**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

----

**FORM 10-QSB**

**ý     QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2001**

**o     TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

**Commission FileNumber  0-33295**

**MedicalCV, Inc.**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

| **Minnesota**                     |   | **41-1717208**      |
|-----------------------------------|--------|---------------------|
| (State or Other Jurisdiction      |   | (I.R.S. Employer    |
| of Incorporation or Organization) |   | Identification No.) |
|                              |   |                |

 

**9725 South Robert Trail**

**Inver Grove Heights, Minnesota 55077**

**(651) 452-3000**

(Address of PrincipalExecutive Offices and Issuer's

Telephone Number, includingArea Code)

 

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 such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes o   No ý

As of December 17, 2001, the issuer had outstanding7,843,834 shares of common stock.  Thisnumber includes 1,500,000 units, each consisting of one share of common stockand one redeemable Class A Warrant, sold in the issuer's initial public offering.

 

**TABLE OF CONTENTS**
|               |                  |                                                                                                                   |   |
|--------------------|-----------------------|------------------------------------------------------------------------------------------------------------------------|--------|
| PART I             | FINANCIAL INFORMATION |                                                                                                                   |
|               |                  |                                                                                                                   |
|               | ITEM 1                | Financial Statements                                                                                                   |   |
|               |                  | Consolidated Balance Sheet  at October 31, 2001 and April 30, 2001                                                     |   |
|               |                  | Consolidated  Statement of Operations for the three and six month periods ended October 31,  2001 and October 31, 2000 |   |
|               |                  | Consolidated  Statement of Cash Flows for the six month periods ended October 31, 2001 and  October 31, 2000           |   |
|               |                  | Notes to  Consolidated Financial Statements                                                                            |   |
|               | ITEM  2               | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                 |   |
|               |                  |                                                                                                                   |   |
| PART II            | OTHER INFORMATION     |                                                                                                                   |
|               |                  |                                                                                                                   |
|               | ITEM 1                | Legal Proceedings                                                                                                      |   |
|               | ITEM  2               | Changes  in Securities and Use of Proceeds                                                                             |   |
|               | ITEM 3                | Defaults upon  Senior Securities                                                                                       |   |
|               | ITEM  4               | Submission  of Matters to a Vote of Security Holders                                                                   |   |
|               | ITEM 5                | Other Information                                                                                                      |   |
|               | ITEM 6                | Exhibits and  Reports on Form 8-K                                                                                      |   |
|               |                  |                                                                                                                   |   |
| SIGNATURES         |                  |                                                                                                                   |
|               |                  |                                                                                                                   |
| INDEX  TO EXHIBITS |                  |                                                                                                                   |

** **

**PART I**

ITEM1       Financial Statements

**MEDICALCV, INC.**

**ConsolidatedBalance Sheet**

 
|                                                                                                 |   | **October  31, 2001** |      | **April 30,  2001** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------|-----------|---------------------|--------|
|                                                                                                 |   | **(unaudited)**       |      |                |   |
| **ASSETS**                                                                                           |   |                  |      |                |   |
| Current assets:                                                                                      |   |                  |      |                |   |
| Cash and cash equivalents                                                                            |   | $                     | 157,884   |                | $      | 111,977 |   |
| Trade and accounts receivable, net                                                                   |   | 1,138,342             |      | 1,125,560           |   |
| Inventories                                                                                          |   | 2,334,357             |      | 2,172,035           |   |
| Prepaid expenses and other assets                                                                    |   | 251,233               |      | 127,354             |   |
| Total current assets                                                                                 |   | 3,881,816             |      | 3,536,926           |   |
| Property, plant and equipment, net                                                                   |   | 1,343,865             |      | 1,446,382           |   |
| Deferred financing costs, net of accumulated amortization of $164,067  and $111,415 respectively     |   | 242,400               |      | 233,936             |   |
| Other assets                                                                                         |   | 1,395                 |      | 1,394               |   |
| Total assets                                                                                         |   | $                     | 5,469,476 |                | $      | 5,218,638 |   |
|                                                                                                 |   |                  |      |                |   |
|                                                                                                 |   |                  |      |                |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                             |   |                  |      |                |   |
| Current liabilities:                                                                                 |   |                  |      |                |   |
| Convertible subordinated bridge notes, net of unamortized discounts                                  |   | $                     | 7,969     |                | $      |   |   |
| Current portion of long-term debt                                                                    |   | 41,427                |      | 42,460              |   |
| Current portion of capital lease obligations                                                         |   | 56,892                |      | 61,552              |   |
| Accounts payable                                                                                     |   | 692,091               |      | 511,340             |   |
| Accrued expenses                                                                                     |   | 424,108               |      | 314,524             |   |
| Total current liabilities                                                                            |   | 1,222,487             |      | 929,876             |   |
| Long-term debt, less current portion                                                                 |   | 2,810,292             |      | 1,786,987           |   |
| Capital lease obligations less current portion                                                       |   | 50,315                |      | 72,504              |   |
| Total liabilities                                                                                    |   | 4,083,094             |      | 2,789,367           |   |
|                                                                                                 |   |                  |      |                |   |
| 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; 6,343,834  shares issued and outstanding |   | 63,438                |      | 63,438              |   |
| Additional paid-in capital                                                                           |   | 11,002,169            |      | 10,490,378          |   |
| Deferred stock-based compensation                                                                    |   | (12,236               | )         | (16,824             | )      |
| Accumulated deficit                                                                                  |   | (9,666,989            | )         | (8,107,721          | )      |
| Total shareholders' equity                                                                           |   | 1,386,382             |      | 2,429,271           |   |
| Total liabilities and shareholders' equity                                                           |   | $                     | 5,469,476 |                | $      | 5,218,638 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

**MEDICALCV, INC.**

**ConsolidatedStatement of Operations**

(unaudited)

 
|                                                          |   | **Three Months Ended** |     | **Six Months Ended** |   |
|---------------------------------------------------------------|--------|------------------------|----------|----------------------|--------|
|                                                          |   | **October 31, 2001**   |     | **October 31, 2000** |   | **October 31, 2001** |   | **October 31, 2000** |   |
|                                                          |   |                   |     |                 |   |   |   |   |   |
| Net sales                                                     |   | $                      | 830,864  |                 | $      | 741,928 |   | $ | 1,472,215 |   | $ | 1,312,502 |   |
| Cost of goods sold                                            |   | 487,014                |     | 452,820              |   | 957,373 |   | 866,073 |   |
| Gross profit                                                  |   | 343,850                |     | 289,108              |   | 514,842 |   | 446,429 |   |
|                                                          |   |                   |     |                 |   |   |   |   |   |
| Operating expenses:                                           |   |                   |     |                 |   |   |   |   |   |
| Sales and marketing                                           |   | 487,129                |     | 523,317              |   | 936,972 |   | 724,294 |   |
| General and administrative                                    |   | 337,325                |     | 254,052              |   | 704,715 |   | 472,430 |   |
| Engineering and regulatory                                    |   | 163,373                |     | 165,482              |   | 370,497 |   | 471,665 |   |
| Total operating expenses                                      |   | 987,827                |     | 942,851              |   | 2,012,184 |   | 1,668,389 |   |
| Loss from operations                                          |   | (643,977               | )        | (653,743             | )      | (1,497,342 | ) | (1,221,960 | ) |
|                                                          |   |                   |     |                 |   |   |   |   |   |
| Other (expense) income:                                       |   |                   |     |                 |   |   |   |   |   |
| Interest expense                                              |   | (57,331                | )        | (11,315              | )      | (99,537 | ) | (60,119 | ) |
| Interest income                                               |   | 16,055                 |     | 12,525               |   | 16,197 |   | 12,525 |   |
| Other income (expense)                                        |   | 6,775                  |     | (583                 | )      | 21,414 |   | 35,419 |   |
| Total other (expense) income                                  |   | (34,501                | )        | 627                  |   | (61,926 | ) | (12,175 | ) |
| Net loss                                                      |   | $                      | (678,478 | )                    | $      | (653,116 | ) | $ | (1,559,268 | ) | $ | (1,234,135 | ) |
| Basic and diluted net loss per share                          |   | $                      | (.11     | )                    | $      | (.11 | ) | $ | (.25 | ) | $ | (.22 | ) |
| Shares used in computing basic and  dilutednet loss per share |   | 6,343,834              |     | 6,193,834            |   | 6,343,834 |   | 5,608,834 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

**MEDICALCV, INC.**

**ConsolidatedStatement of Cash Flows**

**(unaudited)**
|                                                                                                     |   | **Six Months Ended October 31,** |       |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                                                     |   | **2001**                         |       | **2000** |   |
| Cash flows from operating activities:                                                                    |   |                             |       |   |   |
| Net loss                                                                                                 |   | $                                | (1,559,268 | ) | $ | (1,234,135 | ) |
| Adjustments to reconcile net loss to  net cash used inoperating  activities                              |   |                             |       |   |   |
| Depreciation                                                                                             |   | 147,523                          |       | 147,118 |   |
| Amortization                                                                                             |   | 52,651                           |       | 32,788 |   |
| Provision for doubtful accounts                                                                          |   | 113,623                          |       |   |   |
| Provision for inventory obsolescence                                                                     |   | 24,445                           |       |   |   |
| Stock-based compensation                                                                                 |   | 18,754                           |       |   |   |
| Accretion of discount on convertible  subordinated bridge notes                                          |   | 5,094                            |       |   |   |
| Changes in assets and liabilities:                                                                       |   |                             |       |   |   |
| Accounts receivable                                                                                      |   | (85,405                          | )          | 136,156 |   |
| Inventories                                                                                              |   | (186,767                         | )          | (93,510 | ) |
| Prepaid expenses and other assets                                                                        |   | (123,880                         | )          | (28,439 | ) |
| Accounts payable                                                                                         |   | 180,751                          |       | (277,813 | ) |
| Accrued expenses                                                                                         |   | 109,584                          |       | 3,673 |   |
| Net cash used in operating activities                                                                    |   | (1,302,895                       | )          | (1,314,162 | ) |
|                                                                                                     |   |                             |       |   |   |
| Cash flows from investing activities:                                                                    |   |                             |       |   |   |
| Purchase of property, plant and  equipment                                                               |   | (45,006                          | )          | (56,160 | ) |
| Loan to UROPACE                                                                                          |   | (41,000                          | )          |   |   |
| Net cash used in investing activities                                                                    |   | (86,006                          | )          | (56,160 | ) |
|                                                                                                     |   |                             |       |   |   |
| Cash flows from investing activities:                                                                    |   |                             |       |   |   |
| Borrowings on bank line of credit                                                                        |   | 1,522,305                        |       | 760,000 |   |
| Principal payments on bank line of  credit                                                               |   | (475,000                         | )          | (1,980,000 | ) |
| Principal payments on other long-term  debt                                                              |   | (25,033                          | )          | (8,612 | ) |
| Deferred financing costs                                                                                 |   | (61,115                          | )          |   |   |
| Issuance of convertible subordinated  bridge notes                                                       |   | 500,000                          |       |   |   |
| Principal payments under capital lease  obligations                                                      |   | (26,849                          | )          | (46,203 | ) |
| Issuance of warrants                                                                                     |   | 500                              |       |   |   |
| Issuance of common stock                                                                                 |   |                             |       | 2,924,999 |   |
| Net cash provided by financing  activities                                                               |   | 1,434,808                        |       | 1,650,184 |   |
|                                                                                                     |   |                             |       |   |   |
| Net increase in cash and cash  equivalents                                                               |   | 45,907                           |       | 279,862 |   |
| Cash and cash equivalents at beginning  of year                                                          |   | 111,977                          |       | 93,095 |   |
| Cash and cash equivalents at end of  period                                                              |   | $                                | 157,884    |   | $ | 372,957 |   |
| Non-cash investing and financing  activities:                                                            |   |                             |       |   |   |
| Land special assessments due in future  years, net                                                       |   | 54,000                           |       |   |   |
| Discount on convertible subordinated  bridge notes related towarrants  and beneficial conversion feature |   | 497,125                          |       |   |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

**MEDICALCV, INC.**

**Notes to Consolidated Financial Statements**

(1)                                  Basis ofFinancial Statement Presentation

The accompanying unauditedconsolidated financial statements included herein have been prepared byMedicalCV, Inc. (the Company) in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and pursuant to the rules and regulations of the Securities andExchange Commission.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations.  These consolidatedinterim financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto included in MedicalCV'sRegistration Statement on Form SB-2, as amended.

The consolidated balancesheet as of October 31, 2001, the consolidated statement of operations for thethree and six months ended October 31, 2001 and 2000, and the consolidatedstatement of cash flows for the six months ended October 31, 2001 and 2000include, in the opinion of management, all adjustments, consisting solely ofnormal recurring adjustments, necessary for a fair presentation of thefinancial results for the respective interim periods but are not necessarilyindicative of results of operations to be expected for the entire fiscal yearending April 30, 2002.

(2)                                  Net Loss PerShare:

 

Netloss per share is computed under the provisions of SFAS No. 128,"Earnings Per Share."  Basicnet loss per common share is computed using the net loss and weighted-averagenumber of shares of common stock outstanding. Diluted earnings per share reflect the potential dilution of securitiesthat could share in the earnings of an entity. Diluted net loss per common share does not differ from basic net lossper common share in the three and six month periods ended October 31, 2001 and2000 since the potentially dilutive shares are anti-dilutive.  Potentially dilutive shares excluded fromthe calculation of diluted net loss per share relate to outstanding stockoptions and warrants for the purchase of an aggregate of 1,650,640 and1,019,340 shares of the Company's common stock at October 31, 2001 and 2000,respectively.

 

(3)                                  Inventories

 
|            |   | **October  31,**      |      | **April 30,** |   |
|-----------------|--------|-----------------------|-----------|---------------|--------|
|            |   | **2001  (unaudited)** |      | **2001**      |   |
|            |   |                  |      |          |   |
| Raw materials   |   | $                     | 678,544   |          | $      | 664,990 |   |
| Work-in-process |   | 523,064               |      | 423,570       |   |
| Finished goods  |   | 1,132,749             |      | 1,083,475     |   |
|            |   | $                     | 2,334,357 |          | $      | 2,172,035 |   |

 

(4)                                  Recently IssuedAccounting Pronouncements

 

InJune 2001, the FASB issued SFAS No. 141, “Business Combinations,” whichaddresses accounting and financial reporting for business combinations.  Also in June 2001, the FASB issued SFAS No.142, “Goodwill and Other Intangible Assets,” which addresses how intangibleassets acquired 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 also addresses how goodwill and otherintangible assets should be accounted for after they have been initiallyrecognized in the financial statements. Both of these statements are effective in their entirety for the Companyon May 1, 2002.  The adoption of thesestatements will not have a material impact on the current financial position orthe results of operations of the Company.

 

InAugust 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.144, “Accounting for the Disposal of Long-Lived Assets” which addressaccounting and financial reporting for long-lived assets.  This statement is effective for the Companyon May 1, 2002.  The adoption of thisstatement is not expected to have a material impact on the financial positionor results of operations of the Company.

 

(5)                                  ConvertibleSubordinated Bridge Notes

 

OnAugust 21, 2001, the Company sold units of convertible subordinated bridgenotes (Notes) with an aggregate principal amount of $500,000 and redeemablewarrants to purchase an aggregate of 500,000 shares of the Company’s commonstock for total proceeds of $500,500. Each unit consisted of a $25,000 principal amount 10% convertiblesubordinated bridge note and redeemable warrants to purchase 25,000 shares ofthe Company’s common stock at a price of $6.50 per share.  The Notes are unsecured and are due inAugust 2002, but may be converted into shares of the Company’s common stock at anytime before repayment at a price of $4.50 per share.  The Company has the option to prepay the Notes without premium orpenalty.  If the fair value of theCompany’s common stock or units equals or exceeds $8.50 per share, for tenconsecutive trading days, the Company may, at is option, redeem the outstandingwarrants for $0.01 each.  The warrantsare immediately exercisable and have a term of five years.

 

Theallocated fair value of the warrants of $308,236 and the value of thebeneficial conversion feature of $188,889 as of August 21, 2001 are accountedfor as a discount on the Notes.  Thisdiscount, which is presented as a reduction of the face value of the Notes onthe consolidated balance sheet, is being amortized as part of interest expenseover the one-year life of the Notes using the effective interest method.   As of October 31, 2001, the aggregateunamortized balance of the discount was $491,031.

 

(6)                                  SegmentInformation

 

TheCompany views its operations and manages its business as one segment, themanufacturing and marketing of mechanical heart valves.  Factors used to identify the Company’ssingle operating segment include the organizational structure of the Companyand the financial information available for evaluation by the chief operatingdecision maker.

 

Thefollowing table summarizes net sales by geographic area:

 
|        |   | **Three  Months Ended** |    | **Six  months ended** |   |
|-------------|--------|-------------------------|---------|-----------------------|--------|
|        |   | **October  31,**        |    | **October  31,**      |   |
|        |   | **2001**                |    | **2000**              |   | **2001** |   | **2000** |   |
| Europe      |   | $                       | 503,998 |                  | $      | 398,277 |   | $ | 944,840 |   | $ | 685,438 |   |
| South Asia  |   | 142,360                 |    | 106,650               |   | 256,740 |   | 271,450 |   |
| Middle East |   | 41,184                  |    | 84,021                |   | 85,271 |   | 137,521 |   |
| Far East    |   | 132,362                 |    | 96,893                |   | 174,304 |   | 130,350 |   |
| Africa      |   |                    |    | 40,000                |   |   |   | 40,000 |   |
| Other       |   | 10,960                  |    | 16,087                |   | 10,960 |   | 47,743 |   |
|        |   | $                       | 830,864 |                  | $      | 741,928 |   | $ | 1,472,215 |   | $ | 1,312,502 |   |

 

(7)                                  SubsequentEvent – Initial Public Offering

 

OnNovember 27, 2001, the Company completed an 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 estimated offeringcosts, the Company expects net proceeds of approximately $5,400,000.  The underwriter has a 45-day option topurchase an additional 225,000 units from the Company to cover over-allotments,if any.  Each unit consisted of oneshare of common stock and one redeemable Class A Warrant. Each Class A Warrantbecomes exercisable, and may be transferred separately from the common stock,18 months after the effectiveness of the initial public offering, which is May20, 2003.  When each Class A Warrantbecomes exercisable, the holder will be entitled to purchase, at any time untilthree years after the effectiveness of the offering, which is Nov. 20, 2004,one share of common stock at an exercise price of $6.50 per share, subject tocustomary anti-dilution adjustments. The Company may redeem the Class A Warrants for $0.01 per warrant at anytime once they become exercisable, upon ten business days’ written notice, ifthe closing price of the Company’s common stock or units exceeds $8.50, subjectto customary anti-dilution adjustments, for any ten consecutive trading daysbefore such notice.

