_______________________________________________
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, 1999
Commission File Number 0-944
POSSIS MEDICAL, INC.
9055 Evergreen Boulevard N.W.
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 June 10, 1999 was 14,990,592.
________________________________
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, April 30, 1999
and July 31, 1998....................................... 3
Consolidated Statements of Operations for the three
months and nine months ended April 30, 1999 and 1998.... 4
Consolidated Statements of Cash Flows for the
nine months ended April 30, 1999 and 1998 .............. 5
Notes to Consolidated Financial Statements.............. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 7-11
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk....................................... 12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................ 13
SIGNATURES.............................................. 14
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS April 30, 1999 July 31, 1998
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 4,910,663 $13,841,793
Receivables:
Trade (less allowances for doubtful accounts and returns
of $289,000 and $67,000, respectively) .............................. 2,645,552 1,144,472
Other................................................................ -- 3,091
Inventories:
Parts................................................................ 997,603 1,085,236
Work-in-progress..................................................... 1,335,752 1,740,834
Finished goods....................................................... 1,525,257 1,913,084
Prepaid expenses and other assets....................................... 197,775 313,158
Total current assets.............................................. 11,612,602 20,041,668
PROPERTY:
Leasehold improvements.................................................. 1,274,813 1,210,984
Machinery and equipment................................................. 4,044,437 3,720,772
Assets-in-construction.................................................. 185,542 113,094
Total property.................................................... 5,504,792 5,044,850
Less accumulated depreciation........................................... 2,745,371 2,343,691
Property - net.................................................... 2,759,421 2,701,159
OTHER ASSETS:
Deferred debt issue costs............................................... -- 884,105
Goodwill................................................................ 215,922 269,922
TOTAL ASSETS................................................................. $14,587,945 $23,896,854
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................................. $ 447,608 $1,245,552
Accrued salaries, wages, and commissions................................ 1,002,672 1,060,687
Current portion of long-term debt....................................... 89,463 97,713
Clinical trials accrual................................................. 176,260 335,067
Litigation settlement................................................... -- 200,000
Other liabilities....................................................... 739,459 504,624
Total current liabilities......................................... 2,455,462 3,443,643
LONG-TERM DEBT............................................................... 103,940 11,492,661
OTHER LIABILITIES............................................................ 107,000 216,200
SHAREHOLDERS' EQUITY:
Common stock - authorized 100,000,000 shares of $.40 par value each;
issued and outstanding, 14,163,740 shares and 12,218,622
shares, respectively................................................ 5,665,496 4,887,449
Additional paid-in capital.............................................. 54,204,449 42,476,257
Unearned compensation .................................................. (208,174) (489,060)
Retained deficit........................................................ (47,740,228) (38,130,296)
Total shareholders' equity........................................ 11,921,543 8,744,350
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $14,587,945 $23,896,854
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For Three Months Ended For Nine Months Ended
April 30, 1999 April 30, 1998 April 30, 1999 April 30, 1998
Product sales................................................... $ 3,739,108 $ 1,779,416 $ 8,361,575 $ 4,362,068
Cost of sales and other expenses:
Cost of medical products.................................. 2,388,331 1,320,760 5,809,886 4,335,411
Selling, general and administrative....................... 3,117,129 2,045,872 7,608,750 5,296,607
Research and development....................................... 1,510,315 1,273,540 4,530,982 3,731,219
Interest....................................................... 28,216 2,200 379,241 7,007
Total cost of sales and other expenses............ 7,043,991 4,642,372 18,328,859 13,370,244
Operating loss.................................................. (3,304,883) (2,862,956) (9,967,284) (9,008,176)
Interest income................................................. 80,256 90,191 357,352 409,036
Gain (loss) on sale of investments.............................. -- (2,074) -- 12,090
Net loss........................................................ $(3,224,627) $(2,774,839) $(9,609,932) $(8,587,050
Weighted average number of common
shares outstanding........................................ 13,909,660 12,207,036 12,852,970 12,184,132
Basic and dilutive net loss per common share.................... $(.23) $(.23) $(.75) $(.70)
<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, 1999 AND 1998
(UNAUDITED)
1999 1998
OPERATING ACTIVITIES:
