2002 Annual Report

Worldwide approximately 10 million people suffer from blood clots every year. The AngioJet® System has been used over 100,000 times to remove these clots. In most cases when our device is used, a life or limb is saved; in these and other cases, the quality of the patients’ life is significantly enhanced. Coronary heart disease and the resulting clots is the number one killer of Americans. With the AngioJet System installed in over 800 U.S. hospitals, we have established a firm base for our therapy that rapidly, safely and effectively removes blood clots from native coronary arteries and coronary bypass grafts. These clots, or thrombus, cause acute events, like heart attacks, and raise the risk associated with angioplasty and stenting procedures. The AngioJet System is an important part of the physician’s arsenal in treating heart attacks and it is our largest market segment. Important new devices, like drug-eluting stents, will continue to advance the standard of coronary care. In the coming pages, we will outline how Possis intends to be part of advancing this standard by being an integral part of the physician’s coronary toolkit.

We’re in and plan to stay here

14 Letter to Our Shareholders

18 Management’s Discussion and Analysis

of Financial Condition and Results of Operations 25 Financial Statements

29 Notes to Consolidated Financial Statements

36 Independent Auditors’ Report 37 Corporate Information

24 Report of Management

37 Board of Directors and Officers 1

in the black Having a medically effective technology and rapidly growing sales does not ensure success for a pioneering medical device company. Profitability and the ongoing ability to internally generate cash to support growth and continuing investment is critical, particularly in today’s environment of volatile capital markets. In fiscal 2002, Possis Medical was solidly in the black, with pre-tax earnings per share of $0.34 versus $(0.20) in the prior year on a fully-diluted basis. We also virtually doubled our cash balance to $18.6 million at the end of fiscal 2002 from the prior year-end. Our balance sheet allows us the flexibility to stay in the game and solidify our position for the long term.

42,033

FY02 29,553

FY01 U.S. AngioJet Revenue – in Thousands of Dollars

2

70

61

51

40

5

FY98

FY02

Gross Margin – Percent

0.34

(0.20)

(0.67)

(0.90) (0.98)

FY98

FY02

Earnings (Loss) per Share – Pretax

3

1.1 million Americans suffer a heart attack each year. Using the AngioJet System, mechanical thrombectomy, or clot removal, can be particularly helpful for certain high-risk subgroups.

Diabetes, a growing epidemic in the U.S., frequently leads to death from related cardiovascular disease.

Most of the 600,000 coronary bypass graft operations performed each year will require repeat intervention within 7 to 10 years.

About 6.1% of the population is over 75, but they account for 36% of heart attacks and 60% of heart attack deaths.

850,000 interventional procedures annually

Coronary Debris Removal, Embolic Protection & Clinical Trial Results 200,000 potential procedures annually

02

Coronary Thrombus Removal 75,000 potential AngioJet procedures annually

Dramatic Expansion of our Realizable U.S. Marketplace Our current, realizable* coronary market for AngioJet thrombus removal is about 75,000 cases per year out of the 850,000 interventions done annually in the U.S. Our efforts to get additional randomized, clinical data supporting coronary use of our device, new rapid exchange catheter models, and the marriage of embolic protection with our unmatched debris removal capability, can expand our realizable coronary market to approximately 200,000 annual procedures in the U.S. alone.

in the marketplace Our U.S. coronary business is our largest market, and it is rapidly growing and becoming more complex. We believe that this provides us greater opportunities in the future. First, several patient subsets – older Americans, diabetics, heart attack patients who have had bypass surgery, patients contra-indicated for clot-dissolving drugs – present significant treatment challenges to conventional interventional therapies such as ballooning and stenting. Second, clinicians now realize that working in heart vessels with conventional techniques can dislodge thrombotic, calcific or other embolic debris that then migrate with blood flow and lodge in tiny vessels, eventually leading to the death of heart muscle. The AngioJet System is undoubtedly the best debris removal technology approved by the FDA for use in the heart. Over time, as scientific evidence mounts to demonstrate AngioJet’s superior evacuation performance, rapid exchange catheters are introduced, and it gets married to embolic protection devices – our own or those made by others – the utility of the System will increase, dramatically expanding our realizable* market. *Realizable means that physician practice, reimbursement, clinical data, technology, and other factors remain as they are today.

5

in a heartbeat Our clinical understanding of heart attacks has greatly increased in recent years. We know, for example, that if the echocardiogram of a heart attack patient shows ST-segment elevations, the physician must restore blood flow to the patient’s obstructed artery as quickly as possible. Physicians must respond in a metaphorical heartbeat, because mortality increases with every 30 minutes that elapse between the onset of a patient’s symptoms and the completion of effective treatment. We also know that the presence of thrombus – a blood clot – increases the short-term risk of coronary intervention and also reduces the long-term benefit to the patient. Our rapidly growing sales, both of drive units and catheters, are testament to our ability to rapidly, decisively and effectively remove blood clots in minutes, as opposed to hours with clot-dissolving drugs.

6

33,300

25,200

16,100

9,100

4,700

FY98

FY02

Catheter Sets Sold – Units

863

669

443

300 191

FY98

FY02

U.S. Drive Units in the Field

Our growing catheter sales reflect physicians moving towards treating heart attack and other acute life-threatening conditions, with primary intervention. 7

XMI Catheter

in the toolkit Treating complex, coronary artery disease requires a specialized toolkit, where each of the instruments does its job well and work well in concert. For heart attack patients, the toolkit includes the AngioJet XMI® catheter, guide catheters and wires, angioplasty balloons and stents. As this illustration shows, coronary artery disease narrows the artery by forming fatty plaque. When the surface of the plaque ruptures, the lipid-rich material interacts with factors in the blood to form a thrombus, or clot. This thrombus reduces or completely blocks the blood flow, causing chest pain or a heart attack. When this occurs, it is imperative to restore flow by removing the thrombus completely. The AngioJet System does this quickly and safely by working with the traditional tools in the physician’s toolkit, such as guidewires, angioplasty balloons and stents.

8

Designed for use in 2-5 mm arteries of the heart. XMI Catheter (photo enlarged to show detail)

Designed for use in 3-8 mm vessels, like peripheral arteries and coronary bypass grafts. XVG® Catheter (photo enlarged to show detail)

Thrombus

Guidewire

Plaque

9

Dr. Ali is principal investigator for the AiMI (AngioJet in Myocardial Infarction) clinical trial. Arshad Ali, MD St. John Hospital and Medical Center Detroit, MI

in their own words With more than 150 scientific journal articles published about the AngioJet System in different clinical settings, our company has built a significant body of experience on how our device works to help patients. We have achieved a balance of research, clinical investigations, and experience from high-volume practitioners, leading clinical trial investigators, and academic opinion leaders in fields such as interventional cardiology. We want to share their thoughts with you, in their own words.

10

“The AngioJet is a unique device that permits cardiologists to rapidly clear arteries blocked by blood clots. This permits a safer environment for subsequent angioplasty and stenting.”

Kevin F. Browne, Jr., MD Lakeland Regional Medical Center Lakeland, FL

“AngioJet has demonstrable benefits in success, safety, and greater convenience to the patient and physician due to a single, combined procedure for thrombus removal and definitive intervention in patients with coronary thrombus. AngioJet should be regarded as the therapy of choice for treatment of thrombotic SVGs (Saphenous Vein Grafts) or native coronary arteries.” Richard E. Kuntz, MD, MSc Brigham & Women’s Hospital Harvard Medical School Boston, MA

“Rheolytic (AngioJet System) thrombectomy provides interventionalists with a unique ability to deal with thrombotic lesions. It has become an integral part of our cath lab and may become ‘default therapy’ for these high-risk patients.” Arshad Ali, MD 11 St. John Hospital and Medical Center Detroit, MI

Diane Jensen

Amanda Wong

John Riles

Mike Bonnette

Faith Salchert

Marketing

Design Engineering

Marketing

Design Engineering

Marketing

in the future Only one thing is for certain: we will continue to see both evolutionary and revolutionary treatment advances like drug-eluting stents and embolic protection devices. We intend to be in the forefront of these treatment advances. Our product development, engineering, clinical, and marketing staffs are constantly interacting with our physician-customers to design better devices, gather more experience in randomized trials, and better understand their patients’ needs. For example, our physicians have told us that saving heart muscle, instead of just restoring blood flow in an artery, is the ultimate gold standard for treatment of heart attack patients. So, in our AiMI (AngioJet in Myocardial Infarction) randomized trial, we are using state-of-the-art nuclear scans instead of the more common 12

Nicole Vertalino

Michelle Jackson

Hieu Le

Tim Anderson

Research Engineering

Marketing

Research

Quality Assurance

flow measures, to see whether AngioJet therapy saves more heart muscle when used in conjunction with angioplasty, stenting and platelet-inhibiting drugs. Physician opinionleaders are now suggesting that first removing all embolic debris – thrombus, atheroma and other debris – from an artery before deploying the expensive new, drug-eluting stents, can make these devices much more effective. Removing thrombus ensures better contact with the vessel wall, which helps the stent deliver the drug into the smooth muscle of the artery. Physicians have told us that they would like to see rapid exchange versions of AngioJet catheters. Again, we have listened, and we plan to release these products to market later this fiscal year. We are not standing still. As the future evolves day-byday, we intend to be an integral part of it. 13

Robert G. Dutcher Chairman, President and Chief Executive Officer

Fiscal 2002 was an outstanding year for Possis Medical. We achieved rapid revenue growth, full-year profitability and exceeded our earnings expectations for the year against a background of widespread corporate earnings disappointments. 14

in the past year

and the year ahead To Our Shareholders

Fiscal 2002 was an outstanding year for Possis Medical. We achieved rapid revenue growth, full-year profitability and exceeded our earnings expectations for the year against a background of widespread corporate earnings disappointments. Revenue increased 42 percent, to $42.5 million, up from

Building our product line Our pioneering AngioJet System is the leader in the estimated $200 million current realizable market for mechanical thrombectomy, a market that did not even exist a decade ago. Blood clots and the complications they create are a significant

$30 million last year. We continued to grow our drive unit

problem for heart attack victims, diabetics with coronary artery

footprint to 863 units, and significantly increased our dispos-

disease, and people with peripheral vascular disease. Our revo-

able sales. Volume growth and a favorable sales mix allowed

lutionary technology removes blood clots in minutes, instead

us to achieve gross margins of just over 70 percent, up from

of hours – or often days – a typical outcome using thrombolytic

61 percent in fiscal 2001.

drugs, the existing standard of care. The AngioJet System,

Our business model with improving margins allowed us

in combination with other technologies, such as balloon

to translate our revenue growth into profitability for every

angioplasty, stents and distal protection provides what we

quarter of fiscal 2002. We are pleased to report that we ended

believe will be the future gold standard of care for patients

the year with pre-tax earnings of $6.3 million, up from a $3.3

with blood clots.

million loss last year. Our pre-tax earnings per diluted share

Our 4 French XMI® catheter, introduced late last year, has

was $0.34, compared to a loss of $(0.20) in fiscal 2001. Taking

been our biggest product success to date. Its miniature size

into account the benefits from our tax-loss carry-forwards,

makes it compatible with the 6 French guide systems preferred

we reported diluted earnings per share of $0.96 versus a per

by interventional cardiologists, and it combines flexibility,

diluted share loss of $(0.20) in the prior year.

trackability and high performance clot removal in a state-

Our strengthened balance sheet now allows us the flexibil-

of-the-art product. During the year, we also introduced the

ity to grow earnings while also stepping up our expenditures

5 French XVG® catheter, designed for larger vessels, such as

on research and development to ensure our future product

saphenous vein bypass grafts. It also deals more effectively

flow. We virtually doubled our cash position during the year,

with older, more difficult clots. Now approved for peripheral

to $18.6 million at the end of fiscal 2002. With no debt or senior use, we are awaiting FDA approval for coronary use, which we anticipate in fiscal 2003. securities on the balance sheet, we are well positioned to meet these goals.

15

Our strengthened balance sheet now allows us the flexibility to grow earnings while also stepping up our expenditures on research and development to ensure our future product flow.

Clinical trials establish our effectiveness

Investing in R&D

We embarked on a new physician-directed, clinical trial at

Maintaining momentum will require major investment in

the end of the year to measure the effectiveness of AngioJet

research and development in the years ahead. In fiscal 2003,

technology in conjunction with other state-of-the-art therapies. we expect to increase our spending on research and developCalled AiMI (AngioJet in Myocardial Infarction), this study

ment, while still reporting double-digit percentage growth in

promises to firmly establish AngioJet therapy as a clinically

pre-tax earnings per share. As competitors seek to enter our

proven standard of care, along with first line treatments

markets, we will strive to retain our market leading position

including drug therapy, balloon angioplasty and stents.

by moving our product offerings a generation ahead in terms

The AiMI study will enroll approximately 500 patients, and is designed to test the AngioJet System against the current

of effectiveness and ease-of-use. During fiscal 2003, we intend to convert our catheter line

standard of care for treating heart attacks. We want to know,

from exclusively over-the-wire to include rapid exchange,

and will be able to measure with nuclear scans, if we save

making them easier to deploy and manage in the interventional

more heart muscle with Angiojet therapy than without.

lab setting. Rapid exchange catheters are increasingly preferred

Favorable results would be very powerful evidence supporting both domestically, and even more so internationally. future adoption of the AngioJet System as a standard of care. After a slight delay, we are resuming our TIME 1 clinical

We are also entering the emerging distal protection market in 2003 with a distal occlusion product that complements our

trial, which applies AngioJet technology to the treatment

AngioJet catheter’s thrombus removal capability. Distal pro-

of ischemic stroke. We are currently securing Institutional

tection systems prevent dislodged debris from obstructing the

Review Board (IRB) approvals to restart patient enrollment.

patient’s microvascular circulation, and causing death of heart

Our multi-center AJILE study continues to examine the

muscle or limb loss. Our new Guard Dog® distal occlusion

use of the AngioJet Xpeedior catheter for patients with acute

guide wire combined with the clinical utility of the AngioJet

arterial thrombotic occlusions, located in the lower leg. We

System provides a unique distal protection system that

expect clinical results involving approximately forty patients

promises to significantly boost our revenues through the sale

to be presented at the Montefiore Medical Center’s Advanced

of both products in an emerging market estimated to be $200

International Management Meeting to be held in New York

million annually.

City in November 2002.

16

We have proven that Possis is in the game, and we are in to stay and to win. … We have achieved consistent profitability and laid the foundation for our continued growth.

Lastly, we are now beginning a two-year initiative to

We have proven that Possis is in the game, and we are in

enhance the user-friendliness of our current drive unit that

to stay and to win. We have achieved consistent profitability

powers our AngioJet System, while developing a new drive

and laid the foundation for our continued growth and even

unit that will be easier to set up, have a more intuitive interface greater achievements. and offer more operating bandwidth for our future catheters.

We would like to extend our thanks to the more than 200 talented employees who form the foundation of our company.

Our future opportunities

Their hard work and dedication produces results we can all be proud of. Our thanks go also to our shareholders, who have

Since its introduction to market, AngioJet therapy has saved the lives and limbs of more than 100,000 patients worldwide,

continued to support us in our quest for preeminence. We look forward to new levels of success in the years ahead.

enabling them to enjoy a higher quality of life. This, in the end, is what leads to our success. A number of market opportunities point to continuing

Sincerely,

growth for our company in the years to come. • Demographics: The worldwide market for safe and effective cardiovascular treatment is growing, led by the aging baby-boomer population, a large demographic force. • International Markets: Japan, which has a $10 million

Robert G. Dutcher Chairman, President and CEO

estimated market for AngioJet catheters, offers a meaningful opportunity. The addition of rapid exchange also provides expansion possibilities into European markets. • New Treatments: Our new Guard Dog distal occlusion guidewire, along with the proven evacuation capability of the AngioJet System, offers an effective new treatment opportunity for the new and growing distal protection market. Products in development for stroke, deep vein thrombosis, and other chronic vascular conditions will provide additional opportunity.

17

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements Certain statements made in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “could,”

we might make or by known or unknown risks and uncertainties. Except as required by federal securities laws, we undertake no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by us on this subject set forth in the risk factors included in Exhibit 99 to the Company’s Form 10-K for the year ended July 31, 2002 as filed with the Securities and Exchange Commission.

“estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” and similar words or

General

expressions. Our forward-looking statements that may occur in company communications include statements regarding the Company’s ability to increase sales of disposable and capital equipment; its ability to obtain additional FDA approvals; the ability to open up new foreign markets, such as Japan; customer responses to the Company’s marketing strategies; future revenue levels, gross margins, expense levels; ability to retain and motivate skilled employees especially sales positions; deferred tax asset valuation allowance; earnings per share; future equity financing needs and the Company’s ability to develop new products and enhance existing ones. These

The Company was incorporated in 1956 and went public in 1960 as Possis Machine Corporation. Initial operations consisted of design, manufacturing and sales of industrial equipment and a division that provided temporary technical personnel. The Company’s involvement with medical products began in 1976. In 1990 the Company made the decision to focus on medical products and subsequently divested all non-medical operations. The Company operates in one business segment – the manufacture and sale of medical devices. Possis Medical, Inc.

forward-looking statements are based on current expectations evaluates revenue performance based on the total revenues of each major product line and profitability based on an enterpriseand assumptions and entail various risks and uncertainties that could cause actual results to differ materially from those

wide basis due to shared infrastructures to make operating

expressed in such forward-looking statements. Certain factors

and strategic decisions.

that may affect whether these anticipated results occur include

The Company generates revenue from the sale of its prod-

clinical and market acceptance of our products; factors affect-

ucts. The resulting cash flow, together with the net proceeds

ing the health care industry such as restricting sales time at

from the Company’s debt and equity offerings, has been used

interventional labs; consolidation, cost containment and trends to fund the Company’s operations, including research and toward managed care; changes in supplier requirements by

development related to its products. Approximately 99% of

group purchasing organizations; delays, unanticipated costs

fiscal 2002 revenues were from product sales in the United

or other difficulties and uncertainties associated with lengthy

States. The importance of United States revenue generation

and costly new product development and regulatory clearance is expected to continue for the foreseeable future. processes; changes in governmental laws and regulations; changes in reimbursement; the development of new competitive products and compounds that may make our products

Critical Accounting Policies

obsolete; sudden restrictions in supply of key materials and

The consolidated financial statements include accounts of the

deterioration of general market and economic conditions.

Company and all wholly-owned subsidiaries. The preparation

We also caution you not to place undue reliance on forward-

of financial statements in conformity with accounting principles

looking statements, which speak only as of the date made.

generally accepted in the United States requires management

Any or all forward-looking statements in this report and in any to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated other public statements we make may turn out to be inaccurate or false. They can be affected by inaccurate assumptions

18

financial statements and related footnotes. In preparing these

financial statements, management has made its best estimates Management, on a quarterly basis, evaluates the adequacy of and judgments of certain amounts included in the financial

the allowance for doubtful accounts. Management believes the

statements, giving due consideration to materiality. The

amount of the allowance for doubtful accounts is appropriate;

Company’s most critical accounting policies are those described however, nonpayment of accounts could differ from the below. The Company does not believe there is a great likelihood original estimate, requiring adjustments to the allowance. that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. For a detailed discussion of these and other accounting policies, see Note 1 to the Consolidated Financial Statements. Revenue Recognition Revenues associated with products that are already maintained at customer locations are recognized when the Company receives a valid purchase order from the customer. At this time, ownership and risk of loss is transferred to the customer. Revenues associated with products that are not maintained at the customer locations are recognized and title and risk of loss are transferred to the customer when a valid purchase order is received and the products are received at the customer’s location. Provisions for returns are recorded in the same period the related revenues are recognized.

Inventories Inventories are valued at the lower of cost or market. On a quarterly basis, management assesses the inventory quantities on hand to estimated future usage and sales and, if necessary, writes down to market the value of inventory deemed excess or obsolete. Warranty Reserve The Company provides a one-year limited warranty on its AngioJet System drive unit and a limited warranty on AngioJet System disposable products. The warranty reserve is established at the time products are sold and is based upon historical frequency of claims relating to the Company’s products and the cost to replace disposable products and to repair drive units under warranty. Management, on a quarterly basis, evaluates the adequacy of the warranty reserve. Management believes the amount of the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimate, requiring adjustments to the reserve.

Allowance for Returns Accounts receivable are reduced by an allowance for items that may be returned in the future. The estimated allowance for returns is based upon historical experience, information received from our customers and on assumptions that are believed to be reasonable under the circumstances. Management, on a quarterly basis, evaluates the adequacy of the allowance for returns. Management believes the amount of the allowance for returns is appropriate; however, actual returns incurred could differ from the original estimate, requiring adjustments to the allowance.

Deferred Tax Asset Valuation Allowance The Company became profitable starting in the third quarter of fiscal 2001. It has maintained profitability for six quarters, including the fourth quarter of fiscal 2002. Prior to the fourth quarter of fiscal 2002, the Company reduced its net deferred tax asset to zero through a valuation allowance due to the uncertainty of realizing such asset. In the fourth quarter of fiscal 2002, the Company reassessed the likelihood that the deferred tax asset will be recovered from future taxable income. Based on the previous two full years’ operating results projected forward, the

Allowance for Doubtful Accounts Accounts receivable are

Company has reduced its valuation allowance on the deferred

reduced by an allowance for amounts that may become

tax asset by $12,269,000. Management will continue to assess

uncollectible in the future. Substantially all of the Company’s

the likelihood that the balance of the deferred tax asset will be

receivables are due from health care facilities located in the

realizable and the valuation allowance will be adjusted accord-

United States. The estimated allowance for doubtful accounts

ingly. The Company expects that if operations continue to

is based upon the age of the outstanding receivables and

improve in fiscal 2003, the remaining valuation allowance will

the payment history and creditworthiness of each customer.

be reduced to zero by the end of fiscal 2003.

19

Results of Operations Fiscal Years Ended July 31, 2002, 2001 and 2000 Total product sales for fiscal 2002 increased $12,470,000, or 42%, to $42,471,000, compared to $30,001,000 in fiscal 2001. Total product sales for fiscal 2001 increased $9,449,000, or 46%,

devices on the market today. In addition, Cross-Stream Technology has been able to deal more effectively with “mural thrombus,” the older, more organized material that adheres to vessel walls and can complicate patient results. As of July 31, 2002 the Company had a total of 863 domestic

to $30,001,000, compared to $20,552,000 in fiscal 2000. The

AngioJet System drive units in the field, compared to 669 and

Company recorded pre-tax net income of $6,256,000, or

493 at the end of the previous two years. During fiscal 2002, the

$0.34 per diluted share, for fiscal 2002. This compared to

Company sold approximately 33,300 catheters and pump sets

a net loss of $3,304,000, or $0.20 per diluted share, in fiscal

versus approximately 25,200 in fiscal 2001 and 16,100 in fiscal

2001 and a net loss of $10,590,000, or $0.67 per diluted share,

2000. This represents a 32% and 57% increase in unit catheters

in fiscal 2000. In fiscal 2002, the Company recorded a benefit

sales from the previous years. During the fiscal years ended

for income taxes in the amount of $11,526,000 due to the

July 31, 2002, 2001 and 2000 the Company sold 161, 160

reduction of the deferred tax asset valuation allowance. This

and 138 AngioJet System drive unit worldwide, respectively.

resulted in net income after income taxes in fiscal 2002 of

The number of AngioJet System drive unit sales in fiscal

$17,782,000, or $0.96 per diluted share.

2002 and 2001 resulted from a continued increase in market penetration and the overall acceptance of the AngioJet System

Revenue – AngioJet System U.S. AngioJet System revenue

by physicians.

for fiscal 2002 increased $12,480,000, or 42%, to $42,033,000 compared to $29,553,000 in fiscal 2001. U.S. AngioJet System revenue for fiscal 2001 increased $10,400,000 or 54%, to $29,553,000 compared to $19,153,000 in fiscal 2000. The Company markets the AngioJet ® Rheolytic™ Thrombectomy System (AngioJet System) worldwide. The AngioJet System consists of a drive unit (capital) that powers a disposable pump and a family of disposable catheters, each aimed at a specific indication. The main factors in the AngioJet System revenue increase were increased sales resulting from the Company commencing U.S. marketing of the AngioJet System with additional labeling claims. During fiscal 2002, 2001 and 2000 the Company began U.S. marketing of four new catheters for the removal of blood clots in leg (peripheral) arteries; the XVG®135 in April 2002, the XMI®135 in March 2001, the Xpeedior®100 in May 2000 and the LF140 in April 2000. In addition, the Company received clearance to market the Company’s XMI catheter for coronary use in December 2001 and it’s Xpeedior 60 catheter for removal of blood clots from dialysis access grafts in April 2000. The XVG, XMI and Xpeedior catheters feature its proprietary Cross-Stream® Technology. This exclusive technology platform intensifies the action at the tip of the catheter, which doubles the clot removal rate and triples the treatable vessel size compared to other available mechanical thrombectomy

The Company employs a variety of flexible drive unit acquisition programs including outright purchase and various evaluation programs. The purchasing cycle for the AngioJet System drive unit varies depending on the customer’s budget cycle. The Company has signed contracts with six purchasing groups in order to accelerate orders and increase market penetration. These purchasing groups evaluate and screen new medical technologies on behalf of their members, and once they recommend a technology, such as the AngioJet System, they negotiate pre-determined discounts on behalf of their members. The benefit for the Company is access to the recommended vendor list, along with marketing support provided by the purchasing group. The purchasing groups receive a marketing fee on their member purchases from the Company. These discounts and marketing fees have been offset by the increase in sales to the member hospitals of the purchasing group. There has been no material negative effect on the Company’s margins due to these discounts and marketing fees. The discounts reduce gross revenue on the income statement, while marketing fees are included in selling, general and administrative expense on the income statement. The Company expects U.S. AngioJet System sales to continue to grow primarily through obtaining additional Food and Drug Administration (FDA) approved product uses, introduction

20

of new catheter models for existing indications, introduction

indicated its desire to terminate the distribution agreement

of AngioJet System-related products, more face-time selling

and return unsold product. The Company has settled all

to existing accounts, peer-to-peer selling, and the publication

outstanding litigation with the Perma-Seal distributor, and has

of clinical performance and cost-effectiveness data.

terminated the distribution relationship. The settlement had

Foreign sales of the AngioJet System were $438,000 in

no impact on the financial statements as the related accounts

fiscal 2002, $372,000 in fiscal 2001 and $393,000 in fiscal 2000.

receivable balances had been appropriately written down in

The limited foreign sales are primarily due to cost constraints

prior periods. No additional sales of Perma-Seal Dialysis

in overseas markets. In foreign markets, where public sector

Access Grafts are expected.

funds are more crucial for hospital operation, Euro devaluations

The assets of this business have been written off, and the

generated higher public sector deficits, which, in turn, forced

Company is not optimistic that the assets can bring significant

reductions in hospital procedure and equipment budgets.

value in a sale.

In Japan, the coronary AngioJet System clinical study was completed in April 1998 and a regulatory filing was completed in November 1999 with the Japanese Ministry of Health and Welfare (MHW). The Company believes that we have assembled all the information required by the MHW in support of our LF140 coronary catheter submission. Our prospective Japanese distributor must make the submission of this information in response to the last set of questions from MHW. Our prospective Japanese distributor will make this submission dependent on reaching a commercial agreement with the Company. The Company is currently negotiating with its prospective Japanese distributor to resolve key issues relating to regulatory submissions, ownership of regulatory approvals for our coronary products and distribution following regulatory approval.

Cost of Medical Products Cost of medical products, compared to prior years, increased 8% in fiscal 2002 and 16% in fiscal 2001. The increases are primarily due to the significant growth in the U.S. AngioJet System product sales. Medical product gross margins improved by $11,517,000 in fiscal 2002 and $7,852,000 in fiscal 2001, over the prior year. The gross margin percentage in fiscal 2002 was 70% compared to 61% in fiscal 2001 and 51% in fiscal 2000. The improvement in gross margins was driven by higher volumes of XMI, XVG and Xpeedior catheters that carry higher margins than the catheters they replaced and an improvement in the XMI, XVG and LF140 product catheter mix in the year ended July 31, 2002. The Company believes that gross margins will continue to improve as product sales and related volumes continue to

The Company believes that the treatment of blood clots in

grow and as product and process improvements are made.

the coronary vessels, peripheral vessels, vessels in the brain and vascular grafts provide significant worldwide marketing

Selling, General and Administrative Expenses Selling, general

opportunities for the AngioJet System.

and administrative expenses increased $2,126,000 in fiscal 2002 and $1,165,000 in fiscal 2001, as compared to prior

Revenue – Vascular Grafts Revenue from Perma-Seal ® Dialysis Access Grafts was $75,000 in fiscal 2001 and $1,006,000 in fiscal 2000. The Company received no revenue in fiscal 2002 from Perma-Seal Dialysis Access Grafts. In September 1998 the Company received FDA marketing approval for its PermaSeal Dialysis Access Graft. In December 1998, the Company entered into an exclusive worldwide supply and distribution agreement for its Perma-Seal Dialysis Access Graft. The distributor defaulted under the agreement by failing to comply with contractually obligated levels of product purchases and with payment schedules. In November 2000, the distributor

periods. The primary factors for the expense increase for fiscal 2002 were increased sales and marketing expenses related to the expansion of the Company’s U.S. direct sales organization for the AngioJet System, increased commission expense due to increased AngioJet System product sales, increased marketing fees for the national purchasing contracts, increased patient enrollment in the Company’s marketing studies and an increase in management and key employee cash compensation. The primary factors for the expense increase for fiscal 2001 were increased sales and marketing expenses related to the expansion of the Company’s U.S. direct sales organization

21

for the AngioJet System, increased commission expense

Interest Income Interest income decreased $224,000 in fiscal

due to increased AngioJet System product sales, increased

2002 from fiscal 2001 due to declining market interest rates.

marketing fees for the national purchasing contracts, and

Interest income decreased $107,000 in fiscal 2001 from fiscal

increased computer and software depreciation. In fiscal 2001,

2000 due to the use of cash to fund operations. The Company

expense increases were partially offset by the reduction in

expects interest income to increase slightly in fiscal 2003 as

costs related to a work force reduction in January 2001, a 2001 compared to fiscal 2002 due to an anticipated increase in cash Special Equity Compensation Program, discussed in the next

and cash equivalents.

paragraph, and a reduction in sales product demonstrations and samples. The Company expects that the current U.S. sales force will be sufficient to continue to grow sales and service the current customer base for the Company’s AngioJet System through fiscal 2003.

Benefit for Income Taxes The Company became profitable starting in the third quarter of fiscal 2001. It has maintained profitability for six quarters, including the fourth quarter of fiscal 2002. Prior to the fourth quarter of fiscal 2002, the Company reduced its net deferred tax asset to zero through a valuation

The Company issued stock option awards totaling 1,800,865 shares in fiscal 2001. In August 2000, stock option awards of 443,800 were issued that related to the Company’s fiscal 2000 performance, since the fiscal 2000 year ended in July. In fiscal 2001, the Company was faced with two issues: 1) potential of additional dilutive financing due to the prospect of continuing losses, and 2) the hiring away of key employees by competitors. Consequently, 403,885 net stock option awards were issued to conserve cash and reduce expenses. These stock option awards reduced management and key employee cash compensation and sales commission by approximately $810,000. An additional 733,800 stock option awards were issued to retain management and key employees in fiscal 2001. Of the 733,800 stock option awards, 539,800 relate to fiscal 2001 performance stock option awards that are normally issued in

allowance due to the uncertainty of realizing such asset. In the fourth quarter of fiscal 2002, the Company reassessed the likelihood that the deferred tax asset will be recovered from future taxable income. Due to the previous two full years’ operating results projected forward, the Company has reduced its valuation allowance on the deferred tax asset by $12,269,000. $11,526,000 is recorded as a tax benefit in fiscal 2002. The remaining $743,000 relates to disqualified stock options that are recorded in the Consolidated Statement of Changes in Stockholders’ Equity. Management will continue to assess the likelihood that the balance of the deferred tax asset will be realizable and the valuation allowance will be adjusted accordingly. The Company expects that if operations continue to improve in fiscal 2003, the remaining valuation allowance will be reduced to zero by the end of fiscal 2003.

August 2001, subsequent to fiscal 2001 year-end. Accelerating these awards was, in the opinion of management, a necessary Effects of Inflation Due to the low rate of inflation and small and effective retention tool to ensure the continuity of business changes in prices there has been very little effect on the growth and the achievement of profitability goals.

Company’s net revenues and net income from operations as of fiscal 2002. Net income from operations has been slightly

Research and Development Expenses Research and develop-

affected due to higher employment costs.

ment expense decreased 8% in fiscal 2002 and 13% in fiscal 2001, as compared to prior periods. The decreases in fiscal 2002 and 2001 are due to the timing of outlays in different

Liquidity and Capital Resources

stages of development of new AngioJet System applications

The Company’s cash and cash equivalents totaled approxand related products. The Company believes that research and imately $18,557,000 at July 31, 2002 compared to $9,516,000 development expense for AngioJet System applications and at July 31, 2001. The primary factors in the increase were cash related products will increase in fiscal 2003 as the Company

provided by operations of $6,966,000 and the issuance of completes the development of its current products and invests stock and exercise of stock options and warrants of $2,997,000, in the development of new AngioJet System thrombectomy which was partially offset by capital expenditures of $903,000. applications and related products including clinical trials.

22

During fiscal 2002, cash provided by operating activities

in accrued liabilities totaling $2,638,000. The expense reimburse-

was $6,966,000, which resulted primarily from $17,782,000

ment from a city government of $102,000 relates to debt

net income, depreciation of $2,119,000, stock compensation

forgiven by the city government due the Company achieving

expense of $187,000, write-down due to the impairment of

minimum headcount employment objectives. The $1,328,000

assets of $70,000, and an increase in accrued liabilities of

increase in receivables was due to increase in revenue in fiscal

$1,140,000. The net cash provided by operations was partially

2001 as compared to fiscal 2000. The $595,000 decrease in trade

offset by an expense reimbursement from a city government

accounts payable was due to timing of year-end payables,

of $84,000, an increase in receivables of $1,605,000, an increase

especially for software and computer upgrades. The decrease

in inventories of $635,000, an increase in other current assets

in inventories of $218,000 was due to record sales, implemen-

of $420,000, an increase in deferred tax assets of $11,526,000

tation of lean manufacturing initiatives and the writedown of

and a decrease in accounts payable of $59,000. Depreciation

certain raw material inventories related to the LF140 catheter

includes company-owned drive units at customer locations,

during the fourth quarter of fiscal 2001. Cash provided by

as well as property and equipment. The increase in accrued

investing activities was $22,545,000 of proceeds from the

liabilities was due to the timing of the payments of accrued

maturity of marketable securities, offset by purchase of mar-

liabilities and the increase in accrued corporate incentives.

ketable securities of $13,628,000 and the purchase of property

The expense reimbursement from a city government of

and equipment of $1,334,000. Net cash provided by financing

$84,000 relates to debt forgiven by the city government due

activities was $633,000, which resulted from the cash received

to the Company achieving minimum headcount employment

in connection with the issuance of stock and exercise of stock

objectives. The $1,605,000 increase in receivables was due to

options of $638,000.

increase in revenue in fiscal 2002 as compared to fiscal 2001.

During fiscal 2000, cash used in operating activities was

Inventory increased due to the increase in demand for the

$8,818,000, which resulted primarily from the $10,590,00 net

AngioJet System. The increase in other current assets was

loss and a $1,231,000 increase in inventory, partially offset by

due to the increase in prepaid insurance and a grant receivable.

non-cash charges, a decrease in receivables, and an increase

The Company received a grant from the National Institute of

in accounts payable totaling $3,044,000. The $1,231,000

Neurological Disorders and Stroke in the amount of $248,000.

increase in inventories was due to the increase in the number

The grant helped fund development of the AngioJet NV150

of evaluation drive units in the field as of July 31, 2000 as

catheter for acute ischemic stroke. The Company received the

compared to July 31, 1999 and due to the expected increase

grant funds subsequent to July 31, 2002. Deferred tax assets

in future AngioJet System revenue. The $123,000 decrease increased due to the reduction of the valuation allowance. The in receivables was due to reduction in days sales outstanding $59,000 decrease in trade accounts payable was due to timing for U.S. AngioJet System receivables as of July 31, 2000 as of year-end payables. Cash used in investing activities was

compared to July 31, 1999. The $1,037,000 increase in accounts $903,000 for the purchase of property and equipment. Net cash payable was due to the purchasing of software and computers provided by financing activities was $2,971,000, which resulted toward the end of fiscal 2000. The capital expenditures were from the cash received in connection with the issuance of stock paid in August 2000. Cash used in investing activities was and exercise of stock options and warrants of $2,997,000. $10,756,000, which resulted from the purchase of marketable During fiscal 2001, cash used in operating activities was

securities of $24,122,000 and the purchase of property and

$2,755,000, which resulted primarily from the $3,304,000

equipment of $1,852,000, partially offset by the proceeds

net loss, an expense reimbursement from a city government

from the maturity of marketable securities of $15,205,000.

of $102,000, an increase in receivables of $1,328,000, and a

Net cash provided by financing activities was $14,476,000,

decrease in trade accounts payable of $595,000, partially offset which resulted from the net proceeds of the $14,019,000 by non-cash charges, a decrease in inventories, and an increase private placement offering and the exercise of stock options of approximately $500,000.

23

Report of Management

Outlook The Company expects that overall revenue from the

Management of Possis Medical Inc., is responsible for the

AngioJet System, primarily in the United States, will be in the

integrity of the financial information presented in this Annual

range of $53 million to $57 million in fiscal 2003. Gross margin Report. The consolidated financial statements have been for fiscal 2003 is expected to be between 70% and 75% of total prepared in accordance with accounting principles generally sales. The Company expects selling, general and administrative accepted in the United States. Where necessary, they reflect expenses to increase in fiscal 2003 due to anticipated growth

estimates based on management’s judgment.

in revenue. Research and development expenditures are

Management relies upon established accounting procedures expected to increase from the fiscal 2002 level as the Company and related systems of internal control for meeting its responcompletes development of projects and invests in development sibilities to maintain reliable financial records. These systems of new AngioJet System thrombectomy applications and

are designed to provide reasonable assurance that assets are related products including clinical trials. The Company expects safeguarded and that transactions are properly recorded and diluted earnings per share before taxes for the full year in the executed in accordance with management’s intentions. range of $0.50 to $0.60. The net income after tax diluted earnings per share is estimated to be in the range of $0.31 to $0.38, not including any potential tax benefit related to a further reduction of the deferred tax asset valuation allowance. The quarterly revenue progression will be affected by the timing of new product introductions as well as the timing of expenses

The Audit Committee of the Board of Directors meets regularly with management and its independent accountants to discuss audit scope and results, internal control evaluations, and other accounting, reporting, and financial matters. The independent accountants have access to the Audit Committee without management’s presence.

related to marketing and clinical trials. In addition, the Company expects that increasing working capital investments in trade receivables and inventory will be required to support growing product sales. Robert G. Dutcher Quantitative and Qualitative Disclosures

Chairman, President and Chief Executive Officer

About Market Risk: The Company invests its excess cash in money market mutual funds. The market risk on such investments is minimal. The product sales for the Company’s foreign subsidiary

Eapen Chacko

are in U.S. Dollars (“USD”). At the end of July 2002, the amount Vice President of Finance and Chief Financial Officer of currency held in foreign exchange was approximately $1,000 USD. The market risk on the Company’s foreign subsidiary operations is minimal. The Company does not have any debt or off balance sheet liabilities.

24

Consolidated Balance Sheets Y E A R S E N D E D J U LY 3 1

2002

2001

$ 18,556,663

$ 9,515,751

5,873,358 4,134,817 762,615 646,000

4,268,114 4,216,629 342,995 –

29,973,453

18,343,489

3,092,644

3,665,751

11,623,000

–

$ 44,689,097

$ 22,009,240

$ 1,262,711 2,471,557 – 1,200,763

$ 1,321,485 1,532,912 94,310 989,556

4,935,031

3,938,263

6,909,689 78,385,073 (18,900) (45,521,796)

6,728,809 75,411,387 (22,700) (64,046,519)

39,754,066

18,070,977

$ 44,689,097

$ 22,009,240

Assets Current Assets: Cash and cash equivalents (Note 1) Trade receivables (less allowance for doubtful accounts and returns of $582,000 and $659,000, respectively) Inventories (Note 1) Prepaid expenses and other assets Deferred tax asset (Note 3) Total current assets Property and Equipment, net (Notes 1 and 2) Deferred Tax Asset (Note 3) Total Assets Liabilities And Shareholders’ Equity Current Liabilities: Trade accounts payable Accrued salaries, wages, and commissions Current portion of long-term debt (Note 2) Other liabilities Total current liabilities Commitments and Contingencies (Note 7) Shareholders’ Equity (Note 4): Common stock-authorized, 100,000,000 shares of $0.40 par value each; issued and outstanding, 17,274,222 and 16,822,023 shares, respectively Additional paid-in capital Unearned compensation Retained deficit Total shareholders’ equity Total Liabilities and Shareholders’ Equity SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

25

Consolidated Statements of Operations Y E A R S E N D E D J U LY 3 1

2002

2001

2000

$42,470,693

$30,000,547

$ 20,551,704

12,689,835 19,352,991 4,426,663

11,736,253 17,227,164 4,820,037

10,139,799 16,062,207 5,525,431

36,469,489

33,783,454

31,727,437

6,001,204 254,519

(3,782,907) 478,496

(11,175,733) 585,352

6,255,723 11,526,000

(3,304,411) –

(10,590,381) –

Net income (loss)

$17,781,723

$ (3,304,411)

$(10,590,381)

Net income (loss) per common share: Basic Diluted

$ $

$ $

$ $

Products sales (Note 8) Cost of sales and other expenses: Cost of medical products Selling, general and administrative Research and development Total cost of sales and other expenses Operating income (loss) Interest income Net income (loss) before income taxes Benefit for income taxes (Note 3)

Weighted average number of common shares outstanding: Basic Diluted SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

26

1.04 .96

17,078,759 18,602,156

(.20) (.20) 16,739,277 16,739,277

(.67) (.67) 15,697,135 15,697,135

Consolidated Statements of Cash Flows Y E A R S E N D E D J U LY 3 1

Operating Activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation Stock compensation expense Expense reimbursement from city government Writedown due to impairment of assets (Gain) loss on disposal of assets Amortization (Increase) decrease in trade receivables (Increase) decrease in inventories Increase in other current assets Increase in deferred tax assets (Decrease) increase in trade accounts payable Increase (decrease) in accrued and other current liabilities

2002

$ 17,781,723

2001

2000

$(3,304,411)

$(10,590,381)

2,119,240 186,940 (83,866) 70,000 (3,850) – (1,605,244) (635,188) (419,620) (11,526,000) (58,774) 1,140,205

1,950,533 196,199 (101,938) 87,582 8,564 – (1,327,617) 217,959 (64,504) – (594,578) 177,499

1,195,848 271,534 – 338,922 6,345 72,000 122,814 (1,230,513) (30,584) – 1,036,890 (10,489)

6,965,566

(2,754,712)

(8,817,614)

(902,627) 7,344 – –

(1,334,142) 1,402 22,545,000 (13,627,749)

(1,851,510) 13,192 15,205,000 (24,122,251)

(895,283)

7,584,511

(10,755,569)

Net cash provided by (used in) operating activities

Investing Activities: Additions to property and equipment Proceeds from sale of fixed assets Proceeds from sale/maturity of marketable securities Purchase of marketable securities Net cash (used in) provided by investing activities

Financing Activities: Proceeds from issuance of stock and exercise of options and warrants Repayment of long-term debt

2,997,151 (26,522)

637,941 (5,418)

14,480,598 (4,990)

Net cash provided by financing activities

2,970,629

632,523

14,475,608

Increase (Decrease) in Cash and Cash Equivalents

9,040,912

5,462,322

(5,097,575)

Cash and Cash Equivalents at Beginning of Year

9,515,751

4,053,429

9,151,004

$ 18,556,663

$ 9,515,751

$ 4,053,429

$

$

$

Cash and Cash Equivalents at End of Year Supplemental Cash Flow Disclosure: Disqualified stock options Issuance of restricted stock Accrued payroll taxes related to restricted stock Inventory transferred to fixed assets Cancellation of restricted stock

743,000 36,000 (12,600) – –

– 23,900 46,643 – –

– 59,000 18,080 23,280 1,977

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

27

Consolidated Statements of Changes in Shareholders’ Equity COMMON STOCK UNEARNED NUMBER

ADDITIONAL

STOCK

R E TA I N E D

C O M P E N S AT I O N

DEFICIT

OF SHARES

AMOUNT

PA I D - I N C A P I TA L

Balance at July 31, 1999 Employee stock purchase plan Stock options issued to directors and physicians (Note 4) Stock options exercised Stock grants Unearned stock compensation amortization Stock retired Private placement stock offering Net loss

14,998,360 51,999

$5,999,344 20,800

$60,608,623 270,180

– 58,682 5,000

– 23,473 2,000

97,853 147,634 37,000

Balance at July 31, 2000 Employee stock purchase plan Stock options issued to directors and physicians (Note 4) Stock options exercised Stock grants Unearned stock compensation amortization Stock retired Net loss

16,700,942 52,493

– (7,148) 1,594,049 –

Balance at July 31, 2002 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

28

$(141,467) $(50,151,727) $ 16,314,773 – – 290,980 – – (59,000)

– – –

97,853 171,107 (20,000)

– 38,963 13,380,892 –

173,681 1,977 – –

– – – (10,590,381)

173,681 38,080 14,018,512 (10,590,381)

6,680,377 20,997

74,581,145 160,128

(24,809) –

(60,742,108) –

20,494,605 181,125

– 72,127 5,000

– 28,851 2,000

170,190 427,965 13,500

– – (23,900)

– (8,539) –

– (3,416) –

– 58,459 –

26,009 – –

– – (3,304,411)

26,009 55,043 (3,304,411)

(64,046,519) –

18,070,977 238,320

Balance at July 31, 2001 16,822,023 Employee stock purchase plan 63,242 Stock options issued to directors and physicians (Note 4) – Stock options and warrants exercised 387,708 Stock grants 2,124 Unearned stock compensation amortization – Stock retired (875) Disqualified stock options – Net income – 17,274,222

– (2,860) 637,620 –

T O TA L

6,728,809 25,297

75,411,387 213,023

(22,700) –

– 155,083 850

147,140 2,603,748 22,550

– – (36,000)

– (350) – – $6,909,689

– (12,775) – – $78,385,073

39,800 – – –

– – –

170,190 456,816 (8,400)

– – –

147,140 2,758,831 (12,600)

– – 743,000 17,781,723

39,800 (13,125) 743,000 17,781,723

$ (18,900) $(45,521,796) $ 39,754,066

Notes to Consolidated Financial Statements

Note 1.

