agreement for 1992 directors' fees (1992 Plan)
* 10.14 10-K Fiscal year ended Form of nonqualified stock option July 31, 1993 agreement for 1990 directors' fees
* 10.15 10-K Fiscal year ended Form of nonqualified stock option July 31, 1993 agreement for 1989 directors' fees
Exhibit Form Date Filed Description
10.16 10-Q Quarter ended Supply & distribution agreement January 31, 1995 with Bard Vascular Systems Division, C.R.Bard, Inc.
10.17 10-Q Quarter ended Lease agreement for corporate January 31, 1996 headquarters and manufacturing facility dated December 15, 1995.
10.18 8-K March 28, 1996 Supply and distribution agreement with Edwards CVS Division, Baxter Healthcare Corporation
10.19 10-K Fiscal Year ended Addendum to Distributor Agreement July 31, 1998 with Edwards CVS Division, Baxter Healthcare Corporation dated May 1, 1998
21 10-K Fiscal year ended Subsidiaries of registrant July 31, 1995
23 Consent of independent certified public accountants
27 Financial data schedule
99 10-Q Quarter ended Investment risk factors April 30, 1998
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the quarter ended July 31, 1998, the Company filed a report on Form 8-K dated July 14, 1998 reporting under Item 5 that the Company had entered into the Convertible Debenture Purchase Agreement.
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 16, 1998
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 16, 1998 Donald C. Wegmiller
/s/ Robert G. Dutcher Director, President and October 16, 1998 Robert G. Dutcher Chief Executive Officer
/s/ Dean Belbas Director October 16, 1998 Dean Belbas
/s/ Seymour J. Mansfield Director October 16, 1998 Seymour J. Mansfield
/s/ Whitney A. McFarlin Director October 16, 1998 Whitney A. McFarlin
SCHEDULE II POSSIS MEDICAL, INC.
VALUATION ACCOUNTS YEARS ENDED JULY 31, 1998, 1997 AND 1996 _____________________________________________________________________________
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, Registration Statement No. 33-56728 on Form S-8, and Registration Statement No. 333-57289 on Form S-8 of our report, dated August 28, 1998, appearing in this Annual Report on Form 10-K of Possis Medical, Inc. for the year ended July 31, 1998.
Deloitte & Touche LLP Minneapolis, Minnesota October 15, 1998
Exhibit 10.19 ADDENDUM TO DISTRIBUTOR AGREEMENT DATED MARCH 15, 1996 BETWEEN POSSIS MEDICAL, INC. AND BAXTER HEALTHCARE CORPORATION, EDWARDS CVS DIVISION
This Addendum is made effective this first day of May 1998, by and between Possis Medical, Inc., with offices located at 9055 Evergreen Boulevard Northwest, Minneapolis, Minnesota 55433 ("PMI"); and Baxter Healthcare Corporation, Edwards CVS Division, with offices located at 17221 Red Hill Avenue, Irvine, California 92614 (the "Distributor" or "Baxter").
WITNESSETH
WHEREAS, the above-named parties have performed certain activities pursuant to a Distributor Agreement dated March 15, 1996 (the "Distributor Agreement"), and
WHEREAS, the parties desire to revise said Agreement in accordance with their mutual agreement as to activities and rights that are to be applicable in the future; and
WHEREAS, said revisions are incorporated into this Addendum to Agreement, which shall govern the relationship of the parties until March 15, 1999, the original expiration date of the Distributor Agreement.
NOW, THEREFORE, in consideration of the premises and performance of the covenants herein contained, it is agreed that:
1. This instrument, together with the Distributor Agreement dated March 15, 1996, contains the entire agreement of the parties relating to the subject matter hereof and may not be changed, modified or amended, except by writing signed by both parties.
2. The $200,000.00 payment due from Baxter to PMI on the second anniversary of execution of the Distributor Agreement, pursuant to Section II(A)(iii) of the Distributor Agreement, is hereby waived by PMI.
3. The exclusive distribution rights granted to Baxter pursuant to Section I(A) of the Distributor Agreement are modified such that Baxter shall retain only non-exclusive distribution rights outside of the United States and shall have no distribution rights in the United States for the remaining term of the Distributor Agreement.
4. Section II(B) of the Distributor Agreement is revised such that PMI shall not be obligated to refund any previously paid installment payments in the event that it terminates the Agreement pursuant to Section XII(C).
5. Section I(E) of the Distributor Agreement is deleted from the Agreement in its entirety.
6. The minimum purchase requirements, pursuant to Section VI(A)&(B) of the Distributor Agreement, are hereby waived.
7. Section XII(H) of the Distributor Agreement is deleted in its entirety.
8. Within thirty (30) days, or as soon thereafter as is reasonably feasible, Baxter will provide to PMI the original artwork and the original of any other materials it generated in connection with the Product Brochure, Case Study, Advertisement, and Implant Video used to promote the Perma-Flow(R) Graft. All copies of such materials shall be destroyed by Baxter within thirty (30) days of the termination of the Distributor Agreement, except that one copy of each of such materials shall be retained by Baxter for record keeping purposes. With respect to the Investigators Meeting Proceedings Booklet, Baxter shall transfer and assign to PMI the copyright to such booklet. Notwithstanding its receipt and use of these materials, PMI will not use the Baxter trademark on any of its sales and marketing materials and will not otherwise trade on the Baxter or Edwards CVS Division name in the promotion of its products. In addition, PMI will not use such materials in its promotion of the Perma-Flow Graft outside of the United States until the Distributor Agreement expires or is otherwise terminated.
9. Section XII(E) of the Distributor Agreement is deleted from the Agreement in its entirety. Upon any termination of this Agreement, Baxter shall immediately cease using the name, trademark, service mark, logo or any other reference of or to PMI and shall, at its expense, surrender and deliver to PMI within thirty (30) days, all documents, papers, and records which contain confidential information of PMI, except that one copy of such confidential documents, papers and records shall be retained by Baxter for record keeping purposes.
10. In the event that PMI appoints a distributor in Europe prior to the expiration of the term of the Distributor Agreement, PMI or its European distributor will purchase Baxter's remaining inventory of Perma-Flow Grafts at the price Baxter paid to PMI for said Grafts.
11. Any communications concerning the modified relationship between Baxter and PMI made by PMI to Baxter's existing Perma-Flow customers, or made by PMI in a press release, shall be subject to review and approval by Baxter, said approval not to be unreasonably withheld.
12. Upon the request of PMI, Baxter will transfer its regulatory submission for Japan to PMI or another distributor appointed by PMI. In the event of such transfer, PMI shall pay Baxter reasonable out of pocket expenses incurred by Baxter in connection with such submission.
13. Baxter's Perma-Flow Graft inventory, whether in Baxter's possession in Canada or held on consignment by clinical sites in Canada, shall be repurchased by PMI at the price Baxter paid to PMI for said grafts.
14. PMI shall not distribute, directly or through a distributor appointed by PMI, Perma-Flow Grafts that bear the Baxter trademark and/or logo on its packaging and/or instructions for use.
POSSIS MEDICAL, INC. BAXTER HEALTHCARE CORPORATION
By: /s/ By: /s/ Robert G. Dutcher Anita B. Bessler Title: President and CEO Title: President, Edwards CVS Division
Date: Date: