_______________________________________________
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, 1997
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 9, 1997 was 12,193,100.
________________________________
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, October 31, 1997
and July 31, 1997......................................... 3
Consolidated Statements of Operations for the three
months ended October 31, 1997 and 1996.................... 4
Consolidated Statements of Cash Flows for the
three months ended October 31, 1997 and 1996 ............. 5
Notes to Consolidated Financial Statements................ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7-9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.......................... 10
SIGNATURES................................................ 11
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1997 July 31, 1997
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 2,807,378 $ 3,849,194
Marketable securities ................................................. 8,973,122 10,964,170
Receivables:
Trade (less allowance for doubtful accounts of $95,000 and
$80,000, respectively).......................................... 1,037,540 878,893
Other ......................................................... 157,621 120,558
Inventories:
Parts........................................................... 1,189,849 1,242,580
Work-in-process................................................. 1,082,479 940,918
Finished goods.................................................. 1,417,137 1,191,870
Prepaid expenses and other assets.................................. 217,148 264,117
Total current assets............................................ 16,882,274 19,452,300
PROPERTY:
Leasehold improvements............................................. 1,176,608 1,166,306
Machinery and equipment............................................ 3,411,212 3,317,391
Assets-in-construction............................................. 119,024 51,753
Total property 4,706,844 4,535,450
Less accumulated depreciation...................................... 2,028,314 1,906,500
Property - net.................................................. 2,678,530 2,628,950
OTHER ASSETS:
Goodwill .......................................................... 323,922 341,922
TOTAL ASSETS........................................................... $19,884,726 $22,423,172
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................. $ 712,368 $ 648,502
Accrued salaries, wages, and commissions........................... 833,732 762,587
Current portion of long-term debt ................................. 21,561 28,356
Clinical trials accrual............................................ 746,258 879,166
Other liabilities.................................................. 417,677 294,002
Total current liabilities....................................... 2,731,596 2,612,613
OTHER LIABILITIES ..................................................... 189,000 --
LONG-TERM DEBT ........................................................ 180,313 10,213
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares of $ .40 par
value each; issued and outstanding, 12,193,100 and
12,121,312 shares, respectively................................ 4,877,240 4,848,525
Additional paid-in capital......................................... 41,670,494 41,118,611
Unearned compensation.............................................. (786,400) --
Unrealized loss on investments..................................... -- (5,836)
Retained deficit................................................... (28,977,517) (26,160,954)
Total shareholders' equity......................................... 16,783,817 19,800,346
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $19,884,726 $22,423,172
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
REVENUES:
Medical product sales.................................................. $1,367,983 $ 389,154
Sales agreement revenue................................................ -- --
Total revenues....................................................... 1,367,983 389,154
COST OF SALES AND OTHER EXPENSES:
Cost of medical products............................................... 1,478,039 1,269,021
Selling, general and administrative.................................... 1,515,376 715,865
Research and development............................................... 1,371,463 1,077,797
Interest............................................................... 548 2,261
Total cost of sales and other expenses............................... 4,365,426 3,064,944
Operating loss........................................................... (2,997,443) (2,675,790)
Interest income.......................................................... 180,880 255,156
Gain on sale of investments.............................................. -- 7,109
Loss from continuing operations - net.................................... (2,816,563) (2,413,525)
Income from discontinued operations - net................................ -- 111,539
Net loss................................................................. $(2,816,563) $(2,301,986)
Weighted average number of common shares outstanding..................... 12,149,544 12,057,089
Earnings (loss) per common share:
Continuing operations.................................................. $(.23) $(.20)
Discontinued operations ............................................... -- .01
Net loss............................................................... $(.23) $(.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, 1997 AND 1996
(UNAUDITED)
1997 1996
OPERATING ACTIVITIES:
Net loss .................................................................. $(2,816,563) $(2,301,986)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities................................. -- (7,109)
Gain on asset disposal..................................................... (2,100) --
Depreciation............................................................... 122,714 115,103
Amortization of goodwill................................................... 18,000 18,000