Marketable Securities During 2001 and 2000 the Company invested in commercial paper with original maturities of less

Nature of Business and Summary of Significant Accounting Policies Nature of Business Possis Medical, Inc. (the Company) is

than six months. These instruments are classified as held to maturity and carried at amortized cost, which approximates fair value.

a developer, manufacturer and marketer of medical devices, operating in one business segment. The Company was incorporated in 1956 and has operated several businesses over the last 46 years. In 1990, the Company decided to focus on medical

Inventories Inventories are stated at the lower of cost (on the first-in, first-out basis) or market. Inventory balances at July 31 were as follows:

products and changed its name to Possis Medical, Inc. in 1993. In January 1995, the Company established a 100% owned

Finished goods

subsidiary, Possis Medical Europe B.V., in the Netherlands

Work-in-process

to support international product distribution. Possis Medical

Raw materials

received AngioJet Rheolytic Thrombectomy System U.S.

2002

2001

$1,444,973

$1,935,590

805,911

1,432,536

1,883,933

848,503

$4,134,817

$4,216,629

marketing approval for use in arterio-venous (AV) access hemodialysis grafts in December 1996, for use in native

Property and Equipment Property is carried at cost and

coronary arteries and coronary bypass grafts in March 1999,

depreciated using the straight-line method over the estimated

and for use in leg arteries in April 2000.

useful lives of the various assets. Property and equipment

The Company’s thrombectomy products utilize new tech-

balances and corresponding lives at July 31 were as follows:

nology and the production processes and equipment used to manufacture them are unique and have been designed and

Leasehold improvements

constructed by Company employees. In addition, the medical

Equipment

device industry is subject to the laws and oversight of the

Assets in construction

United States Food and Drug Administration as well as non-U.S. regulatory bodies in countries where the Company does business. Basis of Consolidation The consolidated financial statements include the accounts of Possis Medical, Inc. and its whollyowned subsidiaries: Possis Holdings, Inc., JEI Liquidation, Inc. (Jet Edge) and Possis Medical Europe B.V., after elimination of intercompany accounts and transactions. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2002

2001

LIFE

$1,454,833

$1,454,833

10 years

7,536,959

6,814,596

3 to 10 years

138,271

255,502

N/A

9,130,063

8,524,931

Less accumulated depreciation

6,037,419

4,859,180

Property and equipment – net

$3,092,644

$3,665,751

Goodwill Goodwill was being amortized on a straight-line basis over 13 1 ⁄ 2 years, based on the remaining life of patent rights related to the Perma-Flow ® Graft acquired in 1988. As of July 31, 2000, the value of goodwill was determined to be impaired, and the remaining balance of $125,922 was written off as of July 31, 2000. Impairment of Long-lived Assets In fiscal 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” The Financial Accounting Standards Board (FASB) issued SFAS No. 144 to

Cash Equivalents The Company considers highly liquid

establish a single accounting model, based on the framework

investments with original maturities of three months or less

established in SFAS No. 121, as SFAS No. 121 did not address

to be cash equivalents.

the accounting for a segment of a business accounted for as

29

a discontinued operation under Accounting Principle Board

customer. At this time ownership and risk of loss is transferred

(APB) Opinion No. 30 “Reporting the Results of Operations –

to the customer. Revenues associated with products that are

Reporting the Effects of Disposal of a Segment of a Business

not maintained at the customer locations are recognized when

and Extraordinary, Unusual and Infrequent Occurring Events

a valid purchase order is received and the products are received

and Transactions.” SFAS No. 144 also resolves significant

at the customer’s location. At this time title and risk of loss is

implementation issues related to SFAS No. 121. The provisions

transferred to the customer. Provisions for returns are provided

of SFAS No. 144 are to be applied prospectively. There was no

for in the same period the related revenues are recorded.

impact on the Company’s financial statements due to adoption of SFAS No. 144. Impairment of long-lived assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized, based on the difference between the carrying value and the fair market value of an asset, when the estimated future undiscounted cash flows from the asset are less than the carrying value of the asset. In fiscal 2002 and 2001, the Company wrote down $70,000 and $87,582 of a fixed asset (included in selling, general and administrative expense). The value of this fixed asset was determined to be impaired due to the unlikely continued use of this fixed asset. The Company

Shipping and Handling In fiscal 2001, the Company adopted Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling Costs.” EITF 00-10 requires all amounts billed to customers in a sales transaction related to shipping and handling to be classified as product sales. The Company records costs related to shipping and handling in cost of medical products. Prior period product sales and cost of medical products have been adjusted for this change, which had no effect on previously reported net losses. Fair Value of Financial Instruments The carrying value of all financial instruments approximates fair value due to the shortterm nature of the instruments.

wrote the asset down to net realizable value. In fiscal 2000, the Company wrote down $213,000 of fixed assets (included

Income (Loss) Per Share Income per share for 2002 and loss

in cost of goods sold) and $125,922 of goodwill (included in

per share for 2001 and 2000 is computed by dividing net

selling, general and administrative expense) related to the

income (loss) by the weighted average number of common

Company’s vascular graft business. The value of these vascu-

shares outstanding. Warrants and options representing

lar assets was determined to be impaired due to the reduction

373,468, 3,826,089 and 2,549,264 shares of common stock at

of sales by the Company’s vascular graft distributor.

July 31, 2002, 2001 and 2000, respectively, have been excluded from the computations because their effect is antidilutive.

Income Taxes The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” Deferred taxes

Reclassifications Certain reclassifications have been made to

are provided on an asset and liability method whereby deferred

the fiscal 2001 and 2000 financial statements to conform to the

tax assets are recognized for deductible temporary differences presentation used in the fiscal 2002 financial statements. The and operating loss or tax credit carryforwards and deferred

reclassifications had no effect on shareholders’ equity or net

tax liabilities are recognized for taxable temporary differences. losses as previously reported. Temporary differences are the variances between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance to reflect the possibility that some portion or all of the deferred tax assets may not be realized.

Derivative Instruments and Hedging Activities In fiscal 2000, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” SFAS No. 133 establishes account-

Revenue Recognition Revenues associated with products that ing and reporting standards for derivative instruments and for are already maintained at customer locations are recognized

hedging activities. It requires that all derivatives, including

when the Company receives a valid purchase order from the

those embedded in other contracts, be recognized as either

30

assets or liabilities and that those financial instruments be

In fiscal 2001, the Company’s note payable and accrued

measured at fair value. The accounting for changes in the fair

interest to a city government in the amount of $101,938 was

value of derivatives depends on their intended use and desig-

forgiven. The note payable and accrued interest were forgiven

nation. Management has reviewed the requirements of SFAS

due to achieving minimum headcount employment objectives

No. 133 and has determined that they have no free-standing

with the city government.

or embedded derivatives. All contracts that contain provisions

In August 2002, the Company’s note payable and accrued

meeting the definition of a derivative also meet the require-

interest to a city government in the amount of $83,538 was

ments of, and have been designated as, normal purchases

forgiven. The note payable and accrued interest were forgiven

and sales. The Company’s policy is to not use free-standing

due to maintaining minimum headcount employment objec-

derivatives and to not enter into contracts with terms that

tives with the city government.

cannot be designated as normal purchases or sales. Accounting for Asset Retirement Obligations In August 2001,

Note 3.

the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to

Income Taxes

record the fair value of a liability for an asset retirement obli-

At July 31, 2002, the Company had net operating loss carry-

gation in the period in which it is incurred. When the liability

forwards of approximately $53,378,000 for federal tax purposes,

is initially recorded, the entity capitalizes the cost by increasing which expire in 2010 through 2021, and $15,587,000 for the carrying amount of the related long-lived asset. Over time, Minnesota tax purposes, which expire in 2010 through 2016. the liability is accreted to its present value each period, and

In addition, at July 31, 2002, the Company has approxi-

the capitalized cost is depreciated over the useful life of the

mately $2,408,000 and $772,000 in federal and state tax credits,

related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for the

respectively, substantially all of which are research and development tax credits, which expire from 2003 through 2019, and approximately $65,000 alternative minimum tax credit which

Company in fiscal 2003. The Company has not yet determined

does not expire.

the impact of SFAS No. 143 on its financial position and Deferred tax assets and liabilities as of July 31, 2002 and

results of operations.

2001 are described in the table below. 2002

Note 2.

