-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Myt0JWSp2tcAmbXDzh9o9Fda3S5/kaNdbyDUJlR/URuTlA2WHdW8LBVEv61eOatR 8R0dp7O3DRlnlt72hhfvqQ== 0000897101-98-000261.txt : 19980311 0000897101-98-000261.hdr.sgml : 19980311 ACCESSION NUMBER: 0000897101-98-000261 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980310 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDAMICUS INC CENTRAL INDEX KEY: 0000833140 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411533300 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-19467 FILM NUMBER: 98560868 BUSINESS ADDRESS: STREET 1: 15301 HGHWY 55 W CITY: PLYMOUTH STATE: MN ZIP: 55447 BUSINESS PHONE: 6125592613 10KSB40 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________ COMMISSION FILE NUMBER 0-19467 MEDAMICUS, INC. (Name of small business issuer in its charter) MINNESOTA 41-1533300 (State of Incorporation) (IRS Employer Identification No.) 15301 HIGHWAY 55 WEST, PLYMOUTH, MN 55447 (Address of principal executive office, including zip code) (612) 559-2613 (Registrant's telephone number, including area code) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: Common Shares, $.01 Par Value Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes __X__ No ____ Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB __X__ The issuer's revenues for its most recent fiscal year were $7,172,786 The aggregate market value of the Common Shares held by nonaffiliates of the issuer as of February 27, 1998 was approximately $8,130,659 (based on the average of the closing bid and asked prices of the issuer's Common Shares on such date which was $2.625/share). Common Shares outstanding at February 27, 1998: 4,112,274 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Proxy Statement for the Annual Meeting of Shareholders scheduled for April 30, 1998 are incorporated by reference into Part III. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL MedAmicus, Inc. (the "Company") is a medical products company engaged in the following: * The design, development, manufacture and marketing of a pressure measurement system utilizing a proprietary fiber optic transducer for measuring and monitoring physiological pressures in the human body, referred to herein as the LuMax(TM) System. * The manufacture and marketing of a percutaneous vessel introducer and the design and development of related vascular access products. * The manufacture of medical devices and components for other medical product companies on a contract basis. FIBER OPTIC PRESSURE TRANSDUCER (LUMAX SYSTEM) DESCRIPTION Since the completion of its initial public offering in September 1991, the Company has devoted a substantial portion of its research and development efforts to the design and development of the LuMax Cystometry System, a fiber optic pressure transducer system designed to measure physiological pressures within the human body. Measurement of physiological pressures is a frequently used procedure in the diagnosis and treatment of disorders in the cardiovascular, respiratory, neurological and urinary systems. The Company's fiber optic pressure transducer system received marketing clearance from the U. S. Food and Drug Administration in January 1993. The Company's LuMax system consists of a monitor and catheter. The catheter contains optical fibers which transmit light in both directions within the catheter. The distal end of the catheter includes a stainless steel housing with an opening covered by a flexible membrane. The membrane is designed to move into the light path in response to the pressure exerted. An external monitor emits the light and then measures the amount of light returned through the catheter for conversion into a pressure reading. In addition to reading pressure, the monitor calibrates the catheter, records pressures over time and alerts the user to pressure readings outside of a specified range. The Company manufactures two different catheters in several sizes and two separate monitors, which are designed to be used for urological diagnostic procedures. Both catheters have one sensor, the difference being one has an infusion lumen and one does not. An infusion lumen allows the physician to infuse liquid through the catheter during the procedure. The Company markets both single use disposable catheters and catheters which can be sterilized and reused twenty times by the physician. The Company received Food and Drug Administration marketing clearance for the reusable catheter in February 1996. Each of the two monitors addresses separate urological market segments. One of the monitors is a stand alone system (the LuMax Cystometry System) which is designed to conduct tests necessary for a physician to diagnose and treat patients with urological disorders including incontinence and benign prostatic hyperplasia (BPH). Its primary market focus is the office-based gynecology and urology practice. The second monitor is an interface unit (the LuMax Interface System) designed to be connected to an existing urodynamic testing system allowing a hospital or urology clinic, with such testing equipment already in place, to use the Company's fiber optic catheters. The Company is completing final development on the Interface System and anticipates marketing the product in the second half of 1998. In September 1996, the Company began marketing a uroflow accessory to the LuMax Cystometry System which allows urologists to conduct pressure flow studies, a common procedure in the diagnosis of prostate conditions. A uroflow measures volume of urine flow over time to determine severity of blockages caused by an enlarged prostate or other factors. The Company received Food and Drug Administration marketing clearance for this accessory in January 1996. The most commonly used pressure measuring device now on the market is the disposable external strain gauge transducer. Over 7.5 million such devices are used annually in the U. S. An external strain gauge transducer measures internal body fluid pressures through a series of saline solution-filled tubes connected to a catheter which has been inserted into the body. The pressure of the body fluid is conducted through the tubing to the externally located transducer. The transducer then converts that pressure into an electrical signal which is displayed as a pressure reading. The Company believes that the disposable external strain gauge transducer has a number of disadvantages when compared to its fiber optic pressure transducer: * The disposable external strain gauge must be level with the pressure monitoring site on the patient. * A leak anywhere in the tubing system could result in inaccurate readings. * The fluid column connecting the catheter to the external transducer must remain bubble free. * There are delays in response times as pressure is "piped" from the point of measurement to the external transducer which may cause inaccuracies. * A strain gauge device can be affected by electromagnetic interference from other patient monitors. A more recent development in pressure measurement devices is the micro-tipped catheter, which is comprised of a miniaturized strain gauge transducer on the tip of a catheter. While the micro-tipped catheter offers many of the same advantages as the fiber optic catheter and is reusable, it is sold at a substantially higher cost than the Company's current reusable catheter. MARKETS AND MARKETING The Company has evaluated various markets for the application of its fiber optic pressure transducer, including hemodynamic testing, ventilator monitoring, neurological pressure monitoring and urodynamic testing. The Company has initially focused its efforts on the urodynamic testing market because management believes it provides the greatest immediate opportunity for market acceptance and revenue growth. It is estimated that over 12 million Americans suffer from some form of incontinence, a problem that is just beginning to be discussed openly and for which a number of treatments have recently been introduced. In order to prescribe the most appropriate therapy, clinicians usually rely on urodynamic testing, which includes several pressure measurement procedures which the Company's LuMax System is designed to perform. An enlarged prostate or benign prostatic hyperplasia (BPH) is a condition that affects half of all men over age 55. A pressure flow study is a urodynamic test designed to measure the severity of the blockage and determine if intervention is appropriate. The Company's new LuMax System with uroflow is designed to perform this study. The urodynamic testing market in the United States consists of three segments: approximately 2,300 urology practices having access to hospital-based urodynamic monitoring systems; uro-gynecology practices, a small but emerging market primarily focused on incontinence, which generally have sophisticated urodynamic systems located in their offices, and; 19,000 gynecology practices of which only a small percentage are currently equipped to conduct urodynamic testing and, thus, effectively provide the services necessary to treat the incontinent patient. In January 1995, the Company launched a direct sales effort to market its stand-alone LuMax Cystometry System domestically. As a result, the Company hired a National Sales manager, a Marketing Manager and two sales representatives, located in Texas and Illinois. In mid-1995, the Company elected to broaden its sales coverage by contracting with independent sales representatives who were primarily focused on the office-based gynecology market. In September 1995, the first independent sales representative group was trained. In September 1996, the Company engaged independent sales representatives to market the LuMax Cystometry System with Uroflow into the urology office-based market. Today, the Company has three regional and a national sales manager in the United States that oversee the activities of thirty one independent sales groups totaling sixty individuals. Twenty-six representatives call exclusively on gynecologists, twelve on urologists and twenty two representatives market the LuMax System to both gynecologists and urologists. The Company has no plans at this time for international distribution agreements. MANUFACTURING The Company currently manufactures its catheters in its existing facility and expects that adequate space will be available to meet the Company's needs during the next several years. As of February 1998, the Company has the capacity to manufacture approximately 5,000 catheters per month on a single shift using semi-automated equipment designed by the Company. The Company expects such equipment will be adequate to meet production requirements until automated equipment is required to increase capacity. The Company is conducting ongoing studies related to the feasibility and cost of automated manufacturing equipment. As of February 1998, the Company has the capacity to assemble approximately 50 monitors per month on one shift. It is believed that the Company has adequate capacity to meet monitor requirements for the foreseeable future. The Company has approved suppliers for all materials necessary to manufacture the monitors and catheters and believes that other acceptable suppliers exist for these materials. COMPETITION The Company's LuMax System competes with both the traditional external strain gauge transducer, and with transducers that incorporate new designs such as fiber optic transducers and micro-tipped catheter transducers. Companies that market disposable external strain gauge transducers for use in the urological testing markets include Cobe Laboratories, Inc., Lakewood, Colorado; Spectramed Inc., Critical Care Division, Oxnard, California; and Baxter Healthcare Corporation, Edwards Division, Santa Ana, California. Companies which are applying fiber optic technology to pressure sensing devices include Camino Laboratories, San Diego, California, which markets a device used primarily for application in neurological procedures; Radi Medical Systems, Sweden, which markets its device in Europe for hemodynamic testing and possibly urological monitoring and Bard Urological, a subsidiary of C. R. Bard, Inc. which markets a urodynamic system similar to the Company's LuMax System. Bard Urological is aggressively marketing their fiber optic system through a network of direct sales personnel into the U. S. urology office market. Management believes that each of the companies mentioned above may have significantly greater financial and other resources than the Company. The Company believes that the primary bases of competition will be product performance, price and marketing. While the Company has obtained patents relating to its transducer, such patents may not prevent the above described companies or any other companies from developing competing fiber optic devices for the urodynamic testing market or for any other pressure measurement applications which the Company may pursue. RESEARCH AND DEVELOPMENT With the capital made available from its initial public stock offering, the Company established a research and development staff devoted to the transducer project. For the years ended December 31, 1997 and 1996, the Company expended $405,562 and $563,196, respectively, on the transducer development effort. The research and development group intends to continue work on enhancing the transducer for the gynecology and urology markets and begin efforts to apply the technology to other potential applications. INTRODUCER PRODUCTS DESCRIPTION The Company manufactures and markets a proprietary disposable percutaneous vessel introducer which allows physicians to insert infusion catheters, implantable ports and pacemaker leads into a blood vessel. In order to introduce a catheter or pacemaker lead into a vein, a hypodermic needle is first used to access the vessel. A guide wire is inserted through the hypodermic needle. The needle is then removed and a vessel introducer, consisting of a hollow sheath and a dilator, is inserted over the guide wire to expand the opening. The guide wire and dilator are then removed, leaving only the hollow sheath through which the catheter or pacemaker lead is introduced. Once the catheter or pacemaker lead is in place, the vessel introducer sheath is usually removed. To the Company's knowledge, all vessel introducer sheaths currently marketed in competition with the Company's vessel introducer are manufactured with small handles on either side of the sheath at the proximal end, and use what is referred to as the "peel-away" method of sheath removal. As the physician pulls the handles, the sheath tears apart and can then be removed. The Company's vessel introducer, which includes the standard dilator and sheath, also incorporates a proprietary slitting device, resulting in what management believes to be an improved method of removing the sheath. The slitter clamps onto the catheter or lead and has a recessed blade. The physician draws the sheath onto the slitter, which cuts the entire length of the sheath, permitting easy removal. The removal of the sheath can be performed by one physician, unlike the peel-away method which typically requires two people. To the best of the Company's knowledge, there are no other companies marketing vessel introducers which use a slitting method of sheath removal. In 1993, the Company entered into an agreement with Medtronic, Inc. ("Medtronic") to package a "peel-away" introducer into a kit. While the Company believes the slitter introducer is superior to the "peel-away", studies indicate that a significant percentage of physicians will continue to utilize the "peel-away" technology. In August 1994, the Company commenced shipments of "peel-away" introducer kits to Medtronic. The Company is now the sole supplier to Medtronic of introducer kits for pacing lead applications. MARKETS AND MARKETING The Company estimates that there are more than 1,000,000 procedures performed worldwide each year in which venous vessel introducers are used. Because the majority of vessel introducers are sold in combination with the sale of infusion catheters, implantable ports or pacing leads, the Company's management determined that it is advantageous for the Company to enter into distribution agreements with medical device manufacturers who will market the Company's vessel introducer with their catheters, implantable ports or pacing leads. Accordingly, the Company entered into such agreements with Medtronic and with Bard for the sale of the introducer into their respective markets. Medtronic, which the Company believes has the largest worldwide market share of pacing leads, is currently purchasing complete sterilized introducer kits, which include a syringe, hypodermic needle and guide wire, as well as the vessel introducer, packaged by the Company in boxes designed by Medtronic. Medtronic markets the Company's vessel introducer with the slitting device worldwide under its own trade name, "SOLO-TRAK(TM)". Medtronic has indicated that approximately 40% of their introducer sales consist of SOLO-TRAK, and the remainder of the sales are "peel-away" introducers. The Company's distribution agreement with Medtronic was executed in May 1991, and amended in August 1994, August 1995 and again in August 1996. Under the terms of the agreement, Medtronic is obligated to purchase certain specified annual quantities of both slitter introducers and "peel-away" introducers in order to retain exclusive rights in the pacing lead market. The agreement has an indefinite term, but Medtronic may terminate the agreement any time, upon 180 days prior written notice. Bard Access Systems, Inc. ("Bard"), a subsidiary of C.R. Bard, Inc., which is reported to have the largest combined market share of infusion catheters and implantable ports, is primarily purchasing vessel introducers and slitters, which Bard packages in procedural trays with its catheters and ports. Bard markets the vessel introducer under its trade name, "INTRO-EZE(TM)". The Company's distribution agreement with Bard expired in December 1997. The agreement had called for minimum purchases of kits or introducer components in order to maintain the exclusive right to market the Company's vessel introducer in Bard's market. The Company expects to continue sales of the slitter introducer to Bard on a non-exclusive basis. Infusion catheter, implantable port and pacing lead applications represent an estimated 85% of the market applications for the introducer. The Company does not anticipate significant sales from other applications; consequently, the Company's relationships with both Medtronic and Bard are important to the success of the Company. For the years ended December 31, 1997, 1996 and 1995, Medtronic accounted for 51%, 58% and 72% of sales, respectively. The loss of Medtronic as a customer would have a material adverse effect on the Company. MANUFACTURING The vessel introducer is manufactured by the Company and packaged in a "kit" with other components for Medtronic, or sold as a component set consisting of a sheath, dilator and slitter to Bard. The sheath and dilator for the Company's proprietary introducer and the "peel-away" introducer are manufactured from polyethylene tubing which is acquired from outside sources and fabricated by the Company, while the slitter is injection molded by the Company. The Company has designed and constructed a number of pieces of its production and packaging equipment, and has purchased the remainder from outside sources. The vessel introducer kits are packaged in the Company's clean room facility. The Company manufactures and packages vessel introducers in 38 different kit combinations. The Company presently obtains several of its components, raw materials and sterilization services from sole suppliers, but believes that all components, raw materials and sterilization services are readily available from several sources. The Company believes any one of such sources would be acceptable, although Medtronic and Bard each has the right to approve suppliers. COMPETITION The Company's vessel introducers compete with other vessel introducers, all of which utilize the peel-away method. The Company believes that the three major competitors in the venous vessel introducer market are Cook Incorporated, Bloomington, Indiana; Daig Corporation, Minnetonka, Minnesota (recently acquired by St. Jude Medical, St. Paul, Minnesota); and B. Braun of America Company, Allentown, Pennsylvania. Both Daig and B. Braun market their vessel introducers primarily by establishing distribution arrangements with established companies in the medical field, the same strategy the Company follows. Cook markets a variety of vessel introducer kits through distributors and with a direct sales force. Each of these competitors has significantly greater financial, personnel and other resources than the Company. RESEARCH & DEVELOPMENT The Company's development activities are focused primarily on improved vessel introducers. The Company's management believes that, with the trend towards less invasive percutaneous surgical procedures, there will be increasing demand for vessel introducers in a variety of medical procedures and the Company intends to devote some portion of its development activities to understanding the needs of this market and designing products to meet those needs. There can be no assurance that the Company's development efforts will result in additional revenue. The Company's research and development activities have been coordinated primarily by employees of the Company, although the Company has utilized outside specialists on a contract basis, and expects to continue to do so. For the years ended December 31, 1997 and 1996, the Company expended $105,391 and $235,733, respectively, on research and development activities directly related to introducer products. CONTRACT MANUFACTURING Since October 1985, the Company has performed contract manufacturing services for a variety of medical device companies in the Minneapolis and St. Paul, Minnesota metropolitan area, but currently manufactures four medical products for one company. The Company is not aggressively pursuing contract manufacturing revenue. For the years ended December 31, 1997, 1996, and 1995, contract manufacturing revenues were approximately 5%, 9% and 7% respectively, of the Company's total revenues. GOVERNMENT REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in some instances, by state and foreign authorities. Pursuant to the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, and regulations promulgated thereunder, medical devices intended for human use are classified into three categories (Classes I, II and III), depending upon the degree of regulatory control to which they will be subject. Both the transducer and the introducer are considered Class II devices. If a Class II device is substantially equivalent to an existing device that has been continuously marketed since the effective date of the 1976 Amendments, FDA requirements may be satisfied through a Premarket Notification Submission (a "510(k) Submission"), under which the applicant provides product information supporting its claim of substantial equivalence. In a 510(k) Submission, the FDA may also require that it be provided with clinical test results demonstrating the safety and efficacy of the device. The Company submitted a 510(k) Submission to the FDA with respect to the transducer in February 1992 and received approval to market the transducer in the United States in January 1993. The Company has obtained 510(k) approval to market its introducer in the United States. As a manufacturer of medical devices, the Company is also subject to certain other FDA regulations, and its manufacturing processes and facilities are subject to continuing review by the FDA to ensure compliance with Good Manufacturing Practices regulations. The Company believes that its manufacturing and quality control procedures substantially conform to the requirements of FDA regulation. In addition, the Company's sales and marketing practices are subject to regulation by the U.S. Department of Health and Human Services pursuant to federal anti-kickback laws, and are also subject to similar state laws. The Company's devices may also be subject to regulation in foreign countries. Medtronic and Bard are responsible for obtaining approval from the foreign countries in which they desire to sell the vessel introducers manufactured by the Company. Depending upon the distribution relationships established to market the transducer, the Company may be responsible for obtaining approval to sell the transducer in foreign countries. INTELLECTUAL PROPERTY The Company has made and continues to make, when appropriate, efforts to obtain patents, including additional patents on existing products. Certain aspects of the vessel introducer and the fiber optic pressure transducer are the subject of United States Patent Numbers 4,997,424 and 5,005,584, respectively, issued on March 5, 1991 and April 9, 1991, respectively. Both patents have been assigned to the Company by the inventor, Richard L. Little, the Company's former President and Chief Executive Officer, and both expire in the year 2008. The introducer patent covers a means for attaching a slitter with a recessed blade to a catheter or pacing lead for the purpose of removing a sheath from the catheter or pacing lead. The Company has received additional patent protection on features of the vessel introducer. The Company's transducer patent covers a means for incorporating one or more transducers onto a guide wire. The Company has received additional patent protection on technical features of the transducer which have evolved during the development to date. On several occasions, and as recently as February 1998, the Company has received correspondence or inquiries from a competitor in the fiber optic transducer market regarding patents it holds relating to fiber optic transducers, specifically referencing a patent on a technique to calibrate the fiber optic system and requesting additional information regarding the Company's calibration technique and why such technique does not infringe the competitor's patent. The Company has responded to such inquiries each time they have been received. The Company has been aware of this patent and has specifically designed the calibration system associated with its transducer so as not to infringe the competitor's patent. In addition, the Company has been issued a United States patent on its calibration technique. The Company has also received an opinion of counsel that its calibration system does not infringe such patent. While the Company is not aware of the competitors intentions with respect to this matter, the Company will continue to respond to such inquiries and may suggest a cross-licensing arrangement with this competitor to avoid such inquiries in the future. Due to the rapid technological changes experienced in the medical device industry, the Company's management believes that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. EMPLOYEES As of February 27, 1998, the Company employed 75 persons, consisting of 73 full-time and 2 part-time. ITEM 2. DESCRIPTION OF PROPERTY The Company's administrative, manufacturing and research and development facilities, consisting of approximately 21,665 square feet, are located at 15301 Highway 55 West, Plymouth, Minnesota 55447. The Company leases these facilities pursuant to a lease that expired April 30, 1997. The lease provides for up to five one-year extensions which are automatic if the Company does not give a six month notice of evacuation. The lease calls for rent payments of $13,242 per month, which includes base rent, a portion of the operating expenses and real estate taxes. The base rent can escalate yearly based on the consumer price index. The Company has elected to extend the lease until April 30, 1999. ITEM 3. LEGAL PROCEEDINGS The Company's management is not aware of any litigation pending against the Company or its properties. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been traded on The Nasdaq Stock Market(SM) under the symbol MEDM since September 1991. The following sales quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and do not necessarily represent actual transactions.
------------------------- ------------------------- ------------------------- ------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------------------- ------------------------- ------------------------- ------------------------- YEAR LOW HIGH LOW HIGH LOW HIGH LOW HIGH - ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1996 3.000 4.250 3.750 4.750 2.750 4.250 2.125 3.750 - ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1997 2.000 3.250 1.875 2.750 2.250 2.875 2.625 3.625 - ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1998* 2.375 3.125 - ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
* Through February 27 As of February 27, 1998, the Company had approximately 175 record holders and 1,600 beneficial holders of its common stock. The Company has not paid cash dividends in the past and does not expect to do so in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was incorporated under the laws of Minnesota in 1981 and commenced operations in 1985. During the first three years of its existence, the Company devoted the majority of its activities to research and development projects. In 1990, the Company's first proprietary product was announced, a percutaneous venous vessel introducer. Exclusive distribution arrangements were negotiated with Medtronic and Bard for the sale of the introducer into their respective markets. In September 1991, the Company completed its initial public stock offering, raising approximately $3,400,000, net of expenses. With these resources, manufacturing capabilities and capacity were expanded and a number of contract manufacturing jobs were secured. The influx of capital also allowed the Company to significantly accelerate its development efforts on a second proprietary product, the LuMax Fiber Optic Cystometry System. In January 1993, marketing clearance on the fiber optic system was received from the Food and Drug Administration. In January 1994, the Company completed a private placement of common stock and warrants, resulting in proceeds to the Company of approximately $1,000,000, net of offering expenses. In July 1994, the Company entered into loan agreements aggregating $500,000 with two unaffiliated private investors and subsequently amended the agreements in December 1994 to extend the maturity of the loans to June 1996. In October 1994, a private investor purchased 200,000 shares of common stock from the Company for $500,000 and the same investor purchased 266,667 shares for $500,000 in January 1995. With these additional resources, the Company embarked upon a direct sales strategy in January 1995 to distribute the LuMax System into the gynecology office-based market. A sales and marketing staff was hired and, in mid-1995, the Company began contracting with independent sales representatives to sell into this market. The Company also developed a sales strategy to distribute the LuMax System into the urology office-based market. In order to sell into this market, the LuMax System needed to be upgraded to allow it to perform pressure flow studies in addition to the cystometry tests that were already being done. Development on this upgraded LuMax System was started in July 1995 and was completed in November 1996. The Company has contracted with independent sales representative groups to market the LuMax System into the gynecology and urology office-based markets. Currently, thirty-one groups are under contract totaling sixty individuals. Twenty-six of these representatives call specifically on gynecologists, twelve call specifically on urologists and twenty-two represent the Company's product in both markets. In March 1996, the Company obtained a $1,200,000 revolving line of credit with a financial institution. The Company used the line of credit to pay off the $500,000 notes payable with two unaffiliated private investors. In May 1996, the Company completed a private placement of its common stock, resulting in net proceeds to the Company of $1,622,103. In June 1997, the Company renewed its revolving line of credit through June 1998. SALES Net sales were $7,172,786 for 1997, compared to $5,659,522 in 1996, representing an increase of $1,513,264 or 26.7%. Sales of vessel introducers, primarily to Medtronic under an exclusive distribution arrangement, were $4,039,685 in 1997 compared to $3,445,704 in 1996, representing an increase of $593,981 or 17.2%. This increase was primarily due to two factors. First, Medtronic rebuilt its inventories of introducers during the first four months of 1997 which were depleted during the third quarter of 1996 because of a component supply problem. Second, Medtronic's sales of introducers to their customers increased in 1997 over 1996 which led to increased purchases from the Company. Contract manufacturing sales were $365,397 in 1997 compared to $513,814 in 1996, representing a decrease of $148,417 or 28.9%. This decrease was primarily due to two factors. First, one of the Company's contract manufacturing customers decided to manufacture their product internally during 1997. While the Company benefited from some additional orders during the second quarter, the Company does not anticipate any additional business from this customer. Second, the Company's other contract manufacturing customer placed some large orders with the Company during the first quarter of 1997 and then informed the Company that they had excess inventory and would not be placing any additional orders for product for most of 1997. This customer resumed placing orders in 1998. The Company does contract research and development work periodically for Medtronic and realized sales of $28,593 in 1997 compared to $190,341 in 1996. While the Company has generated revenue from this type of work over the past two years, it does not expect it to be a continuous source of revenue. Sales of the Company's fiber optic pressure sensing catheter and monitor transducer products were $2,739,111 in 1997, compared to $1,509,663 in 1996, representing an increase of $1,229,448 or 81.4%. Monitor sales increased from $1,213,894 in 1996 to $1,957,872 in 1997, an increase of 61.3%. Catheter sales increased from $282,668 in 1996 to $731,174 in 1997, an increase of 158.7%. Accessory and service sales increased from $13,101 in 1996 to $50,065 in 1997. The Company has continued to actively market the upgraded version of its LuMax System into the gynecology and urology office markets by adding sales management, attending major trade shows and conducting various direct mail and telemarketing campaigns. While the Company has only minimal experience to date in selling the LuMax System, management believes that the largest percentage of these sales typically occur in the fourth quarter. GROSS PROFIT ON SALES Gross profit as a percentage of sales by category for the years ended December 31, 1997 and 1996 was as follows: 1997 1996 - -------------------------------------------------------------------------- Introducers and contract manufacturing 52.5% 46.9% Fiber optic products 31.7 13.5 - -------------------------------------------------------------------------- Total gross profit percent 44.6% 38.0% ========================================================================== The Company saw an increase in its gross profit percentage related to its vessel introducer and contract manufacturing business in 1997, primarily due to increased introducer sales to Medtronic which affected the Company's utilization of available capacity. The Company expects gross profit in the introducer and contract business to decline slightly in the future as it reduces pricing to Medtronic for introducers in order to respond to competitive pressures. The Company realized improvement in gross profit dollars and percent related to its fiber optic business during 1997, due to a combination of increased sales, which resulted in improved efficiencies and better utilization of the Company's available capacity, and process improvements, which improved yields and reduced the cost of the Company's catheters. The Company expects gross profits in the fiber optic business to increase in the future as the Company increases sales resulting in better utilization of its capacity, and implements further process improvements. RESEARCH AND DEVELOPMENT Total research and development expenditures were $510,953, or 7.1% of sales in 1997, compared to $798,929, or 14.1% of sales in 1996. Approximately 79% and 70% of the 1997 and 1996 expenditures, respectively, were devoted to the development of the Company's LuMax System and the remainder to introducer products. The Company does expect research and development expenditures to increase both in dollar amount and as a percentage of sales in 1998 as it continues to work on improving catheter yields, as well as development of new products. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased to $2,780,203 or 38.8% of sales in 1997, compared to $2,385,953 or 42.2% of sales in 1996. Sales and marketing expenses increased $446,181 in 1997 compared to 1996 primarily because of increased salary, travel, depreciation and commission expense. The Company hired two regional sales managers in 1997 which were not in place during 1996. As a result of these hires, the Company has also experienced an increase in its travel expenses. Depreciation expense has increased during the comparable periods because the Company has placed a greater number of the new LuMax machines with our expanded independent sales force to support the increased sales effort. Commission expense increased during 1997 due to increased sales activity. General and administrative expenses decreased $51,931 in 1997 compared to 1996. This decrease is primarily due to decreased spending on insurance and investor relations expenses. NET LOSS As a result of the above, the Company incurred a net loss of $145,566 or $.04 per share in 1997, compared to a net loss of $1,071,115 or $.28 per share in 1996. Inflation has not had a material impact on the Company's revenues or earnings. The Company currently has sixty independent sales representatives under contract to distribute its LuMax System into both the gynecology and urology markets. The first quarter of each year has historically shown a drop in monitor sales, as well as increased sales and marketing expenses related to promotional activities related to the large national shows. As a result, the Company expects losses to continue at least through the first quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, the Company had unrestricted cash and cash equivalents and investments of $1,102,490, compared to $1,205,783 as of December 31, 1996. Net cash provided by operating activities during the year ended December 31, 1997 was $210,543, consisting primarily of a net loss of $145,566, adjusted for non-cash items of depreciation and amortization of $485,066, less a net change in operating assets and liabilities of $128,957. Net cash used in investing activities in 1997 was $183,813, consisting primarily of the net sale of investments totaling $10,989, the acquisition of property and equipment for $189,115, and the addition to patent rights of $5,687. Net cash used in financing activities totaled $130,023, consisting of $59,933 in proceeds from the exercise of stock options, offset by payments on the Company's capital lease obligations of $52,013, payments on a note payable to a customer of $14,400, and a reduction of the line of credit balance of $123,543. In March 1996, the Company obtained a $1,200,000 revolving line of credit with a financial institution and on June 24, 1997, signed a one year extension through June 30, 1998. The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. The agreement calls for interest at the rate of 2.25% over the financial institution's base rate with minimum interest due over the term of the agreement of $70,000. The line is secured by substantially all of the Company's assets. The Company anticipates that it will be able to extend the line of credit when it expires in June 1998. If the financial institution decides not to extend the agreement, depending on the level of cash flows generated from operating activities in 1998, if any, additional capital may be required to fund 1998 operations and capital expenditure requirements. Sources of additional capital may include additional debt financing and/or the sale of debt or equity securities. If the Company is unable to obtain financing when required, the Company could be forced to curtail its operations. As of December 31, 1997, the Company's current assets exceeded current liabilities by $1,859,102, with a current ratio of 2.2 to 1, compared to working capital of $1,685,731 or a current ratio of 1.8 to 1 as of December 31, 1996. Accounts receivable decreased from $1,346,289 as of December 31, 1996 to $1,004,939 as of December 31, 1997, a decrease of $341,350. Inventory decreased from $1,203,372 as of December 31, 1996 to $1,170,289 as of December 31, 1997, a decrease of $33,083. The Company installed a new management information system in 1997 which has allowed for more aggressive follow-up on accounts receivable and better management of inventory. Accounts payable decreased from $1,109,640 as of December 31, 1996 to $607,029 as of December 31, 1997, a decrease of $502,611 which primarily offset the decreases in accounts receivable and inventory. Finally, notes payable to bank decreased from $782,783 as of December 31, 1996 to $659,240 as of December 31, 1997, a decrease of $123,543. The Company has chosen to use the line of credit instead of available cash as working capital because it is committed to paying a minimum of $70,000 in interest over the term of the agreement on the line of credit with the bank. At December 31, 1997, the Company had income tax carryforwards of net operating losses (NOL's) of approximately $5,687,000 and research and development credit carryforwards of approximately $193,000. At December 31, 1997, the Company's net deferred tax assets, totaling approximately $2,587,000, have been fully offset by a valuation allowance due to their uncertainty of realization. Realization of these deferred tax assets is dependent upon sufficient future taxable income during the period the deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The Company has investigated the impact of the Year 2000 issue on both its own internal information systems and the products it develops, markets and sells. During 1997, the Company purchased, from a world-wide supplier and developer of information systems, an enterprise-wide information system with written assurance from the developer that the system will correctly function across the year 2000. During 1997, the Company reviewed all of the products it develops, markets and sells, as well as the raw materials and subassemblies required to manufacture them, and believes that there are no Year 2000 issues. Therefore, Year 2000 is not expected to have a material effect on the Company's financial position, operations or cash flow. Forward-looking statements contained in this annual report on Form 10-KSB, including without limitation in Management's Discussion and Analysis, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain important factors could cause results to differ materially from those anticipated by some statements made herein. You are cautioned that all forward-looking statements involve risks and uncertainties. Among the factors that could cause results to differ materially are the following: delays in new product launches; lack of market acceptance of the Company's products; introduction of competitive products; competitive pricing developments; lack of performance by the Company's distribution network; challenges to the Company's intellectual property rights; and government regulation matters. Reference is also made to the risk factors contained in the Company's report on Form 8-K as filed with the Securities and Exchange Commission on November 15, 1996. ITEM 7. FINANCIAL STATEMENTS The Independent Auditor's Report for the years ended December 31, 1997 and 1996 is included as Exhibit 23.2 attached hereto. BALANCE SHEETS
