UNITED STATES
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 April 30, 2003
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number 0-944
POSSIS MEDICAL, INC.
(exact name of registrant as specified in its charter)
Minneapolis, Minnesota 41-0783184
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
9055 Evergreen Blvd NW 55433-8003
(Address of principal executive offices) (Zip Code)
763-780-4555
(Registrant's telephone number, including area code)
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 short 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _X_ No ___
The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of May 23, 2003 was 17,798,759.
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, April 30, 2003
and July 31, 2002............................................. 3
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended April 30, 2003 and 2002... 4
Consolidated Statements of Cash Flows for the
nine months ended April 30, 2003 and 2002 .................... 5
Notes to Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................. 17
ITEM 4. Controls and Procedures........................................ 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................... 18
SIGNATURES..................................................... 19
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 30, 2003 July 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 6,926,374 $ 18,556,663
Marketable securities.................................................. 23,142,658 --
Trade receivables (less allowance for doubtful
accounts and returns of $476,000 and
$582,000, respectively)...................................... 7,149,480 5,873,358
Inventories....................................................... 4,369,441 4,134,817
Prepaid expenses and other assets................................. 667,289 762,615
Deferred tax asset................................................ 646,000 646,000
Total current assets.................................... 42,901,242 29,973,453
PROPERTY AND EQUIPMENT, net............................................ 2,869,581 3,092,644
DEFERRED TAX ASSET..................................................... 8,593,682 11,623,000
TOTAL ASSETS........................................................... $ 54,364,505 $ 44,689,097
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................ $ 1,346,521 $ 1,262,711
Accrued salaries, wages, and commissions.......................... 2,685,760 2,471,557
Other liabilities................................................. 1,773,392 1,200,763
Total current liabilities............................... 5,805,673 4,935,031
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares
of $0.40 par value each; issued and outstanding,
17,762,803 and 17,274,222 shares, respectively............... 7,105,121 6,909,689
Additional paid-in capital........................................ 81,450,987 78,385,073
Unearned compensation............................................. (24,000) (18,900)
Retained deficit.................................................. (40,036,446) (45,521,796)
Accumulated other comprehensive income............................ 63,170 --
Total shareholders' equity.............................. 48,558,832 39,754,066
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 54,364,505 $44,689,097
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002
(UNAUDITED)
For Three Months Ended For Nine Months Ended
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
Product sales............................................... $ 14,625,124 $ 10,755,468 $ 41,628,687 $ 30,564,524
Cost of sales and other expenses:
Cost of medical products............................... 3,580,780 3,154,204 10,823,239 9,364,681
Selling, general and administrative.................... 5,986,002 4,946,690 17,325,421 14,094,704
Research and development............................... 2,228,722 1,023,776 4,920,303 3,045,815
Total cost of sales and other expenses........... 11,795,504 9,124,670 33,068,963 26,505,200
Operating income............................................ 2,829,620 1,630,798 8,559,724 4,059,324
Interest income............................................. 91,910 56,124 219,626 191,475
Income before income taxes.................................. 2,921,530 1,686,922 8,779,350 4,250,799
Provision for income taxes.................................. 1,097,000 -- 3,294,000 --
Net income.................................................. 1,824,530 1,686,922 5,485,350 4,250,799
Other comprehensive income, net of tax
Unrealized gains on securities........................ 63,170 -- 63,170 --
Comprehensive income........................................ $ 1,887,700 $ 1,686,922 $ 5,548,520 $ 4,250,799
Weighted average number of common shares
outstanding:
Basic................................................ 17,598,413 17,175,755 17,409,645 17,016,921
Diluted.............................................. 19,159,942 19,025,729 18,807,439 18,697,652
Net income per common share:
Basic................................................. $ .10 $.10 $.32 $.25
Diluted............................................... $ .10 $.09 $.29 $.23
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2003 AND 2002
(UNAUDITED)
2003 2002
OPERATING ACTIVITIES:
Net income................................................................... $ 5,485,350 $ 4,250,799
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation............................................................... 1,589,487 1,585,477
Gain on asset disposal .................................................... (343) (3,626)
Stock compensation expense................................................. 138,927 175,640
Deferred taxes............................................................. 3,029,318 --
Expense reimbursement from city government................................. -- (83,866)
Write-down due to impairment of assets..................................... -- 70,000
Increase in receivables.................................................... (1,276,122) (1,096,183)
Increase in inventories.................................................... (745,575) (580,591)
Decrease (increase) in other assets........................................ 95,326 (97,795)
Increase (decrease) in trade accounts payable.............................. 83,810 (143,089)
Increase in accrued and other current liabilities.......................... 786,832 1,197,949
Net cash provided by operating activities............................... 9,187,010 5,274,715
INVESTING ACTIVITIES:
Purchase of marketable securities............................................ (23,079,488) --
Additions to property and equipment.......................................... (896,487) (667,946)
Proceeds from the disposal of assets......................................... 41,357 7,120
Net cash used in investing activities................................... (23,934,618) (660,826)
FINANCING ACTIVITIES:
Proceeds from issuance of stock and exercise of options
and warrants.............................................................. 4,758,723 2,718,906
Common stock repurchased..................................................... (1,641,404) --
Repayment of long-term debt.................................................. -- (26,522)
Net cash provided by financing activities............................... 3,117,319 2,692,384
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................ (11,630,289) 7,306,273
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 18,556,663 9,515,751
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 6,926,374 $ 16,822,024
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Inventory transferred to property and equipment.............................. $ 47,951 $ --
Issuance of restricted stock................................................. 36,000 36,000
Accrued payroll taxes related to restricted stock............................ -- (12,600)
<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 2002 Annual Report.
2. STOCK OPTIONS
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, we apply the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, to our stock options and other
stock-based compensation plans.
In accordance with APB Opinion No. 25, compensation cost for stock options
is recognized in income based on the excess, if any, of the quoted market price
of the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock. The exercise price for stock
options granted to employees equals the fair market value of our common stock at
the date of grant, thereby resulting in no recognition of compensation expense.
The following table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
Net income:
Net income - as reported........................ $ 1,824,530 $ 1,686,922 $ 5,485,350 $ 4,250,799
Less estimated stock-based employee
compensation determined under fair
value based method, net of tax.............. (733,000) (927,000) (2,309,000) (3,053,000)
Net income - pro forma.......................... $ 1,091,530 $ 759,922 $ 3,176,350 $1,197,799
Earnings per common share:
Basic - as reported............................. $0.10 $0.10 $0.32 $0.25
Less estimated stock-based employee
compensation determined under
fair value based method, net of tax......... (0.04) (0.06) (0.14) (0.18)
Basic - pro forma............................... $0.06 $0.04 $0.18 $0.07
Diluted - as reported........................... $0.10 $0.09 $0.29 $0.23
Less estimated stock-based employee
compensation determined under fair
value based method, net of tax.............. (0.04) (0.05) (0.12) (0.17)
Diluted - pro forma............................. $0.06 $0.04 $0.17 $0.06
Weighted average common shares
outstanding
Basic .......................................... 17,598,413 17,175,755 17,409,645 17,016,921
Diluted......................................... 19,159,942 19,025,729 18,807,439 18,697,652
We estimated the fair values using the Black-Scholes option-pricing model,
modified for dividends and using the following assumptions:
2003 2002
Risk-free rate....................... 3.6-4.3% 5.4%
Expected dividend yield.............. 0% 0%
Expected stock price volatility...... 70-80% 79-86%
Expected option term................. 10 years 10 years
Fair value per option................ $7.52-15.75 $8.20-17.53
For purposes of determining the pro forma amounts, the fair value of
options is amortized to expense over the option-vesting period in determining
the pro forma impact. The option-vesting period is six months to four years (see
Note 4).
3. INTERIM FINANCIAL STATEMENTS
Operating results for the three and nine month periods ended April 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending July 31, 2003.
4. ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15, 2002
(see Note 11).
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), which amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002, and such disclosures have been provided in Note 2. The
adoption of SFAS 148 did not have a material impact on the Company's
consolidated balance sheet, results of operations, or cash flows.
5. MARKETABLE SECURITIES
During the quarter ended April 30, 2003 the Company invested its excess
cash and cash equivalents in a professionally managed portfolio of marketable
securities. All Company securities in this portfolio as of April 30, 2003 are
classified as available-for-sale and consist primarily of U.S. government
securities and corporate bonds. These investments are reported at fair value
with a net unrealized gain of approximately $63,000 included in other
comprehensive income as of April 30, 2003.
6. INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market. Inventory balances were as follows:
April 30, July 31,
2003 2002
Finished goods................. $ 1,757,657 $ 1,883,933
Work-in-process................. 1,057,195 805,911
Raw materials................... 1,554,589 1,444,973
$ 4,369,441 $ 4,134,817
7. 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:
April 30, July 31,
2003 2002 Life
Leasehold improvements.......... $ 1,519,438 $ 1,454,833 10 years
Equipment....................... 7,018,807 7,536,959 3 to 10 years
Assets in construction.......... 159,804 138,271 N/A
8,698,049 9,130,063
Less accumulated depreciation... 5,828,468 6,037,419
Property and equipment - net.... $ 2,869,581 $ 3,092,644
8. 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-wide basis due to shared
infrastructures to make operating and strategic decisions.
Total revenues by United States and outside the United States are as
follows:
Three Months Ended Nine Months Ended
April 30 April 30 April 30 April 30
2003 2002 2003 2002
United States.................. $ 14,306,525 $ 10,639,218 $ 40,788,097 $ 30,212,274
Outside United States.......... 318,599 116,250 840,590 352,250
Total revenues................. $ 14,625,124 $ 10,755,468 $ 41,628,687 $ 30,564,524
9. NET INCOME PER COMMON SHARE
Basic income 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 income 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.
10. COMMON STOCK
During the nine months ended April 30, 2003, stock options and warrants for
the purchase of 568,955 shares of the Company's common stock were exercised at
prices between $2.22 and $18.00 per share.
During the nine months ended April 30, 2003, the Company issued 24,077
shares in connection with its employee stock purchase plan.
During the nine months ended April 30, 2003, the Company issued 2,010
shares of restricted stock to the outside members of the Board of Directors.
During the nine months ending April 30, 2003, the Company repurchased
105,400 shares in the public market at stock prices between $14.02 and $16.48
per share.
11. ACCRUED WARRANTY COSTS
The Company estimates the amount of warranty claims on sold product that
may be incurred based on current and historical data. The actual warranty
expense could differ from the estimates made by the Company based on product
performance. The following table presents the changes in the Company's product
warranty liability:
Accrued warranty costs at July 31, 2002.............. $123,000
Payments made for warranty costs..................... (161,600)
Accrual for product costs............................ 185,100
Accrued warranty costs at April 30, 2003............. $146,500
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-Q
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements can be identified by the use of terminology
such as "anticipate," "believe," "could," "estimate," "expect," "forecast,"
"intend," "may," "plan," "possible," "project," "should," "will," and similar
words or expressions. Our forward-looking statements relate to the Company's
ability to increase sales of disposable product and capital equipment in the
face of new product introductions from competitors; its ability to obtain
additional regulatory approvals on a timely basis; the ability to obtain
regulatory clearance in new foreign markets, such as Japan; customer responses
to the Company's marketing strategies; future revenue levels; gross margins;
expense levels; ability to retain and motivate skilled employees especially
sales positions; ability to expand the sales force; deferred tax asset valuation
allowance; its outlook including future revenue, earnings, earnings per share
and expense levels; future equity financing needs and the Company's ability to
develop new products and enhance existing ones. These forward-looking statements
are 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 clinical and market acceptance
of our products; factors affecting the health care industry such as restricting
sales time at interventional labs; consolidation, cost containment due to rising
expenditures on drug-eluting stents and trends toward managed care; changes in
supplier requirements by group purchasing organizations; 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; changes in reimbursement; the development of new
competitive products such as filterwires, and compounds that may make our
products obsolete; sudden restrictions in supply of key materials and
deterioration of general market and economic conditions. We also caution you not
to place undue reliance on forward-looking statements, which speak only as of
the date made. Any or all forward-looking statements in this report and in any
other public statements we make may turn out to be inaccurate or false. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Except as required by federal securities laws, we undertake
no obligation to update any forward-looking statement. A discussion of these and
other factors that could impact the Company's future results are set forth in
the risk factors included in Exhibit 99.1 to the Company's Form 10-K for the
year ended July 31, 2002 as filed with the Securities and Exchange Commission.