2001

Current assets (liabilities): Allowance for doubtful accounts and returns

Long-term Debt Long-term debt at July 31, 2002 and 2001 is as follows:

$

Note payable, interest at 4.5%, interest and principal due June 1999 and August 2001, collateralized by the Company’s equipment

2001

–

$87,500

Notes payable – other

–

6,810

–

94,310

Less current maturities

–

94,310

$

–

$

–

298,000 252,000

Employee compensation and benefits

126,000

111,000

Valuation allowance $

$

188,000

Other 2002

271,000

Inventory

Net

61,000

79,000

646,000

740,000

– $

646,000

(740,000) $

–

Long-term assets: Net operating losses Amortization of patents Tax credits Depreciation

$ 19,219,000

$ 20,710,000

532,000

459,000

2,421,000

2,421,000

(31,000)

(99,000)

22,141,000 Valuation allowance Net

(10,518,000) $ 11,623,000

23,491,000 (23,491,000) $

–

31

The effective income tax rate differed from the U.S. federal

deferred stock, annual grants of stock options to directors,

statutory rate for each of the three years ended July 31, 2002,

stock options to directors in lieu of compensation for services

2001 and 2000 as follows:

rendered as directors, and other stock-based awards valued in whole or in part by reference to stock of the Company. No 2002

Tax expense (benefit) on income (loss) from continuing operations computed at statutory rate of 35% Change in valuation allowance Other Total income tax (benefit) expense

2001

2000

incentive stock options may be granted on or after December 16, 2009, nor shall such options remain valid beyond ten years

$ 2,190,000

$(1,157,000)

$(3,707,000)

1,047,000

3,644,000

following the date of grant. The total number of shares of stock reserved and available

(13,713,000) (3,000)

110,000

63,000

for distribution under the 1999 Plan originally was 2,000,000 shares, a maximum of 2,000,000 of which may be issued as

$(11,526,000)

$

–

$

–

incentive stock options. The total number of shares of stock reserved and available for distribution under the 1999 Plan are

Note 4.

being increased annually beginning on August 1, 2000 by 2% of the number of shares of the Company’s common stock out-

Common Stock Private Placement Offerings In March 2000, in conjunction

standing on July 31 of the prior fiscal year. At July 31, 2002, there were 2,941,974 shares reserved for

with a private placement offering, the Company issued

outstanding options under all plans and 671,263 shares avail-

1,594,049 shares of its common stock to various investors

able for granting of options under the 1999 Plan.

and received $15,000,000 in gross proceeds. The Company incurred issuance costs of $981,488. In addition, the Company issued 318,810 warrants to purchase shares of its common stock. The exercise price is $12.67 per share. These warrants expire in March 2004. In May and June 1999, in conjunction with a private placement offering, the Company issued 827,852 shares of its com-

In fiscal 2002, 2001 and 2000, the Company granted 7,915, 40,289 and 13,609 compensatory options, respectively, to its outside directors in lieu of cash payments for directors fees. Fiscal 2002, 2001 and 2000 options were granted under the 1999 Plan. These options vest six months after date of grant and expire not more than ten years from date of grant. The expense associated with compensatory options to outside

mon stock to various investors and received $7,000,000 in gross directors were approximately $67,000, $89,000 and $55,000 proceeds. The Company incurred issuance costs of $300,000. In addition, the Company issued 124,178 warrants to purchase shares of its common stock. The exercise price is $11.43 per share for 106,509 warrants and $11.69 per share for 17,669 warrants. These warrants expire in May and June 2003. Stock Options In December 1999, the Company established the 1999 Stock Compensation Plan (the 1999 Plan), which replaced the 1992 Stock Compensation Plan (the 1992 Plan). The 1992 Plan replaced the 1985 and 1983 plans. Although the 1992, 1985 and 1983 plans remain in effect for options outstanding, no new options may be granted under these plans.

for the years ended July 31, 2002, 2001 and 2000, respectively. In fiscal 2002, 2001 and 2000, the Company granted 1,000, 13,000 and 5,000 compensatory options, respectively, to various physicians in lieu of cash payments for services. The Company’s policy is to treat these options under variable plan accounting in accordance with SFAS No. 123 and related Emergency Issues Task Force Issues. These options were granted under the 1999 Plan and vest ratably over a six month to a four year period and expire not more than ten years from date of grant. The expense associated with non-employee options was approximately $50,000, $81,000 and $43,000 for the years ended July 31, 2002, 2001 and 2000, respectively.

The 1999 Plan authorizes awards of the following type of equity-based compensation: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,

32

A summary of changes in outstanding options for each of the three years ended July 31, 2002 follows:

In fiscal 2000, the Company granted 3,000 shares of restricted stock to an employee under the terms of the 1992 Plan, which vest 1,500 shares each year in fiscal 2000 and 2001

Shares under option at beginning of year Options granted

2002

2001

2000

3,246,061

1,969,236

1,621,070

295,045

1,800,865

586,109

Options exercised

(379,884)

(72,127)

(58,682)

Options canceled

(219,248)

(451,913)

(179,261)

and 2,000 shares of restricted stock to an employee under the terms of the 1999 Plan which vest in fiscal 2001. Approximately $20,000 was accrued to pay the estimated withholding taxes on those shares as management believes that the employees will elect to receive fewer shares in lieu of paying the with-

Shares under option at end of year

2,941,974

3,246,061

1,969,236

holding taxes. In case of termination of the employees,

Shares exercisable at end of year

1,878,695

1,009,283

1,011,298

unvested shares are forfeited. Unearned compensation of $59,000 was recorded at the date of grant and is being recognized over the vesting period.

Stock option weighted average exercise prices during fiscal In fiscal 2001, the Company granted 5,000 shares of

2002, 2001 and 2000 are summarized below:

restricted stock to an employee under the terms of the 1999 2002

2001

2000

$ 7.54

$10.43

$10.89

16.45

5.19

8.97

Exercised

7.38

6.33

3.53

Canceled

9.09

10.27

12.56

Outstanding at end of year

8.43

7.54

10.43

Outstanding at beginning of year Granted

Plan, which vest 2,500 shares each year in fiscal years 2002 and 2003. The fair market value of the restricted shares was approximately $61,000 as of July 31, 2001. Approximately $8,000 was accrued to pay the estimated withholding taxes on those shares as management believes that the employee will elect to receive fewer shares in lieu of paying the withholding taxes. In case of termination of the employee, unvested shares

The following table summarizes information concerning options outstanding and exercisable options as of July 31, 2002:

are forfeited. Unearned compensation of approximately $24,000 was recorded at the date of grant and is being recognized over the vesting period.

RANGE OF EXERCISE PRICE

WEIGHTED AVERAGE REMAINING CONTRACTUAL SHARES LIFE IN OUTSTANDING YEARS

WEIGHTED AVERAGE EXERCISE PRICE

WEIGHTED AVERAGE SHARES EXERCISE EXERCISABLE PRICE

In fiscal 2002, the Company granted 2,124 shares of restricted stock to Board of Directors under the terms of the 1999 Plan, which vest in twelve months. The fair market

$ 1– 6

1,092,691

8.04

4.45

804,090

4.80

6 – 12

1,170,671

7.06

7.72

653,396

7.98

value of the restricted shares was approximately $21,000 as

12 – 17

359,912

5.40

14.45

302,825

14.35

of July 31, 2002. Approximately $13,000 was accrued to pay

17 – 21

318,700

7.44

17.88

118,384

18.22

the estimated withholding taxes on those shares as management believes that the Board of Directors will elect to receive

In fiscal 1999, the Company granted 2,500 shares of restricted stock to employees under the terms of the 1992 Plan, which vest 1,250 shares each year in fiscal 2000 and 2001. Approximately $8,000 was accrued to pay the estimated withholding taxes on those shares as management believes

fewer shares in lieu of paying the withholding taxes. In case of termination of the Board of Directors, unvested shares are forfeited. Unearned compensation of $36,000 was recorded at the date of grant and is being recognized over the vesting period. In fiscal 2002, 2001 and 2000, total compensation expense

that the employees will elect to receive fewer shares in lieu

of approximately $40,000, $26,000 and $174,000, respectively,

of paying the withholding taxes. In case of termination of the

were recognized on these restricted stock grants.

employees, unvested shares are forfeited. Unearned compen-

Effective August 1, 1996, the Company adopted SFAS No.

sation of $20,250 was recorded at the date of grant and is

123, “Accounting for Stock-Based Compensation.” As permit-

being recognized over the vesting period.

ted by SFAS No. 123, the Company has elected to continue following the guidance of APB Opinion No. 25 for measurement and recognition of stock-based transactions with employees.

33

No compensation cost has been recognized for stock options

common stock at $15.58 per share. These warrants expired on

issued under the 1999 and 1992 Plans because the exercise

July 15, 2002.

price for all options granted was at least equal to the fair value

In May and June 1999, the Company issued 106,509 and

of the common stock at the date of grant except as noted pre-

17,669 warrants, respectively, to various investors in conjunc-

viously in this note. If compensation cost for the Company’s

tion with the Company’s private placement offering. These stock option and employee purchase plans had been determined warrants expire in May and June 2003 and are exercisable based on the fair value at the grant dates for grants during fis- into common stock at $11.43 and $11.69, respectively. During cal 2002, 2001 and 2000, consistent with the method provided

fiscal 2002, 19,150 of these warrants where exercised. As of

in SFAS No. 123, the Company’s net loss and loss per share

July 31, 2002, the remaining 105,028 warrants were outstand-

would have been as follows:

ing and unexercised. 2002

2001

2000

As reported Pro forma

$17,781,723

$(3,304,411)

$(10,590,381)

13,602,723

(7,184,411)

(13,283,866)

Income (loss) per share – basic: As reported

1.04

$

.80

(.20)

$

(.67)

(.43)

(.85)

Income (loss) per share – diluted:

Pro forma

placement offering. These warrants expire in March 2004 and are exercisable into common stock at $12.67. During fiscal 2002, 13,984 of these warrants were exercised. As of July 31,

$

Pro forma

As reported

In March 2000, the Company issued 318,810 warrants to various investors in conjunction with the Company’s private

Net income (loss):

2002, the remaining 304,826 warrants were outstanding and unexercised. A summary of changes in outstanding warrants for each

$

.96 .73

$

(.20)

$

(.67)

(.43)

(.85)

The fair value of options granted under the various option plans during fiscal 2002, 2001, and 2000 was estimated on the

of the three years ended July 31 follows:

Warrants outstanding at beginning of year Warrants issued

date of grant using the Black-Sholes option pricing model with Warrants exercised Warrants expired

the following weighted average assumptions and results:

Dividend yield Expected volatility Risk-free interest rate Expected life of option Fair value of options on grant date

Warrants outstanding at end of year

2002

2001

2000

None

2002

2001

580,028

580,028

261,218

–

–

318,810

(33,134)

–

–

(110,640)

–

–

580,028

580,028

436,254

2000

None

None

79% - 86%

82%

85%

Employee Stock Purchase Plan The Employee Stock Purchase

5.4%

3.0%

6.0%

Plan, effective January 1, 1991, enables eligible employees,

120 mo.