 

ITEM2                   Management'sDiscussion and Analysis of Financial Condition and Results of Operations

*The following discussion contains various forward-lookingstatements within the meaning of Section 21E of the Exchange Act.  Although we believe that, in making any suchstatement, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in the following discussion, thewords "anticipates," "believes," "expects,""intends," "plans," "estimates" and similar expressions,as they relate to us or our management, are intended to identify suchforward-looking statements.  Theseforward-looking statements are subject to numerous risks and uncertainties thatcould cause actual results to differ materially from those anticipated.  Factors that could cause actual results todiffer materially from those anticipated, certain of which are beyond ourcontrol, are set forth in this document and in our Cautionary Statement filedas an exhibit hereto.*

*Our actual results, performance or achievements could differmaterially 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 in this document and in our Cautionary Statement and torefrain from attributing undue certainty to any forward-looking statements,which speak only as of the date of the document in which they appear.*

**Overview**

We manufacture and market mechanical heart valvesknown as the Omnicarbon Series 3000 and Series 4000.  Our heart valves are used to treat heart valve failure caused bythe aging process, heart diseases, prosthetic heart valve failure andcongenital defects.  To date, we havedistributed the Omnicarbon 3000 and 4000 heart valves primarily in Europe,South Asia, the Middle East and the Far East. In fiscal year 2001, we derived 57.2% 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 largest geographicmarket for mechanical heart valves.  Inanticipation of FDA premarket approval, we invested in our sales and marketinginfrastructure, including adding sales management to our staff in fiscal year2001 and recruiting field sales representatives to call on domestic surgerycenters in the U.S.  Based upon ourOmnicarbon heart valve's 17 years of implants in patients in Europe, we believethat we can establish a competitive position in the mechanical heart valveindustry in the U.S. and leverage this position into other critical areas ofcardiothoracic surgery.  We also expectthat our ability to market the Omnicarbon 3000 heart valve in the U.S. willfavorably affect our international sales, as many cardiovascular surgeons andothers who make purchasing decisions are aware of the FDA's rigorous premarketapproval process and consider it to be a validation of the safety and efficacyof medical devices.  The first implantof our Omnicarbon 3000 heart valve in the United States took place in December2001.

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 filed as an exhibit hereto.

In November 2001, we completed our initial publicoffering.  We sold 1,500,000 units, eachconsisting of one share of common stock and one redeemable Class A Warrant, onNovember 27, 2001.  Each unit was soldfor $4.50, resulting in gross proceeds of $6,750,000.  After estimatedoffering costs, we expect our net proceeds to be approximately $5,400,000.  The underwriter has a 45-day option topurchase an additional 225,000 units from us to cover over-allotments, if any.

**Threeand Six Months Ended October 31, 2000 and 2001**

Our operating results,expressed as a percentage of net sales, were as follows:

 
|                         |   | **Three Months Ended October 31,** |   | **Six Months Ended October 31,** |   |
|------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                         |   | **2001**                           |   | **2000**                         |   | **2001** |   | **2000** |   |
| Net sales                    |   | 100.0                              | %      | 100.0                            | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold           |   | 58.6                               | %      | 61.0                             | %      | 65.0 | % | 66.0 | % |
|                         |   |                               |   |                             |   |   |   |   |   |
| Gross profit                 |   | 41.4                               | %      | 39.0                             | %      | 35.0 | % | 34.0 | % |
|                         |   |                               |   |                             |   |   |   |   |   |
|                         |   |                               |   |                             |   |   |   |   |   |
| Operating expenses:          |   |                               |   |                             |   |   |   |   |   |
|                         |   |                               |   |                             |   |   |   |   |   |
| Sales and marketing          |   | 58.6                               | %      | 70.5                             | %      | 63.6 | % | 55.2 | % |
| General and administrative   |   | 40.6                               | %      | 34.2                             | %      | 47.9 | % | 36.0 | % |
|                         |   |                               |   |                             |   |   |   |   |   |
| Engineering and regulatory   |   | 19.7                               | %      | 22.3                             | %      | 25.2 | % | 35.9 | % |
|                         |   |                               |   |                             |   |   |   |   |   |
| Total operating expenses     |   | 118.9                              | %      | 127.1                            | %      | 136.7 | % | 127.1 | % |
|                         |   |                               |   |                             |   |   |   |   |   |
| Loss from operations         |   | (77.5                              | %)     | (88.1                            | %)     | (101.7 | %) | (93.1 | %) |
|                         |   |                               |   |                             |   |   |   |   |   |
| Other (expense) income       |   |                               |   |                             |   |   |   |   |   |
| Interest expense             |   | (6.9                               | %)     | (1.5                             | %)     | (6.8 | %) | (4.6 | %) |
| Interest income              |   | 1.9                                | %      | 1.7                              | %      | 1.1 | % | 1.0 | % |
| Other (expense) income       |   | 0.8                                | %      | (0.1                             | %)     | 1.5 | % | 2.7 | % |
|                         |   |                               |   |                             |   |   |   |   |   |
| Total other (expense) income |   | (4.2                               | %)     | 0.1                              | %      | (4.2 | %) | (0.9 | %) |
|                         |   |                               |   |                             |   |   |   |   |   |
| Net loss                     |   | (81.7                              | %)     | (88.0                            | %)     | (105.9 | %) | (94.0 | %) |
|                              |        |                                    |        |                                  |        |  |  |  |  |  |

 

**Results ofOperations for the Three and Six Months Ended October 31, 2000 and 2001**

*Net Sales*.  Our net sales for the second quarter of fiscal year 2002 were$830,864, an increase of 12.0% over the second quarter of fiscal year 2001. Netsales for the first six months of fiscal year 2002 were $1,472,215, an increaseof 12.2% over the first six months of fiscal year 2001. Correspondingly, unitsales increased 5.0% in the second quarter of fiscal year 2002 compared to thesecond quarter of fiscal year 2001. Unit sales increased 3.2% in the first six months of fiscal year 2002compared to the first six months of fiscal year 2001.  The increase in net sales and unit sales resulted primarily fromgrowth in our base business related to our distributors in Europe offset bydeclines in the Middle East.