Net loss ....................................................................... $ (9,609,932) $(8,587,050)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities........................................... -- (12,090)
(Gain) loss on asset disposal .................................................. 3,049 (2,100)
Depreciation.................................................................... 743,220 482,261
Amortization .................................................................. 186,077 54,000
Stock compensation.............................................................. 263,202 290,035
Increase in receivables......................................................... (1,497,989) (250,217)
(Increase)decrease in inventories............................................... 592,167 (1,146,510)
Decrease in other assets........................................................ 115,383 28,079
Increase(decrease) in trade accounts payable.................................... (797,944) 31,188
Increase in accrued and other current liabilities............................... 338,216 5,976
Net cash used in operating activities........................................... (9,664,551) (9,106,428)
INVESTING ACTIVITIES:
Additions to plant and equipment................................................ (505,157) (466,814)
Proceeds from the disposal of assets............................................ 14,001 2,100
Purchase of marketable securities............................................... -- (10,852)
Proceeds from sale/maturity of marketable securities............................ -- 6,995,313
Net cash provided by (used in) investing activities............................. (491,156) 6,519,747
FINANCING ACTIVITIES:
Proceeds from notes payable..................................................... 21,074 175,000
Repayment of long-term debt..................................................... (12,884) (23,532)
Proceeds from issuance of stock and exercise of options......................... 1,240,642 140,970
Deferred debt issue costs....................................................... (24,255) --
Net cash provided by financing activities....................................... 1,224,577 292,438
DECREASE IN CASH AND CASH EQUIVALENTS .......................................... (8,931,130) (2,294,243)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 13,841,793 3,849,194
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 4,910,663 $ 1,554,951
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid................................................................... $ 1,674 $ 1,101
Conversion of subordinated debentures and accrued
interest into common stock................................................. 12,346,174 --
Deferred debt issue costs and original issue discount netted against
conversion of subordinated debentures...................................... 1,371,122 --
Issuance of stock to settle litigation.......................................... 225,000 --
Accrued payroll taxes related to restricted stock............................... 83,229 286,002
Cancellation of restricted stock................................................ 37,934 --
Inventory transferred to fixed assets........................................... 32,150 16,288
Issuance of restricted stock.................................................... 20,250 816,300
<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 1998 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three and nine month periods ended April 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending July 31, 1999.
3. RECENTLY ISSUED ACCOUNTING STANDARD
Comprehensive Income:
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130), which
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity during the
period from transactions and other events and circumstances from non-owner
sources. Implementation of SFAS 130 did not have an effect on the Company's
consolidated financial statements because comprehensive income (loss) is the
same as the Company's net income (loss).
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
Three and Nine Month Periods Ended April 30, 1999 and 1998
Total product sales for the three and nine month periods ended April 30,
1999 were $3,739,000 and $8,362,000, respectively. This was an increase of
$1,960,000 and $4,000,000 as compared to the previous year. The significant
revenue growth resulted from growing physician acceptance of the AngioJet(R)
Rheolytic(TM) Thrombectomy System and the receipt of PMA approval on March 12,
1999 from the U.S. Food and Drug Administration ("FDA") to market its Coronary
AngioJet(R) Rheolytic(TM) Thrombectomy System in the United States.
Revenue - AngioJet Systems
The Company received PMA approval in March from the FDA to market its
Coronary AngioJet System in the U.S. for the removal of blood clots in
symptomatic native coronary arteries and coronary bypass grafts. In December
1996 the Company received FDA clearance to commence U.S. marketing of the
AngioJet System, with labeling claims for removal of blood clots from grafts
used by patients on kidney dialysis. U.S. product sales generated from these
approvals for the three and nine months ended April 30, 1999 were $3,186,000 and
$7,546,000, respectively. This was a 99% and 90% increase from the same periods
in the previous year. In the U.S. the Company sold 37 and 89 AngioJet drive
units in the three and nine month periods ending April 30, 1999. During the
three and nine month periods ended April 30, 1999, the Company sold
approximately 2,300 and 5,700 disposable sets in the U.S. versus approximately
1,200 and 2,800 in the same year-ago periods. As of April 30, 1999 the Company
had 239 AngioJet System drive units in U.S. hospitals as compared to 151 a year
earlier.