Critical Accounting Policies
The consolidated financial statements include accounts of the Company and
all wholly-owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these financial
statements, management has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to
materiality. The Company's most critical accounting policies are those described
below. Application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates.
Revenue Recognition
Revenues associated with products that are already maintained at customer
locations are recognized and ownership and risk of loss are transferred to the
customer when the Company receives a valid purchase order from the customer.
Revenues associated with products that are not maintained at the customer
locations are recognized and title and risk of loss are transferred to the
customer when a valid purchase order is received and the products are received
at the customer's location. Provisions for returns are recorded in the same
period the related revenues are recognized.
Allowance for Returns
Accounts receivable are reduced by an allowance for items that may be
returned in the future. The allowance requires us to make estimates at the time
the account receivable is recorded concerning the likelihood for returns in the
future. The estimate is based upon historical experience, information received
from our customers and on assumptions that are believed to be reasonable under
the circumstances. Management, on a quarterly basis, evaluates the adequacy of
the allowance for returns. Management believes the amount of the allowance for
returns is appropriate; however, actual returns incurred could differ from the
original estimate, requiring adjustments to the allowance.
Allowance for Doubtful Accounts
At the time accounts receivable are recorded, they are reduced by an
allowance for amounts that may become uncollectible in the future. Substantially
all of the Company's receivables are due from health care facilities located in
the United States. The estimated allowance for doubtful accounts is based upon
the age of the outstanding receivables and the payment history and
creditworthiness of each customer. Management, on a quarterly basis, evaluates
the adequacy of the allowance for doubtful accounts. Management believes the
amount of the allowance for doubtful accounts is appropriate; however,
nonpayment of accounts could differ from the original estimate, requiring
adjustments to the allowance.
Inventories
Inventories are valued at the lower of cost or market. In order to
determine the market value of inventory on a quarterly basis, management
assesses the inventory quantities on hand to estimated future usage and sales
and, if necessary, writes down inventory deemed excess or obsolete to estimated
market value.
Warranty Reserve
The Company provides a one-year limited warranty on its AngioJet(R)System
drive unit and a limited warranty on AngioJet System disposable products. The
Company establishes a warranty reserve at the time products are sold and is
based upon historical frequency of claims relating to the Company's products and
the cost to replace disposable products and to repair drive units under
warranty. Management, on a quarterly basis, evaluates the adequacy of the
warranty reserve. Management believes the amount of the warranty reserve is
appropriate, given our historical experience; however, actual claims incurred
could differ from the original estimate, requiring adjustments to the reserve.
Deferred Tax Asset Valuation Allowance
The Company became profitable starting in the third quarter of fiscal 2001.
It has maintained profitability for nine quarters, including the third quarter
of fiscal 2003. Prior to the fourth quarter of fiscal 2002, the Company reduced
its net deferred tax asset to zero through a valuation allowance due to the
uncertainty of realizing such asset. In the fourth quarter of fiscal 2002, the
Company reassessed the likelihood that the deferred tax asset will be recovered
from future taxable income. Due to the previous two full years' operating
results projected forward, the Company reduced its valuation allowance on the
deferred tax asset by $12,269,000. Management will continue to assess the
likelihood that the balance of the deferred tax asset will be realizable and the
valuation allowance will be adjusted accordingly.
Results of Operations
Three and Nine Month Periods Ended April 30, 2003 and 2002
Total product sales for the three months ended April 30, 2003 increased
$3,869,000, or 36%, to $14,625,000 compared to $10,756,000 for the comparable
period in fiscal 2002. Total product sales for the nine months ended April 30,
2003 increased $11,064,000, or 36%, to $41,629,000 compared to $30,565,000 for
the comparable period in fiscal 2002. The Company recorded pre-tax income for
the quarter ended April 30, 2003 of $2,922,000, or $0.15 per diluted share. This
compared to pre-tax income in the same period in fiscal 2002 of $1,687,000, or
$0.09 per diluted share. For the nine months ended April 30, 2003 the Company
recorded pre-tax income of $8,779,000, or $0.47 per diluted share. This compared
to pre-tax income in the same period in fiscal 2002 of $4,251,000, or $0.23 per
diluted share. The Company recorded net income for the quarter ended April 30,
2003 of $1,825,000, or $0.10 per diluted share, compared to net income of
$1,687,000, or $0.09 per diluted share in the same period in 2002. For the nine
months ended April 30, 2003, the Company recorded net income of $5,485,000 or
$0.29 per diluted share, compared to net income of $4,251,000, or $0.23 per
diluted share, in the same period in 2002.
Revenue - AngioJet System
U.S. AngioJet System revenue for the three months ended April 30, 2003
increased 35% to $14,307,000 from $10,639,000 for the same period in 2002. U.S.
AngioJet System revenue for the nine months ended April 30, 2003 increased 35%
to $40,788,000 from $30,212,000 in 2002. The Company markets the AngioJet(R)
Rheolytic(TM)Trombectomy 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 continuing
customer acceptance of our improved coronary and peripheral product lines. The
Company began marketing the XVG(R)atheter in April 2002 for the removal of blood
clots in peripheral arteries and the Xpeedior(R)lus 120 catheter in August 2002
to remove blood clots in peripheral arteries. In addition, the Company's
Xpeedior and XMI(R) catheters continue to have increased acceptance by
physicians. The Xpeedior catheters are the first catheters marketed by the
Company based upon its proprietary Cross-Stream(R)Technology. The XVG and XMI
catheters also incorporate Cross-Stream technology. This exclusive technology
platform intensifies the action at the tip of the catheter, which doubles the
clot removal rate and triples the treatable vessel size compared to other
available mechanical thrombectomy 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.
In April 2002, the Company released to the U.S. market its new 5 French XVG
catheter for use in removing blood clots from peripheral arteries greater than
or equal to 3mm in diameter. The 140cm XVG catheter becomes the highest power,
long catheter in the Possis product line, which includes the XMI. The XVG
incorporates the proprietary Cross-Stream technology platform, and it is
optimized for vessels 3-8mm in diameter. The combination of longer length,
Cross-Stream technology, higher clot removal rate, and improved pushability and
tractability should make this a versatile catheter for dealing with larger
vessels, more distal vessels, and older, more problematic clot burdens.
In August 2002, the Company released to the U.S. market the new Xpeedior
Plus 120 catheter for use in removing blood clots from peripheral arteries
greater than or equal to 3mm in diameter. The Xpeedior Plus 120 catheter is an
improved version of our Xpeedior 100. Compared to the Xpeedior 100, the new
catheter's longer length and additional features will allow the physician to
treat more distal vessels.
As of April 30, 2003, the Company had a total of 1,022 domestic drive units
in the field, compared to 824 drive units at April 30, 2002, and 953 units as of
January 31, 2003. During the three month period ended April 30, 2003, the
Company's catheter sales increased approximately 27% to approximately 10,700
catheters versus approximately 8,400 catheters in the same prior year period.
During the nine month period ended April 30, 2003, the Company's catheter sales
increased approximately 28% to approximately 30,600 catheters versus
approximately 24,000 catheters in the same prior year period. The average
catheter utilization rate per installed domestic drive unit was 10.4 in the
third quarter of fiscal 2003, compared to a rate of 10.2 in the same prior year
period, and 10.9 in the second quarter of fiscal 2003. The Company sold 45 and
162 drive units worldwide during the three and nine months ended April 30, 2003,
respectively, compared to 40 and 127 drive units in the same periods in the
prior year, respectively.
The Company employs a variety of flexible drive unit acquisition programs
including outright purchase and various evaluation programs. The Company has no
leasing programs for its capital equipment. The purchasing cycle for the
AngioJet System drive unit varies depending on the customer's budget cycle. The
Company has signed contracts with six purchasing groups in order to accelerate
orders and increase market penetration. These purchasing groups evaluate and
screen new medical technologies on behalf of their members, and once they
recommend a technology, such as the AngioJet System, they negotiate
pre-determined discounts on behalf of their members. The benefit for the Company
is access to the recommended vendor list, along with marketing support provided
by the purchasing group. The purchasing groups receive a marketing fee on their
member purchases from the Company. These discounts and marketing fees have been
offset by the increase in sales to the member hospitals of the purchasing group.
