**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

 

**FORM 10-KSB**

 
| **ý** | **ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------|
|       | **FOR THE FISCAL YEAR ENDED APRIL 30,  2002**                                       |

 
| **o** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------|

 

**CommissionFile Number 000-33295**

 

| **MedicalCV, Inc.**                                                   |
|-----------------------------------------------------------------------|
| (Name of Small  Business Issuer in Its Charter)                       |
|                                                                  |   |   |
| **Minnesota**                                                         |   | **41-1717208** |
| (State or Other  Jurisdiction of  Incorporation or Organization)      |   | (I.R.S. Employer  Identification No.) |
|                                                                  |   |   |
| **9725  South Robert Trail, Inver Grove Heights, Minnesota 55077**    |
| (Address of  Principal Executive Offices, including Zip Code)         |
|                                                                  |   |   |
| **(651)  452-3000**                                                   |
| (Issuer’s  Telephone Number, including Area Code)                |
|                                                                  |   |   |
| Securities  registered pursuant to Section 12(b) of the Exchange Act: |
|                                                                  |   |   |
| **None**                                                              |
|                                                                  |   |   |
| Securities  registered pursuant to Section 12(g) of the Exchange Act: |

 

**Units(each consisting of one share of Common Stock, $0.01 par value, and oneredeemable Class A Warrantto purchase one share of Common Stock), Common Stock ($0.01 par value) andredeemable Class A Warrants to purchase Common Stock**

(Title of Class)

 

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d)of the Exchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.   o

 

The issuer’s revenues for its most recent fiscal yearwere $2,982,198.

 

The aggregate market value of the common equity heldby non-affiliates of the issuer as of July 11, 2002, was approximately $4,489,419; based upon an average of the bid and asked pricesfor one unit on such date.

 

As of July11, 2002, the issuer had outstanding 7,843,834 shares of commonstock.  This number includes 1,500,000units, each consisting of one share of common stock and one redeemable Class AWarrant sold in the issuer’s initial public offering.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None.

 

 

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**TABLE OFCONTENTS**

 
| PART I            |     |
|-------------------|----------|
|              |     |   |   |
|              | ITEM 1   | Description of Business |   |
|              |     |   |   |
|              | ITEM 2   | Description of Property |   |
|              |     |   |   |
|              | ITEM 3   | Legal Proceedings |   |
|              |     |   |   |
|              | ITEM  4  | Submission  of Matters to a Vote of Security Holders |   |
|              |     |
| PART II           |     |
|              |     |   |
|              | ITEM  5  | Market  for Common Equity and Related Shareholder Matters |
|              |     |   |
|              | ITEM  6  | Management’s  Discussion and Analysis or Plan of Operation |
|              |     |   |
|              | ITEM 7   | Financial Statements |
|              |     |   |
|              | ITEM  8  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|              |     |
| PART III          |     |
|              |     |   |   |
|              | ITEM 9   | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |   |
|              |     |   |   |
|              | ITEM 10  | Executive Compensation |   |
|              |     |   |   |
|              | ITEM  11 | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters |   |
|              |     |   |   |
|              | ITEM  12 | Certain  Relationships and Related Transactions |   |
|              |     |   |   |
|              | ITEM  13 | Exhibits,  List and Reports on Form 8-K |   |
|              |     |
| SIGNATURES        |     |
|              |     |
| INDEX TO EXHIBITS |     |

* *

*                Allreferences in this report to our experience in the development, manufacture andmarketing of mechanical heart valves, as well as the number of worldwideimplants of heart valves, include the prior operations of Medical Incorporated,incorporated in 1971, and its successor organization, Omnicor, Inc.,incorporated in 1989, the assets of which we acquired in 1992.*

 

 

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*The following discussion containsvarious forward-looking statements within the meaning of Section 21E of theExchange Act.  Although we believe that,in making any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from thoseprojected.  When used in the followingdiscussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,”“estimates” and similar expressions, as they relate to us or our management,are intended to identify such forward-looking statements.  These forward-looking statements are subjectto numerous risks and uncertainties that could cause actual results to differmaterially from those anticipated. Factors that could cause actual results to differ materially from thoseanticipated, certain of which are beyond our control, are set forth under the caption“Management’s Discussion and Analysis or Plan of Operation — CautionaryStatement.”*

 

*Our actual results, performance orachievements could differ materially from those expressed in, or implied by,forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated byforward-looking statements will occur or, if any of them do occur, what impactthey will have on us.  We caution you tokeep in mind the cautions and risks described in our Cautionary Statement andto refrain from attributing undue certainty to any forward-looking statements,which speak only as of the date of the document in which they appear.*

 

**PART I**

 

**ITEM 1             DESCRIPTION OF BUSINESS**

 

**Overview**

 

We manufacture and market mechanical heart valvesknown as the Omnicarbon Series 3000 and Series 4000.  Omnicarbon heart valves are used to treat heart valve failurecaused by heart disease, natural aging, prosthetic heart valve failure andcongenital defects.  We have beenmanufacturing and marketing Omnicarbon heart valves since 1984.  Approximately 30,000 Omnicarbon heart valveshave been implanted worldwide.  Wemanufactured and marketed the Omnicarbon heart valves’ predecessor, theOmniscience heart valve, between 1978 and 2000.  Approximately 50,000 Omniscience heart valves have been implantedsince the late 1970s.  Beginning in theearly 1970s through 1987, we manufactured and sold the Lillehei-Kaster heartvalve, one of the first heart valves sold, which we licensed from theUniversity of Minnesota.  There havebeen approximately 55,000 implantations of the Lillehei-Kaster heart valveworldwide.  In total, we have more than30 years of experience in developing, manufacturing and marketing heart valves,and we have sold more than 135,000 heart valves worldwide.

 

Other than limited sales of the Omniscience heartvalve in the U.S., our sales of heart valves have been primarily to customersin Europe, South Asia, the Middle East and the Far East.  In fiscal year 2002, we derived 65.0 percent of our netsales from Europe.

 

On July 26, 2001, the FDA gave us notice of premarketapproval to sell our Omnicarbon 3000 heart valve in the U.S.  We are establishing a U.S. salesorganization consisting of independent sales representatives who areexperienced in marketing products to cardiovascular surgeons, and we have commencedmarketing the Omnicarbon 3000 heart valve in the U.S.

 

Our success willprimarily depend on:

 

•                                 developingand managing our U.S. and global distribution capability;

 

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•                                 developingrelationships with cardiovascular surgeons to create awareness of and demandfor our products on a worldwide basis;

 

•                                 capitalizingon the low rate of design-related complications of the Omnicarbon heart valve;and

 

•                                 capitalizingon our experience of more than 30 years and our quality record, with no designfailures or product recalls.

 

Our companywas incorporated in Minnesota on March 30, 1992 under the name CV Dynamics,Inc.  In April 1992, we acquired all ofthe tangible and intangible assets of Omnicor, Inc.  Omnicor resulted from the corporate and financial restructuring ofa predecessor company called Medical Incorporated.  Medical Incorporated was organized in 1971 to develop and marketthe Lillehei-Kaster heart valve, which it licensed from the University of Minnesota.  Our company changed its name to MedicalCV,Inc. in February 2000.

 

**Industry Background**

 

There are two main types of prosthetic heartvalves:  mechanical and biologicaltissue.  The main advantage ofmechanical heart valves is durability because such devices are made fromlow-wear metal and carbon materials. They generally outlast the patient’s lifetime.  However, in order to prevent the formation of blood clots, mechanicalheart valves require the continuous use of blood thinners.  Biological tissue heart valves are valvesmade from animal or cadaver tissue or, in some cases, the patient’s owntissue.  Tissue heart valves generallyhave lower durability but also a lower risk of blood clotting compared to mechanicalheart valves.  If a tissue heart valvefails due to deterioration or calcification, for example, a new heart valvemust be implanted, requiring additional open heart surgery.  Tissue heart valves are generally prescribedfor patients who are less tolerant to blood thinners, such as patients withgastrointestinal ulcers or liver dysfunction, elderly patients, women inchild-bearing years and very active people.

 

Cardiovascular surgeons generally choose a particulartype of mechanical heart valve based upon a number of factors.  A principal factor is the potentialformation of blood clots resulting from the poor flow of blood on certain areasof the heart valve.  A clot forming onthe heart valve, known as valve thrombosis, can impair the performance of theheart valve.  If a clot detaches itselfand moves through the bloodstream, it can result in arterial blockage, known asthromboembolism, or stroke.  To minimizethromboembolism, a mechanical heart valve implant patient is given doses ofblood thinners, which may increase the risk of bleeding and othercomplications.  In addition, mechanicalheart valves may cause varying degrees of red blood cell destruction, known ashemolysis, which is tolerable by a majority of patients.  Another factor is the performance andefficiency of the heart valve in terms of loss of cardiac energy or “cardiacwork” required to move blood through the heart valve orifice.  Lower complication rates translate intobetter quality of life for the patient and reduced medical treatment costs.

 

Hospitals and clinic administrators have beenincreasingly influential in medical device purchasing decisions due to theincreasing emphasis on medical cost containment.  The price of a mechanical heart valve and the costs resultingfrom the treatment of complications affect cost effectiveness.

 

Our Omnicarbon heart valves are designed to replaceheart valves that have been made defective by disease or congenitalorigin.  Cardiovascular disease is oneof the most prevalent diseases in the world

 

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and is a leading cause of death in humans.  The aging population in most developed countries will fuel themarket for cardiovascular implants. Developing countries and eastern European countries are expected toincrease spending on health care and may increase their consumption ofmechanical heart valves due to the prevalence of rheumatic fever and otherdiseases.  These global markets forcardiovascular devices are characterized by large multinational manufacturersand industry consolidation.  Among themajor product segments are pace makers, heart valves, angioplasty products andcoronary stents.  A number of the majormanufacturers, such as Medtronic and St. Jude, have medical device lines whichinclude all or most of these products.

 

The bileaflet mechanical heart valve, a valve with twomoving leaflets which allow the blood to flow in one direction, is the world’smost frequently implanted prosthetic heart valve and accounts for most heartvalve sales in the U.S. heart valve replacement market.  The bileaflet mechanical heart valvemanufactured by St. Jude has been implanted in over one million patients todate, according to the manufacturer. Despite a clear market preference for bileaflet mechanical heart valves,we believe that we will be able to increase our market position with ourOmnicarbon heart valves.  Omnicarbonheart valves are the only all-carbon monoleaflet mechanical heart valves.  A monoleaflet valve has one moving leafletwhich allows the blood to flow in one direction.  In clinical studies conducted in Europe, Canada and Japan, theOmnicarbon design has consistently demonstrated lower rates of thromboembolism,valve thrombosis, blood thinner-related bleeding and hemolysis than the twomarket leaders.

 

Potential complications or side effects with allmechanical heart valve implants include, but are not limited to:

 

•                                        thromboembolismand valve thrombosis, resulting in minor stroke;

 

•                                        hemorrhage;

 

•                                        deteriorationof suture attachments of heart valve to surrounding tissue;

 

•                                        tissueinterference with heart valve function; and

 

•                                        mechanicalfailure of the heart valve.

 

**Our Market Opportunity**

 

We believe that the low complication rates of ourOmnicarbon heart valves and our experience in the heart valve field will enableus to build market share in the U.S. and Canada and to increase market shareinternationally.  Our strategy is tocreate awareness of our products and their advantages among cardiovascularsurgeons, organizations which make purchasing decisions for medical devices andthird party payers who pay for such treatment. To communicate with these groups, we are using our own corporatemarketing personnel, sales managers, independent sales representatives andclinical advisory board members.  Inaddition, we intend to support clinical studies, create state-of-the-artmarketing material, exhibit our products and clinical results at all majorcardiovascular meetings, strategically advertise in the major cardiovascularjournals, develop a dual physician and patient enhanced website and inviteinterested surgeons to visit our facility and attend in-house presentations.

 

**Product Description**

 

Our Omnicarbon all-carbon monoleaflet mechanical heartvalves consist of a rotatable housing ring within a compliant suture ring,which adapts to the native annulus or natural valve rim, and a curved, freelyrotating disc, which is retained by two shields extending from the ring.  The disc pivot axis forms

 

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two orifices, one larger than the other, with a maximum opening angleof 80 degrees.  The example shown belowis larger than actual size.

 

 

The housing and disc of the Omnicarbon 3000 and 4000heart valves are made of pyrolytic carbon, which offers blood compatibility anddurability.  Pyrolytic carbon componentsrepresent the largest portion of our production costs.  In 1999, we began manufacturing Omnicarbonheart valves utilizing our own proprietary pyrolytic carbon coating process.  These heart valves, known as Omnicarbon 4000heart valves, represent the heart valves we currently sell in markets otherthan the U.S. and Japan.

 

At this time, we do not have clearance from the FDA tomanufacture Omnicarbon 4000 heart valves for sale in the U.S.  Therefore, we use pyrolytic carboncomponents purchased from Sulzer Carbomedics in the heart valves we sell in theU.S.  These heart valves, known asOmnicarbon 3000 heart valves, represent the heart valves we have now begun tosell in the U.S. and Japan.

 

We intend to apply for FDA clearance of our pyrolyticcarbon process in order to manufacture carbon components for the sale ofOmnicarbon 4000 heart valves in the U.S. We believe that we can obtain premarket approval from the FDA for ourpyrolytic carbon process by late 2004. We further believe that approval of our pyrolytic carbon coating processwill be important to our future success because it will enable us tosubstantially decrease the manufacturing cost of Omnicarbon heart valves soldin the U.S.  If we receive suchclearance, we plan to discontinue selling Omnicarbon 3000 heart valves andbegin selling Omnicarbon 4000 heart valves in the U.S.  We cannot assure you, however, as to when orwhether we will receive FDA clearance.

 

**Marketing and Sales**

 

Our sales andmarketing plan focuses on:

 

•                                        creatingwidespread awareness of and demand for our Omnicarbon heart valves amongcardiovascular surgeons, cardiologists and medical treatment organizationswhich make medical device purchasing decisions;

 

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•                                        capitalizingon our quality record, with over 135,000 heart valves having been implantedover the last 30 years without design failure or product recall;

 

•                                        creatingawareness of the superior clinical performance of our Omnicarbon heart valves,including lower complication rates of thromboembolism, bleeding and hemolysiscompared to other mechanical heart valves, including those of the two marketleaders;

 

•                                        offeringquality service, rapid product delivery and competitive pricing; and

 

•                                        capitalizingon trends which influence the worldwide cardiovascular market, such as theincreased number of cardiovascular surgical procedures due to the agingpopulation and increases in health care spending in developing countries andeastern Europe.

 

Our goal is to reach cardiovascular surgeons,organizations that make purchasing decisions with regard to medical devices andthird party payers who pay for such treatment to make them aware of theadvantages of our product.  To reachthese groups, we are using our corporate marketing and technical personnel,sales managers, sales representatives and clinical advisory board members.  In addition, we will:

 

•                                        supportvarious clinical studies;

 

•                                        furnishstate-of-the-art marketing materials;

 

•                                        exhibitour products at all major cardiovascular meetings;

 

•                                        strategicallyadvertise in the major cardiovascular journals;

 

•                                        providea website targeting both physicians and patients; and

 

•                                        emphasizefacility visits by surgeons using or interested in our products.

* *

*UnitedStates.*  As of April30, 2002, our U.S. sales team consisted of our senior vice president — salesand marketing, a director of sales,a field sales manager, and independent sales representativeslocated throughout the U.S., who are experienced in marketing medical devicesto cardiothoracic surgeons.  We provideto our sales representatives training programs, marketing aides, educationalmaterials for the medical community and sales literature.  We are committing substantial resources totrain, support and motivate our U.S. sales team to introduce the Omnicarbonheart valve and advance sales of Omnicarbon 3000 heart valves in the U.S.

* *

*International*.  We market and sell our products primarily inEurope, South Asia, the Middle East and the Far East.  As of April 30, 2002, we had a network of over 35 independent distributors sellingOmnicarbon Series 3000 and Series4000 heart valves in these geographic areas.

 

Our customary business practice is to enter intothree-year exclusive distributor contracts with new distributors, which arelinked to annual minimum sales goals. In addition, our distributors are required to attend annual trainingmeetings to ensure competency in heart valve surgery, to promote the Omnicarbonheart valve at local medical meetings and to call on prospective customers on aregular basis.

 

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**Manufacturing and Supply**

 

We manufacture and assemble Omnicarbon heart valvesand other products at our facility in Inver Grove Heights, Minnesota.  We manufacture our Omnicarbon 4000 heartvalve in its entirety, utilizing our proprietary pyrolytic carbon process.  We assemble our Omnicarbon 3000 heart valveusing our own proprietary suture ring and pyrolytic carbon components purchasedfrom Sulzer Carbomedics.

 

Pyrolytic carbon has been used in mechanical heartvalves for approximately 30 years. Pyrolytic carbon coating on such components as heart valve housings andheart valve leafletsis formed by the pyrolysis of carbon. We began to develop our own pyrolytic carbon coating process in1995.  Our process involves heatingpropane to a high temperature, which breaks it down into hydrogen andcarbon.  The hydrogen is then vented andthe carbon atoms are deposited on the surface of graphite substrate shaped as adisc or housing ring.  Pyrolytic carboncoating has greater blood compatibility compared to other materialshistorically used in heart valves, resulting in a lower incidence ofthromboembolism and other potential complications.  Pyrolytic carbon components have been tested to last longer thanany patient’s lifetime.  We alsomanufacture knitted, seamless Teflon tubings which are used in constructingsuture rings to correspond with various heart valve sizes.  We have developed and instituted a complete,vertically integrated manufacturing and quality control system for ourOmnicarbon 4000 heart valves.  Thepyrolytic carbon components we purchase from Sulzer Carbomedics for ourOmnicarbon 3000 heart valves are tested under the same rigorous requirements asour Omnicarbon 4000 heart valves.

 

We ship all of our products from our facility in InverGrove Heights, Minnesota, either to distributors or directly to hospitals.  We generally do not have a significantbacklog of orders and maintain a sufficient inventory of products which enablesus to ship within 24 to 48 hours of receipt of orders.

 

We assemble our Omnicarbon 3000 and 4000 heart valvesin a controlled clean room environment in our facility, where we fabricate thesewing cuff, conduct final cleaning and inspection and package the finishedheart valves.  The packaged heart valvesare then sterilized and quarantined. They must pass sterility tests before being released for shipping.** **Webelieve that our manufacturing facilities meet applicable standards for “good manufacturingpractices” established by the FDA and other applicable governmentstandards.  In the normal course, ourfacility is frequently subject to inspections by the FDA and foreign regulatoryagencies in connection with their reviews of our products.

 

We believe that the raw materials and components usedin manufacturing our Omnicarbon 4000 heart valves are readily available.  However, we purchase the pyrolytic carbonparts for our Omnicarbon 3000 heart valves only from Sulzer Carbomedics, asupplier whose materials and manufacturing meet FDA regulations for inclusionin our medical devices.  We purchasethese components under an original equipment manufacturing supply contractwhich expires in December 2003.  Underthis contract, we are obligated to purchase minimum quantities of ourcarbon-coated components exclusively from Sulzer Carbomedics during the term ofthe agreement.  These components aremanufactured pursuant to our specifications. Sulzer Carbomedics has agreed to supply our requirements and, to date,we have not experienced shortages or significant delays in their supply ofcomponents.  Sulzer Carbomedics mayterminate this contract if we fail to make any payment promptly when due, or ifwe infringe any patent of Sulzer Carbomedics by making or having made anyproduct or using any method covered by such patent in or in preparation forcommercial sale of cardiac valve prostheses, or if we are in default of any ofour material obligations under this contract. We currently depend upon Sulzer Carbomedics for these criticalcomponents and have no other supplier of pyrolytic carbon parts for ourOmnicarbon 3000 heart valves.

 

**Product Development and Research**

 

There is a clear market preference for bileafletdesigns.  Although we believe, and the scientificliterature supports, that this preference is not scientifically justified, wehave undertaken certain product

 

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development efforts towards developing a bileaflet heart valve.  We are also planning to expand our line ofcardiac surgery products by developing and acquiring new products that can bemarketed to cardiovascular surgeons.

* *

*Novadynebileaflet heart valve development project*.  To strengthen our heart valve portfolio, wehave initiated the Novadyne bileaflet heart valve development project.  Successful completion of the Novadyneproject would enable us to offer monoleaflet and bileaflet heart valvesmanufactured with our proprietary pyrolytic carbon process.  Our Novadyne design incorporates featureslearned from more than 30 years of experience with the Lillehei-Kaster,Omniscience and Omnicarbon monoleaflet heart valves and from analyzing existingbileaflet design successes and failures of competitive products.  The Novadyne project involves an all-carbonbileaflet heart valve design with unique open-channel dynamic pivots that areself-washing.  This design is intendedto eliminate deep pivot recesses and associated poor flow characteristics whichare regarded as the cause of thromboembolic complications in bileafletdesigns.  These new design featuresinduce pivot washing, which is intended to reduce thromboembolism.  We have been issued three U.S. patents for bileafletheart valves.

* *

*Bloodfilters*.  We have thetechnology base and manufacturing capability to produce a broad line oftransfusion and extra-corporeal blood filters. We currently market our existing blood filter only in Japan, and salesof this product are immaterial.  We have received FDA clearance to market ourblood filter in the U.S., but have determined that we have only a limitedmarket for such product in the U.S.  Weare exploring the development of additional filters, including a heparin filterand a complement mediator filter, in order to develop a broader line of productsfor cardiothoracic surgeons.  Thesedevices are used in cardiopulmonary bypass procedures, the number of which isnow estimated to be 800,000 per year on a worldwide basis.

 

Our researchand development expenses principally consist of engineering costs.  Our research and development expenses were $496,685 in fiscal year2002, compared to $800,625in fiscal year 2001.  Research and development costsrelate primarily to product and process development initiatives.  We anticipate that research anddevelopment and clinical and regulatory expenses will continue to rise infuture periods.

 

**Patents and Proprietary Rights**

 

We believe strongly in protecting our intellectualproperty and will seek patent protection for new products and processes underdevelopment whenever we believe it is advisable.  As of April 30, 2002, we had three U.S. patents, all relating toour bileaflet heart valve under development.** **We also have two pending foreign patent applications. ** **Wehave filed U.S. and foreign patent applications for the process and processingequipment used in our pyrolytic carbon coating process and are awaiting furtherpatent prosecution in relation to these applications. ** **Ourcurrent patents will begin to expire in 2015. We cannot assure you that any patents held by us will be valid,enforceable or otherwise of value to us in relation to our competitors or themarket in general, or that any patent for which we have applied or may applywill be granted.

 

We have no patents covering the design of ourOmnicarbon heart valves and we do not intend to seek such patents.  Because heart valves of this design havebeen sold in the marketplace for many years, the product is no longerpatentable.  We do not believe thatprotecting the design of a heart valve is critical for the success of a heartvalve manufacturer.  We believe that thekey to success lies in a vertically integrated infrastructure, the soundness ofdesign, clinical safety and efficacy of performance of the heart valve and themanufacturer’s ability to successfully build product awareness.

 

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We also rely upon trade secrets and proprietaryknow-how.  We require our technicalemployees and consultants to agree in writing to keep our proprietaryinformation confidential and, with certain limitations, to assign allinventions relating to our business to us.

 

We have used, and therefore claim common law rightsin, the following trademarks:  *MedicalCV, Omnicarbon, Omniscience, Interface,Whisper Seat, GlideThru, UltraPure,**UPPCarbon* and *Medical Incorporated*.  We also have a federal registration for themark: *Omniscience*.

 

**Government Regulation**

 

The medical devices wemanufacture and market are subject to regulation by the FDA and, in mostinstances, by state and foreign authorities or their designatedrepresentatives.  Under the U.S. FederalFood, Drug and Cosmetic Act and the regulations promulgated thereunder, as amanufacturer of medical devices, we must comply with policies and proceduresthat regulate the manufacturing, composition, labeling, testing, packaging anddistribution of medical devices.  Inaddition, medical devices are subject to different levels of governmentapproval requirements, the most comprehensive of which requires the completionof an FDA approved clinical evaluation program and submission, and approval ofa premarket approval application before a device may be commerciallymarketed.  The FDA also conductsinspections before approving a premarket approval application to determinecompliance with the quality system regulations which cover manufacturing anddesign.  Our heart valves are subject tothis level of approval.  On July 26,2001, we received notice of premarket approval from the FDA with respect to ourOmnicarbon 3000 heart valve.

 

After premarket approval isreceived, the FDA may require testing and surveillance programs to monitor theeffectiveness of approved products which have been commercialized.  It has the power to prevent or limit furthermarketing of a product based on the results of such post-marketingprograms.  In addition, the FDA may, atany time after the approval of a premarket approval application, conductperiodic inspections to determine compliance with good manufacturing practiceregulations and current medical device reporting regulations.  If the FDA concludes that we are not incompliance with applicable laws or regulations, it can institute proceedingsto:

 

•                                        seize our product;

 

•                                        issue a product recall;

 

•                                        impose operating restrictions; and/or

 

•                                        assess civil penalties or recommend criminalprosecution.

 

The FDA also regulates recordkeeping for medicaldevices and reviews hospital and manufacturers’ required reports of adverseexperiences to identify potential problems with FDA-authorized devices.

 

Some of the products thatwe intend to develop and market can be cleared under Section 510(k) of theFederal Food, Drug and Cosmetic Act. The process of obtaining Section 510(k) clearance typically requiresless time and expense than the premarket approval process.  Section 510(k) clearance normally takes fromsix months to one year, but can take years, and generally requires thesubmission of supporting data, which in some cases can be extensive.  In addition, the FDA may require review byan advisory panel as a condition for Section 510(k) clearance.  We intend to continue to rely on the Section510(k) process with regard to certain products, such as any additional bloodfilters we may develop.  However, we maydevelop and produce enhancements to our existing blood filter and heart valvesthat will require

 

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clearance under the FDA’s more lengthy andexpensive premarket approval process, which can take a number of years and canrequire extensive supporting documentation.  If we encounter difficulties in the premarket approval process,the commercial marketing of any future heart valves could be substantiallydelayed or prevented.

 

International sales of ourproducts are also subject to extensive regulation.  Foreign regulatory bodies have established varyingregulations governing product standards, packaging requirements, labelingrequirements, import restrictions, tariff regulations, duties and taxrequirements.  Generally, the extent and complexity of the regulation of medicaldevices is increasing worldwide, with regulations in some countries alreadynearly as extensive as those in the U.S. This trend may continue, and the cost and time required to obtainmarketing approval in any given country thus may increase.  We cannot assure you that any foreignapprovals will be allowed on a timely basis, or at all.

 

To market our products incountries of the European Union, we are required to obtain CE markcertification.  CE mark certification isthe international symbol of adherence to certain quality assurance standardsand compliance with European medical device directives.  In June 1995, we received ISO 9001 and EN46001 qualification of our quality system for our manufacturing processes inour facility in Inver Grove Heights, Minnesota.  We obtained the CE mark for our Omnicarbon 3000 heart valve onJune 27, 1995, for our Omniscience heart valve on July 15, 1998 and for ourOmnicarbon 4000 heart valve on April 8, 1999.

 

We derive substantially all of our revenues from salesof Omnicarbon heart valves outside the U.S. Our inability, or the failure of our foreign distributors, to complywith varying foreign regulations or the imposition of new regulations couldrestrict the sale of our products internationally and thereby materiallyadversely affect our business, financial condition, operating results and cashflows.

 

**Competition**

 

The mechanical heart valve market is highlycompetitive, with St. Jude supplying the majority of mechanical heart valvessold worldwide.  Other competitors inthe mechanical heart valve field include Sulzer Carbomedics, Edwards LifeSciences, Medtronic, Sorin Biomedica spa in Italy, ATS Medical, Inc. and MCRI,Inc.  Many of these competitors have:

 

•                                        greatername and product recognition;

 

•                                        greater financial, manufacturing andmarketing resources;

 

•                                        greater regulatory compliance capabilities;

 

•                                        stronger physician relationships; and

 

•                                        broaderand more established product lines than we have.

 

Most of these competitors market bileaflet heartvalves, for which there is currently a dominant market preference.  Some of these competitors also market tissueheart valves and are currently pursuing new mechanical heart valve designs,biocompatible coatings for mechanical heart valves, longer lasting tissue heartvalves and surgical alternatives to implanting prosthetic heart valves.  It is possible that developments by ourcompetitors could render our current or proposed heart valves obsolete.  We cannot assure you that we will be able tocompete against such competitors.

 

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**Product Liability and Insurance**

 

The development and sale of medical devices entailssignificant risk of product liability claims and, sometimes, product failureclaims.  Although over 30,000 of ourOmnicarbon heart valves have been implanted with no design failures, andalthough there is significant clinical data to reasonably convince us thatthese products are safe and effective, we face an inherent business risk offinancial exposure to product liability claims if the use of our productsresults in personal injury or death.  Wealso face the possibility that defects in the design or the manufacturing ofour products could necessitate a product recall.  We have not, to date, experienced significant product liabilityclaims, and we have never had a product recall.  We cannot assure you, however, that we will not experience lossesin the future due to product liability claims or recalls.

 

We currently maintain product liability insurance withcoverage limits of $5,000,000 in the aggregate annually.  We cannot assure you that such coveragelimits will be adequate.  In addition,trends regarding claims and damages in the medical device industry couldincrease the cost of insurance, which is already expensive, and may makeinsurance coverage difficult for us to obtain in the future on acceptableterms, or at all.  Any claims againstus, regardless of their merit or eventual outcome, could involve a significant financialoutlay in connection with the investigation of claims or payment of deductibleamounts to insurance companies.  Asignificant claim could involve payment of an amount which could have amaterial adverse effect upon our business, financial condition, operatingresults and cash flows.  In addition,adverse publicity resulting from product liability litigation may materiallyand adversely affect us, regardless of whether the claims are valid or whetherwe are liable.

 

**Employees**

 

As of April 30, 2002, we had 44 full-time employees, including 25 who were inmanufacturing and research and development, and the remainder of whom were in administration andsales and marketing. ** **We are not a party to anycollective bargaining agreement and believe that our relations with employeesare good.

 

**ITEM 2             DESCRIPTION OF PROPERTY**

 

We own a 55,000 squarefoot production and administrative facility located on 19 acres of land inInver Grove Heights, a suburb of Saint Paul, Minnesota.  Our facility has approximately 8,000 squarefeet of general office space and over 32,000 square feet of manufacturingspace.  Our facility also includes over9,500 square feet of controlled environment rooms and necessary support areasfor producing and assembling our products. Our facility is subject to inspection by the FDA and foreign regulatoryagencies as part of their product marketing clearance and surveillanceprograms.  This facility, in conjunction with other company assets,secures our indebtedness to Associated Bank Minnesota.  As of April 30, 2002, we owed AssociatedBank Minnesota a principal amount of $2,500,000 under the terms of our line of credit.

 

**ITEM 3             LEGAL PROCEEDINGS**

 

As of April 30, 2002, wewere not a party to any material litigation.

 

**ITEM 4             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

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**Executive Officers of the Registrant**

 

The following tableprovides information with respect to our executive officers as of April 30,2002.  Each executive officer has beenappointed to serve until his successor is duly appointed by the board or hisearlier removal or resignation from office.

 
| **Name**        |   | **Age** |   | **Position  with MedicalCV**                    |   |
|-----------------|--------|---------|--------|-------------------------------------------------|--------|
| Blair P. Mowery |   | 56      |   | President, Chief Executive Officer and Director |   |
| Jules L. Fisher |   | 48      |   | Chief Financial Officer                         |   |
| Allan R. Seck   |   | 56      |   | Senior Vice President - Sales and Marketing     |   |

* *

*BlairP. Mowery*became our President and Chief Executive Officer inJune 2001 and was appointed to our board of directors in July 2001.  After serving our company as an independentadvisor through his wholly-owned company, Bioscrene Ltd., from February 1996 toAugust 1996, he joined us in August 1996 as Vice President - BusinessDevelopment and was promoted to Chief Operating Officer in 1999.  From April 1991 through December 1993, Mr.Mowery was President and Chief Operating Officer of GalaGen, Inc., abiopharmaceutical company.  From March1987 to March 1991, he was President of Procor Technologies, a joint venturewith Abbott Ross Laboratories and the predecessor company to GalaGen.

 

*Jules L. Fisher*became our Chief Financial Officer in January 2002.  From October 1996 to December 2001, Mr.Fisher served as Vice President and Chief Financial Officer of MinntechCorporation, a manufacturer of medical supplies and devices, sterilants, and filtrationand separation products primarily for kidney dialysis, open-heart surgery andendoscopy.  From August 1991 to October1996, he held the position of Director, Operations Accounting for U.S. SurgicalCorp.  Mr. Fisher also served asDirector, Financial Reporting and Analysis in the Pharmaceutical Group ofBristol-Myers Squibb Company from May 1987 to February 1991.

* *

*AllanR. Seck*joined our company in May 1999 as Vice President -Sales and Marketing.  In March 2001, hewas promoted to Senior Vice President - Sales and Marketing.  From May 1996 until May 1999, Mr. Seckserved as Vice President - Sales and Marketing for AVECOR Cardiovascular, Inc.,where he was responsible for sales, marketing, customer service, technicalsupport, customer education and shipping. He has also held senior management positions with Biomedicus, Inc., thecardiopulmonary division of Medtronic, and Johnson & JohnsonCardiovascular.

 

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**PART II**

 

**ITEM 5             MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS**

 

Our units have beenlisted on The Nasdaq SmallCap Market under the symbol “MDCVU” since thecompletion of our initial public offering in November 2001.  The following table sets forth theapproximate high and low closing prices for our units for the periods indicatedas reported by The Nasdaq SmallCap Market. Such quotations reflect inter-dealer prices, without retail mark-up,mark-down or commission, and may not represent actual transactions.

 
| **Period**                                    |   | **High** |   | **Low** |   |
|-----------------------------------------------|--------|----------|--------|---------|--------|
| Fiscal  Year 2002                             |   |     |   |    |   |
| Third  Quarter (commencing November 21, 2001) |   | $        | 4.50   |    | $      | 3.00 |   |
| Fourth  Quarter                               |   | $        | 3.70   |    | $      | 2.35 |   |

 

As of April 30, 2002, wehad 92 shareholdersof record and approximately 453beneficial owners.

 

We have never declared orpaid cash dividends.  We currentlyintend to retain future earnings, if any, to operate and expand our business,and we do not anticipate paying cash dividends on our common stock in theforeseeable future.  Any payment of cashdividends in the future will be at the discretion of our board of directors andwill depend upon our results of operations, earnings, capital requirements,contractual restrictions and other factors deemed relevant by our board.

 

**Sales of Unregistered Securitiesduring the Fourth Quarter of Fiscal Year 2002**

 

Not applicable.

 

**Use of Proceeds from RegisteredSecurities**

 

Our RegistrationStatement on Form SB-2 (File No. 333-68884) was declared effective by the SECon November 20, 2001.

 

Through April 30, 2002,we had incurred total expenses of $1,353,515in connection with our initial public offering.  Such expenses represent: (1) $675,000 in underwriting discounts and commissions paid to ourunderwriter, (2) $202,500 in expenses paid to our underwriter, (3) $206,201 in fees andexpenses paid to our attorneys, (4) $131,910 in fees and expenses paid to ouraccountants, (5) $68,547 paid to our financial printer, (6) $7,167 in NASDAQ listing fees, (7) $53,846 inblue sky legal andfiling fees, (8) $4,744 in SEC registration fees, and (9) $3,600 in transferagent fees. ** **None of the foregoing expenditures represent direct orindirect payments to our directors, officers or their associates, to personsowning 10 percent ormore of any class of our equity securities, or to our affiliates.

 

After deducting the totalexpenses of our initial public offering, our net proceeds were approximately $5,396,485**.**** **We estimate that we used $2,909,000 of the initialpublic offering net proceeds through April 30, 2002.  Such uses of proceeds represent: (1) $2,180,000 to fund sales and marketinginitiatives, including general and administrative expenses to support infrastructure and engineering and regulatory expenses to support operations,(2) $50,000 to fund working capital requirements,(3) $139,000 topurchase capital equipment, (4) $500,000to repay bridge notes, and (5) $40,000inadvances to UROPACE.

 

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**ITEM 6             MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

* *

*The following discussion contains variousforward-looking statements within the meaning of Section 21E of the ExchangeAct.  Although we believe that, inmaking any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from thoseprojected.  When used in the followingdiscussion, the words**“anticipates,”“believes,”“expects,”“intends,”“plans,”“estimates” and similar expressions, as they relateto us or our management, are intended to identify such forward-lookingstatements.  These forward-lookingstatements are subject to numerous risks and uncertainties that could causeactual results to differ materially from those anticipated.  Factors that could cause actual results todiffer materially from those anticipated, certain of which are beyond ourcontrol, include those discussed in our Cautionary Statement as well as thosediscussed elsewhere in this Form 10-KSB.*

* *

*Our actual results, performance or achievementscould differ materially from those expressed in, or implied by, forward-lookingstatements.  Accordingly, we cannot becertain that any of the events anticipated by forward-looking statements willoccur or, if any of them do occur, what impact they will have on us.  We caution you to keep in mind the cautionsand risks described our Cautionary Statement as well as those discussedelsewhere in this Form 10-KSB and to refrain from attributing undue certaintyto any forward-looking statements, which speak only as of the date of thedocument in which they appear.*

 

**Overview**

 

We manufacture and market mechanical heart valves known asthe Omnicarbon Series 3000 and Series 4000. Our heart valves are used to treat heart valve failure caused by theaging process, heart diseases, prosthetic heart valve failure and congenitaldefects.  To date, we have distributedthe Omnicarbon 3000 and 4000 heart valves primarily in Europe, South Asia, theMiddle East and the Far East.  In fiscalyear 2002, we derived 65.0 percent of our net sales from Europe.  As an innovator of heart valve technology,we have more than 30 years of experience in developing, manufacturing andmarketing five generations of heart valves, and we have sold more than 135,000heart valves worldwide.

 

On July 26, 2001, the FDA gave us notice of premarketapproval to sell our Omnicarbon 3000 heart valve in the U.S., the largestgeographic market for mechanical heart valves. In anticipation of FDA premarket approval, we invested in our sales andmarketing infrastructure, including adding sales management to our staff infiscal year 2001 and recruiting field sales representatives to call on domesticsurgery centers in the U.S.  Based uponour Omnicarbon heart valve’s 17 years of implants in patients inEurope, we believe that we can establish a competitive position in themechanical heart valve industry in the U.S. and leverage this position intoother critical areas of cardiothoracic surgery.  We also expect that our ability to market the Omnicarbon 3000heart valve in the U.S. will favorably affect our international sales, as manycardiovascular surgeons and others who make purchasing decisions are aware ofthe FDA’s rigorouspremarket approval process and consider it to be a validation of the safety andefficacy of medical devices.  Ourcompany had its first implant of the Omnicarbon 3000 heart valve in the U. S.in December 2001.

 

The worldwide heart valve market is dynamic and highlycompetitive.  In addition, technologyand competitive offerings, such as new tissue heart valves, place increasedpressure on us as we seek to increase our market share and revenue.  For more information regarding these risks,you should review our Cautionary Statement.

 

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# **Critical Accounting Policies**

 

*The preparation of our financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes.  We believe our estimates and assumptions arereasonable; however, actual results and the timing of the recognition of suchamounts could differ from those estimates. We have identified the following critical accounting policies andestimates utilized by management in the preparation of our financialstatements: revenue recognition, deferred income tax assets, the accountsreceivable allowance for doubtful accounts, and inventory obsolescence.  Actual amounts could differ significantlyfrom management**’s estimates.*

 

***RevenueRecognition*****. **We recognizerevenue using guidance from SEC Staff Accounting Bulletin No. 101 “RevenueRecognition in Financial Statements.”  Revenue from thesale of our mechanical heart valves is recognized provided that we have receiveda purchase order, the price is fixed, title has transferred, collection of theresulting receivable is probable and there are no remaining obligations.  Transfer of title occurs for substantiallyall sales upon shipment.  Our productsare not subject to any customer acceptance process.  There are no rights of return unless the product does not performaccording to specifications.

 

***DeferredIncome Tax Assets*****. **In assessingthe realizability of our deferred tax assets, management considers whether itis more likely than not that our deferred income tax assets will berealized.  The ultimate realization ofdeferred income tax assets is dependent on the generation of future taxableincome, which must occur prior to the expiration of our net operating loss andcredit carryforwards, which comprise the majority of the deferred taxassets.  As of April 30, 2002, we haveestablished a valuation allowance of $5,027,700 to fully offsetour deferred tax assets due to the inherent uncertainty of predicting the sufficiencyof future taxable income necessary to realize these deferred tax assets,particularly in light of our recent history of significant operatinglosses.  In addition, future utilizationof available net operating loss carryforwards may be limited under InternalRevenue Code 382 as a result of future changes in ownership.

 

***Account Receivable Allowance*. **Indetermining the adequacy of our allowance for doubtful accounts, managementconsiders a number of factors, including the aging of our receivable portfolio,customer payment trends, the financial condition of our customer and economicconditions in our customers’ countries.  Ouranalysis in determining the allowance for doubtful accounts is performed bymanagement on a customer-by-customer basis. Although our recorded allowance includes our best estimates, we cannotpredict the resolution of these matters with certainty.

 

***Inventory Obsolescence*. **Indetermining the appropriate carrying value of our inventories, managementconsiders a number of factors, including the aging of our inventory, recentsales trends, industry market conditions and economic conditions.  Our analysis requires us to estimaterevenues by type of mechanical heart valve. For example, we have expected a decline in Omniscience heart valves,which has been a consideration in the valuation of these items in ourinventory.  Although adjustments to thecarrying value of our inventories reflect our best estimates, the estimatesrequire a large degree of judgment.

 

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**Selected Financial Data**

 
|                                                                     |   | **Years ended April 30,** |       |
|--------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                     |   | **2002**                  |       | **2001** |   |
| **Statement of Operations Data:**                                        |   |                      |       |   |   |
| Net sales                                                                |   | $                         | 2,982,198  |   | $ | 2,863,440 |   |
| Cost of goods sold                                                       |   | 2,109,453                 |       | 1,804,278 |   |
| Gross profit                                                             |   | 872,745                   |       | 1,059,162 |   |
| Total operating expenses                                                 |   | 4,685,301                 |       | 3,994,082 |   |
| Net loss                                                                 |   | (3,812,556                | )          | (2,934,920 | ) |
| Basic and diluted net loss per share                                     |   | (.62                      | )          | (.56 | ) |
| Weighted average number of shares outstanding                            |   | 6,980,820                 |       | 5,787,642 |   |
|                                                                     |   |                      |       |   |   |
| **Balance Sheet Data:**                                                  |   |                      |       |   |   |
| Total current assets                                                     |   | $                         | 6,441,819  |   | $ | 3,536,926 |   |
| Total current liabilities                                                |   | 3,689,594                 |       | 929,876 |   |
| Working capital                                                          |   | 2,752,225                 |       | 2,607,050 |   |
| Total assets                                                             |   | 8,091,226                 |       | 5,218,638 |   |
| Long-term  debt and capital lease obligations, including current portion |   | 2,977,906                 |       | 1,963,503 |   |
| Total shareholders’ equity                                          |   | 4,026,040                 |       | 2,429,271 |   |
|                                                                     |   |                      |       |   |   |
| **Statement of Cash Flows Data:**                                        |   |                      |       |   |   |
| Net cash used in operating activities                                    |   | $                         | (3,186,805 | ) | $ | (2,510,698 | ) |
| Cash and cash equivalents at end of year                                 |   | 2,781,675                 |       | 111,977 |   |
|                                                                     |   |                      |       |   |   |
| **General Data and Ratio:**                                              |   |                      |       |   |   |
| Current ratio                                                            |   | 1.7                       |       | 3.8 |   |
| Gross profit margin on net sales                                         |   | 29.3                      | %          | 37.0 | % |

 

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**Results of Operations for the Fiscal YearsEnded April 30, 2002 and 2001**

* *

*Net Sales*.  Net sales in the year ended April 30, 2002 increased 4.1 percentto $2,982,198 from $2,863,440 in the prior year.  The increase was primarily attributable to higher Omnicarbon unitsales in Europe partially offset by the expected decline in unit sales of theOmniscience heart valve which is an earlier generation product.  We have focused our sales and marketingefforts on the Omnicarbon product line due to its superior clinical performanceand market acceptance.

