________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 2001
Commission File Number 0-944
POSSIS MEDICAL, INC.
9055 Evergreen Boulevard
Minneapolis, Minnesota 55433-8003
(763) 780-4555
A Minnesota Corporation IRS Employer ID No. 41-0783184
_________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of November 27, 2001 was 16,952,283.
________________________________
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, October 31, 2001
and July 31, 2001................................... 3
Consolidated Statements of Operations for the three
months ended October 31, 2001 and 2000.............. 4
Consolidated Statements of Cash Flows for the
three months ended October 31, 2001 and 2000 ....... 5
Notes to Consolidated Financial Statements.......... 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8-12
ITEM 3. Quantitative and Qualitative Disclosure about
Market Risks ....................................... 12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................... 13
SIGNATURES.......................................... 14
ITEM 1. FINANCIAL STATEMENTS
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 31, 2001 July 31, 2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $11,368,075 $ 9,515,751
Trade receivables (less allowance for doubtful
accounts and returns of $648,000 and
$659,000, respectively).............................................. 4,337,876 4,268,114
Inventories............................................................ 4,154,783 4,216,629
Prepaid expenses and other assets...................................... 200,658 342,995
Total current assets............................................. 20,061,392 18,343,489
PROPERTY AND EQUIPMENT, net.............................................. 3,605,193 3,665,751
TOTAL ASSETS............................................................. $23,666,585 $22,009,240
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable................................................. $ 1,168,974 $ 1,321,485
Accrued salaries, wages, and commissions............................... 1,686,100 1,532,912
Current portion of long-term debt...................................... -- 94,310
Other liabilities...................................................... 1,137,218 989,556
Total current liabilities........................................ 3,992,292 3,938,263
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares
of $0.40 par value each; issued and outstanding,
16,906,615 and 16,822,023 shares, respectively....................... 6,762,646 6,728,809
Additional paid-in capital............................................. 76,033,038 75,411,387
Unearned compensation.................................................. (13,400) (22,700)
Retained deficit....................................................... (63,107,991) (64,046,519)
Total shareholders' equity....................................... 19,674,293 18,070,977
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $23,666,585 $22,009,240
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000
(UNAUDITED)
2001 2000
Product sales............................................................ $ 9,585,268 $ 6,578,110
Cost of sales and other expenses:
Cost of medical products.............................................. 2,999,982 3,115,045
Selling, general and administrative................................... 4,689,465 4,518,427
Research and development.............................................. 1,031,320 1,487,507
Total cost of sales and other expenses........................... 8,720,767 9,120,979
Operating income (loss).................................................. 864,501 (2,542,869)
Interest income.......................................................... 74,027 170,911
Net income (loss)........................................................ $ 938,528 $(2,371,958)
Weighted average number of common shares
assumed outstanding:
Basic................................................................. 16,858,181 16,700,527
Diluted............................................................... 18,260,374 16,700,527
Net income (loss) per common share:
Basic................................................................. $.06 $(.14)
Diluted............................................................... $.05 $(.14)
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000
(UNAUDITED)
2001 2000
OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 938,528 $(2,371,958)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation........................................................ 508,159 444,316
Stock compensation expense.......................................... 26,100 26,309
Expense reimbursement from city government.......................... (67,788) --
Writedown due to impairment of asset................................ 70,000 --
Increase in receivables............................................. (69,762) (551,457)
(Increase) decrease in inventories.................................. (115,154) 146,099
Decrease in other current assets.................................... 142,337 107,107
Decrease in trade accounts payable.................................. (152,511) (1,052,227)
Increase in accrued expenses and other current liabilities.......... 300,850 292,355
Net cash provided by (used in) operating activities...................... 1,580,759 (2,959,456)
INVESTING ACTIVITIES:
Additions to property and equipment...................................... (340,601) (643,398)
Proceeds from maturity of marketable securities.......................... -- 9,000,000
Purchase of marketable securities........................................ -- (7,742,745)
Net cash (used in) provided by investing activities...................... (340,601) 613,857
FINANCING ACTIVITIES:
Proceeds from issuance of stock and exercise of options and warrants..... 638,688 22,659
Repayment of long-term debt.............................................. (26,522) (1,313)
Net cash provided by financing activities................................ 612,166 21,346
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 1,852,324 (2,324,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER........................ 9,515,751 4,053,429
CASH AND CASH EQUIVALENTS AT END OF QUARTER.............................. $11,368,075 $ 1,729,176
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Accrued payroll taxes related to restricted stock........................ $ -- $ 55,043
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying consolidated financial statements and notes
should be read in conjunction with the audited financial statements and
accompanying notes thereto included in the Company's 2001 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended October 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 2002.
3. INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market. Inventory balances were as follows:
October 31, July 31,
2001 2001
Finished goods $1,971,868 $1,935,590
Work-in-process 1,219,206 1,432,536
Raw materials 963,709 848,503
$4,154,783 $4,216,629
4. PROPERTY AND EQUIPMENT
Property is carried at cost and depreciated using the straight-line method
over the estimated useful lives of the various assets. Property and equipment
balances and corresponding lives were as follows:
October 31, July 31,
2001 2001 Life
Leasehold improvements $1,454,833 $1,454,833 10 years
Equipment 6,965,896 6,814,596 3 to 10 years
Assets in construction 444,801 255,502 N/A
8,865,530 8,524,931
Less accumulated depreciation 5,260,337 4,859,180
Property and equipment - net $3,605,193 $3,665,751
5. SEGMENT AND GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company's operations are in one business segment, the design,
manufacture and distribution of cardiovascular medical devices. Possis Medical,
Inc. evaluates revenue performance based on the worldwide revenues of each major
product line and profitability based on an enterprise-wise basis due to shared
infrastructures to make operating and strategic decisions.
Total revenues by United States and outside the United States for the three
months ended October 31, 2001 and 2000 are as follows:
2001 2000
United States....................... $9,503,818 $6,443,400
Outside the United States........... 81,450 134,710
Total revenues...................... $9,585,268 $6,578,110
6. NET INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is computed by dividing net income for
the period by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the treasury stock
method by dividing net income by the weighted average number of common shares
plus the dilutive effect of outstanding stock options, stock warrants and shares
issuable under the employee stock purchase plan. Diluted (loss) per share does
not include outstanding stock options, stock warrants and shares issuable under
the employee stock purchase plan in the computation since the impact would have
been anti-dilutive because of the net loss.
7. COMMON STOCK
During the three months ended October 31, 2001, stock options and warrants
for the purchase of 84,466 shares of the Company's common stock were exercised
at prices between $12.67 and $5.56 per share.
During the three months ended October 31, 2001, the Company issued 126
shares in connection with its employee stock purchase plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and certain other sections contain certain "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Statements regarding the Company's ability to increase utilization rates of the
AngioJet(R) System at existing customer accounts by increasing disposable sales;
its ability to obtain additional FDA-approvals; customer responses to the
Company's marketing strategies, the ability to maintain and grow sales by
effectively managing a U.S. sales force, its ability to introduce new catheter
models; future revenue levels, gross margins, expenses levels and earnings per
share; its ability to develop new products; and certain other statements
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations and other portions of this report on form 10-Q are forward
looking statements based on current expectations and assumptions and entail
various risks and uncertainties that could cause actual results to differ
materially from those expressed in such forward looking statements. Certain
factors that may affect whether these anticipated results occur include market
acceptance of our products, factors affecting the health care industry such as
consolidation, cost containment and trends toward managed care, delays,
unanticipated costs or other difficulties and uncertainties associated with
lengthy and costly new product development and regulatory clearance processes,
changes in governmental laws and regulations, the development of new products
and compounds by competitors that may compete with our products or make our
products obsolete, sudden restrictions in supply of key materials and
deterioration of general market and economic conditions. These and other risk
factors that may affect our results are included in the Company's Form 10-K for
the year ended July 31, 2001 filed with the Securities and Exchange Commission.
Results of Operations
Three Month Periods Ended October 31, 2001 and 2000
Total product revenue for the three months ended October 31, 2001 increased
$3,007,000, or 46%, to $9,585,000 compared to $6,578,000 in the first quarter of
2000. The Company recorded net income for the quarter ended October 31, 2001 of
$939,000, or $.05 per diluted share. This compared to a net loss of $2,372,000,
or $.14 per share, for the quarter ended October 31, 2000.
Revenue - AngioJet System
U.S. AngioJet System revenue for the three months ended October 31, 2001
increased $3,136,000, or 49%, to $9,504,000 compared to $6,368,000 in the first
quarter of 2000. The Company markets the AngioJet(R) Rheolytic(tm) Thrombectomy
System (AngioJet System) worldwide. The AngioJet System consists of a drive unit
(capital equipment), which powers a disposable pump and a family of disposable
catheters, each aimed at a specific indication. The main factors in the revenue
increase were increased sales resulting from the Company commencing U.S.
marketing of the AngioJet System with an additional labeling claim for the
removal of blood clots in leg (peripheral) arteries for the XMI(tm)135 (XMI)
catheter in March 2001 and the increased acceptance of the Company' Xpeedior
catheters by physicians. The Xpeedior catheters are the first catheters marketed
by the Company based upon its proprietary Cross-Stream(R) Technology. This
exclusive technology platform intensifies the action at the tip of the catheter,
which doubles the clot removal rate and triples the treatable vessel size
compared to other available mechanical thrombectomy devices on the market today.