There has been no material negative effect on the Company's margins due to these
discounts and marketing fees. The discounts reduce gross revenue on the income
statement, while marketing fees are included in selling, general and
administrative expense on the income statement.
The Company expects U.S. AngioJet System sales to continue to grow
primarily through obtaining additional 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 and nine month periods
ended April 30, 2003 were $319,000 and $841,000, respectively. This compared to
foreign sales of the AngioJet System of $116,000 and $352,000, respectively, for
the same periods the previous year. The increase in sales is primarily due to
the introduction of the XMI and XVG catheters and the increase in drive unit
sales in the European market. The Company has recently expanded the sales
territory of one of its existing European distributors to expand product
penetration in Europe. In Japan, the Company has decided to independently pursue
an alternative regulatory strategy that will utilize our U.S. coronary clinical
trial results and extensive body of published clinical studies which is expected
to result in regulatory approval and satisfactory reimbursement for the AngioJet
System with the XMI catheter by the second quarter of fiscal 2004.
The Company believes that the treatment of blood clots in coronary vessels,
peripheral vessels, vessels in the brain and vascular grafts, provide
significant worldwide marketing opportunities for the AngioJet System.
Cost of Medical Products
Cost of medical products increased $427,000 to $3,581,000 in the three
month period ended April 30, 2003 over the same period in the previous year, and
increased $1,458,000 to $10,823,000 for the nine month period ended April 30,
2003 over the same period in the previous year. These increases are primarily
due to the significant growth in the U.S. AngioJet System product sales. For the
three months ended April 30, 2003, gross profit improved by $3,443,000 to
$11,044,000 over the same period in the previous year. This resulted in a gross
profit margin of 76% as a percentage of product sales. Gross margins improved
$9,605,000 to $30,805,000, or 74% as a percentage of product sales, for the nine
month period ended April 30, 2003 over the same period in the previous year.
This compares to gross margins as a percentage of product sales of 69% for each
of the three and nine month periods ended April 30, 2002. The improvement in
gross margins was driven by higher volumes of the XMI, XVG and Xpeedior
catheters, an improvement in the higher margin, long and middle catheter product
mix in the three and nine months ended April 30, 2003 as compared to same period
in the previous fiscal year. This was partially offset by the impact of higher
international sales versus the prior year period. The Company believes that
gross margins will be in the low to mid seventies, as a percent of sales, for
the remainder of calendar 2003.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $1,039,000 to
$5,986,000 for the three months ended April 30, 2003 and increased $3,230,000 to
$17,325,000 for the nine months ended April 30, 2003, compared to the same
periods in the previous year. The primary factors in the expense increase for
the three months ended April 30, 2003 were the $450,000 additional expenses
associated with the growth in the sales force versus a year ago, increased
expenses associated with marketing studies of $183,000, increased outside
services of $110,000, increased sales demos and sales materials of $109,000, and
higher medical insurance expense of $94,000. The primary factors for the expense
increase for the nine months ended April 30, 2003 were the $1,275,000 additional
expenses associated with the growth in the sales force versus a year ago,
increased contract labor of $121,000, increased outside services of $242,000,
increased sales demos and sales materials of $245,000, sales meetings and
conventions of $269,000, increased expenses associated with marketing studies of
$438,000 and higher medical insurance expense of $424,000. The Company expects
selling, general and administrative expense to increase for the remainder of
fiscal 2003 as a result of the Company's expansion of its sales force to enhance
marketing penetration and due to the anticipated growth in U.S. AngioJet System
revenue.
Research and Development Expense
Research and development expense increased $1,205,000 to $2,229,000, in the
three months ended April 30, 2003, when compared to the same period in the prior
year. Research and development expense increased $1,874,000 to $4,920,000 in the
nine months ended April 30, 2003. These increases were primarily due to the
shifting of priorities between various development projects. The Company
believes that research and development expense for AngioJet System applications
will increase for the remainder of fiscal 2003 as the Company completes the
development of its current products and invests in the development of new
AngioJet System thrombectomy applications and related products, including its
distal protection device.
