_______________________________________________
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, 1996
Commission File Number 0-944
POSSIS MEDICAL, INC.
9055 Evergreen Boulevard
Minneapolis, Minnesota 55433-8003
(612) 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 December 12, 1996 was 12,095,034.
________________________________
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, October 31, 1996
and July 31, 1996.......................................3
Consolidated Statements of Operations for the three
months ended October 31, 1996 and 1995..................4
Consolidated Statements of Cash Flows for the
three months ended October 31, 1996 and 1995 ...........5
Notes to Consolidated Financial Statements..............6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................7-8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................9
SIGNATURES..................................................10
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1996 July 31, 1996
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 7,111,387 $ 7,688,507
Marketable securities ............................................. 13,943,297 15,838,543
Receivables:
Trade (less allowance for doubtful accounts of $60,000,........... 367,558 389,983
Other .......................................................... 254,893 218,154
Inventories:
Parts............................................................ 875,100 755,081
Work-in-process.................................................. 726,773 898,721
Finished goods................................................... 695,550 466,985
Prepaid expenses and other assets.................................. 204,273 207,156
Total current assets............................................ 24,178,831 26,463,130
PROPERTY:
Leasehold improvements............................................. 1,154,032 1,090,935
Machinery and equipment............................................ 2,966,397 2,782,287
Assets-in-construction............................................. 50,496 92,743
Total property.................................................. 4,170,925 3,965,965
Less accumulated depreciation...................................... (1,597,336) (1,482,233)
Property - net............................................. 2,573,589 2,483,732
OTHER ASSETS:
Goodwill .......................................................... 395,922 413,922
TOTAL ASSETS......................................................... $27,148,342 $29,360,784
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................. $ 199,520 $ 317,905
Accrued salaries, wages, and commissions........................... 693,811 725,988
Current portion of long-term debt ................................. 54,280 73,386
Other liabilities.................................................. 673,659 566,313
Total current liabilities....................................... 1,621,270 1,683,592
DEFERRED REVENUE .................................................... -- 41,768
LONG-TERM DEBT ...................................................... 34,934 38,569
SHAREHOLDERS' EQUITY:
Common stock-authorized, 20,000,000 shares of $ .40 par
value each; issued and outstanding,
12,061,317 and 12,052,644 shares, respectively................... 4,824,527 4,821,058
Additional paid-in capital......................................... 40,739,885 40,688,535
Unearned compensation.............................................. (71,859) (102,690)
Unrealized loss on investments..................................... (33,657) (145,276)
Retained deficit................................................... (19,966,758) (17,664,772)
Total shareholders' equity...................................... 25,492,138 27,596,855
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 27,148,342 $29,360,784
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
(UNAUDITED)
1996 1995
REVENUES:
Medical product sales.................................................. $ 389,154 $ 200,895
Sales agreement revenue................................................ -- --
Total revenues.................................................... 389,154 200,895
COST OF SALES AND OTHER EXPENSES:
Cost of medical products............................................... 1,269,021 1,049,384
Selling, general and administrative.................................... 715,865 558,322
Research and development............................................... 1,077,797 877,752
Interest............................................................... 2,261 4,989
Total cost of sales and other expenses............................ 3,064,944 2,490,447
Operating loss.............................................................. (2,675,790) (2,289,552)
Interest income............................................................. 255,156 188,106
Gain on sale of investments................................................. 7,109 --
Loss from continuing operations - net....................................... (2,413,525) (2,101,446)
Income from discontinued operations - net................................... 111,539 68,070
Net loss.................................................................... $(2,301,986) $(2,033,376)
Weighted average number of common shares outstanding........................ 12,057,089 10,461,004
Earnings (loss) per common share:
Continuing operations.................................................. $(.20) $(.20)
Discontinued operations ............................................... .01 .01
Net loss............................................................... $(.19) $(.19)
<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, 1996 AND 1995
(UNAUDITED)
1996 1995
OPERATING ACTIVITIES:
Net loss ...................................................................... $(2,301,986) $(2,033,376)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities...................................... (7,109) --
Gain on asset disposal..................................................... -- (267)
Depreciation............................................................... 115,103 96,842
Amortization of goodwill................................................... 18,000 18,000
Stock compensation......................................................... 30,831 9,983
Increase in receivables.................................................... (14,314) (227,590)
Increase in inventories.................................................... (176,636) (71,256)
Decrease in other assets................................................... 2,883 56,932
Increase (decrease) in trade accounts payable.............................. (118,385) 425,220
Increase (decrease) in accrued and other current liabilities............... 33,401 (200,698)
Net cash used in operating activities........................................... (2,418,212) (1,926,210)
INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations................................... -- 12,500
Additions to plant and equipment................................................ (204,960) (52,977)
Proceeds from the disposal of assets............................................ -- 267
Purchase of marketable securities............................................... (1,997,667) (4,345)
Proceeds from sale/maturity of marketable securities............................ 4,011,641 1,275,000
Net cash provided by investing activities....................................... 1,809,014 1,230,445
FINANCING ACTIVITIES:
Repayment of long-term debt..................................................... (22,741) (14,063)
Proceeds from issuance of stock and exercise of options......................... 54,819 23,782,080
Net cash provided by financing activities....................................... 32,078 23,768,017
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................................... (577,120) 23,072,252
CASH AND CASH EQUIVALENTS AT BEGINNING..........................................