120 mo.

120 mo.

$4,179,000

$8,648,000

$4,362,000

through payroll deduction, to purchase the Company’s common stock at the end of each calendar year. The purchase price is the lower of 85% of the fair market value of the stock

Stock Warrants Stock purchase warrants held by unrelated parties representing the right to purchase 26,400 shares of the Company’s common stock at $8.52 a share were outstanding

on the first or last day of the calendar year. The Company issued 63,242 shares in fiscal 2002, 52,493 shares in fiscal 2001 and 51,999 shares in fiscal 2000 under this Plan.

as of July 31, 2002. These warrants do not have an expiration date and must be exercised if the market value of the Company’s Note 5. common stock exceeds $22.73 per share for any sixty consecutive calendar days. In July 1998, the Company issued to various investors

401(k) Plan The Company has an employees’ savings and profit sharing

110,640 stock purchase warrants in conjunction with a private

plan for all qualified employees who have completed six months

placement of convertible debentures and are exercisable into

of service. Company contributions are made at the discretion of

34

the Board of Directors subject to the maximum amount allowed Note 8. under the Internal Revenue Code. Contributions for the years ended July 31, 2002, 2001 and 2000 were $276,196, $250,179

Segment and Geographic Information and Concentration of Credit Risk

and $260,482, respectively.

The Company’s operations are in one business segment, the design, manufacture and distribution of cardiovascular and Note 6.

vascular medical devices. The Company evaluates revenue performance based on the worldwide revenues of each major

Related Party Transactions

product line and profitability based on an enterprise-wide A Director of the Company at times performs outside legal services for the Company. During fiscal 2002, 2001 and 2000

basis due to shared infrastructures to make operating and strategic decisions.

the amount of these services were approximately $2,000, $74,000 and $1,000, respectively. A Director of the Company is a Principal of an investment banking firm that performed

Total revenues from sales in the United States and outside the United States for each of the three years ended July 31,

services for the Company and which received fees of $925,000 2002, 2001 and 2000 are as follows: during fiscal 2000 in connection with a private placement financing by the Company.

United States Outside the United States Total revenues

2002

2001

2000

$42,032,901

$29,628,777

$20,158,934

437,792

371,770

392,770

$42,470,693

$30,000,547

$20,551,704

Note 7. Commitments and Contingencies

In fiscal 2002, 2001 and 2000 there were no individual

The Company’s medical products operation is conducted from customers with sales exceeding 10% of total revenues. a leased facility under an operating lease which expires in fiscal 2006. The lease can be canceled by either party with notice

Note 9.

and payment of a termination fee. The Company is also leasing a sales office under an oper-

Product Supply and Distribution Agreements

ating lease that expires in 2005. The future annual rentals on

In December 1998, the Company entered into an exclusive

this operating lease are approximately $15,000 per year

worldwide supply and distribution agreement for its Perma-Seal

through 2005.

Dialysis Access Graft. The distributor defaulted under the

Total rental expense charged to operations was approxi-

agreement by failing to comply with contractually obligated

mately $261,000, $258,000 and $260,000 for the years ended

levels of product purchases and with payment schedules. In

July 31, 2002, 2001, and 2000, respectively.

November 2000, the distributor indicated its desire to termi-

Future minimum payments under the non-cancelable

nate the distribution agreement and return unsold product. The Company has settled all outstanding litigation with the

operating leases at July 31, 2002 were:

Perma-Seal distributor, and has terminated the distribution Y E A R E N D E D J U LY 3 1

AMOUNT

relationship. The settlement had no impact on the financial

2003

$257,000

statements.

2004

257,000

2005

257,000

2006 Total minimum lease payments

151,000 $922,000

35

Note 10. Selected Quarterly Financial Data (Unaudited) F I S C A L Y E A R E N D E D J U LY 3 1 , 2 0 0 2

F I R S T Q U A RT E R

S E C O N D Q U A RT E R

T H I R D Q U A RT E R

F O U RT H Q U A RT E R

$ 9,585,268

$10,223,788

$10,755,468

$11,906,169

6,585,286

7,013,293

7,601,264

8,581,015

Net income – before income taxes

938,528

1,625,349

1,686,922

2,004,924

Net income – after income taxes

938,528

1,625,349

1,686,922

13,530,924

Product Sales Gross profit

Net income per common share – before income taxes Basic

$

0.06

Diluted

$

0.05

0.10

$

0.09

0.10

$

0.09

0.12 0.11

Net income per common share – after income taxes Basic

$

0.06

Diluted

$

0.10

$

0.10

$

0.78

0.05

0.09

0.09

0.74

$ 6,578,110

$ 6,947,017

$ 7,411,418

$ 9,064,002

3,463,065

3,993,346

4,865,420

5,943,113

Net income – before income taxes

(2,371,958)

(1,598,409)

28,726

637,232

Net income – after income taxes

(2,371,958)

(1,598,409)

28,726

637,232

F I S C A L Y E A R E N D E D J U LY 3 1 , 2 0 0 1

Product Sales Gross profit

Net income per common share – before income taxes Basic and Diluted

$

(0.14)

$

(0.10)

$

–

$

0.04

$

(0.14)

$

(0.10)

$

–

$

0.04

Net income per common share – after income taxes Basic and Diluted

Independent Auditors’ Report To the Shareholders of Possis Medical, Inc.: We have audited the accompanying consolidated balance

accounting principles used and significant estimates made by

sheets of Possis Medical, Inc. and subsidiaries (the Company)

management, as well as evaluating the overall consolidated

as of July 31, 2002 and 2001, and the related consolidated

financial statement presentation. We believe that our audits

statements of operations, cash flows, and changes in share-

provide a reasonable basis for our opinion.

holders’ equity for each of the three years in the period ended

In our opinion, such consolidated financial statements pre-

July 31, 2002. These consolidated financial statements are

sent fairly, in all material respects, the financial position of the the responsibility of the Company’s management. Our respon- Possis Medical, Inc. and subsidiaries as of July 31, 2002 and sibility is to express an opinion on these financial statements 2001 and the results of their operations and their cash flows based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America.

for each of the three years in the period ended July 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence

Deloitte & Touche LLP

supporting the amounts and disclosures in the consolidated

Minneapolis, Minnesota

financial statements. An audit also includes assessing the

September 12, 2002

36

Board of Directors

Officers

Robert G. Dutcher

Whitney A. McFarlin

Robert G. Dutcher

Chairman of the Board Director since 1993 Chairman, President and Chief Executive Officer

Director since 1998 Retired Chairman of the Board, President and CEO, Angeion Corporation Minneapolis, MN

Chairman, President and Chief Executive Officer

Mary K. Brainerd Director since 2001 Chief Executive Officer HealthPartners, Inc. Minneapolis, MN

Donald C. Wegmiller Director since 1987 Chairman, Clark/Bardes ConsultingHealthCare Group Minneapolis, MN

Seymour J. Mansfield Director since 1987 Officer and Shareholder, Mansfield, Tanick & Cohen, P.A., Minneapolis, MN William C. Mattison, Jr.

Eapen Chacko Vice President, Finance, Investor Relations, Public Relations and Chief Financial Officer Irving R. Colacci Vice President, Legal Affairs & Human Resources, General Counsel and Secretary

Rodney A. Young Director since 1999 Chairman of the Board, CEO and President, LecTec Corporation, Minnetonka, MN

Director since 1999 Principal Gerard, Klauer Mattison & Co., Inc., New York, NY

James D. Gustafson Vice President, Technology, Product Development and Quality Systems Shawn F. McCarrey Vice President, U.S. Sales T.V. Rao Vice President, Marketing and Worldwide Sales Robert J. Scott Vice President, Manufacturing and Information Technology

Corporate Information

Deloitte & Touche LLP, Minneapolis, MN

and Exchange Commission will be provided to shareholders without charge upon written request.

Legal Counsel

Investor Information

Dorsey & Whitney LLP, Minneapolis, MN

Shareholders, security analysts, and investors seeking additional information about the company should call Investor Relations at 763-780-4555. The following information may be obtained upon request from the Possis Medical Investor Relations Department, 9055 Evergreen Boulevard, N.W. Minneapolis, MN 55433-8003, USA.

Auditors

Design: The Nancekivell Group

www.nancekivell.com

Transfer Agent Wells Fargo Minnesota, N.A. Shareowner Services 161 North Concord Exchange P.O. Box 738 South Saint Paul, MN 55075-0738 Phone: (800) 468-9716 Annual Meeting The annual meeting will be held at the Marriott City Center, 30 South Seventh Street, Minneapolis, MN on Wednesday, December 11, 2002 at 4:00 P.M. Form 10-K A copy of the Company’s Annual Report on Form 10-K filed with the Securities

• News releases describing significant company events and sales and earnings results for each quarter and the fiscal year. • Form 10-K Annual and Form 10-Q Quarterly Reports to the Securities and Exchange Commission detailing Possis’ business and financial condition. News releases and other information can be accessed via the Internet at www.possis.com

Possis Medical, Inc. 9055 Evergreen Boulevard NW Minneapolis, MN 55433-8003 USA Tel 763.780.4555 Fax 763.780.2227 www.possis.com