During the second quarter of fiscal year2002, we continued to decrease our marketing emphasis on the Omniscience heartvalve, which has been implanted since 1978. Net sales from Omniscience heart valves in the second quarter of fiscalyear 2002 were $3,600 compared to $53,650 in the second quarter of fiscal year2001, a decline of 93.3%.  Net salesfrom Omniscience heart valves in the first six months of fiscal year 2002 were$29,100 compared to $104,760 in the first six months of fiscal year 2001, adecline of 72.2%.  This decline wasconsistent with our strategy to increase our marketing efforts on Omnicarbonheart valves.  The decision tode-emphasize the Omniscience heart valve was based upon the superior clinicalperformance and acceptance of the Omnicarbon heart valve.

In the first six months of fiscal years2002 and 2001, substantially all of our sales were denominated in U.S. dollars.  Fluctuations in foreign currency exchangerates have not subjected us to significant losses or gains on outstanding tradeaccounts receivable.  All of ourdistributors are required to pay for products in U.S. dollars, other than ourJapanese distributor, which pays in yen. We recognize that a strong U.S. dollar can adversely affect unit salespayable in currencies other than U.S. dollars for our foreign distributors.

*Cost ofGoods Sold*.  Cost of goods sold consists of the costs tomanufacture a heart valve, including all variable costs such as raw material,labor, scrap, packaging, sterilization and documentation plus fixed overheadcosts associated with supporting manufacturing, and fixed facility expensesallocated to manufacturing.

Our cost of goods sold in the secondquarter of fiscal year 2002 was $487,014 compared to $452,820 for the secondquarter of fiscal year 2001, representing a 7.6% increase.  Our gross profit margin as a percentage ofnet sales for the second quarter of fiscal year 2002 was 41.4% compared to39.0% for the second quarter of fiscal year 2001. Our cost of goods sold in thefirst six months of fiscal year 2002 was $957,373 compared to $866,073 for thefirst six months of fiscal year 2001, representing a 10.5% increase.  Our gross profit margin as a percentage ofnet sales for the first six months of fiscal year 2002 was 35.0% compared to34.0% for the first six months of fiscal year 2001.  The results for the second quarter of fiscal year 2002 included$33,249 of production scrap compared to $103,062 for the second quarter offiscal year 2001.  The results for thefirst six months of fiscal year 2002 included $134,913 of production scrapcompared to $166,512 for the first six months of fiscal year 2001.  To effect this reduction of scrap and toenhance gross margins, we implemented a planned production shutdown (in thefirst quarter of fiscal year 2002) during which we integrated new carbonmanufacturing and process technologies used to produce components for theOmnicarbon 4000 heart valve.  This60-day production shutdown began in late June 2001 and clinical productionresumed in late August 2001 as new equipment and manufacturing procedures wereintegrated into manufacturing.  Ourstrategy is to obtain FDA approval of this process for the manufacture of heartvalves sold in the U.S.  If we obtainFDA approval, we believe our gross margin will improve because of reduced coststo manufacture our total line of heart valves.

*Sales and Marketing*.  Our sales and marketing expenses decreasedfrom $523,317 in the second quarter of fiscal year 2001 to $487,129 in thesecond quarter of fiscal year 2002, representing a decrease of 6.9%.  Sales and marketing expenses for the secondquarter of fiscal year 2002 were 58.6% of net sales compared to 70.5% of netsales for the second quarter of fiscal year 2001.  Sales and marketing expenses decreased from $936,972 in the firstsix months of fiscal year 2001 to $724,294 in the first six months of fiscalyear 2002, representing a decrease of 29.4%. Sales and marketing expenses for the first six months of fiscal year2002 were 63.6% of net sales compared to 55.2% of net sales for the first sixmonths of fiscal year 2001.  The secondquarter decrease was primarily attributable to a shift in timing of promotionalprograms in Europe and the Pacific Rim markets compared to the same period oneyear ago.  Expenditures for marketingactivities are projected to increase as we spend more to increase our marketingefforts internationally and domestically. We feel it is critical for our long term success that we provideincreased management supervision and marketing support materials to our foreigndistributors and U.S. sales representatives. We believe such increase inmanagement and marketing support will continue to positively impact ouroperating results.  Our overallmarketing strategy is to promote the superior clinical results of the Omnicarbonheart valve and the technical strengths of our company in designing andmanufacturing mechanical heart valves.

*General and Administrative*.  General and administrative expensesincreased 32.8% from $254,052 in the second quarter of fiscal year 2001 to$337,325 for the second quarter of fiscal year 2002.  General and administrative expenses were 40.6% of net sales forthe second quarter of fiscal year 2002 compared to 34.2% for the second quarterof fiscal year 2001. General and administrative expenses increased 49.2% from$472,430 in the first six months of fiscal year 2001 to $704,715 for the firstsix months of fiscal year 2002.  Generaland administrative expenses were 47.9% of net sales for the first six months offiscal year 2002 compared to 36.0% for the first six months of fiscal year 2001.The majority of these increases were due to increased legal and audit fees andincreased stock based compensation expenses.