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------------- ASSETS (Note 6) CURRENT ASSETS: Cash and cash equivalents $ 1,102,490 $ 1,205,783 Accounts receivable, less allowance for doubtful accounts of $2,050 and $8,250, respectively (Note 9) 1,004,939 1,346,289 Inventories (Note 3) 1,170,289 1,203,372 Prepaid expenses and other assets 96,423 60,300 - ------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 3,374,141 3,815,744 - ------------------------------------------------------------------------------------------------------ PROPERTY AND EQUIPMENT: (Note 7) Equipment 1,942,072 1,819,901 Office furniture, fixtures and computers 502,806 437,053 Leasehold improvements 363,950 362,759 - ------------------------------------------------------------------------------------------------------ 2,808,828 2,619,713 Less accumulated depreciation and amortization (1,940,914) (1,477,554) - ------------------------------------------------------------------------------------------------------ NET PROPERTY AND EQUIPMENT 867,914 1,142,159 - ------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS, RESTRICTED (Notes 2 and 7) 19,296 28,888 PATENT RIGHTS, NET OF ACCUMULATED AMORTIZATION OF $124,319 AND $102,613, RESPECTIVELY 18,202 34,221 ====================================================================================================== TOTAL ASSETS $ 4,279,553 $ 5,021,012 ====================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable to bank (Note 6) $ 659,240 $ 782,783 Accounts payable 607,029 1,109,640 Accrued expenses (Note 4) 208,112 174,399 Current installments of note payable to customer (Note 6) 2,822 14,400 Current installments of capital lease obligations (Note 7) 37,836 48,791 - ------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 1,515,039 2,130,013 - ------------------------------------------------------------------------------------------------------ LONG-TERM LIABILITIES: Note payable to customer, less current installments (Note 6) 0 2,822 Capital lease obligations, less current installments (Note 7) 47,190 88,248 - ------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM LIABILITIES 47,190 91,070 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 1,562,229 2,221,083 - ------------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (NOTE 7) SHAREHOLDERS' EQUITY: (Note 8) Preferred stock-undesignated, authorized 1,000,000 shares 0 0 Common stock-$.01 par value, authorized 9,000,000 shares 41,123 40,668 Additional paid-in capital 8,578,142 8,515,636 Accumulated deficit (5,901,941) (5,756,375) - ------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 2,717,324 2,799,929 ====================================================================================================== TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,279,553 $ 5,021,012 ======================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATMENTS STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 1996 - -------------------------------------------------------------------------------------------- Net sales (Note 9) $ 7,172,786 $ 5,659,522 Cost of sales 3,976,791 3,509,497 - -------------------------------------------------------------------------------------------- GROSS PROFIT 3,195,995 2,150,025 - -------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 510,953 798,929 Selling, general and administrative 2,780,203 2,385,953 - -------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 3,291,156 3,184,882 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- OPERATING LOSS (95,161) (1,034,857) - -------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense (80,765) (89,165) Interest income 48,796 55,689 Other (18,436) (2,782) - -------------------------------------------------------------------------------------------- TOTAL OTHER INCOME (EXPENSE) (50,405) (36,258) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- NET LOSS $ (145,566) $ (1,071,115) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.28) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 4,090,811 3,836,271 - --------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional ---------------------- Paid-In Accumulated YEARS ENDED DECEMBER 31, 1997 AND 1996 Shares Amount Capital Deficit Total - ------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1995 3,434,774 $ 34,348 $ 6,871,803 $ (4,685,260) $ 2,220,891 Stock options exercised 22,000 220 27,830 0 28,050 Common stock purchased by private investors, net of offering costs 610,000 6,100 1,616,003 0 1,622,103 Net loss for the year ended December 31, 1996 0 0 0 (1,071,115) (1,071,115) - ------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1996 4,066,774 $ 40,668 $ 8,515,636 $ (5,756,375) $ 2,799,929 Stock options exercised 44,075 441 59,492 0 59,933 Common stock issued as sales incentive 1,425 14 3,014 0 3,028 Net loss for the year ended December 31, 1997 0 0 0 (145,566) (145,566) - ------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1997 4,112,274 $ 41,123 $ 8,578,142 $ (5,901,941) $ 2,717,324 ==================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (145,566) $(1,071,115) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 485,066 402,148 Interest accretion on notes payable to private investors 0 22,037 Interest added to investments (1,397) (388) Common stock issued as sales incentive 3,028 0 Changes in operating assets and liabilities: Accounts receivable 341,350 (611,363) Inventories 33,083 (417,604) Prepaid expenses and other assets (36,123) (36,663) Accounts payable (502,611) 469,162 Accrued expenses 33,713 (35,529) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 210,543 (1,279,315) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (189,115) (488,199) Additions to patent rights (5,687) (6,340) Purchase of available-for-sale marketable securities, including reinvestment of securities which matured (19,011) (28,500) Sale of available-for-sale marketable securities, including sales of securities which matured 30,000 996,145 - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (183,813) 473,106 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (52,013) (49,817) Proceeds from sales of stock, net of offering costs 0 1,622,103 Proceeds from exercise of stock options 59,933 28,050 Payments on notes payable to private investors 0 (500,000) Proceeds from (payments on) note payable to bank (123,543) 782,783 Payments on note payable to customer (14,400) (14,400) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (130,023) 1,868,719 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (103,293) 1,062,510 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,205,783 143,273 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,102,490 $ 1,205,783 - -------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 82,782 $ 60,073 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital leases incurred on purchase of equipment $ 0 $ 134,739
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- NATURE OF BUSINESS MedAmicus, Inc. (the "Company") is a medical products company engaged in the following: * The design, development, manufacture and marketing of a pressure measurement system utilizing a proprietary fiber optic transducer for measuring and monitoring physiological pressures in the human body. * The manufacture and marketing of a percutaneous vessel introducer and the design and development of related vascular access products. * The manufacture of medical devices and components for other medical product companies as a contract manufacturer. REVENUE RECOGNITION The Company recognizes revenue upon shipment of the product to the customer. 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 period. Actual results could differ from those estimates. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of certain financial instruments for which it is practicable to estimate that value: * CASH EQUIVALENTS: The carrying amount approximates fair value because of the short maturity of those instruments. * MARKETABLE SECURITIES: The fair values of these investments are estimated based on quoted market prices for those or similar instruments. At December 31, 1997 and 1996, the fair value of the Company's marketable securities approximated their carrying value. * NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: The fair value of the Company's notes payable and capital lease obligations is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities with similar collateral requirements. At December 31, 1997 and 1996, the fair value of the Company's notes payable and capital lease obligations approximated their carrying value. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with an original maturity of three months or less. The Company maintains its cash in bank accounts which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated and amortized on a straight-line basis over a period of three to seven years. Leasehold improvements are amortized over the term of the lease. Repair and maintenance costs are charged to operations as incurred. The Company periodically reviews the utilization of its long-lived assets in its business for impairment. To date, management had determined that no impairment of long-lived assets exists. PATENT RIGHTS Patent rights, which are amortized over a five-year period, include costs incurred by the Company to secure patents for technology that the Company has developed. RESEARCH AND DEVELOPMENT EXPENDITURES The Company's research and development expenditures are expensed as incurred. NET LOSS PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE, which supersedes APB Opinion No. 15. SFAS No. 128 requires the presentation of earnings per share by all entities that have common stock or potential common stock, such as options, warrants, and convertible securities, outstanding that trade in a public market. Those entities that have only common stock outstanding are required to present basic earnings-per-share amounts. Basic per-share amounts are computed, generally, by dividing net income or loss by the weighted-average number of common shares outstanding. All other entities are required to present basic and diluted per-share amounts. Diluted per-share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless the effect is anti-dilutive, thereby reducing a loss or increasing the income per common share. The Company initially applied Statement No. 128 for the year ended December 31, 1997 and, as required by the Statement, has restated the