In addition, Cross-Stream Technology has been able to deal more effectively with
"mural thrombus," the older, more organized material that adheres to vessel
walls and can complicate patient results.
As of October 31, 2001, the Company had a total of 726 domestic drive units
in the field, compared to 541 drive units at October 31, 2000, and 669 units as
of July 31, 2001. During the three-month periods ended October 31, 2001 and
2000, the Company sold approximately 7,500 and 5,400 catheters, respectively.
This was a 39% increase in unit catheter sales from the same prior year period.
The average catheter utilization rate per installed domestic drive unit was 10.5
in the first quarter, compared to a rate of 10.1 in the same prior year period,
and compared to a rate of 11.2 in the fourth quarter of fiscal 2001. The first
quarter utilization rate was negatively impacted by the timing of customer
returns of older products replaced by the XMI. The Company sold 45 and 42 drive
units during the three months ended October 31, 2001 and 2000, respectively.
The Company employs a variety of flexible drive unit acquisition programs
including outright purchase and various evaluation programs. The purchasing
cycle for the AngioJet System drive unit varies depending on the customer's
budget cycle. The Company has signed contracts with five purchasing groups in
order to accelerate orders and increase marketing penetration. These purchasing
groups negotiate pre-determined discounts on the drive units and catheters for
their member hospitals. Member hospitals are required, with some exceptions, to
purchase products from approved vendors, such as the Company. The purchasing
groups receive a marketing fee on their purchases from the Company. These
discounts and marketing fees have been offset by the increase in sales to the
member hospitals of the purchasing group. There has been no material negative
effect on the Company's margins due to these discounts and marketing fees.
The Company expects U.S. AngioJet System sales to continue to grow
primarily through obtaining additional FDA-approved product uses, introduction
of new catheter models for existing indications, more face time selling to
existing accounts, peer-to-peer selling, and the publication of clinical
performance and cost-effectiveness data.
Foreign sales of the AngioJet System for the three months ended October 31,
2001 and 2000 were $81,000 and $135,000, respectively. The limited foreign sales
are due to cost constraints in overseas markets that result in lower margins.
Due to the lower margins the Company is not actively seeking to expand its
distribution network in Europe. In Japan, the coronary AngioJet System clinical
study was completed in April 1998 and a regulatory filing was completed in
November 1999 with the Japanese Ministry of Health and Welfare (MHW). The
Company is actively responding to MHW regulatory issues and expects Japanese
approval for coronary use of the AngioJet System in fiscal 2002.
The Company believes that the treatment of blood clots in the coronary
vessels, peripheral arteries, and neuro vessels are significant worldwide
marketing opportunities for the AngioJet System.
Revenue - Vascular Grafts
Vascular graft sales were $0 and $75,000 for the three months ended October
31, 2001 and 2000 respectively. All of the vascular graft sales were
Perma-Seal(R) Dialysis Access Grafts. No additional sales of Perma-Seal Dialysis
Access Grafts are expected. Currently the Company has put all graft activities
on hold as it concentrates its efforts on the development on new AngioJet System
applications.
Cost of Medical Products
Cost of medical products decreased $115,000 in the three month period ended
October 31, 2001 over the same period in the previous year. The decrease is
primarily driven by higher volumes of XMI and Xpeedior catheters that have a
lower per unit cost compared to the catheters they replaced and an improvement
in the in the coronary product catheter mix in the quarter. This per unit cost
decrease was offset by the significant growth in the U.S. AngioJet System
product sales. Medical product gross margins improved by $3,122,000 for the
three months ended October 31, 2001 over the same period in the previous year.
This resulted in gross margins of 69% and 53%, respectively, for the three
months ended October 31, 2001 and 2000, respectively. The Company believes that
gross margins will be in the high sixties to low seventies, as a percent to
sales, for the remainder of fiscal 2002.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $171,000 for the
three months ended October 31, 2001, compared to the same year-ago period. The
primary factors in the expense increase for the three months ended October 31,
2001 were the higher commissions on increased sales, increased marketing fees
paid to group purchasing organizations, and higher management incentives,
partially offset by an earlier workforce reduction and other one time and
ongoing cost saving measures in fiscal 2001. The Company expects that selling,
general and administrative expense to increase in fiscal 2002 due to the
anticipated growth in U.S. AngioJet System revenue.