*Engineering and Regulatory*.  Engineering and regulatory expensesdecreased from $165,482 in the second quarter of fiscal year 2001 to $163,373for the second quarter of fiscal year 2002, representing a decrease of1.3%.  Engineering and regulatoryexpenses were 19.7% of net sales in the second quarter of fiscal year 2002 and22.3% in the second quarter of fiscal year 2001.  Engineering and regulatory expenses decreased from $471,665 inthe first six months of fiscal year 2001 to $370,497 for the first six monthsof fiscal year 2002, representing a decrease of 21.4%.  Engineering and regulatory expenses were25.2% of net sales in the first six months of fiscal year 2002 and 35.9% in thefirst six months of fiscal year 2001. We spent $105,163 on engineering expense for the second quarter offiscal year 2002 compared to $120,438 for the second quarter of fiscal year2001, representing a decrease of 12.7%. We spent $248,339 on engineeringexpense for the first six months of fiscal year 2002 compared to $390,152 forthe first six months of fiscal year 2001, representing a decrease of 36.3%.These decreases were the result of a shift of priorities from new productdevelopment to installation of new equipment and processes for the productionof the Omnicarbon 4000 heart valve.  Incontrast, regulatory expenses increased from $45,044 in the second quarter offiscal year 2001 to $58,210 in the second quarter of fiscal year 2002.  This increase of 29.2% was the result ofincreased regulatory expenses associated with obtaining premarket approval fromthe FDA to market our Omnicarbon 3000 heart valve in the U.S. and was comprisedlargely of legal fees, the cost of label changes for the product dictated bythe FDA and consulting fees paid to clinical experts.  Regulatory expenses decreased from $122,158 in the first sixmonths of fiscal year 2001 to $81,512 in the first six months of fiscal year 2002.

*Other (Expense) Income*.  Interest expense increased to $57,331 in thesecond quarter of fiscal year 2002 from $11,315 in the second quarter of fiscalyear 2001 due to an increase in bank borrowings.  Interest expense increased to $99,537 in the first six months offiscal year 2002 from $60,119 in the first six months of fiscal year 2001 alsodue to the increase in bank borrowings. Other income was up $7,358 in the second quarter of fiscal year 2002from an expense of $583 in the second quarter of fiscal 2001 to an income of$6,775 largely due to sales tax refunds.

*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 the second quarter offiscal year 2002 due to the inherent uncertainty of predicting the sufficiencyof future taxable income necessary to realize our deferred tax assets.

*Loss from Operations*.  As of October 31, 2001, we had anaccumulated deficit of $9,666,989.  Wehave incurred losses in each of the last five fiscal years.  Since 1994, we have invested in developing abileaflet heart valve, a proprietary pyrolytic carbon coating process andobtaining premarket approval from the FDA to market our Omnicarbon 3000 heartvalve in the U.S.  Our strategy had beento invest in technology to better position us 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**

Net cash used in operating activities was$1,302,895 in the six months ended October 31, 2001 compared to $1,314,162 inthe six months ended October 31, 2000. The decrease of $49,848 was primarily due to improvement in workingcapital balances that offset the increase in the net loss.  In addition, we also increased our inventoryof Omnicarbon 4000 heart valves so as to provide sufficient finished goodsinventory in anticipation of a planned 60-day production shutdown at thebeginning of fiscal year 2002.  Our productionshutdown commenced in late June 2001 and clinical production resumed in lateAugust 2001.  The shutdown involvedimprovements in equipment, production controls and production methods in someareas of production involving the carbon components associated with theOmnicarbon 4000 heart valve.

Net cash used in investing activities was$86,006 in the first six months ending October 31, 2001 compared to $56,160 inthe first six months ended October 31, 2000. Net cash used in investing activities was $516,344 in fiscal year 2001and $141,129 in fiscal year 2000.  Weinvested $362,344 in fiscal year 2001 and $141,129 in fiscal year 2000 in thepurchase of equipment to support our proprietary pyrolytic carbon coatingprocess for Omnicarbon 4000 heart valves. As described in Commitments and Contingent Liabilities, we loaned$154,000 to UROPACE during fiscal year 2001 and an additional $41,000 in thefirst two quarters of fiscal year 2002.

Net cash provided by financing activitieswas $1,434,808 in the first six months ending October 31, 2001 compared to$1,650,184 in the first six months ending October 31, 2000.  In the first six months of fiscal year 2002,the primary source of cash from financing activities was our net increasedborrowings of $1,047,305 on our line of credit and the proceeds of $500,000from the sale of convertible subordinated bridge notes.  In the first quarter of fiscal year 2001, weobtained proceeds of $2,925,000 from the issuance of 1,170,000 shares of ourcommon stock in a private placement. Net cash provided by financing activities was $3,045,924 in fiscal year2001 and $406,654 in fiscal year 2000. The increase in cash in fiscal year 2001 was driven by our privateplacement of common stock issued in the first quarter.  We also received $41,249 in fiscal year 2001and $80,750 in fiscal year 2000 from the exercise of options.  The balance of the increase between fiscalyear 2000 and fiscal year 2001 was derived from a combination of increased borrowingsunder our bank line of credit and repayments of amounts due on other long-termfinancing arrangements.

Since March 1992, our primary source offunding has been private sales of equity securities, which totaled $9,775,704in gross cash proceeds through October 31, 2001.  We have also funded our operations through secured equipmentfinancing term loans and equipment leases. In addition, we financed our operations since fiscal year 2000 through abank line of credit secured by our real estate, tangible and intangibleproperty and a guarantee by a principal shareholder.  Under this line of credit, we are able to borrow up to anaggregate of $2,500,000.  This line ofcredit will expire in November 2002. Amounts borrowed under this line of credit generally bear interest atthe prime rate.  As of October 31, 2001,$45,618 was available to us under this line of credit.

As part of our credit agreement withAssociated Bank Minnesota, we were 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, 2000 and 2001, wefailed 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.  As of November 11, 2001, we had utilized ourline of credit in full.

In August 2001, we sold $500,000 principalamount of 10% convertible subordinated bridge notes due August 2002, along withfive-year warrants to purchase 500,000 shares of common stock at an exerciseprice of $6.50 per share.  The unsecurednotes may be converted into shares of our common stock at any time beforerepayment at a price of $4.50 per share. We may require conversion of the notes into common stock at a price of$6.50 per share if the closing price of our common stock or units equals orexceeds $8.50, subject to customary anti-dilution adjustments, for tenconsecutive trading days.