The Company plans to continue growing AngioJet System revenue by obtaining
additional FDA marketing approvals for existing products, by developing and
marketing AngioJet products that improve on the performance and are less costly
to make than current versions and by developing and marketing new catheters to
remove clots from large diameter blood vessels and the arteries in the central
brain. The coronary PMA presented the results of a 349 patient randomized trial
comparing AngioJet System treatment to intracoronary infusion of the blood
clot-dissolving drug urokinase for patients with demonstrated clot in native
coronary arteries and saphenous vein bypass grafts. The randomized trial showed
that AngioJet System treatment has significantly better outcomes than the
urokinase treatment for procedure success and device success. AngioJet System
treatment also had lower in-hospital major cardiac complications, including
fewer bleeding complications and vascular complications. Also, results of a
cost-effectiveness trial run concurrently with the coronary AngioJet trial shows
that the AngioJet treatment costs are approximately $5,000 less than those
associated with the use of urokinase. The Company believes that the treatment of
blood clots in coronary vessels and bypass grafts is a $800 million worldwide
marketing opportunity for the AngioJet System. In July 1997, the Company
submitted a 510(k) application to the FDA seeking clearance to expand label
claims for its AngioJet System to include use in peripheral arteries and bypass
grafts in the U.S. The Company expects an FDA decision on the application in
calendar 1999. In December 1997, the Company received approval to commence a
clinical study of the AngioJet System for use in the treatment of stroke caused
by blockage of the carotid arteries, the main vessels supplying blood to the
brain. There are three patients enrolled to date in the carotid stroke clinical
study. The Company believes that the treatment of neurovascular stroke is a $500
million worldwide marketing opportunity for the AngioJet System. A new catheter
in development, the NV150, is planned to begin a neurovascular stroke FDA
clinical trial in late calendar 1999.
Foreign sales of the AngioJet System for the three and nine months ended
April 30, 1999 were $128,000 and $322,000, respectively. This compared to
foreign sales of the AngioJet System of $149,000 and 313,000 for the same
periods the previous year.
In Japan, the coronary AngioJet System clinical study enrollment was
completed in April 1998 and a regulatory filing is planned for June 1999 with
the Japanese Ministry of Health and Welfare. Japanese approval for coronary use
of the AngioJet System is expected mid-calendar 2000.
Revenue - Vascular Grafts
Vascular graft sales were $425,000 and $494,000 for the three and nine
month periods ended April 30, 1999. This compared to $32,000 and $85,000 for the
three and nine month periods ended April 30, 1998. All vascular graft sales for
fiscal 1999 were Perma-Seal(R) Dialysis Access Grafts. In December 1998 the
Company entered into an exclusive worldwide Supply and Distribution Agreement
with Horizon Medical Products, Inc. for its Perma-Seal(R) Dialysis Access Graft.
The first shipment under this agreement was made in January 1999. All fiscal
1998 vascular graft sales were Perma-Flow(R) Coronary Bypass Grafts. The
Company's Perma-Flow(R) Coronary Bypass Graft Distribution Agreement expired in
March 1999 and the Company is seeking a new distributor.
In February 1999, the company received 510(k) approval from the FDA to
market three expanded polytetrafluoroethylene ("ePTFE") synthetic vascular
grafts. ePTFE synthetic grafts are the most commonly used synthetic graft in
peripheral vessel bypass procedures. This product will be marketed and sold by a
marketing partner or independent distributor.
A goal of the Company is to maximize the value of these products and
technologies for its shareholders. Its strategy is to seek partners to
distribute the products and possibly fund the graft product development program.
In addition, the Company will continue to pursue the possible sale of the
products and technologies. While the Company works toward completing these
activities, it has placed further product development activities on hold,
including enrollment into the Perma-Flow Graft clinical trial (PerFCT).
The Company is planning for continued growth in product sales for the
remainder of fiscal 1999 and beyond and believes that most of this growth will
come from AngioJet System sales in the U.S. marketplace.