Interest Income
Interest income was $92,000 and $56,000 in the three months ended April 30,
2003 and 2002, respectively. Interest income increased $28,000 in the nine
months ended April 30, 2003 to $92,000, when compared to the same period in the
prior year. The increases are due to the investing of excess cash and cash
equivalents in an enhanced cash management portfolio of marketable securities.
The Company expects interest income on a quarterly basis to increase slightly
during the fourth quarter of fiscal 2003 as cash is generated from operations.
Provision For Income Taxes
The Company recorded a provision for income taxes of $1,097,000 and
$3,294,000 or 37.5% of income before income taxes for the three and nine months
ended April 30, 2003. The tax provision for the three and nine months ended
April 30, 2002 was reduced to zero due to the reduction of the Company's
deferred tax asset valuation allowance.
The Company became profitable starting in the third quarter of fiscal 2001.
It has maintained profitability for nine quarters, including the third quarter
of fiscal 2003. Prior to the fourth quarter of fiscal 2002, the Company reduced
its net deferred tax asset to zero through a valuation allowance due to the
uncertainty of realizing such asset. In the fourth quarter of fiscal 2002, the
Company reassessed the likelihood that the deferred tax asset will be recovered
from future taxable income. Due to the previous two full years' operating
results projected forward, the Company reduced its valuation allowance on the
deferred tax asset by $12,269,000. $11,526,000 was recorded as a tax benefit in
fiscal 2002, and the remaining $743,000 relates to disqualified stock options
that are recorded directly in Shareholders' Equity. Management will continue to
assess the likelihood that the balance of the deferred tax asset will be
realizable and the valuation allowance will be adjusted accordingly.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities totaled
approximately $30,069,000 at April 30, 2003 versus $18,557,000 at July 31, 2002.
The $11,512,000 net increase in cash, cash equivalents and marketable
securities in the most recent nine-month period was primarily due to the net
cash provided by operating activities of $9,187,000. Net cash provided by
operating activities was primarily due to the net income of $5,485,000,
depreciation of $1,589,000, stock compensation expense of $139,000, a decrease
in deferred tax asset of $3,029,000, and an increase in accrued liabilities of
$787,000. This net cash provided by operating activities was partially offset by
an increase in trade receivables of $1,276,000 and an increase in inventory of
$746,000. Depreciation includes company-owned drive units at customer locations,
as well as company-owned property and equipment. The decrease in deferred tax
asset was due to the utilization of the net operating loss carryovers to offset
current taxes payable. Trade receivables increased due to the increase in
revenue for the three-month period ending April 30, 2003 as compared to revenue
for the last three months' fiscal 2002. Inventory was increased to meet the
increase in demand of the AngioJet System. The increase in accrued liabilities
was due to the timing of the payments for payroll and other accrued liabilities.
This increase was partially offset by the payment of fiscal 2002 corporate
incentives in September 2002. Cash used in investing activities was $23,935,000.
This includes the purchase of $23,079,000 of marketable securities and the
purchase of $896,000 of property and equipment. Net cash provided by financing
activities was $3,117,000, which resulted from the cash received in connection
with the exercise of stock options and warrants for $4,759,000, offset by the
repurchase of 105,400 shares for $1,641,000 of the Company's stock in the open
market transactions.