In November 2001, we completed an initialpublic offering (IPO) in which 1,500,000 units consisting of one share ofcommon stock and one redeemable Class A warrant were sold at a per unit priceof $4.50 yielding gross proceeds of $6,750,000.  The Underwriter of the offering has the option to purchase theremaining 225,000 units of the registered offering until January 5, 2002.  The expected net proceeds are approximately$5,400,000.

 

We expect to continue developing our businessand to build market share in the U.S. now that we have FDA premarket approvalof our Omnicarbon 3000 heart valve for sales in the U.S.  These activities will require significantexpenditures to develop, train and supply marketing materials to our independentsales representatives and to build our sales and marketing infrastructure.  As a result, we anticipate that our salesand marketing and general and administrative expenses will continue toconstitute a material use of our cash resources.  Although we have no commitment for these expenditures, wecurrently anticipate spending approximately $3,430,000 in fiscal year 2002 andapproximately $4,700,000 in fiscal year 2003. In addition, we project capital expenditures of approximately $212,000for fiscal year 2002 and approximately $418,000 for fiscal year 2003 toincrease manufacturing capacity in certain functions and make necessaryimprovements to our corporate facility. The actual amounts and timing of our capital expenditures will varydepending upon the speed at which we are able to expand our distributioncapability in domestic and international markets.  We believe that the net proceeds from our IPO, will be sufficientto fund our operating needs, capital expenditures and working capital requirementsthrough fiscal year 2003.

We expect that our operating losses andnegative operating cash flow will continue in fiscal years 2002 and 2003 as weexpand our manufacturing capabilities, continue increasing our corporate staffto support the U.S. roll-out of our Omnicarbon 3000 heart valve, and addmarketing programs domestically and internationally to build awareness of andcreate demand for our Omnicarbon heart valves. We expect that additional financing may be required following fiscalyear 2003.  We may seek to obtainadditional financing through a combination of the sale of equity or debtsecurities and commercial bank borrowings. Our capital requirements may vary depending upon the timing and thesuccess of the implementation of our business plan, regulatory, technologicaland competitive developments, or if:

•                  our manufacturing anddevelopment costs or projections prove to be inaccurate,

•                  we determine to licenseor 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 make acquisitions.

We cannot assure you that we will be ableto raise sufficient capital on terms that we consider acceptable, or atall.  If we are unable to obtainadequate funds on acceptable terms, our ability to fund the expansion of ourbusiness or respond to competitive pressures would be significantly impaired.

**Commitments and Contingent Liabilities**

 

In July 1998, we entered into a three-year supplyagreement 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 did not meet the minimum purchaserequirements in calendar year 1999 or calendar year 2000.  In addition, wedo not believe we will meet the minimum purchase requirement for calendar year2001.  As a result, we expensed $239,907in fiscal year 2000, and $108,174 in fiscal year 2001.  We expensed $100,000 in the first six monthsof fiscal year 2002 and expensed $41,533 in the first six months of fiscal year2001.  These charges were reflected incost of goods sold.  Future purchaseshortfalls could adversely affect our ongoing relationship with SulzerCarbomedics.

In July 1995, we established a wholly ownedsubsidiary, UROPACE, Inc., to commercialize technology for treating femaleurinary incontinence.  On November 1,2000, we completed the spin-off of UROPACE to our existing shareholders.  The separation was effected by transferringfrom our company to UROPACE all assets, tangible and intangible, relating tothe development of female urinary incontinence technology.  Our shareholders of record on September 15,2000 received one share of common stock of UROPACE for each 6.882 shares of ourcommon stock they held on that date. The assets transferred to UROPACE had no book value at November 1, 2000,and the operations of UROPACE before the spin-off had no revenues and minimalexpenses during fiscal year 2000 and fiscal year 2001.  As a part of this spin-off, we agreed toloan UROPACE up to $356,250 at a variable interest rate.  Principal and interest on the note will bepayable in installments equal to 5% of UROPACE's future annual net sales untilthe note and interest is paid in full. At October 31, 2001, we had loaned UROPACE $195,000.  Due to the development stage of UROPACE andthe uncertainty associated with the collection of this amount, we have recordedan allowance for the entire balance of the loan at October 31, 2001, with thecorresponding expense included in other (expense) income in the ConsolidatedStatement of Operations.

**Recent Accounting Pronouncements**

 

In August 2001, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 144, "Accounting for the Disposal ofLong-Lived Assets" which addresses accounting and financial reporting forlong-lived assets.  This statement iseffective for us on May 1, 2002.  Theadoption of this statement is not expected to have a material impact on ourfinancial position or results of operations.

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 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 how goodwill and other intangible assets should beaccounted for after they have been initially recognized in the financialstatements.  Both of these statementsare 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.

**Qualitative and Quantitative Disclosures About Market Risk**

 

We develop our products in the U.S. and market ourproducts globally.  Because we continueto derive our revenue primarily from sources outside of the U.S., our financialresults could be affected by many factors, such as changes in currency exchangerates or 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 available line of creditrequire interest payments calculated at variable rates.  Based on the current nature and levels ofour investments and debt, however, we believe that we currently have no materialmarket risk exposure.

Our general investing policy is to limit market andcredit risk and the risk of principal loss. All liquid investments with original maturities of three months or lessare considered to be cash equivalents.

**PART II **                                             OTHER INFORMATION

ITEM 1                                                        Legal Proceedings

 

                                                                                                As of October31, 2001, we were not a party to any litigation.

 

ITEM 2                                                        Changes in Securities andUse of Proceeds

 

(c)                                  On August 21,2001, we issued $500,000 principal amount of 10% convertible subordinatedbridge notes to 13 accredited investors with five-year warrants to purchase500,000 shares of common stock at an exercise price of $6.50 per share.  We received gross cash proceeds of $500,500in consideration of the bridge notes and the warrants.  We paid a cash commission of $40,040 and anon-accountable expense allowance of $5,005 to Equity Securities Investments,Inc. in connection with this transaction. We issued the securities in a private placement transaction notinvolving a public offering and not involving a general solicitation.  We issued the securities to individuals whorepresented that (a) they were acquiring the securities for investmentpurposes, (b) they were "accredited investors" within the meaning ofRule 501(a) of Regulation D promulgated under the Securities Act, and (c) theyhad such knowledge and experience in financial and business matters that theywere capable of evaluating the merits and risks of investment as required byRule 506(b)(2)(ii) under the Securities Act. We believe that this transaction was exempt from registration underSection 4(2) of the Securities Act and within the safe harbor provided by Rule506 of Regulation D under the Securities Act.