Research and Development Expense
Research and development expense decreased 31% in the three months ended
October 31, 2001, respectively, when compared to the same period in the prior
year. This decline was primarily due the completion of certain development
projects and the timing of expenses incurred for clinical trials. The Company
believes that research and development expense for AngioJet System applications
will increase in fiscal 2002 as the Company completes the development of its
current products and invests in the development of new AngioJet System
thrombectomy applications and related products.
In October 1999, the Company received full FDA approval for its
Investigational Device Exemption (IDE) application for the clinical trial (TIME
1) of the AngioJet System in the treatment of acute ischemic stroke. The first
patient was enrolled in May 2000. After the first five patients had been treated
in the TIME 1 clinical trial for ischemic stroke, a planned review was
conducted. This review concluded that the AngioJet NV150 neurocatheter could
access the middle cerebral artery where most ischemic strokes occur, and that
the device can effectively remove clot from this territory. The review suggested
changes to the protocol covering a variety of areas, including patient
selection, exclusion criteria, and specifications for physician technique in
deploying and moving the device in the cerebral vasculature. Physician reviewers
also suggested changes to the device, to improve the trackability, flexibility
and efficacy profile. In May 2001, the FDA approved the re-start of patient
enrollment in the TIME 1 clinical trial. TIME 1 will enroll up to 30 patients at
up to eight centers in the U.S. to determine safety of the device for this
indication. Three patients have been enrolled to date under the re-opened trial
and a summary of results is expected after five to ten patients are treated.
Interest Income
Interest income decreased $97,000 in the three months ended October 31,
2001, when compared to the same period in the prior year. The decrease is due to
the declining market interest rates. The Company expects interest income on a
quarterly basis to increase slightly during the remainder of fiscal 2002 as cash
is generated from operations.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled approximately $11.4 million
at October 31, 2001 versus $9.5 million at July 31, 2001.
The $1,852,000 net increase in cash and cash equivalents in the most recent
three-month period was primarily due to the net cash provided by operating
activities of $1,581,000. Net cash provided by operating activities was
primarily due to the net income of $939,000, depreciation of $508,000, a
decrease in other current assets of $142,000 and an increase in accrued expenses
and other current liabilities of $301,000. This net cash provided by operating
activities was partially offset by an increase in inventory of $115,000 and a
decrease in accounts payables of $153,000. The decrease in other current assets
was due to the expensing of prepaid assets, primarily insurance. The increase in
accrued liabilities was due to the timing of the payments of accrued
liabilities. Inventory was increased due to the increase in demand of the
AngioJet System. The decrease in accounts payable was due to the timing of the
payment of accounts payables. Cash used in investing activities of $341,000 was
for the purchase of property and equipment. Net cash provided by financing
activities was $612,000, which resulted from the cash received in connection
with the exercise of stock options and warrants of $639,000, offset by the
repayment of debt of $27,000.
The Company expects that fiscal 2002 revenue from the AngioJet System,
primarily in the United States, will be in the middle of the previously
estimated range of $39 million to $44 million. Gross margin for fiscal 2002 is
expected to be in the high sixties and low seventies as a percent-of-sales. The
Company expects selling, general and administrative expenses to increase in
fiscal 2002 due to anticipated growth in revenue. Research and development
expenditures are expected to increase from the fiscal 2001 level as the Company
completes development of projects and invests in development of new AngioJet
System thrombectomy applications and related products. The Company is increasing
its expected diluted earnings per share for fiscal 2002 to be at the top of the
previously estimated range of $0.18-0.23. The quarterly revenue progression
should build steadily through the year, from a seasonal low in the first
quarter, with the profile being affected by the timing of new product
introductions as well as the timing of expenses related to marketing and
clinical trials. In addition, the Company expects that increasing working
capital investments in trade receivables and inventory will be required to
support growing product sales. Possis Medical expects its business to be cash
flow positive for the balance of the year, given current plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds. The
market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of October 2001, the amount of currency held in foreign
exchange was approximately $1,000 USD. The market risk on the Company's foreign
subsidiary operations is minimal.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated below.
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as amended
July 31, 1994 and restated to date.
3.2 10-K Fiscal year ended Bylaws as amended and restated
July 31, 1999 to date.
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
October 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POSSIS MEDICAL, INC.
DATE: December 3, 2001 BY: /s/
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: December 3, 2001 BY: /s/
EAPEN CHACKO
Vice President of Finance and
Chief Financial Officer