Stock compensation......................................................... 22,200 30,831
Increase in receivables.................................................... (195,710) (14,314)
Increase in inventories............................................... (314,097) (176,636)
Decrease in other assets.............................................. 46,969 2,883
Increase (decrease) in trade accounts payable.............................. 63,866 (118,385)
Increase (decrease) in accrued and other liabilities....................... (32,090) 33,401
Net cash used in operating activities...................................... (3,086,811) (2,418,212)
INVESTING ACTIVITIES:
Additions to plant and equipment........................................... (172,294) (204,960)
Proceeds from the disposal of assets....................................... 2,100 --
Purchase of marketable securities.......................................... (3,116) (1,997,667)
Proceeds from sale/maturity of marketable securities....................... 2,000,000 4,011,641
Net cash provided by investing activities.................................. 1,826,690 1,809,014
FINANCING ACTIVITIES:
Proceeds from notes payables............................................... 175,000 --
Repayment of long-term debt................................................ (11,695) (22,741)
Proceeds from issuance of stock and exercise of options.................... 55,000 54,819
Net cash provided by financing activities.................................. 218,305 32,078
DECREASE IN CASH AND CASH
EQUIVALENTS.............................................................. (1,041,816) (577,120)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF QUARTER.............................................................. 3,849,194 7,688,507
CASH AND CASH EQUIVALENTS AT END OF
QUARTER.................................................................. $2,807,378 $7,111,387
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.............................................................. $ 548 $ 2,211
Inventory transferred to fixed assets...................................... -- 9,730
Issuance of restricted stock............................................... 808,600 --
Accrued payroll taxes related to restricted stock.......................... 283,000 --
<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 1997 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended October 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 1998.
3. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share, which is
effective for interim and annual reporting periods ending after December 1997.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings per
Share, and replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires dual presentation for
all entities with complex capital structures and provides guidance on other
computational changes. The implementation of SFAS No. 128 is not expected to
have a material impact on earnings per share.
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, 1997 and 1996.
Total revenue for the three months ended October 31, 1997 and 1996 were
$1,368,000 and $389,000, respectively. The significant revenue growth in the
current quarter resulted from AngioJet Rapid Thrombectomy System sales of
$1,367,000, compared to $241,000 in the year earlier. The AngioJet System
received U.S. FDA marketing clearance for blood clot removal in dialysis grafts
in December 1996. The AngioJet System drive unit is a piece of capital equipment
and currently lists for $80,000 to U.S. hospitals. The purchasing cycle for the
AngioJet System drive unit, the Company believes, will average nine to twelve
months, depending on the customer's budget cycle. The Company offers an AngioJet
System evaluation program during which, in return for free placement of the
drive unit, the hospital purchases a minimum number of disposable catheters and
pumps. If the hospital requires additional time to complete the purchase and
chooses to keep the drive unit, monthly rent or a charge for each procedure is
made with a portion of rent or per procedure payment applied to the final drive
unit purchase price. Drive unit rental programs are available and, through a
third party, the Company offers various drive unit financing plans including
prime interest rate capital leases, operating leases, and a plan to acquire the
drive unit through the purchase of a minimum number of marked-up disposable
products. AngioJet System drive unit and disposable sales in the U.S. in the
most recent quarter were $1,289,000. In December 1997 the Company received
conditional approval from the FDA to commence a clinical study of its AngioJet
Rapid Thrombectomy System for use in the treatment of stroke caused by blockage
of the carotid arteries, the main vessels supplying blood to the brain. The
Company believes that the treatment of stroke is a significant marketing
opportunity for the AngioJet System. The Company expects that U.S. AngioJet
System sales will grow primarily through the addition of sales people, the
completion of clinical trials designed to yield additional label-approved
product uses, the publication of clinical performance and cost effectiveness
data and the introduction of additional catheter designs.
AngioJet System sales outside the United States have been below Company
expectations. Capital equipment, such as the Company's drive unit, is very
difficult to sell in the price-sensitive European market. The Company has been
without product distribution in Germany since February 1997 and is currently
interviewing potential AngioJet System independent distributors. Actions the
Company is taking to improve AngioJet System sales in Europe include conducting
European cost effectiveness studies and developing European physician advocates
for the AngioJet System. In Japan, the coronary AngioJet System clinical study
is nearing completion and a regulatory filing is planned for 1998 with the
Japanese Ministry of Health. The Company believes that the U.S. market will lead
the worldwide growth of AngioJet System sales revenue.