per share information for the prior year to conform to the statement. As described in Note 8, at December 31, 1997 and 1996, the Company had options and warrants outstanding to purchase a total of 1,239,571 and 1,289,479 shares of common stock, respectively, at a weighted average exercise price of approximately $3.60 and $3.50, respectively. However, because the Company has incurred a loss in all periods presented, the inclusion of those potential common shares in the calculation of diluted loss per-share would have a anti-dilutive effect. Therefore, Basic and Diluted loss per-share amounts are the same in each period presented. - -------------------------------------------------------------------------------- 2. MARKETABLE SECURITIES - -------------------------------------------------------------------------------- Long-term investments, as of December 31, 1997, consist of a U.S. Treasury bill which matures in September 1998. The Treasury bill is recorded as long-term because it is pledged as collateral to a capital lease through November 1999 (See Note 7). Investments are recorded at cost plus accrued interest earned. The Company recognizes interest income on U.S. Treasury bills on a straight-line basis over the term of the securities. Due to the short-term maturity of the Company's marketable securities, the market value approximates their carrying value. Therefore, no unrealized gains or losses for available-for-sale marketable securities have been recorded in either 1997 or 1996. - -------------------------------------------------------------------------------- 3. INVENTORIES - -------------------------------------------------------------------------------- INVENTORIES AT DECEMBER 31, 1997 AND 1996 CONSIST OF THE FOLLOWING: 1997 1996 - ----------------------------------------------------------------------- Purchased parts and subassemblies $ 638,542 $ 655,584 Work in process 238,042 412,520 Finished goods 293,705 135,268 - ----------------------------------------------------------------------- $ 1,170,289 $ 1,203,372 ======================================================================= - -------------------------------------------------------------------------------- 4. ACCRUED EXPENSES - -------------------------------------------------------------------------------- ACCRUED EXPENSES AT DECEMBER 31, 1997 AND 1996 CONSIST OF THE FOLLOWING: 1997 1996 - ----------------------------------------------------------------------- Payroll and commissions $ 49,056 $ 34,475 Vacation and sick pay 78,168 59,112 Other 80,888 80,812 - ----------------------------------------------------------------------- $ 208,112 $ 174,399 ======================================================================= - -------------------------------------------------------------------------------- 5. INCOME TAXES - -------------------------------------------------------------------------------- At December 31, 1997, the Company had income tax carryforwards of net operating losses (NOL's) of approximately $5,687,000 and research and development credit carryforwards of approximately $193,000. These carryforwards are available to offset future taxable income and related income taxes, and expire as follows: Net Research And Operating Development Tax Year of Expiration Losses Credits - ------------------------------------------------------------------- 2002 $67,000 $1,000 2003 90,000 3,000 2004 200,000 5,000 2005 285,000 3,000 2006 275,000 10,000 2007 670,000 28,000 2008 1,300,000 55,000 2009 1,170,000 36,000 2010 664,000 13,000 2011 966,000 16,000 2012 0 23,000 - ------------------------------------------------------------------- $5,687,000 $193,000 =================================================================== Deferred tax assets (net of any valuation allowance) and liabilities resulting from temporary differences, net operating loss carryforwards and tax credit carryforwards are recorded using an asset and liability method. Deferred taxes relating to temporary differences and loss carryforwards are measured using the enacted tax rate expected to be in effect when they are reversed or are realized. The appropriate tax effect of each type of temporary difference and carryforward is: 1997 1996 - ---------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $2,161,000 $2,162,000 Depreciation 162,000 115,000 Vacation accrual 27,000 18,000 Inventory 1,000 0 Other 43,000 38,000 Tax credit carryforwards 193,000 170,000 ...................................................................... 2,587,000 2,503,000 Valuation allowance (2,587,000) (2,503,000) - ---------------------------------------------------------------------- Net deferred tax asset $0 $0 ====================================================================== Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. A reconciliation of the valuation allowance for deferred tax assets is as follows: 1997 1996 - ---------------------------------------------------------------------------- Valuation at beginning of the year $2,503,000 $2,101,000 Addition to allowance 84,000 402,000 - ---------------------------------------------------------------------------- Valuation allowance at end of the year $2,587,000 $2,503,000 ============================================================================ Total tax benefit differs from the expected tax benefit, computed by applying the federal statutory rate of 35% as follows: 1997 1996 - -------------------------------------------------------------------------------- Expected income tax benefit (51,000) $(375,000) Effect of net operating loss and tax credit carryforwards with no current benefit 79,000 433,000 State income taxes (5,000) (42,000) Income tax credits (23,000) (16,000) - -------------------------------------------------------------------------------- $0 $0 ================================================================================ - -------------------------------------------------------------------------------- 6. NOTES PAYABLE - -------------------------------------------------------------------------------- NOTE PAYABLE TO BANK During 1996, the Company entered into a $1,200,000 line of credit with a financial institution which expired June 30, 1997. On June 24, 1997, the Company signed an extension through June 30, 1998 on the line of credit. The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. The agreement calls for interest at the rate of 2.25% over the financial institution's base rate with minimum interest due over the term of the agreement of $70,000. The line is secured by substantially all of the Company's assets. The agreement also requires the Company to meet certain financial covenants. Outstanding borrowings under the agreement were $659,240 at December 31, 1997. NOTE PAYABLE TO CUSTOMER On May 14, 1991, the Company entered into a $100,000 non-interest bearing note payable agreement with a customer. The agreement called for quarterly payments commencing May 1, 1992. In February 1993, the customer agreed to defer payments for one year. On January 1, 1994, the Company commenced payments at the rate of $1,200 per month which continue until the loan is retired in February 1998. - -------------------------------------------------------------------------------- 7. LEASES - -------------------------------------------------------------------------------- The Company is obligated under capital lease agreements for equipment and leasehold improvements. Future minimum payments under capital leases are as follows: Years Ending December 31, 1998 $52,979 1999 42,458 2000 3,720 2001 620 - ------------------------------------------------------------------------- Total minimum lease payments 99,777 Less amounts representing interest imputed at 11% to 17.9% 14,751 - ------------------------------------------------------------------------- Present value of net minimum lease payments 85,026 Less current installments 37,836 - ------------------------------------------------------------------------- $47,190 ========================================================================= Capital leases are secured by the equipment under lease. In addition, one of the capital leases is also secured by the Company's investment in U.S. Treasury bills at December 31, 1997 (See Note 2). Equipment and leasehold improvements under capital leases as of December 31, 1997 and 1996 are as follows: 1997 1996 - -------------------------------------------------------------------- Equipment $128,589 $134,739 Leasehold improvements 0 152,451 Less accumulated amortization (55,845) (169,326) - -------------------------------------------------------------------- $72,744 $117,864 ==================================================================== The Company leases its office and manufacturing facility under an operating lease that expires in April 1999 with a monthly base rent of $9,793, which escalates yearly based on the consumer price index. Operating expenses and real estate taxes are paid by the Company. Rent expense, including operating expenses and real estate taxes, was approximately $159,000 for each of the years ended December 31, 1997 and 1996. - -------------------------------------------------------------------------------- 8. SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- WARRANTS In connection with both stock and debt offerings, as well as several consulting arrangements, the Company has issued warrants to purchase the Company's common stock. The warrants outstanding as of December 31, 1997 are summarized in the table below:
EVENT # SHARES PRICE EXPIRE - ----------------------------------------------------------------------------------------------------- Non-employee consultant 13,333 $2.125 02/01/98 Non-employee consultant 2,500 $3.750 08/10/98 Investment agreement with Empi 66,845 $5.610 01/21/99 Private placement 1994 309,555 $5.610 01/21/99 Private placement 1994 (placement agent) 30,313 $4.490 01/21/99 Private placement 1996 (placement agent) 107,000 $3.900 01/21/99 Non-employee consultant 2,000 $3.000 02/08/99 Private investors note payable 50,000 $1.500 07/29/99 Private investors note payable (investment advisor) 5,517 $1.500 08/03/99 Private stock purchase 1994 (investment advisor) 8,000 $2.500 10/06/99 Private investors note payable amendment 30,000 $1.500 12/30/99 Private investors note payable amendment (investment advisor) 4,483 $1.500 12/30/99 Private stock purchase 1995 (investment advisor) 10,667 $1.875 01/27/00 Non-employee consultant 7,500 $2.560 02/25/02 - ----------------------------------------------------------------------------------------------------- TOTAL OUTSTANDING 647,713 - -----------------------------------------------------------------------------------------------------