Outlook
The Company expects that overall revenue from the AngioJet System,
primarily in the United States, will be approximately $57 million in fiscal
2003. Gross margin for fiscal 2003 is expected to be in the mid seventies, as a
percent of sales. The Company expects selling, general and administrative
expenses to continue increasing throughout the remainder of fiscal 2003 as a
result of the Company's expansion of its sales force to enhance market
penetration. Research and development expenditures are expected to continue to
increase from the fiscal 2002 level as the Company completes development of
projects and invests in development of new AngioJet System thrombectomy
applications and related products including clinical trials for a new distal
occlusion product. The Company expects pre-tax, diluted earnings per share for
the full year in the range of $0.62 to $0.64. After tax diluted earnings per
share are estimated to be in the range of $0.39 to $0.40, not including any
potential tax benefit related to a further reduction of the deferred tax asset
valuation allowance. For fiscal 2004, the Company's preliminary guidance is to
expect revenue in the range of $72-$75 million, with slightly expanding
full-year margins, as a percent-of-sales. The Company expects diluted earnings
per share for the full year in the range of $0.54 to $0.64. In addition, the
Company expects that increasing working capital investments in trade receivables
and inventory will be required to support growing product sales. The Company's
primary source of cash is from its product sales. Cash is sufficient for the
Company's needs into the foreseeable future. Collections of the trade
receivables resulting from the product sales are reviewed monthly to ensure that
the customers are paying in a timely manner. The Company's use of cash is for
payment of normal trade accounts payable, capital equipment purchases, employee
compensation, stock repurchases and other normal business expenses, all on terms
that are customary in the industry. The Company is current with its vendors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in a professionally managed,
institutional fixed income portfolio of short duration. The market risk on a
diversified portfolio of related, short duration is minimal, while enhancing
returns above money market levels.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of April 2003, 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.
The Company does not have any debt or off-balance-sheet liabilities.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The term "disclosure
controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of the
Securities and Exchange Act of 1934 ("Exchange Act"). These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our chief executive officer and our chief financial
officer have evaluated the effectiveness of the Company's disclosure controls
and procedures as of April 30, 2003, (the "Evaluation Date"), and they have
concluded that, as of the Evaluation Date, such controls and procedures were
effective at ensuring that required information will be disclosed on a timely
basis in our reports filed under the Securities Exchange Act of 1934, as
amended. The Company is in the process of evaluating methods for facilitating an
outside review of its internal controls, in keeping with recent directives
issued by the SEC following the Sarbanes-Oxley Act; this would prepare the
Company for the review of controls and July 31, 2004 attestation by outside
auditors, mandated by the Sarbanes-Oxley Act.
(b) Changes in internal controls. We maintain a system of internal
accounting controls that are designed to provide reasonable assurance that our
books and records accurately reflect our transactions and that our established
policies and procedures are carefully followed. For the quarter ended April 30,
2003, there were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls, and we have not
identified any significant deficiencies or material weaknesses in our internal
controls.
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 Description
3.1 Articles of incorporation as amended and restated to date
(incorporated by reference to Exhibit [3.1] of the Company's
Annual Report on Form 10-K for the fiscal year ended
July 31, 1994).
3.2 Bylaws as amended and restated to date (incorporated by reference
to Exhibit [3.2] of the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1999)
99.1 Certifications pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarter ended April 30, 2003, the Company filed a Report on Form
8-K on February 11, 2003 under Item 5 reporting second quarter earnings.
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: June 16, 2003 BY: /s/
ROBERT G. DUTCHER
Chairman, President and Chief Executive Officer
DATE: June 16, 2003 BY: /s/
EAPEN CHACKO
Vice President of Finance and Chief Financial Officer
Certification of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Robert G. Dutcher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Possis Medical,
Inc. (Possis Medical);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Possis
Medical as of, and for, the periods presented in this quarterly report;
4. Possis Medical's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to Possis Medical, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of Possis Medical's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Possis Medical's other certifying officer and I have disclosed, based on
our most recent evaluation, to Possis Medical's auditors and the audit committee
of Possis Medical's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Possis Medical's ability to record,
process, summarize and report financial data and have identified for Possis
Medical's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in Possis Medical's internal controls; and
6. Possis Medical's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 16, 2003 /s/
Robert G. Dutcher
Chairman, President and
Chief Executive Officer
Certification of Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Eapen Chacko, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Possis Medical,
Inc. (Possis Medical);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Possis
Medical as of, and for, the periods presented in this quarterly report;
4. Possis Medical's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to Possis Medical, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of Possis Medical's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Possis Medical's other certifying officer and I have disclosed, based on
our most recent evaluation, to Possis Medical's auditors and the audit committee
of Possis Medical's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Possis Medical's ability to record,
process, summarize and report financial data and have identified for Possis
Medical's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in Possis Medical's internal controls; and
6. Possis Medical's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 16, 2003 /s/
Eapen Chacko
Chief Financial Officer
Vice President of Finance