 

In fiscal years 2002 and 2001, the vast majority of oursales were denominated in U.S. dollars. Fluctuations in foreign currency exchange rates have not resulted insignificant losses or gains on outstanding trade accounts receivable.  All of our distributors are required to payfor products in U.S. dollars, other than our Japanese distributor, which paysin yen.  We recognize that a strong U.S.dollar can adversely affect unit sales payable in currencies other than U.S.dollars for our foreign distributors.

* *

*Gross Profit.*  Gross profit as a percentage of net salesdeclined to 29.3 percent in the year ended April 30, 2002 from 37.0 percent inthe prior year.  We have expendedconsiderable resources in developing our new carbon manufacturing processtechnologies utilized in manufacturing the Omnicarbon 4000 heart valve which iscurrently sold outside the U.S. market. Gross profit margins in the year ended April 30, 2002 were unfavorablyimpacted by non-recurring costs associated with these developmentactivities.  In particular, fiscal year2002 cost of sales reflected higher Omnicarbon 4000 production costs during thefirst half of fiscal year 2002 when we were operating at lower productionvolumes due to the extensive development work we conducted in connection withour carbon manufacturing process.  Ourstrategy is to obtain FDA approval of our proprietary pyrolitic carbonmanufacturing process in order to market the Omnicarbon 4000 in the U.S.  Due to its lower manufacturing cost, webelieve the Omnicarbon 4000 will generate significantly higher gross profitmargins when sold in the U.S. than the Omnicarbon 3000 heart valve.

* *

*Sales and Marketing*.  Sales and marketing expenses in the yearended April 30, 2002 were $2,089,104 or 70.1 percent of net sales compared to $1,425,493or 49.8 percent of net sales in the prior year.  The increase in spending in fiscal year 2002 related to expandedOmnicarbon marketing efforts in the U.S. and international markets.  Our overall marketing strategy is to promotethe superior clinical results of the Omnicarbon heart valve and the technicalstrengths of our company in designing and manufacturing mechanical heartvalves.

* *

*General and Administrative*.  General and administrative expenses for theyear ended April 30, 2002 were $1,817,159 or 60.9 percent of net sales comparedto $1,603,117 or 56.0 percent of net sales in the prior year.  The increase was primarily attributable toincreased legal and audit fees associated with operating as a public company,and salary and related expenses associated with strengthening the executivemanagement staff.

* *

*Engineering and Regulatory*.  Engineering and regulatory expenses for theyear ended April 30, 2002 were $779,038 or 26.1 percent of net sales comparedto $965,472 or 33.7 percent of net sales in the prior year.  The decrease in fiscal year 2002 spendingwas attributable to shifting priorities from new product development toinstallation of new equipment and processes for the production of theOmnicarbon 4000 heart valve.

* *

*Other (Expense) Income*.  Interest expense totaled $241,197 in theyear ended April 30, 2002 compared to $207,314 in the prior year.  The increase in fiscal year 2002 interestexpense was attributable to maintaining a higher level of bank borrowingscombined with the impact of the convertible bridge note financing in fiscalyear 2002.  Loss from the earlyextinguishment of convertible subordinated bridge notes of $335,410 wasreflected in fiscal year 2002.

* *

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* *

*Income Tax Provision*.  In light of our recent history of operatinglosses, we recorded a valuation allowance to fully offset our deferred taxassets in fiscal year 2000.  We havecontinued to provide a full valuation allowance through fiscal year 2002 due tothe inherent uncertainty of predicting the sufficiency of future taxable incomenecessary to realize our deferred tax assets.

* *

*Loss from Operations*.  As of April 30, 2002, we had an accumulateddeficit of $12,405,386.  We haveincurred losses in each of the last six fiscal years.  Since 1994, we have invested in developing a bileaflet heartvalve, a proprietary pyrolytic carbon coating process and obtaining premarketapproval from the FDA to market our Omnicarbon 3000 heart valve in theU.S.  Our strategy has been to invest intechnology to better position ourselves competitively once FDA premarketapproval was obtained.  We expectcumulative net losses to continue at least through fiscal year 2003 because ofanticipated spending necessary to market the Omnicarbon 3000 heart valve in theU.S. and to establish and maintain a strong marketing organization for domesticand foreign markets.

 

**Liquidityand Capital Resources**

 

Cash and cash equivalents increased to $2,781,675 at April30, 2002, from $111,977 at April 30, 2001. The increase in cash was attributable to completion of our initialpublic offering (IPO) in November 2001. Net cash used in operating activities was $3,186,805 in the year endedApril 30, 2002, and $2,510,698 in the prior year.

 

Net cash used in operating activities increased $676,107due principally to the increase in our pre-tax loss in fiscal year 2002.  Inventories increased $188,084 in fiscal year2002 and $564,359 in fiscal year 2001.  Theincrease in inventory in fiscal year 2002 and 2001 was related to the launch ofthe Omnicarbon 3000 in the U.S. market combined with anticipated growth ininternational sales.

 

Net cash used in investing activities was $465,024 and$516,344 for the years ended April 30, 2002 and 2001, respectively.  We invested $384,024 in property, plant, andequipment in the year ended April 30, 2002, compared to $362,344 in the prioryear.  Our investment in property,plant, and equipment over the last two years related primarilyto the development of our proprietary pyrolytic carbon manufacturingprocess.  As described in Commitmentsand Contingent Liabilities, we loaned $81,000 to UROPACE during fiscal year 2002and $154,000 in fiscal year 2001.

 

Net cash provided by financing activities was $6,321,527 inthe year ended April 30, 2002.  Wecompleted our IPO early in the third quarter of fiscalyear 2002 which generated net proceeds of $5,396,485.  Other sources of cash from financing activities were ourincreased borrowings of $1,570,000 on our line of credit and the net proceedsof $438,885 from the sale of 10 percent convertible subordinated bridge notesdescribed below.  We used $500,000 offunds generated through our IPO to repay the bridge notes in the fourth quarterof fiscal year 2002 and $475,000 to make principal payments on our bank line ofcredit.  Net cash provided by financingactivities was $3,045,924 in fiscal year 2001. In the first quarter of fiscal year 2001, we obtained proceeds of$2,925,000 from the issuance of 1,170,000 shares of our common stock in aprivate placement.  In fiscal year 2001,we borrowed an additional $2,315,000 on our bank line of credit partiallyoffset by $2,130,000 of principal payments on our bank line of credit.

 

From March 1992 through April 2002, our primary source offunding has been private sales of equity securities, which totaled $9,775,704in gross cash proceeds.  We have alsofunded our operations through secured equipment financing term loans andequipment leases.  In addition, wefinanced our operations since fiscal year 2000 through a bank line of creditsecured by our real estate, tangible and intangible property and a guarantee bya principal shareholder.  This line ofcredit will expire in November 2002. Amounts borrowed under this line of credit generally bear interest atthe prime rate.  As

 

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of April 30,2002, we had borrowed the maximum amount available of $2,500,000 under thisline of credit.

 

As part of our credit agreement with Associated BankMinnesota, we were required to maintain a minimum tangible net worth of notless than $3,000,000, measured as of the last day of each fiscal quarter.  At April 30, 2001, we failed to comply withthe minimum tangible net worth covenant. On August 24, 2001, Associated Bank Minnesota waived such covenantdefaults, and we amended our credit agreement, which now provides that we mustmaintain a minimum tangible net worth of not less than $1,000,000, measured asof the last day of each calendar month. We were in compliance with our debt covenants as of April 30, 2002.

 

In August 2001, we sold $500,000 principal amount of 10%convertible subordinated bridge notes due August 2002, along with five-yearwarrants to purchase 500,000 shares of common stock at an exercise price of$6.50 per share.  The unsecured notes wereconvertible into shares of our common stock at any time before repayment at aprice of $4.50 per share.  We repaid theconvertible subordinated bridge notes in full in the fourth quarter of fiscalyear 2002.

 

We expect to continue developing our business and to buildmarket share in the U.S. now that we have FDA premarket approval of ourOmnicarbon 3000 heart valve for sales in the U.S.  These activities will require significant expenditures todevelop, train and supply marketing materials to our independent sales representativesand to build our sales and marketing infrastructure.  As a result, we anticipate that our sales and marketing andgeneral and administrative expenses will continue to constitute a material useof our cash resources.  Although we haveno commitment for these expenditures, we currently anticipate spending between$4,900,000 and $5,600,000 in fiscal year 2003. In addition, we project capital expenditures of approximately $250,000 to$350,000 for fiscal year 2003 to increase manufacturing capacity in certainfunctions and make necessary improvements to our corporate facility.  The actual amounts and timing of our capitalexpenditures will vary depending upon the speed at which we are able to expandour distribution capability in domestic and international markets and theavailability of financing as described below.

 

We expect that our operating losses and negative operatingcash flow will continue in fiscal years 2003 and 2004 as we expand ourmanufacturing capabilities, continue increasing our corporate staff to supportthe U.S. roll-out of our Omnicarbon 3000 heart valve, and add marketingprograms domestically and internationally to build awareness of and createdemand for our Omnicarbon heart valves. We will require additional financing in fiscal year 2003.  We anticipate that we will need to raisebetween $3,000,000 and $4,000,000 of additional equity or debt financing tofund operations and working capital requirements for the next 12 to 18 months.  We expect to face substantial difficulty inraising funds in the current market environment and we have no commitments atthis time to provide the required financing. We will seek to refinance our bank debt before November 2002 to give usadditional borrowing capacity and flexibility in funding the growth of ourbusiness.  Our capital requirements mayvary depending upon the timing and the success of the implementation of ourbusiness plan, regulatory, technological and competitive developments, or if:

 

•                       ourmanufacturing and development costs or projections prove to be inaccurate,

 

•                       we determine tolicense or develop additional technologies,

 

•                       we experiencesubstantial delays in obtaining FDA clearance of our proprietary carbon coatingprocess for heart valves sold in the U.S. market, or

 

•                       we makeacquisitions.

 

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We cannot assure you that we will be able to raisesufficient capital on terms that we consider acceptable, or at all.  If we are unable to obtain adequate funds onacceptable terms, our ability to fund the expansion of our business or respondto competitive pressures would be significantly impaired.  We also would be required to revise ourbusiness plans and reduce operating expenditures.  In the event that we are unable to refinance our revolving line ofcredit and obtain funds by the end of calendar year 2002, we will be requiredto significantly revise our business plans and substantially reduce our operating expenditures.

 

 

**Commitments and Contingent Liabilities**

 

*Sulzer Carbomedics.* In July 1998, we entered into a three-yearsupply agreement with Sulzer Carbomedics, the source of certain raw materialcomponents used in the manufacture of our Omnicarbon 3000 heart valves.  The supply agreement was extended for anadditional two years in March 2001.  Theagreement provides that we purchase a minimum number of raw material units eachcalendar year through 2003.  Under theterms of the agreement, we are required to compensate Sulzer Carbomedics forany purchase shortfalls up to a maximum of $200,000 per year.  We have not met the minimum purchaserequirements for the past three calendar years.  In addition, we do not believe we will meet the minimum purchaserequirement for calendar year 2002.  Asa result, we expensed $148,991 in fiscal year 2002, and $108,174 in fiscal year2001 related to these purchase shortfalls. These charges were reflected in cost of goods sold.  Future purchase shortfalls could adverselyaffect our ongoing relationship with Sulzer Carbomedics.

* *

*UROPACE*.  In July 1995,we established a wholly-owned subsidiary, UROPACE, Inc., to commercializetechnology for treating female urinary incontinence.  On November 1, 2000, we completed the spin-off of UROPACE to ourexisting shareholders.  The separationwas effected by transferring from our company to UROPACE all assets, tangibleand intangible, relating to the development of female urinary incontinencetechnology.  Our shareholders of recordon September 15, 2000 received one share of common stock of UROPACE for each6.882 shares of our common stock they held on that date.  The assets transferred to UROPACE had nobook value at November 1, 2000, and the operations of UROPACE before thespin-off had no revenues and minimal expenses during fiscal year 2000 andfiscal year 2001.  As a part of thisspin-off, we agreed to loan UROPACE up to $356,250 at a variable interestrate.  Principal and interest on thenote will be payable in installments equal to 5 percent of UROPACE’sfuture annual net sales until the note and interest is paid in full.  At April 30, 2002, we had loaned UROPACE $235,000.  Due to the development stage of UROPACE andthe uncertainty associated with the collection of these borrowings, we haverecorded an allowance for the entire balance of the loan, with the correspondingexpense included in other (expense) income in the Consolidated Statement ofOperations.

* *

*Bank Line of Credit*.  Since fiscalyear 2000, we have financed our operations in part through a bank line ofcredit secured by our real estate, tangible and intangible property and aguarantee by a principal shareholder. This line of credit will expire in November 2002.  Amounts borrowed under this line of creditgenerally bear interest at the prime rate. As of April 30, 2002, we had borrowed the maximum amount available of$2,500,000 under this line of credit.

 

As part of our revolving credit agreement with AssociatedBank Minnesota, we were formerly required to maintain a minimum tangible networth of not less than $3,000,000, measured as of the last day of each fiscalquarter.  At April 30, 2001,we failed to comply with the minimum tangible net worth covenant.  On August 24, 2001, Associated BankMinnesota waived such covenant defaults, and we amended our credit agreement,which now provides that we must maintain a minimum tangible net worth of notless than $1,000,000, measured as of the last day of each calendar month.  With the net proceeds from our November 2001IPO, we met ourminimum tangible net worth requirement through April 30, 2002.  As of April 30, 2002, we had fully utilizedour line of credit.

 

As of April 30,2002, we were in compliance with all covenants or other requirements set forthin our credit agreement.  We do not haveany rating downgrade triggers that would accelerate the maturity dates of ourdebt.  A downgrade in our credit ratingcould adversely affect our ability to renew existing, or obtain access to new,credit facilities in the future and could increase the cost of such facilities.

 

 

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*Dakota Electric Association. *We were indebted to DakotaElectric Association in the principal amount of $165,983. Payments are due inmonthly installments through May 2009, with interest at 5.75 percent,collateralized by our lighting equipment and rooftop air-conditioning units.

 

*Dakota County. *We owe Dakota County for special land assessments withprincipal and interest due at 8 percent in semi-annual installments through May2010.

 

*Operating and Capital Leases*.  We lease certain manufacturing equipmentunder various operating and capital leases. The operating leases expire at various dates through fiscal year2003.  The capital lease terms extendintofiscal year 2004 with implicit interest rates ranging from 6.9 to 16.2percent.  The capital leases arecollaterized by the underlying equipment with a total original cost of $322,733.

 

*Clinical Studies. *We entered into an agreement withseveral large non-U.S. hospitals to conduct clinical studies regarding certainaspects of our Omnicarbon heart valve’s clinicalperformance.  The agreement runs throughfiscal year 2006.  In general,recipients of clinical study payments are required to purchase our products in order to complete their studies.

 

*Consulting*.  In November2001, we entered into a separation agreement and release with Adel A. Mikhail,Ph.D., who was our founder and served as our President and Chief ExecutiveOfficer from March 1992 until June 15, 2001, when he retired.  Dr. Mikhail continues to serve as Chairmanof our Board of Directors.  As part ofthe agreement, we agreed to retain Dr. Mikhail as an independent consultant fora period of two years.  Dr. Mikhailreceives a $6,000 per month retainer. The agreement expires in June 2003.

 
| **Summary of  Contractual Obligations.** |   |      |      | **Payments Due By Period** |   |
|------------------------------------------|--------|-----------|-----------|----------------------------|--------|
|                                     |   | **TOTAL** |      | **Less than One****Year**  |   | **Two to Three****Years** |   | **Four or More****Years** |   |
| Sulzer Carbomedics                       |   | $         | 200,000   |                       | $      | 200,000 |   | $ |   |   | $ |   |   |
| UROPACE Loan                             |   | 121,250   |      | 121,250                    |   |   |   |   |   |
| Bank Line of Credit                      |   | 2,500,000 |      | 2,500,000                  |   |   |   |   |   |
| Dakota Electric Association (1)          |   | 202,469   |      | 28,584                     |   | 57,168 |   | 116,717 |   |
| Dakota County (1)                        |   | 255,360   |      | 39,360                     |   | 72,960 |   | 143,040 |   |
| Operating Leases                         |   | 19,742    |      | 19,742                     |   |   |   |   |   |
| Capital Leases (1)                       |   | 112,936   |      | 67,480                     |   | 45,456 |   |   |   |
| Clinical Studies                         |   | 422,380   |      | 143,762                    |   | 198,247 |   | 80,371 |   |
| Consulting                               |   | 81,000    |      | 72,000                     |   | 9,000 |   |   |   |
| TOTAL CONTRACTUAL OBLIGATIONS            |   | $         | 3,915,137 |                       | $      | 3,192,178 |   | $ | 382,831 |   | $ | 340,128 |   |

 

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(1)           Future payments include interest due.

 

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**Recent Accounting Pronouncements**

 

                In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” which addresses accounting and financialreporting for business combinations. Also in June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses how intangible assetsacquired individually or with a group of other assets, except for thoseacquired in a business combination, should be accounted for in financialstatements upon their acquisition and how goodwill and other intangible assetsshould be accounted for after they have been initially recognized in thefinancial statements.  Both of thesestatements are effective in their entirety for our company on May 1, 2002.  The adoption of these statements will nothave a material impact on our current financial position or our results ofoperations.

 

In August 2001, the Financial Accounting Standards Board (FASB)issued SFAS No. 144, “Accounting for the Disposal of Long-LivedAssets,” whichaddresses accounting and financial reporting for long-lived assets.  This statement is effective for us on May 1,2002.  The adoption of this statement isnot expected to have a material impact on our financial position or results ofoperations.

 

In May 2002,the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendments to SFASNo. 13, and Technical Corrections as of April 2002.” The new statement amends existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe their applicabilityunder changed conditions.  SFAS No. 145was adopted by us effective May 1, 2001. The adoption of SFAS No. 145 required the classification of the loss onearly extinguishment of convertible subordinated bridge notes as a component ofnet loss from recurring operations for fiscal year 2002 versus being classifiedas an extraordinary item.

 

**Qualitative and Quantitative Disclosuresabout Market Risk**

 

We develop our products in the U.S. and market our productsglobally.  Because we continue to deriveour revenue primarily from sources outside of the U.S., our financial resultscould be affected by many factors, such as changes in currency exchange ratesor weak economic conditions in foreign markets.  Substantially all of our sales are denominated in U.S.dollars.  A strengthening of the U.S.dollar could make our products less competitive in foreign markets.  We do not currently participate in anycurrency hedging activities to mitigate this risk.  We intend to assess the need to use financial instruments tohedge our exchange rate exposure on an ongoing basis.  Our interest income and expenses are sensitive to changes in thegeneral level of U.S. interest rates, particularly since our investments are inshort-term instruments and our long-term debt and revolving line of credit requireinterest payments calculated at variable rates.  Based on the current nature and levels of our investments anddebt, however, we believe that we currently have no material market riskexposure.

 

Our general investing policy is to limit market and credit riskand the risk of principal loss.  Allliquid investments with original maturities of three months or less areconsidered to be cash equivalents.

 

 

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**Cautionary Statement**

* *

*MedicalCV,Inc., or persons acting on our behalf, or outside reviewers retained by usmaking statements on our behalf, or underwriters of our securities, from timeto time, may make, in writing or orally, “forward-looking statements” asdefined under the Private Securities Litigation Reform Act of 1995.  This Cautionary Statement, when used inconjunction with an identified forward-looking statement, is for the purpose ofqualifying for the “safe harbor” provisions of the Litigation Reform Act and isintended to be a readily available written document that contains factors whichcould cause results to differ materially from such forward-lookingstatements.  These factors are inaddition to any other cautionary statements, written or oral, which may bemade, or referred to, in connection with any such forward-looking statement.*

* *

*Thefollowing matters, among others, may have a material adverse effect on ourbusiness, financial condition, liquidity, results of operations or prospects,financial or otherwise.  Reference tothis Cautionary Statement in the context of a forward-looking statement orstatements shall be deemed to be a statement that any one or more of thefollowing factors may cause actual results to differ materially from those insuch forward-looking statement or statements.*

* *

***Risks related to our business***

 

**We may be unable to fund our significantfuture capital needs, and we may need additional funds sooner than anticipated.** Based on our current rate of expenditures, anticipated net sales andcurrent sales and marketing plans, we estimate thatwe will need to raise between$3,000,000 and $4,000,000 of additional equity or debt financing to fundoperations and working capital requirements for the next 12 to 18 months.  We expect to face substantial difficulty inraising funds in the current market environment and we have no commitments atthis time to provide the required financing. We seek to refinance our bank debt before November 2002 to give usadditional borrowing capacity and flexibility in funding the growth of our business. The timing and amount of ourfuture capital requirements will depend on a number of factors, including:

 

•                                 the extent to which our Omnicarbon 3000heart valve gains market acceptance in the U.S.;

 

•                                 costs of manufacturing and marketing;

 

•                                 potential reductions in heart valvepricing by our competitors;

 

•                                 costs of licensing and acquiring newproducts and technologies;

 

•                                time and costs involved in obtainingregulatory clearance for our pyrolytic carbon coating process for sales in theU.S. of our Omnicarbon 4000 heart valve and other unanticipated regulatorycosts;

 

•                                  costs involved in filing, prosecuting andenforcing patents or defending against any patent infringement claims;

 

•                                  competing technological and marketdevelopments; and

 

 

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•                                  progress and cost of clinical trials fornew products.

 

We willrequire additional capital to support future operations, to complete thedevelopment of products and to manufacture and market any products resulting fromcurrent development projects.  We cannotassure you that such additional financing will be available on acceptableterms, or at all.  If funds are raisedby issuing additional equity securities, our then existing shareholders willexperience further dilution.  If we areunable to obtain additional funds as needed, we may not be able to:

 

•                                  develop or enhance our products,

 

•                                  gain market share in the U.S., or

 

•                                  respond to competitive pressures orunanticipated requirements.

 

In the event that we areunable to refinance our revolving line of credit and obtain funds by the end ofcalendar year 2002, we will be required to significantly revise our businessplans and substantially reduce our operating expenditures.