STOCK OPTIONS The Company has three stock option plans: the 1989 Incentive Plan, the 1991 Non-Qualified Plan and the 1996 Non-Employee Director and Medical Advisory Board Plan. In April 1997, the Shareholders approved increasing the number of options available under the Incentive Plan from 200,000 to 400,000. Under the three plans, a maximum of 780,000 options were designated for grant at prices not less than 85% of fair market value at date of grant if a non-qualified option, or 100% if an incentive option as defined under the Internal Revenue Code. Options vest over periods ranging from two years to five years and the options expire over periods ranging from six to fifteen years after the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation expense for the Company's three stock option plans been determined based on the fair value at the grant date for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
1997 1996 - -------------------------------------------------------------------------------------- Net loss - as reported $ (145,566) $ (1,071,115) Net loss - pro forma $ (189,513) $ (1,103,575) Basic and diluted net loss per share - as reported $ (.04) $ (.28) Basic and diluted net loss per share - pro forma $ (.05) $ (.29) - --------------------------------------------------------------------------------------
The above pro forma effects on net loss and net loss per share are not likely to be representative of the effects on reported net income (loss) for future years because options vest over several years and additional awards generally are made each year. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996:
1997 1996 - -------------------------------------------------------------------------------------- Expected dividend yield $0 $0 Expected stock price volatility 43.6% 57.3% Risk-free interest rate 6.3% 6.3% Expected life of options (years) 5 5 - -------------------------------------------------------------------------------------- Weighted average fair value of options granted $1.18 $1.96 - --------------------------------------------------------------------------------------
Additional information relating to all outstanding options as of December 31, 1997 and 1996 is as follows:
----------------------------- ------------------------- 1997 1996 ----------------------------- ------------------------- WEIGHTED AVG WEIGHTED AVG SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------------------------------------------------------- Options outstanding, beginning of year 376,291 $2.51 278,541 $1.99 Options granted 84,600 2.63 135,000 3.46 Options exercised (44,075) 1.36 (22,000) 1.28 Options surrendered (45,583) 2.94 (15,250) 3.10 - -------------------------------------------------------------------------------------------------------- Options outstanding, end of year 371,233 $2.63 376,291 $2.51 Options available for grant at end of year 220,625 265,475 - -------------------------------------------------------------------------------------------------------- Total reserved shares 591,858 641,766 - --------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1997:
----------------------------------- ---------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------- ---------------------------------- Weighted Avg Number Remaining Number Range of Exercise Outstanding Contractual Life Weighted Avg Exercisable at Weighted Avg Prices at 12/31/97 (Yrs) Exercise Price 12/31/97 Exercise Price - -------------------------------------------------------------------------------------------------------- $1.28 - $2.12 80,000 8.0 $1.28 80,000 $1.28 $2.13 - $3.19 158,533 3.8 $2.58 66,889 $2.48 $3.20 - $4.00 132,700 4.9 $3.49 39,900 $3.54 - -------------------------------------------------------------------------------------------------------- $1.28 - $4.00 371,233 5.1 $2.63 186,789 $2.19 - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 9. SIGNIFICANT CUSTOMER - -------------------------------------------------------------------------------- The Company extends unsecured credit to customers primarily in the United States. For the years ended December 31, 1997 and 1996, one customer accounted for 51% and 58% of sales, respectively. The customer accounted for 33% of accounts receivable as of December 31, 1997 and 50% as of December 31, 1996. - -------------------------------------------------------------------------------- 10. RETIREMENT PLAN - -------------------------------------------------------------------------------- The Company has a profit sharing plan (the Plan) classified as a defined contribution plan and qualifying under Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer a portion of their annual compensation through pre-tax contributions to the Plan. The Company matches 10% of an employee's contribution provided the employee's contribution does not exceed 5% of the employee's compensation. Matching contributions for the years ended December 31, 1997 and 1996 were $6,884 and $6,372, respectively. The Company's Board of Directors may approve discretionary contributions to the Plan. No discretionary contribution has been made since the Plan's inception. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by Item 9 concerning the executive officers and directors of the Company is incorporated herein by reference to pages 3 through 6 of the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. ITEM 10. EXECUTIVE COMPENSATION The information required by Item 10 is incorporated herein by reference to pages 6 and 7 of the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 is incorporated herein by reference to pages 2 and 3 of the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K A. Documents filed as part of this report (1) Exhibits. See "Exhibit Index" on page following signatures B. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly cause this report to be signed on its behalf by the undersigned thereunto duly authorized: MEDAMICUS, INC. Date: March 03, 1998 By: /s/ James D. Hartman President and Chief Financial Officer 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 in the capacities and on the dates indicated: /s/ James D. Hartman President and Chief Executive Officer 03/03/98 Principal Financial and Accounting Officer Director // Richard W. Kramp Director /s/ Richard L. Little Director 03/03/98 /s/ Richard F. Sauter Director 03/03/98 //Ted Schwarzrock Director EXHIBIT INDEX EXHIBIT # DESCRIPTION PAGE - -------------------------------------------------------------------------------- 3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 3.2 Articles of Amendment of Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 3.3 By-laws of the Company (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). *10.1 Employment Agreement, dated January 1, 1993, between the Company and Richard L. Little (incorporated by reference to Exhibit 10.1 to the Company's annual report on Form 10-KSB for the year ended December 31, 1993). *10.2 Employment Agreement, dated February 19, 1996, between the Company and Dennis S. Madison (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). *10.3 Employment Agreement, dated February 19, 1996, between the Company and James D. Hartman (incorporated by reference to Exhibit 10.3 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). *10.4 MedAmicus, Inc. 1991 Non-Statutory Stock Option Plan, restated to reflect amendments dated December 18, 1991 (incorporated by reference to Exhibit 10.7 to the Company's annual report on Form 10-K for the year ended December 31, 1991). *10.5 MedAmicus, Inc. Stock Option Incentive Plan, restated to reflect amendments dated December 18, 1991, amendments approved by shareholders on April 21, 1994, and amendments approved by shareholders on April 24, 1997. 10.6 Supply and Distribution Agreement, dated July 31, 1990, between the Company, Davol Inc. and Sigma Medical U.S.A., Ltd. (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.7 Supply and Distribution Agreement, dated October 1, 1990, between the Company, Sigma Medical U.S.A., Ltd. and Davol Inc. (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.8 Amendment No. 2 to Supply and Distribution Agreement, dated January 10, 1991, between the Company, Sigma Medical U.S.A., Ltd. and Davol Inc. (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.9 Supply and Distribution Agreement Amendment No. 3, dated June 4, 1991 and June 6, 1991, between the Company and Davol Inc. (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.10 Supply Agreement, dated May 3, 1991, between the Company and Medtronic, Inc. (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). EXHIBIT # DESCRIPTION PAGE - -------------------------------------------------------------------------------- 10.11 Promissory Note, dated May 14, 1991, to Davol Inc. (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.12 Lease Agreement, dated February 2, 1990, between the Company and Jagodzinski Properties, including First Amendment to Lease Agreement, dated May 1, 1991 (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.13 Form of Agreement Restricting Sale of Stock (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-18 [File No. 33-42112C]). 10.14 Second Amendment to Lease Agreement, dated December 3, 1991, between Jagodzinski Properties and the Company (incorporated by reference to Exhibit 10.16 to the Company's annual report on Form 10-K for the year ended December 31, 1991). *10.15 MedAmicus, Inc. 1992 Non-Employee Director Plan (incorporated by reference to Exhibit 10.22 to the Company's annual report on Form 10-K for the year ended December 31, 1991). 10.16 Investment Agreement, dated November 9, 1993, between the Company and Empi, Inc. (incorporated by reference to the Exhibit to the Company's report on Form 10-QSB for the quarter ended September 30, 1993). 10.17 Form of Bridge Loan Agreement (incorporated by reference to the Exhibit to the Company's quarterly report on Form 10-QSB for the quarter ended June 30, 1994). 10.18 Form of Bridge Warrant (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-3 [File No. 33-86292]). 10.19 Form of Advisor's Warrant (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-3 [File No. 33-86292]). 10.20 Form of Bridge Loan Extension Agreement, dated as of December 30, 1994 (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-3 [File No. 33-86292]). 10.21 Form of Bridge Warrant pursuant to Extension Agreement (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-3 [File No. 33-86292]). 10.22 Subscription Agreement, Letter of Investment Intent and Investor Rights Agreement, between the Company and Rudiger Dahle, dated as of January 27, 1995 (incorporated by reference to Exhibit 10.22 to the Company's annual report on Form 10-KSB for the year ended December 31, 1994). 10.23 International Distribution Agreement, by and between the Company and NICOLAI, dated as of January 1, 1995 (incorporated by reference to Exhibit 10.23 to the Company's annual report on Form 10-KSB for the year ended December 31, 1994). 