(d)                                   OurRegistration Statement on Form SB-2 (File No. 333-68884) was declared effectiveby the SEC on November 20, 2001, and our initial public offering commenced onNovember 21, 2001.  We closed on thesale of 1,500,000 units, each consisting of one share of common stock and oneredeemable Class A Warrant, on November 27, 2001.  Equity Securities Investments, Inc. served as underwriter of theabove-described securities.

 

                                                  We registeredan aggregate offering amount of 1,725,000 units with an estimated aggregateoffering price of $7,762,500 (based on an offering price per unit of$4.50).  We sold 1,500,000 of the unitswe registered at a price of $4.50 per unit, resulting in gross proceeds of$6,750,000.  The underwriter has a45-day option to purchase the remaining 225,000 units from us to coverover-allotments, if any.

 

                                                  Through October31, 2001, we had paid total expenses of $38,187 in connection with our initialpublic offering.  Such expensesrepresent:  (1) $25,000 in expenses paidto our underwriter, (2) $7,443 in blue sky filing fees, (3) $1,000 in Nasdaqlisting fees, and (4) $4,744 in SEC registration fees.

 

                                                  In addition tothe foregoing, through the date of closing of our IPO, we paid:  (1) $675,000 in underwriting discounts andcommissions paid to our underwriter, (2) $177,500 in expenses paid to ourunderwriter, and (3) $9,000 in Nasdaq listing fees.

 

                                                  In the thirdquarter of fiscal year 2002, we expect to pay the following additional expensesin connection with our initial public offering:  (1) $67,152 to our printer, (2) $241,701 to our attorneys, (3) $3,600 to our transferagent, and (4) $135,830 in fees and expenses to our accountants.

 

                                                  None of the foregoing expenditures represent direct or indirectpayments to our directors, officers or their associates, to persons owning 10%or more of any class of our equity securities, or to our affiliates.

                                                  After deducting the total paid and estimated expenses of ourinitial public offering, we believe that our net proceeds will be approximately$5,400,000.

 

ITEM 3                                                        Defaults upon SeniorSecurities

 

                                                                                                Not applicable.

 

ITEM 4                                                        Submission of Matters to aVote of Security Holders

 

                                                                                                The 2001 AnnualMeeting of Shareholders was held on August 9, 2001.  Four proposals were submitted for shareholder approval, all ofwhich passed with voting results as follows:

 

(1)                                  To elect sevendirectors of the company to serve until the next meeting of shareholders.

 
|                              |   |      |   | **WITHHOLD**  |   |
|-----------------------------------|--------|-----------|--------|---------------|--------|
|                              |   | **FOR**   |   | **AUTHORITY** |   |
| Adel A. Mikhail, Ph.D.            |   | 5,298,349 |   | 141,000       |   |
| Blair P. Mowery                   |   | 5,298,349 |   | 141,000       |   |
| Ronald M. Bosrock                 |   | 5,298,349 |   | 141,000       |   |
| Salvador Mercé Cervelló |   | 5,298,349 |   | 141,000       |   |
| Norman Dann                       |   | 5,298,349 |   | 141,000       |   |
| Richard A. DeWall, M.D.           |   | 5,298,349 |   | 141,000       |   |
| Paul K. Miller                    |   | 5,298,349 |   | 141,000       |   |

 

(2)                                  To consider andvote upon a proposal to amend and restate Article 3 of the company's RestatedArticles of Incorporation to provide, among other things, that the capitalshares of the company shall consist of 95,000,000 shares of common stock and5,000,000 shares of preferred stock.

 
| FOR:     |   | 5,298,349 |   | AGAINST:  |   | 0 |   |
|----------|--------|-----------|--------|-----------|--------|---|--------|
| ABSTAIN: |   | 141,000   |   | NON-VOTE: |   | 0 |   |

 

(3)                                  To consider andvote upon approval of the company's 2001 Equity Incentive Plan.

 
| FOR:     |   | 5,087,099 |   | AGAINST:  |   | 18,750 |   |
|----------|--------|-----------|--------|-----------|--------|--------|--------|
| ABSTAIN: |   | 333,500   |   | NON-VOTE: |   | 0      |   |

 

(4)                                  To ratify theappointment of PricewaterhouseCoopers LLP to serve as the auditors of thecompany's books and records for its fiscal year ending April 30, 2002.

 
| FOR:     |   | 5,298,349 |   | AGAINST:  |   | 0 |   |
|----------|--------|-----------|--------|-----------|--------|---|--------|
| ABSTAIN: |   | 141,000   |   | NON-VOTE: |   | 0 |   |

 

ITEM 5                                                        Other Information

 

We are filing herewith aCautionary Statement pursuant to the Private Securities Litigation Reform Actof 1995 for use as a readily available written document to which reference maybe made in connection with forward-looking statements, as defined in such act.

 

ITEM 6                                                        Exhibits and Reports on Form8-K

 

                                                                                                (a)                                  Exhibits

 

                                                                                                                                                See "Indexto Exhibits."

 

                                                                                                (b)                                 Reports on Form8-K

 

The registrant filed noCurrent Reports on Form 8-K during the quarter ended October 31, 2001.

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                          | MedicalCV,  Inc. |
|-------------------------------|------------------|
|                          |             |   |
|                          |             |   |
| Date:  December 17, 2001 | By               | /s/  Blair P. Mowery |
|                          |             | Blair  P. Mowery |
|                          |             | President  and Chief Executive Officer |
|                          |             |   |
|                          |             |   |
| Date:  December 17, 2001 | By               | /s/  George M. Wettstaedt |
|                          |             | George  M. Wettstaedt |
|                          |             | Principal  Accounting Officer |

 

**INDEX TO EXHIBITS**

Exhibit

**Number**                                                      Description

99                                                                                    CautionaryStatement