 

**We anticipate future losses and negative cash flows, whichmay limit or delay our ability to become profitable.**  We have incurred losses in each of the last six fiscal years.  We had net losses of $4,297,665 for the fiscal year ended April 30,2002 and $3,238,829 for the fiscal year ended April 30, 2001.  As of April 30, 2002, we had an accumulateddeficit of $12,405,386**.**  If we fail to obtain financing when required, we may not be ableto develop or enhance our products, gain market share in the U.S. or respond tocompetitive pressures or unanticipated requirements, which could seriously harmour business, financial position and results of operations.  We expect to incur additional net lossesuntil we are able to generate and sustain substantially higher revenues whilemaintaining reasonable expense levels, both of which involve uncertainty.  We also must continue to make significantexpenditures on sales and marketing in connection with our heart valves.  We cannot assure you that our revenues willgrow in future periods or that we will ever become profitable.  If we do achieve profitability, we cannotassure you that we would be able to sustain or increase profitability on aquarterly or annual basis in the future.  In addition, thereport of our independent accountants for fiscal year 2002 includes anexplanatory paragraph expressing doubt about our ability to continue as a goingconcern.

 

**We rely upon sales of our Omnicarbon heart valves forsubstantially all of our revenue.**  Our results of operations materially depend on the success of theOmnicarbon 3000 and 4000 heart valves, which accounted for substantially all ofour operating revenue for the fiscal years ended April 30, 2002 and April 30,2001.  A significant reduction in salesof Omnicarbon heart valves for any reason, including the introduction ofadditional competing products, would have a material adverse effect on us.  If we develop additional products, we wouldneed to obtain regulatory approval before we could sell them.  Given the time-consuming nature of theregulatory clearance process, we do not expect to be able to sell suchadditional products in the foreseeable future. We also anticipate that research and development and clinical andregulatory expenses will continue to rise in future periods.

 

**We cannot assure you that our heart valves will gainphysician acceptance.** A limited number of cardiovascular surgeons and cardiologists caninfluence medical device selection and purchase decisions for a large portionof the target cardiovascular surgery patient population.  We cannot assure you that our Omnicarbonheart valves, or any of the products that we may develop, will gain anysignificant degree of physician acceptance, or that users will accept theseproducts as preferable to alternative products or methods of treatment.  Physician acceptance of our Omnicarbon heartvalves will depend upon our ability to demonstrate the clinical advantages oflower complication rates and cost-effectiveness of Omnicarbon heart valves whencompared to other prosthetic heart valves. Negative publicity involving Omnicarbon heart valves or other prostheticheart valves could adversely affect the overall acceptance of Omnicarbon heartvalves.  Further, because Omnicarbonheart valves are monoleaflet heart valves, we must overcome in the U.S. and inother markets a preference for bileaflet heart valves, which are marketed bymost major manufacturers of mechanical heart valves.  Any of the foregoing factors, among others, could limit ordetract from physician acceptance of our product and have a negative effect onour business, financial condition, operating results and cash flows.

 

 

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**Because we do not have FDA clearance to manufacture ourOmnicarbon 3000 heart valves using our own pyrolytic carbon process for sale inthe U.S., we depend upon a third party supplier for critical components.**  We market our Omnicarbon 3000 heart valves,which we have now begun to sell in the U.S. and Japan, with pyrolytic carboncomponents produced by Sulzer Carbomedics, a third party supplier which sellscompeting heart valves.  We have asupply contract that requires us to purchase such components for use in theOmnicarbon 3000 heart valve solely from Sulzer Carbomedics until December2003.  Given the absence of FDA-clearedalternative sources for pyrolytic carbon components for our Omnicarbon 3000heart valves, any disruption or termination of our supply contract, or ourfailure to extend it, if necessary, would have a material adverse effect on ourcontinued ability to sell Omnicarbon 3000 heart valves.  Future purchase shortfalls could adverselyaffect our ongoing relationship with Sulzer Carbomedics.  Further, we cannot assure you that we willbe able to obtain FDA clearance to manufacture Omnicarbon heart valves for salein the U.S. using our own pyrolytic carbon process.  Our future success will depend, in part, on obtaining FDAclearance to manufacture carbon components for heart valves for sale in theU.S.

 

**We may need to fund multiple research studies throughout thelifecycle of each of our products, providing statistically significantscientific data to regulatory agencies and cost effectiveness data to thirdparty payers.**  TheFDA, foreign regulatory agencies and third party health care payers may requirescientific clinical outcomes data and cost effectiveness data.  We will need to provide this data throughoutour products’ lifecycles.  Payers andgovernmental agencies may change the frequency and breadth of clinical researchrequired, potentially significantly increasing our costs.  Without adequate positive outcomes data thatdemonstrate advantages from the use of our Omnicarbon heart valves, we may notachieve any significant market penetration. We cannot assure you that our outcomes data will be adequate to meetpresent or future medical device utility requirements.  If our outcomes data does not meet suchrequirements, we may be unable to sell our products or obtain third partyreimbursement for the costs of our products.

 

**Intense competition in the prosthetic heart valve industrycould prevent us from successfully marketing our products or render ourproducts obsolete.**  Wecompete in mature, highly competitive markets in which many of our competitorshave well-known and established products. To compete successfully in these markets, we must maintain competitivepricing and demonstrate the advantages of our Omnicarbon heart valves in termsof post-surgical complications.  Severalcompanies are currently pursuing new mechanical heart valve designs, bloodcompatible coatings for mechanical heart valves, longer lasting tissue heartvalves and surgical alternatives to implanting prosthetic heart valves.  It is possible that technological advancesby our competitors, or advances in surgical procedures that delay the need forreplacing heart valves, could render our Omnicarbon heart valves noncompetitiveor obsolete.

 

Our primary competitors, St. Jude Medical, Inc.,Medtronic, Inc. and Sulzer Carbomedics, dominate the market and control most ofthe mechanical heart valve market worldwide. Our competitors have extensive clinical data demonstrating theperformance of their heart valves and internal carbon manufacturingcapabilities.  The companies with whichwe compete have many additional competitive advantages over us, including:

 

•                                  greatername recognition and product market acceptance;

 

•                                  moreestablished physician relationships;

 

•                                  broaderproduct lines;

 

•                                  greaterdistribution capabilities;

 

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•                                  greaterregulatory compliance capabilities;

 

•                                  largermarketing, research and development staffs and facilities; and

 

•                                  greaterfinancial resources.

 

We cannot assure you that we will be able to competeagainst such competitors or their products.

 

**Our future results depend upon the strength of the mechanicalheart valve market.** Our business could suffer if the use of mechanical heart valvesdeclines.  In recent years, there hasbeen an increase in the number of tissue heart valves used.  We believe that improvements in tissue heartvalve longevity and an increase in the average age of heart valve patients havecontributed to the recent increase in the use of tissue heart valves.  If the use of mechanical heart valvesdeclines, it could materially adversely affect our business, financialcondition, operating results and cash flows.

 

**The small number of distributors operating in foreign marketswho currently generate substantially all of our revenues pose a concentrationof credit risk and could leave us at any time, impairing our business.**  Substantially all of our sales originatefrom eight distributors who market our Omnicarbon 4000 heart valves in Europe,South Asia, the Middle East and the Far East. Because we do not control the amount or timing of the resources suchparties allocate to sales of our product, any revenues we derive from suchrelationships depend upon the efforts of such distributors.  If we could not locate a replacement on atimely basis, the loss of an international distributor could adversely affectus.

 

Certain of our significant international distributorsare affiliates of our company.  Duringour fiscal year ended April 30, 2002, such affiliates made net purchases ofproduct from our company equal to approximately 48.6 percent of our net sales. ** **Duringour fiscal year ended April 30, 2001, such affiliates made net purchases ofproduct from our company equal to approximately 45.5 percent of our net sales.  Obligations to us from our distributors areunsecured.  Such affiliates could failto pay receivables or cease distributing our products at any time, therebymaterially and adversely affecting our business, financial condition, operatingresults and cash flows.

 

**We depend upon sales outside the U.S., which are subject to anumber of risks that could harm our ability to successfully commercialize ourproduct and could harm our business.**  We face several risks as a result of doingbusiness in foreign markets, including:

 

•                                  unforeseenchanges in regulatory requirements and government health programs;

 

•                                  potentiallyadverse tax consequences;

 

•                                  politicaland economic instability; and

 

•                                  greaterdifficulty in collecting payments from product sales.

 

In addition, the value of the U.S. dollar in relationto other currencies may also harm our sales to customers outside the U.S.because we require substantially all of our customers to pay for our productsin U.S. currency.

 

**Substantial government regulation in the U.S. and abroad mayrestrict our ability to sell our heart valves.**  The FDA and comparable regulatory authoritiesin foreign countries extensively and rigorously regulate our products, productdevelopment activities and manufacturing processes.  In the

 

 

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U.S., the FDA regulates the introduction of medical devices as well asthe manufacturing, labeling and record-keeping procedures for suchproducts.  We are required to:

 

•                                  obtainclearance before we can market and sell medical devices;

 

•                                  satisfycontent requirements applicable to our labeling, sales and promotionalmaterials;

 

•                                  complywith manufacturing and reporting requirements; and

 

•                                  undergorigorous inspections.

 

The process of obtaining marketing clearance for newmedical devices from the FDA can be costly and time consuming.  For example, the premarket clearanceprocess, which our medical devices must undergo, can require numerous years to complete.  Although we recently obtained FDA clearancefor our Omnicarbon 3000 heart valve, we cannot assure you that our futureproducts will obtain FDA clearance on a timely basis, or at all.  Our products must also comply with laws andregulations of foreign countries in which we market such products.  In general, the extent and complexity ofmedical device regulation is increasing worldwide.  This trend may continue, and the cost and time required to obtainmarketing clearance in any given country may increase as a result.  We cannot assure you that our products willobtain any necessary foreign clearances on a timely basis, or at all.

 

**Once medical devices are cleared for sale, regulatoryauthorities may still limit the use of such products, restrict sales to certainmodels or sizes, prevent the sale or manufacture of such products or require arecall or withdrawal of such products from the marketplace.**  Following initial clearance from regulatoryauthorities, we continue to be subject to extensive regulatoryrequirements.  Government authoritiescan withdraw marketing clearance due to our failure to comply with regulatorystandards or due to the occurrence of unforeseen problems following initialclearance.  Ongoing regulatoryrequirements are wide-ranging and govern, among other things:

 

•                                  annualinspections to retain CE mark for sale of products in the European Union;

 

•                                  productmanufacturing;

 

•                                  annualinspections to retain ISO certification of our quality system;

 

•                                  suppliersubstitution;

 

•                                  productchanges;

 

•                                  processmodifications;

 

•                                  medicaldevice reporting; and

 

•                                  productsales and distribution.

 

The FDA and various government agencies inspect ourfacilities from time to time to determine whether we are in compliance withapplicable laws and regulations.  If wefail to comply or maintain compliance with medical device laws or regulations,regulatory authorities may fine us and bar us from selling our products.  If the FDA believes we are not in compliancewith such laws or regulations, it can:

 

•                                  seizeour products;

 

 

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•                                  requirea recall;

 

•                                  withdrawpreviously granted market clearances;

 

•                                  implementprocedures to stop future violations; and/or

 

•                                  seekcivil and criminal penalties against us.

 

**The uncertainty of third party reimbursements and possiblehealth care reforms may adversely affect us. **Our ability to market products successfully in theU.S. will depend in part on the extent to which reimbursement for the cost ofsuch products and related treatment will be available from government healthadministration authorities, private health insurers, health maintenanceorganizations and other third party payers. Payers increasingly challenge the need for, and prices of, medicalproducts and services.  Payers may denyreimbursement for procedures that they deem experimental or for devices used inways other than as cleared by the FDA or stated in their indications foruse.  With respect to our products, somepayers could deny coverage until the devices become generally accepted by themedical profession.  The inability ofhospitals and other providers to obtain reimbursement from third party payersfor our products would have a material adverse impact on our business,financial condition, operating results and cash flows.

 

Health care reform may also impact sales of newproducts in the U.S.  Reforms mayinclude:

 

•                                  mandatedbasic health care benefits;

 

•                                controlson health care spending through limiting the growth of private health insurancepremiums and Medicare and Medicaid spending; and

 

•                                  fundamentalchanges to the health care delivery system.

 

We anticipate that Congress and state legislatureswill continue to review and assess alternative health care delivery systems andpayment methodologies, and that public debate of these issues will likelycontinue in the future.  Due touncertainties regarding the ultimate features of reform initiatives and theirenactment and implementation, we cannot predict which, if any, of such reformproposals will be adopted, when they may be adopted or what impact they mayhave on our ability to market our current and future products.  Laws resulting from such reform initiativescould adversely impact our business, financial condition, operating results andcash flows.

** **

**Despite our efforts to protect our proprietary rights,unauthorized parties may attempt to use information that we regard asproprietary.  We also run the risk ofinfringing the proprietary rights of third parties.**  We do not have patent protection for thedesign of our Omnicarbon heart valves. We rely upon a combination of trade secrets, know-how andconfidentiality agreements to protect the proprietary aspects of ourtechnology, including aspects of manufacturing.  We have patent applications filed for the pyrolytic carboncoating process used in our Omnicarbon 4000 heart valve.  We have patents for our bileaflet mechanicalheart valve project which is currently under development.  We expect to seek patent protection foradditional products in the future.  Oursuccess will depend, in part, on our ability to protect our products and tomanufacture and sell them without infringing the rights of third parties.  The validity and breadth of claims coveredin medical technology patents involve complex legal and factual questions and,therefore, are highly uncertain.  Inaddition, the laws of many countries do not protect our proprietary rights toas great an extent as do the laws of the U.S. We cannot assure you that:

 

 

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•                                anypending patent applications or any future patent applications will result inthe issuance of patents;

 

•                                thescope of any patent protection will be effective to exclude competitors or toprovide competitive advantages to us;

 

•                                wewill be able to commercially exploit any issued patents before they expire;

 

•                                anyof our patents will be held valid if subsequently challenged;

 

•                                otherswill not claim rights in, or ownership of, the patents and other proprietaryrights we hold;

 

•                                ourproducts and processes will not infringe, or be alleged to infringe, theproprietary rights of others; or

 

•                                wewill be able to protect meaningful rights in proprietary technology over whichwe do not hold patents.

 

Furthermore, we cannot assure you that others have notdeveloped or will not develop products which may duplicate any of our productsor manufacturing processes, or that others will not design around ourpatents.  Other parties mayindependently develop or otherwise acquire substantially equivalent techniques,gain access to our proprietary technology or disclose such technology.  In addition, whether or not we obtainadditional patents, others may hold or receive patents covering components ofproducts we independently develop in the future.  We cannot assure you that third parties will not claiminfringement by us, and seek substantial damages, with respect to current orfuture products.  If we were to becomeinvolved in a dispute regarding intellectual property, whether ours or that ofanother company, we may be involved in legal proceedings.  Any such claims, with or without merit,could be time-consuming, result in costly litigation, cause product shipmentdelays and require us to:

 

•                                ceasemanufacturing and selling our product, which would seriously harm us;

 

•                                enterinto royalty or licensing agreements; or

 

•                                designcommercially acceptable non-infringing alternative products.

 

We cannot assure you that we would be able to obtainroyalty or licensing agreements, if required, on terms acceptable to us or atall, or that we would be able to develop commercially acceptable non-infringingalternative products.  Our failure to doso could have a material adverse effect upon our business, financial condition,operating results and cash flows.

 

**If patients allege that the use of Omnicarbon heart valvesadversely affected them, we may face substantial product liability claims.**  Substantial product liability litigationexists within the medical device industry. Mechanical heart valves are life-sustaining devices, and their failuremay result in patient death.  We havehad product liability claims in the past, which have been resolved withoutmaterial financial cost to us.  Wecannot assure you, however, that future product liability claims will notexceed the limits of our insurance coverage or that such insurance willcontinue to be available on commercially reasonable terms, or at all.  Consequently, a product liability claim orother claim with respect to uninsured liabilities, or in excess of insuredliabilities, could have a material adverse effect on our business, financialcondition, operating results and cash flows. In addition, adverse publicity resulting from product liabilitylitigation may materially adversely affect us regardless of whether the

 

 

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claims are valid or whether we are liable.  These claims may divert our financial and management resourcesthat would otherwise be used to benefit the future performance of ouroperations.

 

**Key employees could leave our company at any time, impairingour development and profitability**.  We depend heavily on the technical knowledge and industryexpertise of our management team and our founder and former chief executiveofficer, Adel A. Mikhail, Ph.D., with whom we have a two-year consultingagreement.  The development andexecution of our business plan depends upon these individuals.   We do not have employment agreements withmost of our key employees.  Thedeparture of key people could adversely affect our business, financialcondition, operating results and cash flows.

 

**We may be unable to recruit, motivate and retain qualifiedemployees.**  Oursuccess depends upon our ability to attract, motivate and retain a sufficientnumber of qualified employees, including those who concentrate in research anddevelopment, sales, marketing and manufacturing, to keep pace with our productdevelopment schedules.  Even though wehave not experienced shortages of qualified people to date, qualifiedindividuals needed to fill these positions could be in short supply in ourmarket.  Our inability to recruit,motivate and retain such individuals may delay the planned launch of newproducts or result in high employee turnover, either of which could have amaterial adverse effect on our business, financial condition, operating resultsand cash flows.  Additionally,competition for qualified employees could require us to pay higher wages andprovide additional benefits to attract sufficient employees.

 

**We may be unable to collect on our loan to UROPACE, Inc. **In July 1995, weestablished a wholly-owned subsidiary called UROPACE, Inc.  On November 1, 2000, we completed a spin-offof UROPACE to our existing shareholders. As part of this spin-off, we agreed to loan UROPACE up to $356,250 at avariable interest rate.  As of April 30,2002, we had loaned UROPACE $235,000.** **Principaland interest on the note is payable in installments equal to 5 percent of UROPACE’sfuture annual net sales until the note is paid in full.  Due to the development stage of UROPACE, itis uncertain whether we will be able to collect on this loan.  For financial reporting purposes, we haverecorded an allowance for the entire balance of the loan at April 30, 2002.

 

***Risks related to our securities***

 

**Fluctuations in our operating results may result in decreasesin the price of our securities.**  Our operating results have and will continue to fluctuatesignificantly because of several factors, including the timing of FDAclearance, government policies regarding payment for our products and newtechnology.  Consequently, our operatingresults may fall below the expectations of public market analysts andinvestors.  In that event, the price ofour securities would likely decrease.

 

**No public market exists for our common stock or Class AWarrants, and an active market may not develop for our units.**  No public market exists for our common stockor Class A Warrants.  Such a market maynot exist until at least May 20, 2003, when the unit components may be tradedseparately.  We cannot assure you thatan active market for such securities will develop in the future or that anactive market for our units will develop. Before our initial public offering, there was no public market for ourunits.  As a result, we arbitrarilyestablished the offering price for the units and the exercise price of theClass A Warrants through negotiations with our underwriter.  Such prices were not based upon our assets,earnings history or book value.

 

**If we do not maintain our Nasdaq listing, you may havedifficulty reselling your units.**  We will need to maintain certain financial and corporategovernance qualifications to keep our units listed on The Nasdaq SmallCapMarket and to obtain listing for our common stock and Class A Warrants.  We cannot assure you that we will at alltimes meet the criteria for continued or initial listing.  If we fail to maintain such qualifications,including a minimum bid price for our units of $1.00, our units may be

 

 

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delisted and our common stock and Class A Warrants may not becomelisted.  In the event of delisting orfailure to list, trading, if any, would be conducted in the over-the-countermarkets in the so-called “pink sheets” or the National Association ofSecurities Dealers, Inc. “Electronic Bulletin Board.”  At that point, our securities would become subject to the SEC’s“penny stock rules.”  The penny stockrules would impose additional requirements on broker-dealers who effect tradesin our securities other than trades with their established customers andaccredited investors.  Consequently, thedelisting or failure to list our securities and the applicability of the pennystock rules may adversely affect the ability of broker-dealers to sell oursecurities, which may adversely affect your ability to resell oursecurities.  If any of these events takeplace, you may not be able to sell as many securities as you desire, you mayexperience delays in the execution of your transactions and our securities maytrade at a lower market price than they otherwise would.

 

**Our existing shareholders have significant control, whichcould reduce your ability to receive a premium for your securities through achange in control.** Officers and directors of our company beneficially own 38.6 percent of our common stock.** **Asa result, they may be able to control our company and direct our affairs,including the election of directors and approval of significant corporatetransactions.  This concentration ofownership could also delay, defer or prevent a change in control of ourcompany, and make some transactions more difficult or impossible without theirsupport.  These transactions mightinclude proxy contests, tender offers, open market purchase programs or othershare purchases that could give our shareholders the opportunity to realize apremium over the then prevailing market price of our securities.  As a result, this concentration of ownershipcould depress the price of our securities.

 

**Minnesota law and our ability to issue preferred stock coulddeter a take-over or acquisition of our company**.  Our articles of incorporation authorize theissuance of shares of preferred stock. Our board of directors, without any action by our shareholders, isauthorized to designate and issue the preferred stock in such classes or seriesas it deems appropriate and establish the rights and privileges of such shares,including liquidation and voting rights. Our ability to designate and issue preferred stock having preferentialrights over our common stock could adversely affect the voting power and otherrights of holders of common stock, should we determine to issue preferredstock.  We are also subject to theMinnesota Business Corporation Act, which includes provisions that limit thevoting rights of persons acquiring specified percentages of shares of anissuing public corporation in a “control share acquisition” and restrict“business combinations” between issuing public corporations and specifiedpersons acquiring their securities.  Ourability to issue preferred stock and the application of the provisions ofMinnesota law discussed above could impede or deter another company from makinga tender offer or other proposal to take us over.

 

**We may redeem the Class A Warrants at a nominal price. **We may redeem the Class AWarrants at $0.01 per warrant at any time once they become exercisable, uponten business days’ notice, if the closing price of our common stock or unitsexceeds $8.50, subject to customary anti-dilution adjustments, for any tenconsecutive trading days before such notice. If we redeem the Class A Warrants, you will lose your right to exercisethe Class A Warrants except during the ten business day notice period.  Our redemption of the Class A Warrants couldforce you to exercise the Class A Warrants at a time when it may bedisadvantageous for you to do so, to sell the Class A Warrants at the then currentmarket price or to accept the redemption price, which could be substantiallyless than the market value of the Class A Warrants at the time of redemption.

 

**If we do not maintain an effective prospectus, you will beunable to exercise your Class A Warrants.**  You will be able to exercise the Class AWarrants, and we will be able to issue shares to you upon such exercise, onlyif a current prospectus relating to the shares underlying the Class A Warrantsis then in effect and only if such securities are qualified for sale or exemptfrom qualification under the

 

 

32

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applicable securities laws of the state in which you reside.  Although we cannot assure you that we willactually be able to do so, we will use our best efforts to:

 

•                                maintainthe effectiveness of a current prospectus covering the shares underlying theClass A Warrants, and

 

•                                maintainthe registration of such shares under the securities laws of the states inwhich we initially qualified the units for sale in our initial public offering.