10.24 Addendum to Supply Agreement, dated August 1, 1994, by and between the Company and Medtronic, Inc. (incorporated by reference to Exhibit 10.24 to the Company's annual report on Form 10-KSB for the year ended December 31, 1994). EXHIBIT # DESCRIPTION PAGE - -------------------------------------------------------------------------------- 10.25 Credit and Security Agreement, dated March 5, 1996, by and between the Company and Norwest Credit, Inc. (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). 10.26 Revolving Note, dated March 26, 1996 to Norwest Credit, Inc. (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). 10.27 Collateral Account Agreement, dated March 26, 1996, by and between the Company and Norwest Credit, Inc. (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). 10.28 Lockbox Agreement, dated March 26, 1996 by and among the Company, Norwest Credit, Inc. and Norwest Bank Minnesota (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). 10.29 Management Support Agreement, dated March 26, 1996 by and among the Company, James Hartman and Norwest Credit, Inc. (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). *10.30 MedAmicus, Inc. 1996 Non-Employee Director and Medical Advisory Board Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's annual report on Form 10-KSB for the year ended December 31, 1995). 10.31 First Amendment to Credit and Security Agreement, dated June 24, 1997, by and between the Company and Norwest Credit, Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-QSB for the quarter ended June 30, 1997). 21.1 Subsidiaries of the Registrant. None. 23.1 Consent of McGladrey & Pullen, LLP. 23.2 Independent Auditor's Report for the years ended December 31, 1996 and 1997 * Indicates a management contract or compensatory plan or arrangement. EX-10.5 2 STOCK OPTION INCENTIVE PLAN EXHIBIT 10.5 STOCK OPTION INCENTIVE PLAN MEDAMICUS, INC. (restated to reflect (i) amendments dated December 18, 1991; (ii) amendments approved by shareholders on April 21, 1994; and (iii) amendment approved by the Board on August 1, 1996 and by shareholders on April 24, 1997) 1. Purpose. The purpose of this Plan is to further the growth and general prosperity of MedAmicus, Inc., the Company, by enabling the employees of the Company, who have been or will be given responsibility for the affairs of the Company, to acquire shares of its common stock under the terms and conditions and in the manner set forth by this Plan, increasing their personal involvement in the Company and to enable the Company to obtain and retain the services of those employees. 2. Administration. This Plan shall be administered by a Committee of at least two (2) Directors who are disinterested administrators within the meaning of Section 16 of the Securities Exchange Act of 1934 and the rules, regulations and interpretations promulgated thereunder. Each option granted will be evidenced by a written agreement (Stock Option Agreement) and a document containing the terms and conditions of the Plan. 3. Eligibility and Participation. Employees eligible to receive options under the Plan shall be key personnel including officers of the Company and directors who are also employees of the Company. The Committee shall allot to such participant options to purchase shares as the Committee shall from time to time determine: provided, however, that no employee shall be allotted an option for any greater number of shares than would result in him owning directly or indirectly, more than 10% of the total combined voting power or value of the stock of the Company or any of its subsidiaries unless the option price is at least 85% of the market value of the stock on the date of grant, and the option is, by its terms, not exercisable after six (6) years from the date of grant. 4. Shares Subject to Plan. Subject to adjustment as provided in Section 5, an aggregate of up to 400,000 shares of the Common Stock of the Company shall be subject to the Plan and the Committee is authorized to grant options hereunder with respect to such number of shares. Any unsold shares subject to an option under the Plan which for any reason expires or otherwise terminates may again be made subject to option under the Plan at the discretion of the Committee. 5. Adjustments Upon Changes in Capitalization. In the event of a merger, consolidation, reorganization, stock dividend, stock split, or any other change in corporate structure or capitalization affecting the Company's common shares, appropriate adjustment shall be made in the maximum number of shares available under the Plan or to any one individual and in the number, kind, option, price, etc. of shares subject to options granted under the Plan. 6. Terms and Conditions of Options. The Committee shall have power subject to the limitations contained in the Plan, to prescribe any terms and conditions in respect to the granting or exercise of any option under the Plan and in particular shall prescribe the following terms and conditions: (a) Each option shall state the number of shares to which it pertains. (b) Each option shall be granted within ten years of the date the Plan is adopted. (c) Each option shall be exercisable only within six years of the date of grant. (d) The purchase price, which shall be at least 85% of the fair market value of the shares at such time as the option is granted and shall not be less than the par value of the shares sold. (e) An option may be exercised at any time after the date of grant subject to the provisions of section 6(f) of the Plan with respect to all or part of the shares covered by the option. An option may not be exercised for fractional shares of stock. In the event the Company or the stockholders of the Company enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger, reorganization, liquidation or otherwise, an option shall become immediately exercisable with respect to the full number of shares. (f) An option shall be exercised when written notice of such exercise has been given to the Company at its principle business office by the person entitled to exercise the option and full payment for the shares has been received by the Company. Until the stock certificates are issued, no right to vote, receive dividends, or any other rights as a shareholder shall exist with respect to optioned shares, notwithstanding the exercise of the option. (g) An option may be exercised by the optionee only while he is, and has continually been, since the date of the grant of the option, an employee of the Company or within three months following termination of employment (for reasons other than death, disability or termination for cause). If the continuous employment of an optionee terminates by reason of his death, options which the deceased employee would be entitled to exercise as of the date of death may be exercised within one year following the date of death by the person to whom his rights under such option shall have passed by will or by the laws of descent and distribution, but in no event later than the expiration of the option. If the continuous employment of an optionee terminates by reason of disability, options which the disabled employee would be entitled to exercise as of the date of termination of employment may be exercised within one year following the date of termination, but in no event later than the expiration of the option. If the continuous employment of an optionee terminates for cause, any options which have not been exercised as of the date of termination shall be cancelled. 7. Options Not Transferable. No option granted under the Plan will be transferrable by the optionee, either voluntarily or involuntarily, except by will or the laws of descent and distribution, and then only to the extent provided in Section 6 hereof, or pursuant to a qualified domestic relations order (as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act and the rules thereunder.) 8. Amendment or Termination of the Plan. The Board of Directors may amend the Plan from time to time as it deems advisable. The Board of Directors may at any time terminate the Plan, provided that any termination of the Plan shall not affect options already granted. The options shall remain in full force and effect as if the Plan had not been terminated. 9. Agreement and Representation of Employee. As a condition to the exercise of any option or portion thereof, the Company may require the person exercising the option to represent and warrant at the time of any exercise that the shares are being purchased only for investment and without any present intention to sell or distribute the shares if in the option of counsel for the Company such representation is required under the Securities Act of 1933, or any other applicable law, regulation or rule of any governmental agency. In the event legal counsel to the Company renders an option to the Company that shares for options exercised pursuant to this Plan cannot be issued to the optionee because such act would violate the applicable Federal or State securities law, then and in that event, the optionee agrees that the Company shall not be required to issue the shares to the optionee tendered to the Company upon exercise of the option. 10. Effectiveness and Termination of the Plan. The Plan shall become effective upon adoption by the Board of Directors and shall be subject to approval of the stockholders of MedAmicus, Inc. within 12 months of adoption. The Plan shall terminate on the earliest of: (a) the date when all the common shares available under the Plan shall have been acquired through exercising the options granted under the Plan, (b) August 1, 1999, (c) such other date as the Board may determine. 11. Form of Option. Options may be issued by the execution of the MedAmicus, Inc. form entitled "Stock Option Agreement." EX-23.1 3 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.1 Independent Auditor's Consent We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 related to the Stock Option Incentive Plan, 1991 Non-Statutory Stock Option Plan and the 1992 Non-Employee Director Plan (Commission File No. 33-94524) and on Form S-3 relating to the registration of 1,061,734 shares of common stock, (Commission File No. 33-86292) of our report dated January 20, 1998 with respect to the financial statements of MedAmicus, Inc. included in this Annual Report on Form 10-KSB for the year ended December 31, 1997. McGladrey & Pullen, LLP Minneapolis, Minnesota March 9, 1998 EX-23.2 4 INDEPENDENT AUDITOR'S REPORT EXHIBIT 23.2 To the Board of Directors and Shareholders of MedAmicus, Inc. Minneapolis, Minnesota We have audited the accompanying balance sheets of MedAmicus, Inc. as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MedAmicus, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. McGladrey & Pullen, LLP Minneapolis, Minnesota January 20, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS Dec-31-1997 Dec-31-1997 1,102,490 0 1,006,989 2,050 1,170,289 3,374,141 2,808,828 1,940,914 4,279,553 1,515,039 47,190 41,123 0 0 2,676,201 4,279,553 7,172,786 7,172,786 3,976,791 3,976,791 0 0 80,765 (145,566) 0 (145,566) 0 0 0 (145,566) (0.04) (0.04)
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