Vascular graft sales were $1,000 and $148,000 for the three months ended
October 31,1997 and 1996, respectively. Perma-Flow Coronary Bypass Graft sales
were $1,000 and $24,000, respectively. In October 1997 Baxter Healthcare
Corporation, the Company's Perma-Flow Graft worldwide distribution partner,
launched the product within the European market following the receipt of CE Mark
regulatory approval. In November 1997 the Company submitted a Humanitarian
Device Exemption (HDE) application to the FDA requesting approval for U.S.
marketing of the Perma-Flow Coronary Bypass Graft. This exemption would allow
the Company to market the product in the U.S. for a limited indication as it
completes the U.S. clinical study and PMA registration designed to provide broad
marketing approval. The Company expects a decision from the FDA on the HDE
application in the first half of 1998. The sales for the quarter ended October
31, 1996 included $124,000 to the Company's worldwide Perma-Seal Dialysis
Access Graft distributor. This distributor agreement was terminated in January
1997. The Company is seeking another distributor of this product and is in
discussion with several potential companies. There were no sales of the
Perma-Seal Graft during the three months ended October 31, 1997.
The Company is planning for continued growth in product sales for the
remainder of fiscal 1998 and beyond and believes that for the next several years
most of this growth will come from AngioJet System sales in the U.S.
marketplace.
Cost of medical products in the current period increased 16% or $209,000
compared to the same period a year ago. The increase is primarily due to the
significant growth in the AngioJet System product sales. The Company believes
that manufacturing costs per unit will be reduced and gross margins will
increase as product sales and related production volumes grow and as identified
product and process improvements are made.
Selling, general and administrative expenses for the three months ended
October 31, 1997 increased by $800,000 compared to the same period a year ago.
The primary factor is increased sales and marketing expense related to the
establishment of a direct U.S. sales organization to sell the AngioJet Rapid
Thrombectomy System and expenses of marketing the product in the United States.
The Company plans to continue to grow its field sales organization during fiscal
1998, and sales and marketing expenditures are expected to grow significantly in
the current year and beyond.
Research and development expenses increased 27% or $293,000 in the
mostrecent three-month period, compared to the same period a year ago. The
increase is primarily due to increased U.S. clinical study expenses associated
with the use of the AngioJet System in coronary vessels and the cost of
developing additional AngioJet System catheter designs. The Company believes
that research and development expenses will continue to increase as it completes
the development of its current products, invests in development of new AngioJet
Rapid Thrombectomy System applications, new vascular grafts and new AngioJet
technology-based products.
Interest income has decreased in the most recent period due to the use of
the Company's cash reserves to fund the Company's operations.
The Company recorded the final income relating to the sale of its Technical
Service division during the first quarter of fiscal 1997.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities totaled $11,781,000 at
October 31, 1997 versus $14,813,000 at July 31, 1997.
Net cash usage for the three months ended October 31, 1997 averaged
$1,014,000 per month, consistent with the Company's expectations. Most of the
$3,087,000 cash used in operations in the most recent three month period is due
to the $2,817,000 first quarter net loss. The Company believes that product
sales of the AngioJet System primarily in the U.S. will yield meaningful sales
growth going forward. Concurrently, sales and marketing expenditures are planned
to increase with the sales growth. Research and development expenditures are
expected to grow as well. The Company expects to report a loss for the last
three quarters of the current fiscal year. In addition, the Company expects that
increasing working capital investments in trade accounts receivable and
inventory will be required to support growing product sales.
The Company is currently evaluating its capital needs and the options
available for raising cash. Additional capital will be sought in fiscal 1998.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. 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, the Company's ability to
establish product distribution channels, changes in manufacturing methods,
market acceptance of the AngioJet System, changes in the levels of capital
expenditures by hospitals, 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
July 31, 1994 as amended and restated
to date.
3.2 S-2 Amendment No. 1 Bylaws as amended and
August 9, 1994 restated 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, 1997.
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 11, 1997 BY: ____/s/____________________________
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: December 11, 1997 BY: ____/s/____________________________
RUSSEL E. CARLSON
Vice President of Finance and
Chief Financial Officer