 

**We have broad discretion to use the proceeds from our initialpublic offering for purposes with which you may not agree, and we may not besuccessful in investing the proceeds.**  We plan to use the proceeds from our initialpublic offering for general corporate purposes including, but not limited to,marketing, developing various medical devices and, potentially, licensingtechnology from third parties.  Theamounts actually expended for the above purposes may vary significantlydepending upon a number of factors. Therefore, we will have broad discretion as to how we will spend theproceeds.  Shareholders may not agreewith the ways in which we use the proceeds and our management may not make thebest use of the proceeds.  We cannotpredict whether our management’s investment of the proceeds will yield afavorable, or any, return.

 

 

33

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**ITEM 7             FINANCIALSTATEMENTS**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**MedicalCV, Inc.**
| Report of  Independent Accountants                               |
|------------------------------------------------------------------|
| Consolidated Financial Statements                                |
| Consolidated Balance Sheet                                       |
| Consolidated  Statement of Operations                            |
| Consolidated  Statements of Changes in Shareholders’ Equity |
| Consolidated  Statement of Cash Flows                            |
| Notes  Consolidated to Financial Statements                      |

 

 

34

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**Report of Independent Accountants**

 

To the Board of Directors and Shareholders of MedicalCV, Inc.

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of operations, of changes in shareholders’ equity and of cash flows present fairly, in all materialrespects, the financial position of MedicalCV, Inc. at April 30, 2002 and 2001,and the results of its operations and its cash flows for the years then endedin conformity with accounting principles generally accepted in the UnitedStates of America.  These financialstatements are the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed inNote 1 to the financial statements, the Company has sustained losses andnegative cash flows from operations in recent years and has insufficient fundsto meet the requirements of its revolving credit facility, which matures November2002, and finance its working capital and capital expenditure needs, whichraises substantial doubt about the Company’s ability to continue as agoing concern.  Management’s plans in regard to these matters arealso described in Note 1.  The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopersLLP

June 6, 2002

 

 

35

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**MedicalCV, Inc.**

**Consolidated Balance Sheet**

 
|                                                                                                                              |   | **April 30,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-----------|
|                                                                                                                              |   | **2002**      |      | **2001** |   |
| **ASSETS**                                                                                                                        |   |          |      |   |   |
| Current assets:                                                                                                                   |   |          |      |   |   |
| Cash and cash equivalents                                                                                                         |   | $             | 2,781,675 |   | $ | 111,977 |   |
| Trade accounts receivable, net                                                                                                    |   | 1,258,616     |      | 1,125,560 |   |
| Inventories                                                                                                                       |   | 2,322,535     |      | 2,172,035 |   |
| Prepaid expenses and other assets                                                                                                 |   | 78,993        |      | 127,354 |   |
| Total current assets                                                                                                              |   | 6,441,819     |      | 3,536,926 |   |
| Property, plant and equipment, net                                                                                                |   | 1,575,153     |      | 1,446,382 |   |
| Deferred financing costs, net                                                                                                     |   | 72,860        |      | 233,936 |   |
| Other assets                                                                                                                      |   | 1,394         |      | 1,394 |   |
| Total assets                                                                                                                      |   | $             | 8,091,226 |   | $ | 5,218,638 |   |
|                                                                                                                              |   |          |      |   |   |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY**                                                                                         |   |          |      |   |   |
|                                                                                                                              |   |          |      |   |   |
| Current liabilities:                                                                                                              |   |          |      |   |   |
| Current portion of long-term debt                                                                                                 |   | $             | 2,542,460 |   | $ | 42,460 |   |
| Current portion of capital lease obligations                                                                                      |   | 59,854        |      | 61,552 |   |
| Accounts payable                                                                                                                  |   | 589,520       |      | 511,340 |   |
| Accrued expenses                                                                                                                  |   | 491,760       |      | 314,524 |   |
| Total current liabilities                                                                                                         |   | 3,683,594     |      | 929,876 |   |
|                                                                                                                              |   |          |      |   |   |
| Long-term debt, less current portion                                                                                              |   | 339,523       |      | 1,786,987 |   |
| Capital lease obligations, less current portion                                                                                   |   | 42,069        |      | 72,504 |   |
| Total liabilities                                                                                                                 |   | 4,065,186     |      | 2,789,367 |   |
|                                                                                                                              |   |          |      |   |   |
| Commitments and contingencies (Notes 5, 9 and 11)                                                                                 |   |          |      |   |   |
|                                                                                                                              |   |          |      |   |   |
| Shareholders' equity:                                                                                                             |   |          |      |   |   |
| Preferred stock, $.01 par value; 5,000,000 shares  authorized; no shares issued and outstanding                                   |   | —        |      | — |   |
| Common stock, $.01 par value; 95,000,000 shares  authorized; 7,843,834 and 6,343,834 shares issued and outstanding,  respectively |   | 78,438        |      | 63,438 |   |
| Additional paid-in capital                                                                                                        |   | 16,362,050    |      | 10,490,378 |   |
| Deferred stock-based compensation                                                                                                 |   | (9,062        | )         | (16,824 | )  |
| Accumulated deficit                                                                                                               |   | (12,405,386   | )         | (8,107,721 | )  |
| Total shareholders' equity                                                                                                        |   | 4,026,040     |      | 2,429,271 |   |
| Total liabilities and shareholders' equity                                                                                        |   | $             | 8,091,226 |   | $ | 5,218,638 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

36

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**MedicalCV,Inc.**

**ConsolidatedStatement of Operations**

 
|                                                                     |   | **Year ended  April 30,** |       |
|--------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                     |   | **2002**                  |       | **2001** |   |
|                                                                     |   |                      |       |   |   |
| Net sales                                                                |   | $                         | 2,982,198  |   | $ | 2,863,440 |   |
| Cost of goods sold                                                       |   | 2,109,453                 |       | 1,804,278 |   |
|                                                                     |   |                      |       |   |   |
| Gross profit                                                             |   | 872,745                   |       | 1,059,162 |   |
|                                                                     |   |                      |       |   |   |
| Operating expenses:                                                      |   |                      |       |   |   |
| Sales and marketing                                                      |   | 2,089,104                 |       | 1,425,493 |   |
| General and administrative                                               |   | 1,817,159                 |       | 1,603,117 |   |
| Engineering and regulatory                                               |   | 779,038                   |       | 965,472 |   |
|                                                                     |   |                      |       |   |   |
| Total operating expenses                                                 |   | 4,685,301                 |       | 3,994,082 |   |
|                                                                     |   |                      |       |   |   |
| Loss from operations                                                     |   | (3,812,556                | )          | (2,934,920 | ) |
|                                                                     |   |                      |       |   |   |
| Other (expense) income:                                                  |   |                      |       |   |   |
| Interest expense                                                         |   | (241,197                  | )          | (207,314 | ) |
| Interest income                                                          |   | 47,414                    |       | 14,722 |   |
| Loss from early extinguishment of convertible  subordinated bridge notes |   | (335,410                  | )          |   |   |
| Other income (expense)                                                   |   | 44,084                    |       | (111,317 | ) |
|                                                                     |   |                      |       |   |   |
| Total other expense                                                      |   | (485,109                  | )          | (303,909 | ) |
|                                                                     |   |                      |       |   |   |
| Net loss                                                                 |   | $                         | (4,297,665 | ) | $ | (3,238,829 | ) |
|                                                                     |   |                      |       |   |   |
| Basic and diluted net loss per share                                     |   | $                         | (.62       | ) | $ | (.56 | ) |
|                                                                     |   |                      |       |   |   |
| Shares used in computing basic and diluted net loss  per share           |   | 6,980,820                 |       | 5,787,642 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

37

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**MedicalCV, Inc.**

**Consolidated Statements of Changes inShareholders’ Equity**

 
|                                                                                                                 |   |       |       | **Additional****Paid-inCapital** |       | **Deferred****Stock-BasedCompensation** |       | **(Accumulated****Deficit)** |       | **Total**  |       |
|----------------------------------------------------------------------------------------------------------------------|--------|------------|------------|----------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|------------|------------|
| **Common Stock**                                                                                                     |
| **Shares**                                                                                                           |   | **Amount** |
|                                                                                                                 |   |       | ** ** |                             | ** ** |                                    | ** ** |                         | ** ** |       | ** ** |   | ** ** |
| Total, April 30, 2000                                                                                                |   | 5,023,834  |       | $                                | 50,238     |                                    | $          | 6,779,082                    |       | $          | —     |   | $ | (4,868,892 | ) | $ | 1,960,428 |   |
| Net loss                                                                                                             |   |       |       |                             |       |                                    |       |                         |       | (3,238,829 | )          | (3,238,829 | ) |
| Common stock issued                                                                                                  |   | 1,170,000  |       | 11,700                           |       | 2,913,300                               |       |                         |       |       |       | 2,925,000 |   |
| Exercise of stock options                                                                                            |   | 255,000    |       | 2,550                            |       | 673,199                                 |       |                         |       |       |       | 675,749 |   |
| Repurchase of common stockin  connection with stockoption exercises                                                  |   | (120,000   | )          | (1,200                           | )          | (298,800                                | )          |                         |       |       |       | (300,000 | ) |
| Deferred stock-basedcompensation                                                                                     |   |       |       |                             |       | 20,075                                  |       | (20,075                      | )          |       |       |   |   |
| Amortization of stock-basedcompensation                                                                              |   |       |       |                             |       |                                    |       | 3,251                        |       |       |       | 3,251 |   |
| Issuance of common stockfor  compensation                                                                            |   | 15,000     |       | 150                              |       | 41,850                                  |       |                         |       |       |       | 42,000 |   |
| Issuance of warrants forcompensation                                                                                 |   |       |       |                             |       | 162,000                                 |       |                         |       |       |       | 162,000 |   |
| Stock options issued to non-employees                                                                                |   |       |       |                             |       | 123,050                                 |       |                         |       |       |       | 123,050 |   |
| Warrants issued in connectionwith  bank line of creditguarantee                                                      |   |       |       |                             |       | 76,622                                  |       |                         |       |       |       | 76,622 |   |
| Total, April 30, 2001                                                                                                |   | 6,343,834  |       | 63,438                           |       | 10,490,378                              |       | (16,824                      | )          | (8,107,721 | )          | 2,429,271 |   |
| Net loss                                                                                                             |   |       |       |                             |       |                                    |       |                         |       | (4,297,665 | )          | (4,297,665 | ) |
| Common stock issued, netof  issuance costs of$1,353,515                                                              |   | 1,500,000  |       | 15,000                           |       | 5,381,485                               |       |                         |       |       |       | 5,396,485 |   |
| Warrants issued in connectionwith  issuance of commonstock                                                           |   |       |       |                             |       | 50                                      |       |                         |       |       |       | 50 |   |
| Amortization of stock-basedcompensation                                                                              |   |       |       |                             |       |                                    |       | 7,762                        |       |       |       | 7,762 |   |
| Stock options issued to non-employees                                                                                |   |       |       |                             |       | 69,844                                  |       |                         |       |       |       | 69,844 |   |
| Discount on convertiblesubordinated  bridge notes                                                                    |   |       |       |                             |       | 497,125                                 |       |                         |       |       |       | 497,125 |   |
| Warrants issued in connectionwith  convertiblesubordinated  bridge notes                                             |   |       |       |                             |       | 500                                     |       |                         |       |       |       | 500 |   |
| Repurchase of beneficialconversion  feature relatedto early  extinguishment ofconvertible  subordinatedbridge  notes |   |       |       |                             |       | (77,332                                 | )          |                         |       |       |       | (77,332 | ) |
|                                                                                                                 |   |       |       |                             |       |                                    |       |                         |       |       |       |   |   |
| Total, April 30, 2002                                                                                                |   | 7,843,834  |       | $                                | 78,438     |                                    | $          | 16,362,050                   |       | $          | (9,062     | ) | $ | (12,405,386 | ) | $ | 4,026,040 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

38

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**MedicalCV, Inc.**

**Consolidated Statement of Cash Flows**

 
|                                                                                                                   |   | **Year ended April 30,** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                                                                   |   | **2002**                 |       | **2001** | ** ** |
| Cash flows from operating  activities:                                                                                 |   |                     |       |   |   |
| Net loss                                                                                                               |   | $                        | (4,297,665 | ) | $ | (3,238,829 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                                           |   |                     |       |   |   |
| Loss on early  extinguishment of convertible subordinated bridge notes                                                 |   | 335,410                  |       |   |   |
| Depreciation                                                                                                           |   | 290,049                  |       | 203,133 |   |
| Amortization                                                                                                           |   | 222,191                  |       | 179,428 |   |
| Amortization of discount on  convertible subordinated bridge notes                                                     |   | 84,383                   |       |   |   |
| Provision for doubtful  accounts                                                                                       |   | 133,360                  |       | 167,222 |   |
| Provision for inventory obsolescence                                                                                   |   | 37,584                   |       | 67,083 |   |
| Stock-based compensation                                                                                               |   | 77,606                   |       | 664,801 |   |
| Changes in assets and  liabilities:                                                                                    |   |                     |       |   |   |
| Accounts receivable                                                                                                    |   | (185,416                 | )          | 82,484 |   |
| Inventories                                                                                                            |   | (188,084                 | )          | (564,359 | ) |
| Prepaid expenses and other  assets                                                                                     |   | 48,361                   |       | (22,777 | ) |
| Accounts payable                                                                                                       |   | 78,180                   |       | (61,474 | ) |
| Accrued expenses                                                                                                       |   | 177,236                  |       | 12,590 |   |
|                                                                                                                   |   |                     |       |   |   |
| Net cash used in operating  activities                                                                                 |   | (3,186,805               | )          | (2,510,698 | ) |
|                                                                                                                   |   |                     |       |   |   |
| Cash flows from investing  activities:                                                                                 |   |                     |       |   |   |
| Purchase of property, plant  and equipment                                                                             |   | (384,024                 | )          | (362,344 | ) |
| Loan to UROPACE                                                                                                        |   | (81,000                  | )          | (154,000 | ) |
|                                                                                                                   |   |                     |       |   |   |
| Net cash used in investing  activities                                                                                 |   | (465,024                 | )          | (516,344 | ) |
|                                                                                                                   |   |                     |       |   |   |
| Cash flows from financing  activities:                                                                                 |   |                     |       |   |   |
| Borrowings on bank line of  credit                                                                                     |   | 1,570,000                |       | 2,315,000 |   |
| Principal payments on bank  line of credit                                                                             |   | (475,000                 | )          | (2,130,000 | ) |
| Principal payments on other  long-term debt                                                                            |   | (42,464                  | )          | (17,419 | ) |
| Borrowings on bridge loans,  net                                                                                       |   | 438,885                  |       |   |   |
| Principal payments on  bridge loans                                                                                    |   | (500,000                 | )          |   |   |
| Principal payments under  capital lease obligations                                                                    |   | (66,929                  | )          | (87,906 | ) |
| Issuance of common stock,  net of issuance costs                                                                       |   | 5,396,485                |       | 2,925,000 |   |
| Issuance of warrants                                                                                                   |   | 550                      |       |   |   |
| Exercise of stock options                                                                                              |   |                     |       | 41,249 |   |
|                                                                                                                   |   |                     |       |   |   |
| Net cash provided by  financing activities                                                                             |   | 6,321,527                |       | 3,045,924 |   |
|                                                                                                                   |   |                     |       |   |   |
| Net increase in cash and  cash equivalents                                                                             |   | 2,669,698                |       | 18,882 |   |
|                                                                                                                   |   |                     |       |   |   |
| Cash and cash equivalents  at beginning of year                                                                        |   | 111,977                  |       | 93,095 |   |
|                                                                                                                   |   |                     |       |   |   |
| Cash and cash equivalents  at end of year                                                                              |   | $                        | 2,781,675  |   | $ | 111,977 |   |
|                                                                                                                   |   |                     |       |   |   |
| Supplemental disclosure of  cash flow information:                                                                     |   |                     |       |   |   |
| Cash paid during the year  for:                                                                                        |   |                     |       |   |   |
| Interest                                                                                                               |   | $                        | 241,197    |   | $ | 93,451 |   |
| Income taxes                                                                                                           |   | 1,256                    |       | 750 |   |
|                                                                                                                   |   |                     |       |   |   |
| Non-cash investing and  financing activities:                                                                          |   |                     |       |   |   |
| Capital lease obligations  incurred for the purchase of property, plant, and equipment                                 |   | 34,796                   |       |   |   |
| Discount on convertible  subordinated bridge notes related to warrants and beneficial conversion  feature              |   | 497,125                  |       |   |   |
| Repurchase of beneficial  conversion feature related to early extinguishment of convertible subordinated  bridge notes |   | 77,332                   |       |   |   |
| Land special assessments  due in future years, net                                                                     |   |                     |       | 162,000 |   |
| Stock option exercises  using common stock                                                                             |   |                     |       | 337,500 |   |
| Issuance of common stock  for compensation                                                                             |   |                     |       | 42,000 |   |
| Warrants issued in  connection with bank line of credit guarantee                                                      |   |                     |       | 76,622 |   |
|                                                                                                                   |   |                     |       |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

39

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**MedicalCV, Inc.**

**Notes to Consolidated Financial Statements**

 

**1.          BusinessDescription**

 

MedicalCV, Inc. (the Company) is a corporation engagedin the manufacture and marketing of mechanical monoleaflet heart valvesprimarily in Europe, SouthAsia, the Middle Eastand the Far East.

 

The Company’s consolidatedfinancial statements for the year ended April 30, 2002, have been prepared on agoing concern basis, which contemplates the realization of assets andsettlement of liabilities and commitments in the normal course ofbusiness.  The Company has sustainedlosses and negative cash flows from operations in recent years and expectsthese conditions to continue for the foreseeable future.  At April 30, 2002, the Company had anaccumulated deficit of $12,405,386, and has insufficient funds to meet therequirements of its revolving line of credit, which matures November 2002, andfinance its working capital and capital expenditure needs.  Accordingly, these matters raise substantialdoubt about the Company's ability to continue as a growing concern.  The Company is currently pursuing therefinancing of its revolving line of credit and seeking other financing to fundits operations and working capital requirements.  If the Company is unable to refinance its revolving line ofcredit and obtain funds by the end of calendar year 2002, it will be required tosignificantly revise its business plans and drastically reduce operatingexpenditures such that it may not be able to develop or enhance its products,gain market share in the United States or respond to competitive pressures orunanticipated requirements, which could seriously harm its business, financialposition and results of operations.

 

The Company is subject to risks and uncertaintiescommon to rapidly growing medical technology-based companies, including rapidtechnological change, dependence on one principal product, new productdevelopment and acceptance, actions of competitors, dependence on key personneland United States market penetration.

 

**2.          Summary of Significant AccountingPolicies**

 

**Principles of Consolidation**

 

The Company’s consolidated financial statementsinclude the accounts of MedicalCV, Inc. and its wholly-owned subsidiaries, CVHoldings, Inc., CVD International, Inc. and its 80 percent-owned dormantsubsidiary Medical Europe CVD which was liquidated in fiscal 2001 with nomaterial impact to the financial statements. All significant intercompany transactions and balances have beeneliminated in consolidation.

 

**Use of Estimates**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

**Fair Value of Financial Instruments**

 

The Company’s financial instruments consist primarilyof cash and cash equivalents, trade accounts receivable and accounts payablefor which the current carrying amounts approximate fair value.  Additionally, the borrowing rates currentlyavailable to the Company approximate current rates for debt agreements withsimilar terms and average maturities.

 

 

40

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**Cash and Cash Equivalents**

 

Cash and cash equivalents consist of checking accountsand a money market account, all of which are held in two depositoryinstitutions.  The Company considers allhighly-liquid investments with originalmaturities of three months or less to be cash equivalents.  The carrying value of cash equivalentsapproximates fair value because of the short maturity of these instruments.  The majority of the Company’s cash and cash equivalents are held intwo financial institutions.  Deposits inthese institutionsmay exceed the amount of federal insurance provided on such deposits.

 

**Inventories**

 

Inventories consist of various mechanical heart valvesand other medical items that are stated at the lower of cost or market, withcost determined utilizing standard costs, which approximate the first-in,first-out method of inventory valuation.

 

**Property, Plant and Equipment**

 

Property, plant and equipment is stated at cost.  Depreciation and amortization is computedusing the straight-line method over the estimated useful lives of the relatedassets.  The building is depreciatedover a 30-year life.  Machinery andequipment, furniture and fixtures, and tooling and software are depreciatedover five-year lives.  Maintenance andrepairs are charged to current operations when incurred.  The cost and related accumulateddepreciation or amortization of assets disposed of are removed from the relatedaccounts and any resulting gains or losses are recorded to the statement ofoperations.

 

**Long-Lived Assets**

 

The Company periodically evaluates the carrying valueof long-lived assets to be held and used, including but not limited to, capitalassets and intangible assets, when events and circumstances warrant such areview.  The carrying value of along-lived asset is considered impaired when the anticipated undiscounted cashflow from such asset is separately identifiable and is less than its carryingvalue.  In that event, a loss isrecognized based on the amount by which the carrying value exceeds the fairvalue of the long-lived asset.  Fairvalue is determined primarily using the anticipated cash flows discounted at arate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in asimilar manner, except that fair values are reduced for the cost todispose.  No losses from impairment havebeen recognized in the financial statements.

 

**Revenue Recognition**

 

The Company recognizes revenues from the sale of its mechanical heart valvesprovided that the Company has received a purchase order, the price is fixed,title has transferred, collection of the resulting receivable is probable, andthere are no remaining obligations. Transfer of title occurs for substantially all sales upon shipment.  The Company’s products are not subject toany customer acceptance process.  Thereare no rights of return unless the product does not perform according tospecifications.

 

**Research and Development**

 

Research and development costs are expensed asincurred.

 

 

41

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**Stock-Based Compensation**

 

The Company accounts for stock-based employeecompensation arrangements in accordance with the provisions of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and complies with the disclosure provisions of Statement of FinancialAccounting Standard (SFAS) No. 123, “Accounting for Stock-BasedCompensation.”  The Company accounts forstock-based compensation to non-employees using the fair value methodprescribed by Emerging Issues Tax Force (EITF) Issue 96-18.