OF QUARTER................................................................... 7,688,507 5,450,057
CASH AND CASH EQUIVALENTS AT END OF
QUARTER....................................................................... $7,111,387 $28,522,309
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid................................................................... $ 2,211 $ 4,989
Inventory transferred to fixed assets........................................... 9,730 10,015
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 notes
thereto included in the Company's 1996 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended October 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 1997.
3. RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Pursuant to the new standard, companies are encouraged, but are
not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, but would be required to disclose in a
note to the financial statements pro forma net income and, if presented,
earnings per share as if the Company had applied the new method of accounting.
Disclosure provisions are required to be adopted when the recognition and
measurement provisions are adopted, but no later than fiscal years beginning
after December 15, 1995. The Company has not yet determined if it will elect to
change to the fair value method, nor has it determined the effect the new
standard will have on net income and earnings per share should it elect to make
such a change.
4. EARNINGS (LOSS) PER SHARE
The Company's outstanding stock options and stock warrants were not
included in the computation of earnings per share since the impact would have
been anti-dilutive because of the net loss.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Quarters Ended October 31, 1996 and 1995.
Product sales of $389,000 for the three months ended October 31, 1996
increased significantly from the $201,000 reported in the same year-ago period.
Current quarter sales mix is $241,000 AngioJet System sales and $148,000 from
vascular graft sales. All product sales in both periods occurred outside the
United States, primarily in Europe. Most of the sales growth in the current
period is vascular grafts, specifically $124,000 in sales of the Perma-Seal
Dialysis Access Graft to C. R. Bard (Bard), the Company's product distributor.
On December 6, 1996, the Company announced that it had sent a notice terminating
its Supply and Distribution Agreement with Bard for the Perma-Seal Graft, based
on Bard's breach of the Agreement. The two parties are negotiating concerning
settlement and terms of separation. The Company believes the Perma-Seal Graft is
the smallest marketing opportunity of its three products. Also on December 6,
1996, the Company announced that it had received U.S. Food and Drug
Administration (FDA) clearance to commence U.S. marketing of the AngioJet Rapid
Thrombectomy System with labeling claims for removal of blood clots from grafts
used by patients on kidney dialysis. The Company anticipates growth in product
sales in the third and fourth quarters of fiscal 1997 and believes most of this
growth will be the result of AngioJet System sales in the U.S. marketplace.
Cost of medical products in the current period increased 21%, or $227,000,
compared to the same year-ago period. The increase is primarily due to an
increase in manufacturing start-up expense related to the AngioJet Rapid
Thrombectomy System inventory buildup in anticipation of the receipt of U.S. FDA
marketing clearance.
Selling, general and administrative expense in the current period increased
28%, or $158,000, compared to the same period last year. The greatest single
contributing factor is increased sales compensation expense and the related
hiring costs of establishing a direct U.S. sales organization to market the
AngioJet Rapid Thrombectomy System. The Company has employed five regional sales
representatives and anticipates adding a sixth very soon. Sales and marketing
expenses are expected to grow with increases in product sales.
Research and development cost increases of $200,000 in the most recent
three-month period are primarily due to increased vascular graft product and
production process validation expenses. AngioJet System research and development
expense decreased in the current quarter as patient enrollment in the U.S.
clinical trial for the Peripheral AngioJet System slowed in anticipation of FDA
marketing clearance. The Company believes that research and development expenses
will continue to increase as it completes the development of its current
products, invests in the development of new AngioJet Rapid Thrombectomy System
applications, an endovascular stent graft and other vascular graft and AngioJet
technology-based products.
Interest income grew in the current period due to an increase in the
Company's current period cash reserves from an October 1995 stock offering.
Income from discontinued operations increased in the most recent
three-month period due to a favorable one-time $70,000 adjustment, relating to
royalties from the 1991 sale of the Company's Technical Services division. The
Company believes it has now recorded the final income from its discontinued
operations.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities totaled $21,055,000 at
October 31, 1996 versus $23,527,000 at July 31, 1996.
Net cash usage for the three months ended October 31, 1996 averaged
$824,000 per month, consistent with the Company's expectations. Most of the
$2,418,000 cash used in operations in the most recent three month period is due
to the $2,302,000 first quarter net loss. The Company believes that product
sales of the AngioJet System in the United States, when added to the more modest
but growing international product sales, will yield meaningful sales growth
going forward. At the same time, sales and marketing expenditures will increase
with the sales growth, and research and development expenditures are expected to
grow as well. The Company anticipates reporting a loss for the last three
quarters of the current fiscal year. In addition, the Company believes that
working capital investments in trade accounts receivable and inventory will be
required to support growing product sales. The Company is planning on a
comparable net cash outflow in the second quarter to that reported in the
first quarter and reduced cash usage thereafter as product sales growth occurs.
The Company believes that its existing cash reserves will be adequate to
complete the development and commercialization of its three current products.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934 as amended. Such statements relating
to future events and financial performance, including the submission of
applications to the FDA, revenue and expense levels and future capital
requirements, are forward-looking statements that involve risks and
uncertainties, including the Company's ability to meet its timetable for FDA
submissions, the review time at the FDA which is out of the Company's control,
changes in the Company's marketing strategies, changes in manufacturing methods,
the levels of sales of the Company's products that can be achieved, and other
risks detailed from time to time in the Company's various Securities and
Exchange Commission filings.
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 S-2 Amendment No.1 Bylaws as amended and restated
August 9, 1994 to date.
27 Financial data schedule.
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
October 31, 1996.
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 13, 1996 BY: /s/ Robert G. Dutcher
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: December 13, 1996 BY: /s/ Russel E. Carlson
RUSSEL E. CARLSON
Vice President of Finance and
Chief Financial Officer