 

**Income Taxes**

 

Deferred income taxes are recorded to reflect the taxconsequences on future years of differences between the tax bases of assets andliabilities and their financial reporting amounts at each year-end, based onenacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income.  Deferred tax assets are reduced by a valuation allowance when, inthe opinion of management, it is more likely than not that some portion or allof the deferred tax asset will not be realized.  Income tax expense or benefit is the tax payable or refundablefor the year and the change during the year in deferred tax assets andliabilities.

 

**Comprehensive Income (Loss)**

 

Comprehensive income (loss) includes net income (loss)and items defined as other comprehensive income (loss).  Items defined as other comprehensive income(loss) include items such as foreign currency translation adjustments and unrealizedgains and losses on certain marketable securities.  For the years ended April 30, 2002 and 2001, there were no adjustments to net loss toarrive at comprehensive loss.

 

**Concentration of Credit Risk**

 

At April 30, 2002 and 2001, approximately 68 percent and 59 percent, respectively, of the Company’saccounts receivable were due from several distributors that individuallyaccounted for 10 percentor more of the Company’s net sales in each respective fiscal year (see Note10).  The Company generally requires nocollateral from its customers with respect to trade accounts receivable.  The Company maintains an allowance fordoubtful accounts based upon its historical experience and the expectedcollectibility of all accounts receivable.

 

**Net Income (Loss) Per Share**

 

Net income (loss) per share is computed under theprovisions of SFAS No. 128, “Earnings Per Share.”  Basic net income (loss) per common share is computed using netincome (loss) and the weighted-average number of shares of common stock outstanding.  Diluted earnings per share reflect thepotential dilution of securities that could share in the earnings of anentity.  Diluted net loss per commonshare does not differ from basic net loss per common share in the years endedApril 30, 2002 and2001 since 3,551,390 and 815,140,respectively, of potential dilutive shares of common stock from exercise ofstock options and warrants are anti-dilutive.

 

 

42

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**Reclassifications**

 

Certainamounts previously reported have been reclassified to conform to their fiscalyear 2002 presentation.  Thesereclassifications had no effect on net loss, cash flows or shareholders’ equity as previously reported.

 

**NewAccounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board(FASB) issued SFAS No. 141, “Business Combinations,” which addresses accountingand financial reporting for business combinations.  Also in June 2001, the FASB issued SFAS No. 142, “Goodwill andOther Intangible Assets,” which addresses how intangible assets acquiredindividually or with a group of other assets, except for those acquired in abusiness combination, should be accounted for in financial statements upontheir acquisition and also addresses how goodwill and other intangible assetsshould be accounted for after they have been initially recognized in thefinancial statements.  Both of thesestatements are effective in their entirety for the Company on May 1, 2002.  The adoption of these statements will nothave a material impact on the current financial position or results ofoperations of the Company.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Disposal of Long-Lived Assets,” which addresses accounting and financialreporting for long-lived assets.  Thisstatement is effective for theCompany on May 1, 2002. The adoption of this statement is not expected to have a material impacton the currentfinancial position or results of operations of the Company.

 

In May 2002, theFASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64,Amendments to SFAS No. 13, and Technical Corrections as of April 2002.” The new statement amends existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe their applicabilityunder changed conditions.  SFAS No. 145was adopted by the Company effective May 1, 2001.  The adoption of SFAS No. 145 required the classification of theloss on early extinguishment of convertible subordinated bridge notes as acomponent of net loss from recurring operations for the year ended April 30,2002 versus being classified as an extraordinary item.

 

**3.             SupplementalFinancial Statement Information**

 

Certain balance sheet components consist of the following at April 30:

 

| **Trade  Accounts Receivable, Net** |   | **2002** |      | **2001** |   |
|-------------------------------------|--------|----------|-----------|----------|--------|
|                                |   |     |      |     |   |
| Related parties                     |   | $        | 849,696   |     | $      | 660,557 |   |
| Other                               |   | 607,577  |      | 620,295  |   |
| Allowance for doubtful  accounts    |   | (198,657 | )         | (155,292 | )      |
|                                |   |     |      |     |   |
|                                |   | $        | 1,258,616 |     | $      | 1,125,560 |   |

 

 

43

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| **Inventories** |   | **2002**  |      | **2001**  |   |
|-----------------|--------|-----------|-----------|-----------|--------|
|            |   |      |      |      |   |
| Raw materials   |   | $         | 436,855   |      | $      | 664,990 |   |
| Work-in-process |   | 551,561   |      | 423,570   |   |
| Finished goods  |   | 1,334,119 |      | 1,083,475 |   |
|            |   |      |      |      |   |
|            |   | $         | 2,322,535 |      | $      | 2,172,035 |   |

 

| **Property,  Plant and Equipment, Net**    |   | **2002**   |      | **2001**   |   |
|--------------------------------------------|--------|------------|-----------|------------|--------|
|                                       |   |       |      |       |   |
| Land                                       |   | $          | 182,000   |       | $      | 182,000 |   |
| Building                                   |   | 1,225,190  |      | 1,166,085  |   |
| Machinery and equipment                    |   | 1,512,611  |      | 1,233,933  |   |
| Furniture and fixtures                     |   | 177,513    |      | 139,481    |   |
| Tooling                                    |   | 100,263    |      | 84,163     |   |
| Software                                   |   | 112,271    |      | 85,366     |   |
|                                       |   |       |      |       |   |
|                                       |   | 3,309,848  |      | 2,891,028  |   |
|                                       |   |       |      |       |   |
| Accumulated depreciation  and amortization |   | (1,734,695 | )         | (1,444,646 | )      |
|                                       |   |       |      |       |   |
|                                       |   | $          | 1,575,153 |       | $      | 1,446,382 |   |

 

 

| **Deferred  Financing Costs** |   | **2002** |    | **2001** |   |
|-------------------------------|--------|----------|---------|----------|--------|
|                          |   |     |    |     |   |
| Deferred financing costs      |   | $        | 345,351 |     | $      | 345,351 |   |
| Accumulated amortization      |   | (272,491 | )       | (111,415 | )      |
|                          |   | $        | 72,860  |     | $      | 233,936 |   |

 

 

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**4.             Long-TermDebt and Convertible SubordinatedBridge Notes**

 

Long-term debtsconsist of the following at April 30:

 
|                                                                                                                                                                                                                               |   | **2002**   |      | **2001**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|-----------|------------|
|                                                                                                                                                                                                                               |   |       |      |      |       |
| Revolving credit line with  Associated Bank, interest is payable monthly and the principal is due  November 2002, collateralized by the Company's real estate and other business  assets excluding accounts receivable             |   | $          | 2,500,000 |      | $          | 1,405,000 |   |
|                                                                                                                                                                                                                               |   |       |      |      |       |
| Promissory note with  Dakota Electric Association, principal and interest due in monthly  installments through May 2009, interest at 5.75%, collateralized by the  Company's lighting equipment and rooftop air-conditioning units |   | 165,983    |      | 184,447   |       |
|                                                                                                                                                                                                                               |   |       |      |      |       |
| Land special assessments  payable to Dakota County, principal and interest due in semi-annual  installments through May 2010, interest at 8%                                                                                       |   | 216,000    |      | 240,000   |       |
|                                                                                                                                                                                                                               |   |       |      |      |       |
|                                                                                                                                                                                                                               |   | 2,881,983  |      | 1,829,447 |       |
|                                                                                                                                                                                                                               |   |       |      |      |       |
| Less current maturities                                                                                                                                                                                                            |   | (2,542,460 | )         | (42,460   | )          |
|                                                                                                                                                                                                                               |   |       |      |      |       |
|                                                                                                                                                                                                                               |   | $          | 339,523   |      | $          | 1,786,987 |   |

 

Scheduled maturities of long-term debt are as follows:

 

| **Year  Ending April 30,** |   | **Amount** |      |
|----------------------------|--------|------------|-----------|
|                       |   |       |      |
| 2003                       |   | $          | 2,542,460 |   |
| 2004                       |   | 44,704     |      |
| 2005                       |   | 45,926     |      |
| 2006                       |   | 47,221     |      |
| 2007                       |   | 48,592     |      |
| Thereafter                 |   | 153,080    |      |
|                       |   |       |      |
|                       |   | $          | 2,881,983 |   |

 

On November 23, 1999, the Company obtained a $2,500,000 revolving creditline with Associated Bank.  The line ofcredit is due November 23, 2002 in one payment of all outstanding principalplus all accrued unpaid interest, and is collateralized by the Company’s realestate and other business assets,excluding accounts receivable.  Inaddition, a shareholder and amember of the Board of Directors of the Company has provided a $2,000,000 personal guaranteeand has pledged marketable securities with a guaranteed value of $1,100,000 to support repaymentof borrowings on the credit line. Interest is required to be paid monthly and accrues at the Wall StreetJournal Prime Rate.  The interest rateat April 30, 2002 and2001 was 4.75 percent and 7.5 percent ,respectively.  As part of the credit agreement,the Company was formerly required tomaintain a minimum tangible net worth of not less than $3,000,000 on aquarterly basis.  At April 30,2001, the Company failed to comply with the minimum tangible net worthcovenant; on August 24, 2001, the Company received an amendment retroactivelychanging the minimum tangible net worth to not less than $1,000,000 on amonthly basis.  The Company was in compliance with its debt covenants as ofApril 30, 2002.

 

 

45

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**Convertible Subordinated Bridge Notes**

 

On August 21, 2001, the Company sold units of convertiblesubordinated bridge notes with an aggregate principal amount of $500,000 andredeemable warrants to purchase an aggregate of 500,000 shares of the Company’scommon stock for total proceeds of $500,500. Each unit consisted of a $25,000 principal amount 10 percent convertiblesubordinated bridge note and redeemable warrants to purchase 25,000 shares ofthe Company’s commonstock at a price of $6.50 per share. The notes are unsecured and were due in August 2002.  The Company had the option to prepay thenotes without premium or penalty.  Ifthe fair value of the Company’s common stock or units equalled or exceeded $8.50 pershare, for ten consecutive trading days, the Company could, at its option,require conversion of the notes into its common stock at a price of $6.50 pershare and redeem the outstanding warrants for $0.01 each.  The warrants are immediately exercisable andhave a term of five years.

 

The allocated fair value of the warrants of $308,236 and the valueof the beneficial conversion feature of $188,889 as of August 21, 2001 areaccounted for as a discount on the convertible subordinated bridge notes.  This discount, which is presented as areduction of the face value of the Notes on the consolidated balance sheet, wasamortized as part of interest expense over the one-year life of the Notes usingthe effective interest method.

 

During the fourth quarter of 2002, the Company early extinguishedthe convertible subordinated bridge notes. On the date ofextinguishment, $77,332 of the remaining discount, representing the repurchaseof the beneficial conversion feature, was treated as a reduction of AdditionalPaid-in Capital with the balance of the discount of $335,410 being charged toother expense.

 

**5.          Leases**

 

**Operating Leases**

 

The Company leases certain manufacturing equipmentunder various operating lease agreements which expire at various dates throughfiscal year 2003.  At the end of thelease terms, the Company has the option to renew the leases, purchase theequipment at fair value,or return the equipment.  Minimumpayments under operating leases with non-cancelable terms total $19,742 for fiscal year 2003.

 

Rental expense under operating leases was $66,874 and $107,870 in fiscalyears 2002 and 2001, respectively.

 

**Capital Leases**

 

The Company leases certain manufacturing equipmentunder various capital leases.  Theequipment is leased under agreements expiring through fiscal year 2004 withimplicit interest rates ranging from 6.9percent to 16.2percent.  The Company mayelect to purchase the equipment under bargain purchase options at the end ofthe lease terms.  The leases arecollateralized by the underlying equipment with a total cost of $322,733 andaccumulated amortization of $225,958and $168,371 at April 30, 2002and 2001,respectively.

 

 

46

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Scheduled lease payments under capital lease obligations are asfollows:

 

| **Fiscal  Year**                                 |   |    |   |
|--------------------------------------------------|--------|---------|--------|
|                                             |   |    |   |
| 2003                                             |   | $       | 67,480 |   |
| 2004                                             |   | 45,456  |   |
| Total minimum lease  payments                    |   | 112,936 |   |
|                                             |   |    |   |
| Less interest                                    |   | 11,013  |   |
| Present value of capital  lease obligations      |   | 101,923 |   |
|                                             |   |    |   |
| Less current portion                             |   | (59,854 | )      |
| Capital lease obligations,  less current portion |   | $       | 42,069 |   |

 

**6.          Income Taxes**

 

The components of deferred income tax assets at April 30 are asfollows:

 
|                                               |   | **2002**   |      | **2001**   |   |
|----------------------------------------------------|--------|------------|-----------|------------|--------|
|                                               |   |       |      |       |   |
| Federal net operating loss  carryforwards          |   | $          | 3,863,200 |       | $      | 2,508,200 |   |
| Research and  experimentation credit carryforwards |   | 524,200    |      | 469,000    |   |
| State net operating loss  carryforwards            |   | 245,800    |      | 169,500    |   |
| Other carryforwards                                |   | 78,800     |      | 79,300     |   |
| Inventories                                        |   | 86,000     |      | 73,700     |   |
| Allowance for  uncollectible accounts              |   | 147,400    |      | 52,800     |   |
| Property, plant and  equipment                     |   | 44,900     |      | 54,100     |   |
| Accrued expenses and other                         |   | 37,400     |      | 24,300     |   |
|                                               |   |       |      |       |   |
| Total deferred tax assets                          |   | 5,027,700  |      | 3,430,900  |   |
|                                               |   |       |      |       |   |
| Valuation allowance                                |   | (5,027,700 | )         | (3,430,900 | )      |
|                                               |   |       |      |       |   |
| Net deferred tax asset                             |   | $          | —    |       | $      | — |   |

 

TheCompany has established valuation allowances to fully offset tax assets due to theinherent uncertainty of predicting the sufficiency of future taxable incomenecessary to realize these deferred tax assets, particularly in light of theCompany’s recent history of significant operating losses.  In addition, future utilization of availablenet operating loss carryforwards may be limited under Internal Revenue Code 382as a result of future changes in ownership.

 

The Company’s federal net operating loss carryforwardsof approximately $11,362,327 and state net operating loss carryforwards of$3,570,754 expire in fiscal years 2013 through 2022.  Available research and experimentation credits at April 30, 2002represent federal and state amounts of $354,603 and $111,930, respectively, with expiration datesin fiscal years 2010 through 2021.

 

 

47

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The reconciliation of the U.S. statutory federalincome tax rate with the effective rate for the years ended April 30, 2002 and 2001, is as follows:

 
|                                      |   | **2002**  |       | **2001**  |   |
|-------------------------------------------|--------|-----------|------------|-----------|--------|
|                                      |   |      |       |      |   |
| Tax benefit at statutory  rate            |   | $         | (1,355,000 | )         | $      | (638,000 | ) |
|                                      |   |      |       |      |   |
| Research and  experimentation tax credits |   | (55,200   | )          | (172,300  | )      |
| State taxes, net of  federal benefit      |   | (76,300   | )          | (19,600   | )      |
| Nondeductible expenses                    |   | (97,700   | )          | (91,700   | )      |
| Other                                     |   | (12,600   | )          | (166,900  | )      |
| Change in valuation  allowance            |   | 1,596,800 |       | 1,088,500 |   |
|                                      |   |      |       |      |   |
| Total income tax (benefit)  provision     |   | $         | —     |      | $      | — |   |

 

**7.             Shareholders’Equity**

 

**Common Stock**

 

On January 25, 2001, the Company gave a stock bonus of15,000 shares of the Company’s common stock to an officer of the Company.  The estimated fair value of the shares of$42,000 was recorded as a general and administrative expense.

 

On November27, 2001, the Company closed on its initial public offering (IPO).  In connection with the IPO, the Companyissued 1,500,000 units at a price of $4.50 per unit for gross proceeds of$6,750,000.  After offering costs, theCompany received net proceeds of $5,396,485. Each unit consisted of one share of common stock and one redeemableClass A Warrant.  Each Class A Warrantbecomes exercisable, and may be transferred separately from the common stock,on or after May 20, 2003.  When eachClass A Warrant becomes exercisable, the holder will be entitled to purchase,at any time until November 20, 2004, one share of common stock at an exerciseprice of $6.50 per share, subject to customary anti-dilution adjustments.  The Company may redeem the Class A Warrantsfor $0.01 per warrant at any time once they become exercisable, upon tenbusiness days’written notice, if the closing price of the Company’s common stock or units exceeds $8.50,subject to customary anti-dilution adjustments, for any ten consecutive tradingdays before such notice.

 

**Stock Options**

 

The Company has authorized the issuance of stockoptions for the aggregate purchase of 2,653,034 shares of common stock undervarious plans covering certain employees, members of the Board of Directors andcertain independent contractors approved by the Board of Directors.  Options are typically granted at prices notless than fair market value at the date of grant.  Options generally become exercisable between one to three yearsafter grant date and have a maximum term of three to ten years depending on theplan.

 

 

48

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The following is a summary of stock option activitywith respect to the Company’s various plans and includes option activity foremployees, directors and non-employees:

 

|                         |   | **Options** |   | **Weighted  Average  Exercise Price  Per Share** |   |
|------------------------------|--------|-------------|--------|--------------------------------------------------|--------|
|                         |   |        |   |                                             |   |
| Outstanding, April 30, 2000  |   | 801,680     |   | $                                                | 2.50   |   |
|                         |   |        |   |                                             |   |
| Granted                      |   | 422,640     |   | 2.50                                             |   |
| Expired                      |   | (514,180    | )      | 2.60                                             |   |
| Exercised                    |   | (255,000    | )      | 1.34                                             |   |
|                         |   |        |   |                                             |   |
| Outstanding, April 30,  2001 |   | 455,140     |   | $                                                | 3.03   |   |
|                         |   |        |   |                                             |   |
| Granted                      |   | 591,250     |   | 3.79                                             |   |
| Expired                      |   | (5,000      | )      | 5.00                                             |   |
|                         |   |        |   |                                             |   |
| Outstanding, April 30,  2002 |   | 1,041,390   |   | $                                                | 3.46   |   |

 

At April 30, 2002 and 2001, 655,534 and 498,608 options, respectively, were availablefor grant under the Company’s stock option plans. On August 9, 2001, the Company’s shareholders approved the 2001 Equity Incentive Plan(2001 Plan) and reserved 500,000 shares of common stock for issuance uponexercise of stock options to be granted under the 2001 Plan to employees,officers, consultants, advisors, employee and non-employee directors andemployees of certain related entities. The number of shares reserved for issuance under the 2001 Plan increaseson January 1 of each year by the greater of 50,000 shares or 3.5 percent of theoutstanding shares of the Company’s common stock on such date, unless the Board of Directorssets the increase at a lower number of shares. On January 1, 2002, the number of shares reserved under the 2001 Planincreased by 274,534 shares pursuant to the foregoing provision.

 

The following table summarizes information about stock options outstandingand exercisable at April 30, 2002:

 
|                          |   | **Options  Outstanding** |       | **Options  Exercisable**                                    |       |
|-------------------------------|--------|--------------------------|------------|-------------------------------------------------------------|------------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**  |       | **Weighted  Average  Remaining  Contractual  Life (Years)** |       | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                     | ** ** |                                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |
| $2.36 – $5.00            |   | 1,041,390                |       | 4.66                                                        |       | $ | 3.46 |   | 610,040 |   | $ | 3.92 |   |
|                               |        |                          |            |                                                             |            |  |  |  |  |  |  |  |  |

 

 

49

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During the yearsended April 30, 2002 and 2001, the Company issued fully vested, four andfive-year options to purchase an aggregate of 37,500 and 85,000 shares of theCompany’s common stock at exercise prices of$2.53 to $4.50 and $2.50 per share, respectively, to certain non-employees whoprovided technical advisory services to the Company.  The aggregate fair value of the options using the Black-Scholesvaluation model was $69,844 and $123,050 and were fully expensed in fiscal years2002 and 2001. 

The followingassumptions were used to value the options for the years ended April 30, 2002and 2001:

 

|                     |   | **2002**      |   | **2001**     |   |
|--------------------------|--------|---------------|--------|--------------|--------|
| Dividend yield rate      |   | 0 percent     |   | 0 percent    |   |
| Risk free  interest rate |   | 3.91 percent  |   | 5.69 percent |   |
| Expected life            |   | 4 to 10 years |   | 4 to 6 years |   |
| Volatility               |   | 85 percent    |   | 69 percent   |   |

 

Deferredcompensation relating to stock options granted below fair value during the yearended April 30, 2001 was $20,075.  Suchdeferred compensation will be amortized over the vesting periods of the relatedstock options, which generally range from three to five years.  This compensation is recognized on an acceleratedbasis in accordance with FASB Interpretation (FIN) No. 28.  Compensation expense relating to stockoptions granted below fair market value of $7,762 and $3,251 was recognizedduring the years ended April 30, 2002 and 2001.

 

During the yearended April 30, 2001, certain employees exercised stock options by surrenderingan aggregate of 120,000 shares of the Company’scommon stock as consideration for the exercise price.  In connection with this form of exercise, the Company recordedcompensation expense of $334,500 with the offsetting amount increasingadditional paid-in capital.

 

If theCompany had elected to recognize compensation expense for options granted basedon the minimum value of the options granted at the date of grant as prescribedby SFAS No. 123, the Company’s net loss for fiscal years 2002 and 2001 would have beenas follows:

 
|                                            |   | **2002**   |       | **2001**   |   |
|-------------------------------------------------|--------|------------|------------|------------|--------|
|                                            |   |       |       |       |   |
| As reported                                     |   | $          | (4,297,665 | )          | $      | (3,238,829 | ) |
| Pro forma                                       |   | (5,249,444 | )          | (3,470,775 | )      |
|                                            |   |       |       |       |   |
| Net loss per common share  - basic and diluted: |   |       |       |       |   |
| As reported                                     |   | (.62       | )          | (.56       | )      |
| Pro forma                                       |   | (.75       | )          | (.60       | )      |
|                                                 |        |            |            |            |        |  |  |

 

During the yearended April 30, 2002, for purposes of determining fair value using theBlack-Scholes option pricing model as prescribed by SFAS No. 123, the Companyused the contractual life of the options as the expected holding period foremployees and the life of the options for directors. The risk-free interestrate for 2002 was 4.71 percent, the dividend yield used was 0 percent and thevolatility factor was 85 percent.

 

 

50

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During the yearended April 30, 2001, for purposes of determining minimum value using theBlack-Scholes option pricing model as prescribed by SFAS No. 123, the Companyused 95 percent of the life of the options as the expected holding period foremployees and the life of the options for directors. The risk-free interestrate for 2001 was 5.75 percent. The dividend yield used was 0 percent andvolatility factors were not applicable.

 

**Stock Warrants**

 

At April 30,2002 and 2001, the Company had outstanding and exercisable warrants to purchase2,510,000 and 360,000 shares, respectively, of the Company’scommon stock at prices ranging from $2.00 to $6.75 per share. The warrantsexpire at various dates through February 1, 2006.  At April 30, 2002 and 2001, the weighted average remainingcontractual life of the warrants was 3.14 and 4.23 years and the weightedaverage exercise price of the warrants was $5.91 and $2.25, respectively.

 

On February 1, 2001, the Company issued a fully-vested,four-year warrant to purchase 240,000 shares of the Company’s common stock at$2.125 per share to an officer of the Company in connection with a separationagreement.  The intrinsic value of thewarrant was $162,000 and was fully expensed in fiscal year 2001.

 

In November 1999 and December 2000, the Company issuedfully vested four-year warrants to purchase an aggregate of 100,000 shares ofcommon stock exercisable at $2.00 per share to a board member in connectionwith a bank line of credit guarantee. The fair value of the warrants was calculated using the Black-Scholesvaluation model and $76,622 was capitalized as deferred financing costs infiscal year 2001.  The deferredfinancing costs are being amortized to interest expense on a straight-line basisover the life of the guarantee.  Thefollowing assumptions were used to value the warrants:  dividend yield of 0 percent, risk-free interest rate of 5.69 percent, expected lifeequal to the contractual life of four years and volatility of 69 percent.  At April 30, 2002,the unamortized balance was $19,155.

 

**8.          Research and Development Costs**

 

Research andDevelopment costs principally consist of engineering costs,included as part of engineering and regulatory in the Consolidated Statement ofOperations, totaled $496,685 and$800,625 for the fiscal years ended April 30,2002 and 2001, respectively.  Researchand Development costs relate primarily to product and process developmentinitiatives.

 

**9.          Supply Agreement**

 

In July 1998, the Company entered into a three-yearsupply agreement with Sulzer Carbomedics, Inc. (Carbomedics), the source ofcertain raw material components associated with the manufacture of certain ofthe Company’s heart valves.  The supplyagreement was extended for an additional two years in March 2001.

 

 

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This agreement provides that the Company purchase aminimum number of raw material units each calendar year through 2003.  Under the terms of the agreement, theCompany is required to compensate Carbomedics for any purchase shortfalls up toa maximum of $200,000 per year.  TheCompany has not metthe minimum purchase requirement forthe last three calendar years and does not believe it will meetthe minimum purchase requirement for calendar year 2002.  As a result, the Company expensed $148,991 and $108,174 related to these purchaseshortfalls to cost of goods sold in fiscal years 2002 and 2001, respectively.

 

**10.        Segment andRelated Party Information**

 

The Company views its operations and manages itsbusiness as one segment, the manufacturing and marketing of mechanicalmonoleaflet heart valves.  Factors usedto identify the Company’s single operating segment include the organizationalstructure of the Company and the financial information available for evaluationby the chief operating decision maker.The following table summarizes net sales by geographic area:

 

|        |   | **For the  Years Ended  April 30,** |      |
|-------------|--------|-------------------------------------|-----------|
|        |   | **2002**                            |      | **2001** | ** ** |
|        |   |                                |      |   |   |
| Europe      |   | $                                   | 1,938,847 |   | $ | 1,636,825 |   |
| South Asia  |   | 488,940                             |      | 634,030 |   |
| Middle East |   | 209,346                             |      | 234,726 |   |
| Far East    |   | 306,735                             |      | 256,924 |   |
| Other       |   | 38,330                              |      | 100,935 |   |
|        |   |                                |      |   |   |
| Total       |   | $                                   | 2,982,198 |   | $ | 2,863,440 |   |

 

At April30, 2002and 2001,substantially all of the Company’s operations and assets are based in theUnited States.

 

The Company distributes its products primarily throughdistributor organizations that, in turn, market the product directly to medicalinstitutions.  Three of thesedistributors are shareholders of the Company with ownership interests of up toapproximately 6 percenteach.  An affiliate of one of these shareholderdistributors is also a member of the Company’s Board of Directors.  Sales to distributors that individuallyaccount for 10 percentor more of the Company’s net sales in each respective fiscal year are asfollows (related party distributors are separately presented below regardlessof sales level):

 

|                            |   | **2002** |      | **2001** |   |
|---------------------------------|--------|----------|-----------|----------|--------|
|                            |   |     |      |     |   |
| Distributor #1 (related  party) |   | $        | 1,421,960 |     | $      | 1,170,700 |   |
| Distributor #2 (related  party) |   | 15,300   |      | 130,980  |   |
| Distributor #3                  |   | 443,940  |      | 424,520  |   |
| Distributor #4 (related  party) |   | 13,300   |      |     |   |
|                                 |        |          |           |          |        |  |  |

 

Aggregate accounts receivable from the above three related partydistributors at April 30, 2002and 2001 totaled $849,696 and $660,557, respectively.

 

 

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**11.        Spin-off ofUROPACE**

 

On November 1, 2000, the Company completed thespin-off of UROPACE, Inc. (UROPACE), a subsidiary of the Company, to theexisting shareholders of the Company. The separation was effected by transferring from the Company to UROPACEall assets, tangible and intangible, relating to the development of femaleurinary incontinence technology. Shareholders of record on September 15, 2000 received one share ofcommon stock of UROPACE for each 6.882 shares of the Company’s common stockheld on that date.

 

The assets transferred to UROPACE had no book value atNovember 1, 2000 and the operations of UROPACE prior to the spin-off had norevenues and minimal expenses during the fiscal year ended April 30, 2001.  As a part of this spin-off, the Companyagreed to loan UROPACE up to $356,250 at a variable interest rate.  Principal and interest on the note will bepayable in installments equal to 5percent of UROPACE’s future annual net sales until the note andinterest is paid in full.  The Companyhad loaned UROPACE $235,000 and$154,000 at April 30, 2002 and 2001. Due to the development stage of UROPACE and the uncertainty associatedwith the collection of this amount, the Company has recorded an allowance forthe entire balance of the loan at April 30, 2001, with the correspondingexpense included in other income (expense) in the Consolidated Statement ofOperations.

 

**12.        Savings and Retirement Plan**

 

The Company sponsors a 401(k) savings and retirementplan (the Plan) which is available to all eligible employees.  Under the Plan, the Company may make adiscretionary contribution to the Plan upon approval by the Company’s Board ofDirectors.  Employees are fully vestedin their own contributions and earnings thereon and become fully vested in theCompany’s contributions and earnings thereon after three years of service.  The Company made contributions to the Planof $16,475 and $14,764in fiscal years 2002and 2001,respectively.

 

 

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**ITEM 8****                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

The disclosure called for by paragraph (a) of thisitem has been “previously reported” as that term is defined in Rule 12b-2 underthe Exchange Act.

 

 

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**PART III**

 

**ITEM 9****                                     DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACT**

 

The following table provides information with respectto our directors and executive officers as of April 30, 2002.  Our executive officers serve at thediscretion of our board of directors. Our directors hold office until our next annual meeting of shareholdersand until their successors have been elected and qualified.  There are no family relationships among ourdirectors and executive officers.

** **
| **Name**                           |   | **Age** |   | **Principal  Occupation**                                              |   | **Position  with MedicalCV**                      |   | **Director  Since** |   |
|------------------------------------|--------|---------|--------|------------------------------------------------------------------------|--------|---------------------------------------------------|--------|---------------------|--------|
| Adel A. Mikhail, Ph.D.             |   | 67      |   | Chairman of the Board  of MedicalCV                                    |   | Chairman of the Board                             |   | 1992                |   |
| Blair  P. Mowery                   |   | 56      |   | President, Chief  Executive Officer and  Director of MedicalCV         |   | President, Chief  Executive Officer and Director  |   | 2001                |   |
| Jules  L. Fisher                   |   | 48      |   | Chief Financial Officer  of  MedicalCV                                 |   | Chief Financial Officer                           |   | N/A                 |   |
| Allan  R. Seck                     |   | 56      |   | Senior Vice President -Sales  and Marketing of  MedicalCV              |   | Senior Vice President —  Sales and Marketing |   | N/A                 |   |
| Ronald  M. Bosrock                 |   | 63      |   | Founder and Executive  Director of the Global  Institute               |   | Director                                          |   | 1999                |   |
| Salvador  Mercé Cervelló |   | 46      |   | Managing and General  Director of Mercé V.  Electromedicina, S.L. |   | Director                                          |   | 1996                |   |
| Norman  Dann                       |   | 75      |   | Consultant to the  Medical Device Industry                             |   | Director                                          |   | 1995                |   |
| Richard  A. DeWall, M.D.           |   | 75      |   | Retired Cardiovascular  Surgeon                                        |   | Director                                          |   | 1992                |   |
| Paul  K. Miller                    |   | 79      |   | President of Acton  Construction  Management Company                   |   | Director                                          |   | 1994                |   |

 

*Adel A.Mikhail, Ph.D.* became Chairman of the Board, President andChief Executive Officer in March 1992. While he continues to serve our company as Chairman of the Board and asa consultant, he retired as Chief Executive Officer and President in June2001.  Dr. Mikhail has more than 29years of experience in the mechanical heart valve industry, including 17 yearswith our predecessors, Medical Incorporated and Omnicor.  Dr. Mikhail served such entities in severaltechnical capacities, including Senior Vice President of Clinical Research andRegulatory Affairs.  In that capacity,Dr. Mikhail led the team that successfully obtained FDA marketing clearance ofthe Omniscience heart valve.  Dr.Mikhail is named as an inventor in patents in the urology and heart valvefields.

 

*BlairP. Mowery*became our President and Chief Executive Officer inJune 2001 and was appointed to our board of directors in July 2001.  After serving our company as an independentadvisor through his wholly-owned company, Bioscrene Ltd., from February 1996 toAugust 1996, he joined us in August 1996 as Vice President - BusinessDevelopment and was promoted to Chief Operating Officer in

 

 

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1999.  From April 1991 throughDecember 1993, Mr. Mowery was President and Chief Operating Officer of GalaGen,Inc., a biopharmaceutical company.  FromMarch 1987 to March 1991, he was President of Procor Technologies, a jointventure with Abbott Ross Laboratories and the predecessor company to GalaGen.

 

*JulesL. Fisher*became our Chief Financial Officer in January2002.  From October 1996 to December2001, Mr. Fisher served as Vice President and Chief Financial Officer ofMinntech Corporation, a manufacturer of medical supplies and devices,sterilants, and filtration and separation products primarily for kidneydialysis, open-heart surgery and endoscopy. From August 1991 to October 1996, he held the position of Director,Operations Accounting for U.S. Surgical Corp. Mr. Fisher also served as Director, Financial Reporting and Analysis in the Pharmaceutical Group ofBristol-Myers Squibb Company from May 1987 to February 1991.

 

Allan*R. Seck*joined our company in May 1999 asVice President - Sales and Marketing. In March 2001, he was promoted to Senior Vice President - Sales andMarketing.  From May 1996 until May1999, Mr. Seck served as Vice President - Sales and Marketing for AVECORCardiovascular, Inc., where he was responsible for sales, marketing, customerservice, technical support, customer education and shipping.  He has also held senior management positionswith Biomedicus, Inc., the cardiopulmonary division of Medtronic, and Johnson& Johnson Cardiovascular.

 

*RonaldM. Bosrock*, one of our directors since July 1999, is thefounder and executive director of the Global Institute.  He currently holds a John Myers Chair ofManagement at St. John’s University in Minnesota.  Mr. Bosrock has 30 years of experience in the banking andmanufacturing industries and has served as managing director of Arthur AndersenInternational.

 

*SalvadorMercé Cervelló*, one of our directors, serves as Managing andGeneral Director of Mercé V. Electromedicina, S.L., a commercial supplier ofelectromedical products, mainly products for cardiac surgery and cardiology,including those produced by our company, in Spain.  He served on our board from November 1993 to November 1995 andagain from December 1996 through the present.

 

*NormanDann*has been a director of our company since September1995.  Between 1980 and 1992, Mr. Dannwas a general partner in and co-founder of Pathfinder Ventures, Inc., a venturecapital business.  Since 1992, he hasbeen a consultant to the medical device industry.  Mr. Dann is a member of the board of directors of Medwave, Inc.

 

*RichardA. DeWall, M.D.*, a retired cardiovascular surgeon,**has been one of our directors sinceNovember 1992.  Dr. DeWall has over 35years of experience in heart valve replacement and was instrumental inimplanting the first Omniscience heart valve. He was a medical professor at the Chicago Medical School and is creditedwith developing the first workable heart-lung machine for use during open heartsurgery.

 

*Paul K.Miller*, one of our directors since August 1994, has served asPresident of Acton Construction Management Company, a real estate managementcompany, since 1980.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of theExchange Act requires our officers, directors and persons who own more than 10%of a registered class of our equity securities to file reports of ownership andchanges in ownership with the SEC.  Suchofficers, directors and shareholders are required by the SEC to furnish us withcopies of all such reports.  To ourknowledge, based solely on a review of copies of reports filed with the SECduring the last fiscal year, all applicable Section 16(a) filing requirementswere met, except that one report on Form 3 for each of our then executiveofficers and directors was not filed by November 20,

 

 

56

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2001, the effective date of the registration statement covering ourinitial public offering.  The reports onForm 3 for Adel A. Mikhail, Ph.D., Blair P. Mowery, George M. Wettstaedt, AllanR. Seck, Ronald M. Bosrock, Salvador Mercé Cervelló, Norman Dann, Richard A.DeWall, M.D. and Paul K. Miller were filed on November 29, 2001.

 

 

57

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**ITEM 10****                              EXECUTIVECOMPENSATION**

 

The following table sets forth information withrespect to compensation paid by us to our Chief Executive Officer and the otherhighest paid executive officers (the “Named Executive Officers”) during ourmost recent fiscal years.

 

**Summary Compensation Table**

 
|                                        |   |     |   |                    |   |          |   |                                |   | **Long-Term  Compensation**         |   |
|---------------------------------------------|--------|----------|--------|-------------------------|--------|---------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                                        |   |     |   | **Annual Compensation** |   | **Awards**    |   | **Payouts**                         |   |
| **Name and  Principal Position**            |   | **Year** |   | **Salary ($)**          |   | **Bonus ($)** |   | **Other  Annual  Compensation ($)** |   | **Securities  Underlying  Options** |   | **All  Other  Compensation ($)** |   |
| Adel A. Mikhail,  Ph.D. (1)                 |   | 2002     |   | 0                       |   | 0             |   | 0                                   |   | 7,000                               | (2)    | 59,422 | (3) |
| Chairman of the  Board                      |   | 2001     |   | 143,960                 |   | 0             |   | 0                                   |   | 240,000                             | (4)    | 120,833 | (5) |
|                                        |   |     |   |                    |   |          |   |                                |   |                                |   |   |   |
| Blair P. Mowery  (6)                        |   | 2002     |   | 170,298                 |   | 50,000        |   | 0                                   |   | 300,000                             |   | 0 |   |
| President and  Chief Executive Officer      |   | 2001     |   | 131,489                 |   | 0             |   | 42,000                              | (7)    | 0                                   |   | 0 |   |
|                                        |   |     |   |                    |   |          |   |                                |   |                                |   |   |   |
| Allan R. Seck                               |   | 2002     |   | 139,775                 |   | 0             |   | 0                                   |   | 0                                   |   | 0 |   |
| Senior Vice President - Sales and Marketing |   | 2001     |   | 131,002                 |   | 0             |   | 0                                   |   | 0                                   |   | 100,000 |   |
|                                             |        |          |        |                         |        |               |        |                                     |        |                                     |        |  |  |  |  |  |  |

 

----

(1)             Dr.Mikhail served as our President and Chief Executive Officer until June 15,2001.

(2)    Representsan option grant issued to Dr. Mikhail for serving as a Director on theCompany's Board.

(3)    Representsseverance compensation paid under our separation agreement with Dr. Mikhail.

(4)             Representsa warrant issued on February 1, 2001 under our separation agreement with Dr.Mikhail.

(5)             Representsseverance compensation paid under our separation agreement with Dr. Mikhail.

(6)             Mr.Mowery, who previously served as our Chief Operating Officer, became ourPresident and Chief Executive Officer on June 15, 2001.

(7)             Representsthe market value of 15,000 shares of common stock awarded to Mr. Mowery onJanuary 25, 2001.

 

**Option Grants in Last Fiscal Year**

 

Thefollowing table sets forth information concerning grants of stock optionsduring the fiscal year ended April 30, 2002 to each executive officer named inthe Summary Compensation Table.  Wegranted no stock appreciation rights during our last fiscal year.

 
|                   |   | **Individual Grants**                                      |   |
|------------------------|--------|------------------------------------------------------------|--------|
| **Name**               |   | **Number of  Securities****Underlying Options****Granted** |   | **Percent of Total  Options Granted  to Employees in  Fiscal Year** |   | **Exercise Price****($/share)** |   | **Expiration  Date** |   |
|                   |   |                                                       |   |   |   |   |   |   |   |
| Adel A. Mikhail, Ph.D. |   | 7,000                                                      |   | 1.3 | % | $ | 4.50 |   | 08-15-06 |   |
|                   |   |                                                       |   |   |   |   |   |   |   |
| Blair P. Mowery        |   | 300,000                                                    |   | 57.1 | % | $ | 4.50 |   | 06-15-06 |   |
|                   |   |                                                       |   |   |   |   |   |   |   |
| Allan R. Seck          |   | 0                                                          |   | 0 | % | N/A |   | N/A |   |

 

 

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Thefollowing table sets forth information concerning the options exercised by each executive officer named inthe Summary Compensation Table during the fiscal year ended April 30,2002.  It also sets forth informationconcerning unexercised options held by such persons as of April 30, 2002.  No stock appreciation rights were exercisedby such persons during the last fiscal year or were outstanding at the end of thatyear.

 

**Aggregated Option Exercises in Last Fiscal Year and FiscalYear End Option Values**

 
| **Name**              |   | **Shares  Acquired  on  Exercise** |            | **Value  Realized  ($)** |              | **Number of Securities****Underlying Unexercised  Options at  Fiscal Year End** |            | **Value of Unexercised  In the Money Options  at Fiscal Year End ($) (1)** |              |
|-----------------------|--------|------------------------------------|-----------------|--------------------------|-------------------|---------------------------------------------------------------------------------|-----------------|----------------------------------------------------------------------------|-------------------|
|                  |   |                               | **Exercisable** |                     | **Unexercisable** |                                                                            | **Exercisable** |                                                                       | **Unexercisable** |   |
|                  |   |                               |            |                     |              |                                                                            |            |                                                                       |              |   |   |   |   |
| Adel A. Mikhail, Ph.D |   | 0                                  |            | N/A                      |              | 0                                                                               |            | 7,000                                                                      |              | N/A |   | 0 |   |
|                  |   |                               |            |                     |              |                                                                            |            |                                                                       |              |   |   |   |   |
| Blair P. Mowery       |   | 0                                  |            | N/A                      |              | 300,000                                                                         |            | 0                                                                          |              | 0 |   | N/A |   |
|                  |   |                               |            |                     |              |                                                                            |            |                                                                       |              |   |   |   |   |
| Allan R. Seck         |   | 0                                  |            | N/A                      |              | 40,000                                                                          |            | 60,000                                                                     |              | 0 |   | 0 |   |

 

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(1)                Represents the fair market value of one shareof our common stock at April 30, 2002 minus the exercise price.

 

**EmploymentAgreements**

 

We entered into aseparation agreement and release effective as of November 1, 2000 with Adel A.Mikhail, Ph.D., our former President and Chief Executive Officer.  Under this agreement, we have made severanceand consulting payments to Dr. Mikhail. For information regarding these compensatory arrangements, please referto Certain Relationships and Related Transactions.

 

Under an employmentagreement effective June 15, 2001, we employ Blair P. Mowery as our Presidentand Chief Executive Officer at a salary of $165,000 per year.  This agreement has a term of two years.  It prohibits Mr. Mowery from competing withour company during its term and for 12 months thereafter.  This agreement also provides that if eitherwe terminate Mr. Mowery’s employment without cause or Mr. Mowery resigns withsix months’ notice, we will make severance payments to him equal to his monthlybase salary for 18 months.  Inconsideration of Mr. Mowery’s entry into this agreement, on June 15, 2001, wegranted him a stock option to purchase 300,000 shares of our common stock at aprice of $4.50 per share.  Such optionis immediately exercisable.  Inaddition, we have agreed to pay Mr. Mowery a bonus of $50,000 for services infiscal year 2002 subject to achievement of goals agreed upon by Mr. Mowery andour board of directors.

 

In May 1999, we enteredinto a letter agreement with Allan R. Seck. Under this agreement, Mr. Seck was employed to serve as our VicePresident - Sales and Marketing at a salary of $132,000 per year plus a bonusof one percent of sales over $3,500,000 per year.  We have the right to terminate Mr. Seck’s employment atwill.  However, upon a change in controlof our company, we have agreed to pay him an amount equal to two years’ salaryand accelerate the vesting of Mr. Seck’s unvested stock options to beimmediately exercisable.  In considerationof Mr. Seck’s entry into this agreement, we granted him a stock options topurchase 100,000 shares of our common stock at a price of $2.50 per share.  Such options vest over four years and expireon July 26, 2005.  In August 2001, weamended this agreement to provide that the bonus based on annual sales would bepayable through fiscal year 2002.  Inconsideration of Mr. Seck’s entry into this amendment, we agreed to increasehis salary by an amount not to exceed 15% and develop a new executive and salesincentive plan in which he will participate.

 

 

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**Director Compensation**

 

Our directors arereimbursed for certain reasonable expenses incurred in attending boardmeetings.  Directors who are alsoemployees receive no remuneration for services as members of the board or anyboard committee.  Under our directorstock option plan, directors who are not employed by us are entitled to receiveannual grants of stock options.

 

 

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**ITEM 11****                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDERMATTERS**

 

The following table setsforth certain information known to us regarding beneficial ownership of ourcommon stock as of April 30, 2002, by: (a) each person who is known to us to own beneficially more than fivepercent of our common stock, (b) each director, (c) each Named ExecutiveOfficer (as defined herein), and (d) all executive officers and directors as agroup.  The percentage of beneficialownership is based on 7,843,834 shares outstanding as of April 30, 2002.  As indicated in the footnotes, sharesissuable pursuant to warrants and options are deemed outstanding for computingthe percentage of the person holding such warrants or options but are notdeemed outstanding for computing the percentage of any other person.  Unless otherwise noted, each personidentified below has sole voting and investment power with respect to suchshares. Except as otherwise noted below, we know of no agreements among ourshareholders which relate to voting or investment power with respect to ourcommon stock.  Unless otherwiseindicated, the address for each listed shareholder is c/o MedicalCV, Inc., 9725South Robert Trail, Inver Grove Heights, Minnesota 55077.

 
| **Name and Address of Beneficial  Owner (1)**                |   | **Number of  Shares  Beneficially  Owned (1)** |   | **Percent  Beneficially Owned (1)** |   |
|--------------------------------------------------------------|--------|------------------------------------------------|--------|-------------------------------------|--------|
| Paul K. Miller                                               |   | 1,715,580                                      | (2)    | 21.5                                | %      |
| Adel A. Mikhail,  Ph.D.                                      |   | 739,552                                        | (3)    | 9.1                                 |   |
| Graphite Enterprise Trust PLC                                |   | 630,000                                        | (4)    | 8.0                                 |   |
| 4th Floor, Berkeley Square House                             |   |                                           |   |                                |   |
| Berkeley Square, London W1X 5PA                              |   |                                           |   |                                |   |
| United Kingdom                                               |   |                                           |   |                                |   |
| Salvador Mercé Vives                                    |   | 519,232                                        | (5)    | 6.6                                 |   |
| Plaza America, 5                                             |   |                                           |   |                                |   |
| Valencia, Spain                                              |   |                                           |   |                                |   |
| Hilmar Siebecker                                             |   | 405,000                                        |   | 5.2                                 |   |
| Staffelstrasse 8                                             |   |                                           |   |                                |   |
| D-67292 Kirchheimbolanden, Germany                           |   |                                           |   |                                |   |
| N.G.C. Medical S.p.A.                                        |   | 400,000                                        |   | 5.1                                 |   |
| Via Novedratese 35                                           |   |                                           |   |                                |   |
| 22060 Novedrate, Como, Italy                                 |   |                                           |   |                                |   |
| Richard A. DeWall, M.D.                                      |   | 324,780                                        | (6)    | 4.1                                 |   |
| Blair P. Mowery                                              |   | 315,000                                        | (7)    | 3.9                                 |   |
| Salvador Mercé Cervelló                            |   | 133,000                                        | (8)    | 1.7                                 |   |
| Allan R. Seck                                                |   | 50,000                                         | (9)    | *                                   |   |
| Norman Dann                                                  |   | 48,000                                         | (10)   | *                                   |   |
| Ronald M. Bosrock                                            |   | 24,000                                         | (11)   | *                                   |   |
| Jules L. Fisher                                              |   | 0                                              |   | 0                                   |   |
| All directors  and executive officers as a group (9 persons) |   | 3,349,912                                      | (12)   | 38.6                                | %      |

 

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*              Less than onepercent.

 

 

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(1)                                  Beneficialownership is determined in accordance with the rules of the SEC and includesvoting or investment power with respect to securities.  Securities “beneficially owned” by a personmay include securities owned by or for, among others, the spouse, children orcertain other relatives of such person as well as other securities as to whichthe person has or shares voting or investment power or has the option or rightto acquire within 60 days of April 30, 2002.

(2)                                  Includes120,000 shares owned by Gracon Contracting Co., an entity over which Mr. Millerexercises control, 28,000 shares issuable pursuant to presently exercisableoptions, 100,000shares issuable pursuant to presently exercisable warrants, and 100,000 units.

(3)                                  Includes499,552 shares held by Adel A. Mikhail and Narguis Mikhail, Mr. Mikhail’sspouse, as joint tenants and 240,000 shares issuable pursuant to presentlyexercisable warrants.

(4)                                  Includes126,000 shares held by Graphite Enterprise Trust Limited Partnership, an entityover which Foreign & Colonial Enterprise Trust PLC exercises control.

(5)                                  Includes16,212 shares owned by Mercé V. Electromedicina, S.L., which Mr. Mercé Vivesfounded.

(6)                                  Includes35,500 shares issuable pursuant to presently exercisable options.

(7)                                  Includes300,000 shares issuable pursuant to presently exercisable options.

(8)                                  Includes28,000 shares issuable pursuant to presently exercisable options.  Mr. MercéCervelló is the son of Mr. Mercé Vives and is the Managing and General Directorof Mercé V. Electromedicina, S.L.

(9)                                  Includes40,000 shares issuable pursuant to presently exercisable options.

(10)                            Includes28,000 shares issuable pursuant to presently exercisable options.

(11)                            Representsshares issuable pursuant to presently exercisable options.

(12)                            Includes483,500 shares issuable pursuant to presently exercisable options and 340,000shares issuable pursuant to presently exercisable warrants.

 

Certain shares, optionsand warrants beneficially owned by our officers, directors, significantshareholders and employees are subject toan escrow agreement with the Commissioner of Commerce for the State ofMinnesota.  The depositors, who placedan aggregate of 1,664,845 shares into escrow, entered into this escrowagreement as a condition of the registration of the units sold in our initialpublic offering.  The term of escrowruns through November 20, 2004.

 

 

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**Equity Compensation Plan Information**

 

The followingtable provides information as of the end of the most recently completed fiscalyear with respect to compensation plans under which our equity securities areauthorized for issuance.

 
|                                                                       |   | **Number of securities  to be issued upon****exercise of  outstanding options,warrants and rights  (a)** |   | **Weighted-average  exercise price of****outstanding  options, warrantsand rights  (b)** |   | **Number of securities****remaining availablefor future issuanceunder equity  compensation  plans (excluding  securities reflected in  column (a))(c)** |    |
|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                                       |
|                                                                       |
| **Plan category**                                                          |
|                                                                       |
| **Equity****compensation plans approved by security holders**              |   | 1,039,890                                                                                                |   | $                                                                                        | 3.58   |                                                                                                                                                    | 655,534 | (1) |
| **Equity****compensation plans****not approved****by security****holders** |   | 510,000                                                                                                  | (2)    | $                                                                                        | 3.57   |                                                                                                                                                    | 0       |   |
| **Total**                                                                  |   | 1,549,890                                                                                                |   | $                                                                                        | 3.58   |                                                                                                                                                    | 655,534 |   |

 

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(1)          Represents77,000 shares remaining available for future issuance under our 1993 Director StockOption Plan and 578,534 shares remaining available for future issuance underour 2001 Equity Incentive Plan.

 

(2)          Represents (a)240,000 shares of common stock underlyinga five-year warrantexercisable at $2.125 per share issued to Adel A. Mikhail, Ph.D., a directorand our former chief executive officer, on February 2, 2001, pursuant to aseverance and consulting agreement dated November 1, 2000; (b) an aggregate of100,000 shares of common stock underlying warrants exercisable at $2.00 pershare issued to Paul K. Miller, a director, on November 22, 1999 and December6, 2000, in connection with Mr. Miller’s guarantee of a bank loan, both of which warrantsexpire on November 19, 2004; (c)20,000 shares of common stock underlying warrants exercisable at $5.00 pershare issued to Dominick &  Dominickin 1997, in consideration for investment banking services, which warrantexpired on June 1, 2002; and(d) 150,000 units underlying awarrant exercisable at $6.75 per unit issued to Equity Securities Investments,Inc. on November 20, 2001, in connection with its services as underwriter ofour initial public offering.

 

 

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**ITEM 12****                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

We entered into a separation agreement and releaseeffective as of November 1, 2000 with Adel A. Mikhail, Ph.D.  Dr. Mikhail was our founder and served asour President and Chief Executive Officer from March 1992 until June 15, 2001,at which time he retired.  Under theterms of the separation agreement, Dr. Mikhail’s employment under hisemployment agreement dated January 1, 1995 terminated, and we agreed to pay himseverance compensation in cash totaling $144,000.  We agreed to pay Dr. Mikhail his salary and benefits until a newchief executive officer was hired and to continue his chairmanship of ourboard.  At the time of entering into theseparation agreement, Dr. Mikhail had vested stock options to purchase an aggregateof 420,000 shares of our common stock at an exercise price of $1.375 per share,expiring on February 2, 2001.  Under theseparation agreement, Dr. Mikhail agreed to exercise the option to the extentof 30,000 shares for $41,250 in cash and to surrender 240,000 shares which heotherwise would have been entitled to purchase under the option.  We agreed to allow Dr. Mikhail to exercisehis option for the remaining 150,000 shares on a cashless basis.  In connection with such cashless conversion,we issued 67,500 shares to Dr. Mikhail and Dr. Mikhail surrendered 82,500shares which he otherwise would have been entitled to purchase under theoption.  On February 1, 2001, we alsoissued a five-year warrant to Dr. Mikhail for the purchase of 240,000 shares ofcommon stock exercisable at $2.125 per share.

 

The separation agreement further provided thatfollowing the termination of his employment as President and Chief ExecutiveOfficer, we would retain Dr. Mikhail as an independent consultant for a periodof two years to provide advice and technical expertise with respect to ouroperations.  Dr. Mikhail has agreed toprovide up to 40 hours of consulting services per month, for a retainer of$6,000 per month.  If additional serviceis provided beyond 40 hours per month, we will pay Dr. Mikhail at the rate of$125 per hour, up to a maximum of $1,000 per day.  Dr. Mikhail began providing consulting services to us under thisagreement beginning June 15, 2001.

 

In August 1999, we obtained a bank line of credit fromRiverside Bank, which was subsequently acquired by Associated BankMinnesota.  The loan was extended to uson the condition that it be personally guaranteed by Paul K. Miller, one of ourdirectors and our largest individual shareholder.  Under an agreement we entered into on August 31, 1999, Mr. Millerpersonally guaranteed such indebtedness. To induce Mr. Miller to guarantee such indebtedness, we paid Mr. Millera one-time guarantee fee in the amount of $75,000 and issued to him, onNovember 22, 1999 and December 6, 2000, warrants to purchase an aggregate of100,000 shares exercisable at $2.00 per share. These warrants expire on November 19, 2004.

 

We sell heart valves through a distribution network ofapproximately 35 exclusive****distributors,including Mercé V. Electromedicina, S.L., Pro-Medica and formerly N.G.C.Medical S.p.A.  The followinginformation relates to sales to such parties over our last two fiscalyears.  We anticipate that we willcontinue to do business with Mercé V. Electromedicina and Pro-Medica in futureperiods.

 

•                                            Salvador Mercé Vives owns more than 5 percent of our outstandingcommon stock and is one of our former board members.  He founded Mercé V. Electromedicina.  SalvadorMercé Cervelló, one of our current directors and the son of Salvador MercéVives, serves as Managing and General Director of Mercé V.Electromedicina.  During our fiscal yearended April 30, 2002, Mercé V. Electromedicina purchased $1,421,960 of product from our company,representing 47.5 percentof our net sales.  During our fiscalyear ended April 30, 2001, Mercé V. Electromedicina purchased $1,170,700 ofproduct from our company, representing 40.9 percent of our net sales.

 

 

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•                                           Hilmar Siebecker owns more than 5 percent of our outstandingcommon stock and is the President of Pro-Medica.  During our fiscal year ended April 30, 2002,Pro-Medica purchased $13,300of product from our company, representing 0.4 percent of our net sales.  During our fiscal year ended April 30, 2001,Pro-Medica did not purchase product from our company.

 

•                                           Eugenio Cremascoli, one of our former directors,is President and Chief Executive Officer of N.G.C. Medical, a formerdistributor which owns more than 5percent of our outstanding common stock.  During our fiscal year ended April 30, 2002,N.G.C. Medical purchased $15,300of product from our company, representing 0.5 percent of our net sales.  Duringour fiscal year ended April 30, 2001, N.G.C. Medical purchased $130,980of product from our company, representing 4.6 percent of our net sales.

 

On June 1, 2000, wegranted Ronald M. Bosrock, one of our directors, an option to purchase 10,000shares of our common stock at $2.50 per share under our 1997 Stock OptionPlan.  This option is exercisable forfour years and vested at the time of grant. We granted this option in consideration of Mr. Bosrock’s efforts tocomplete the spin-off of UROPACE.  Underthe terms of the Agreement and Plan of Reorganization and Corporate Separationbetween our company and UROPACE, dated November 1, 2000, UROPACE assumedconsulting fees of $5,000 per month payable to Mr. Bosrock and granted him anoption to purchase 40,000 shares of its common stock at $0.01 per share.  This option is exercisable for four years andvested at the time of grant.  Followingcompletion of the spin-off, Mr. Bosrock became the acting Chief ExecutiveOfficer of UROPACE.

 

Certain individuals haveemployment agreements with us.  Youshould review Management — Employment Agreements for more information aboutsuch agreements.

 

The transactions setforth herein were approved by a majority of our independent, disinteresteddirectors who had access, at our expense, to our legal counsel or independentlegal counsel.  We believe that all suchtransactions were made on terms no less favorable to us than we could haveobtained from unaffiliated third parties. In the future, all material affiliated transactions and loans, and anyforgiveness of loans, will be approved by a majority of our independent,disinterested directors who will have access, at our expense, to our legalcounsel or independent legal counsel and will be on terms no less favorable tous than we could obtain from unaffiliated third parties.

 

We have no current plansto issue preferred stock.  However,should we determine to issue preferred stock, we will offer such stock topersons who are considered promoters of our company only if the preferred stockis offered on the same terms to all other existing shareholders or to newshareholders, or the issuance of preferred stock is approved by a majority ofour independent, disinterested directors who have access, at our expense, toour legal counsel or independent legal counsel.

 

 

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| **ITEM 13** |   | **EXHIBITS,  LIST AND REPORTS ON FORM 8-K**                                       |
|-------------|--------|-----------------------------------------------------------------------------------|
|        |   |                                                                              |
| (a)         |   | Exhibits                                                                          |
|        |   |                                                                              |
|        |   | See “Index to  Exhibits.”                                               |
|        |   |                                                                              |
| (b)         |   | Reports on Form 8-K                                                               |
|        |   |                                                                              |
|        |   | We filed no Current  Reports on Form 8-K during the quarter ended April 30, 2002. |

 

 

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**SIGNATURES**

 

In accordance with Section13 or 15(d) of the Exchange Act, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, in theCity of Inver Grove Heights, State of Minnesota, on July 29, 2002.

 
|   | MedicalCV, Inc. |
|--------|-----------------|
|   |            |   |
|   | By              | /s/ Blair P. Mowery |
|   |            | Blair P. Mowery |
|   |            | President, Chief  Executive Officer and Director  (Principal Executive Officer) |

 

**POWER OFATTORNEY**

 

KNOW ALL BY THESE PRESENT, that each person whosesignature appears below constitutes and appoints Blair P. Mowery and Jules L.Fisher as his or her true and lawful attorney-in-fact and agent, with fullpowers of substitution and resubstitution, for him or her and in his or hername, place and stead, in any and all capacities, to sign any or all amendmentsto this report, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the SEC, granting unto saidattorney-in-fact and agent, full power and authority to do and perform each andevery act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he or she might or could doin person, hereby ratifying and confirming all that said attorney-in-fact andagent, or her substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant, and inthe capacities and on the date indicated.

 
| **Signature**                          |   | **Title**                                             |   | **Date**       |
|----------------------------------------|--------|-------------------------------------------------------|--------|----------------|
|                                   |   |                                                  |   |           |
| /s/ Blair P.  Mowery                   |   | President, Chief  Executive Officer and               |   | July 29, 2002  |
| Blair P. Mowery                        |   | Director (Principal  Executive Officer)               |   |           |
|                                   |   |                                                  |   |           |
| /s/ Jules L.  Fisher                   |   | Chief Financial Officer  (Principal                   |   | July 29, 2002  |
| Jules L. Fisher                        |   | Accounting Officer and  Principal  Financial Officer) |   |           |
|                                   |   |                                                  |   |           |
| /s/ Adel A.  Mikhail, Ph.D.            |   | Chairman of the Board                                 |   | July 29, 2002  |
| Adel A. Mikhail,  Ph.D.                |   |                                                  |   |           |
|                                   |   |                                                  |   |           |
| /s/ Ronald M.  Bosrock                 |   | Director                                              |   | July 29, 2002  |
| Ronald M.  Bosrock                     |   |                                                  |   |           |
|                                   |   |                                                  |   |           |
| /s/ Salvador  Mercé Cervelló |   | Director                                              |   | July  29, 2002 |
| Salvador Mercé Cervelló      |   |                                                  |   |           |
|                                   |   |                                                  |   |           |
| /s/ Norman Dann                        |   | Director                                              |   | July 29, 2002  |
| Norman Dann                            |   |                                                  |   |           |
|                                   |   |                                                  |   |           |
| /s/ Richard A.  DeWall, M.D.           |   | Director                                              |   | July 29, 2002  |
| Richard A.  DeWall, M.D.               |   |                                                  |   |           |
|                                   |   |                                                  |   |           |
| /s/ Paul K.  Miller                    |   | Director                                              |   | July 29, 2002  |
| Paul K. Miller                         |   |                                                  |   |           |

 

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |   | Restated Articles of Incorporation of the Registrant  (incorporated by reference to our Registration Statement on Form SB-2, filed  on August 31, 2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                 |   | Bylaws of the Registrant (incorporated by reference  to our Registration Statement on Form SB-2, filed on August 31, 2001 (File  No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1                 |   | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2                 |   | Specimen common stock certificate (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3                 |   | Form of Warrant Agreement (including specimen Class  A Warrant certificate) (incorporated by reference to our Registration  Statement on Form SB-2, filed on August 31, 2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4                 |   | Specimen unit certificate (incorporated by reference  to our Registration Statement on Form SB-2, filed on August 31, 2001 (File  No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                |   | Separation Agreement and Release by and between the  Registrant and Adel A. Mikhail, effective November 1, 2000 (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                  |
| 10.2                |   | 1992 Stock Option Plan (incorporated by reference to  our Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3                |   | 1993 Director Stock Option Plan (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4                |   | 1997 Stock Option Plan (incorporated by reference to  our Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5                |   | 2001 Equity Incentive Plan (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                |   | Warrant Agreement by and between the Registrant and  Paul K. Miller, dated November 22, 1999 (incorporated by reference to our  Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7                |   | Warrant Agreement by and between the Registrant and  Adel A. Mikhail, dated February 2, 2001 (incorporated by reference to our  Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8                |   | Warrant Agreement by and between the Registrant and  Paul K. Miller, dated December 6, 2000 (incorporated by reference to our  Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9                |   | Form of Escrow Agreement by and between the  Registrant, Paul K. Miller, Adel A. Mikhail, Ph.D., Salvador Mercé Vives,  Mercé V. Electromedicina S.L., Richard A. DeWall, M.D., Blair P. Mowery,  Salvador Mercé Cervelló, Allan R. Seck, Norman Dann, Ronald M. Bosrock,  George M. Wettstaedt, Gene E. Stobbs, Shelley Johnson, Associated Trust Company  National Association and the Commissioner of Commerce for the State of  Minnesota (incorporated by reference to our Registration Statement on Form  SB-2, filed on August 31, 2001 (File No. 333-68884)). |
| 10.10               |   | O.E.M. Supply Contract by and between the Registrant  and Sulzer Carbomedics, Inc., effective July 24, 1998 (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).*                                                                                                                                                                                                                                                                                                                                                     |
| 10.11               |   | First Amendment to Supply Agreement by and between  the Registrant and Sulzer Carbomedics, Inc., effective March 6, 2001  (incorporated by reference to our Registration Statement on Form SB-2, filed  on August 31, 2001 (File No. 333-68884)).*                                                                                                                                                                                                                                                                                                                                        |
| 10.12               |   | Promissory Note in the principal amount of  $2,500,000, issued by the Registrant, maker, to Associated Bank Minnesota,  payee, dated November 23, 1999 (incorporated by reference to our Registration  Statement on Form SB-2, filed on August 31, 2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                            |
| 10.13               |   | Commitment Letter by and between Associated Bank  Minnesota, lender, and the Registrant, borrower, dated August 26, 1999,  pertaining to proposed revised line of credit terms (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                   |
| 10.14               |   | Working Capital Line of Credit — Change in Terms  Agreement by and between Associated Bank Minnesota, lender, and the  Registrant, borrower, dated November 23, 2000 (incorporated by reference to  our Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                        |
| 10.15               |   | Correspondence from Associated Bank Minnesota to the  Registrant, dated December 11, 2000, extending the line of credit maturity  date (incorporated by reference to our Registration Statement on Form SB-2,  filed on August 31, 2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                            |
| 10.16               |   | Correspondence to Paul Miller, dated August 31,  1999, regarding the Registrant’s compensation to Mr. Miller for his personal  guarantee of the Associated Bank Minnesota line of credit (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                    |
| 10.17               |   | Amendment to Working Capital Line of Credit by and  between Associated Bank Minnesota, lender, and the Registrant, borrower,  dated August 24, 2001 (incorporated by reference to our Registration  Statement on Form SB-2, filed on August 31, 2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                               |
| 10.18               |   | Employment Agreement by and between the Registrant  and Blair P. Mowery, effective June 15, 2001 (incorporated by reference to  our Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                 |
| 10.19               |   | Letter Agreement by and between the Registrant and  Allan R. Seck, dated May 5, 1999 (incorporated by reference to our  Registration Statement on Form SB-2, filed on August 31, 2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                              |
| 10.20               |   | Amendment to Letter Agreement by and between the  Registrant and Allan R. Seck, dated August 30, 2001 (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                            |
| 16                  |   | Letter on change in certifying accountant from  Bertram Vallez Kaplan & Talbot Ltd. (incorporated by reference to our  Registration Statement on Form SB-2, filed on August 31, 2001 (File No.  333-68884)).                                                                                                                                                                                                                                                                                                                                                                          |
| 21                  |   | Subsidiaries of the Registrant (incorporated by  reference to our Registration Statement on Form SB-2, filed on August 31,  2001 (File No. 333-68884)).                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 23                  |   | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 24                  |   | Power of Attorney (included on signature page to  Form 10-KSB).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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*                                         Certainportions of this exhibit are subject to an order granting confidentialtreatment pursuant to Rule 406.

 

 

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