Cost of Medical Products
Cost of medical products increased 80% and 34% in the 1999 three and nine
month periods, respectively, over the same periods in the previous year. The
increase is primarily due to the significant growth in the AngioJet System
product sales. Medical product gross margins improved by $892,000 and
$2,525,000, respectively, for the three and nine month periods as compared to
the same periods a year ago. This resulted in positive gross margins of 36% and
31%, respectively, for the three and nine month periods ending April 30, 1999.
This compares to positive gross margins of 26% and 1% for the three and nine
month periods ending April 30, 1998. The Company believes that manufacturing
costs per unit will be reduced and gross margins will continue to improve as
product sales and related production volumes continue to grow.
Selling, General and Administrative Expense
Selling, general and administrative expenses, in the three and nine months
ended April 30, 1999, increased $1,071,000 and $2,312,000, respectively,
compared to the same periods a year ago. The primary factors are increased sales
and marketing expenses related to the establishment of a direct sales
organization to sell the AngioJet System and expenses of marketing the product
in the United States. Based upon early physician interest and with the AngioJet
System receiving FDA approval for coronary use , the Company has grown the U.S.
AngioJet System sales and marketing organization from 27 in April 1998 to 39
employees in April 1999. The Company plans to further increase the direct U.S.
sales force to 50 employees by July 1999, to meet the growing demand for the
Company's AngioJet System. The Company plans on increasing its sales and
marketing expenditures going forward.
Research and Development Expense
Research and development expense, in the three and nine months ended April
30, 1999, increased 19% and 21%, respectively, over the previous year. The
increase is primarily due to increased expenses in the development of new
AngioJet System products. Vascular graft research and development expenses
decreased $330,000 and $326,000 for the three and nine months ended April 30,
1999 as compared to the same periods a year ago. The Company has placed further
vascular graft research and development activities on hold, including enrollment
into the Perma-Flow Graft clinical trial (PerFCT). The Company believes that
research and development expenses for AngioJet Thrombectomy System applications
will continue at the current level as it completes the development of its
current products and invests in development of new AngioJet System thrombectomy
applications and new high-pressure waterjet technology-based products.
Interest Income and Expense
Interest income decreased slightly in the most recent three and nine months
ended April 30, 1999 due to a reduction in cash reserves. The Company expects
interest income to increase through the remainder of the year due to the $7.0
million raised in a private placement offering closed in May and June 1999 (see
Subsequent Events). Interest expense for the three and nine month periods were
$28,000 and $379,000 for the 1999 periods compared to $2,000 and $7,000 in 1998.
These increases were due to the issuance of the 5% convertible subordinated
debentures in July 1998. The Company expects interest expense to decrease
through the remainder of the year. The final 5% convertible subordinated
debenture was converted into the Company's common stock in March 1999.
Liquidity and Capital Resources
Cash and cash equivalents, and marketable securities totaled $4,911,000 at
April 30, 1999 versus $13,842,000 at July 31, 1998.
Net cash usage for the nine months ended April 30, 1999 averaged $992,000
per month. Cash usage was less than the Company expected due to the early
conversion of stock warrants in the amount $828,000. Most of the $9,665,000 cash
used in operations in the most recent nine month period was due to the
$9,610,000 net loss. The other primary uses of cash is the payment of $720,000
in transaction fees and expenses relating to the issuance of the convertible
debentures issued in July 1998, the increase in receivables due to the increase
in product sales and the additions of plant and equipment.
During February and March 1999, the remaining $9,700,000 of debentures were
converted into 1,390,566 shares of the Company's common stock, including shares
issued for accumulated interest. These conversions combined with the $2,300,000
of debentures converted in January 1999 resulted in a total of 1,733,334 shares
being issued. As of April 30, 1999 all of the $12.0 million of debentures have
been converted.
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 slightly decrease due to
the reduced activity with the vascular grafts. Interest income is expected to
increase due to the $7.0 million private placement in May and June 1999 (see
Subsequent Events). Interest expense is expected to decrease due to the
convertible debentures being converted into the Company's common stock. The
Company expects to report a loss for the current fourth quarter and fiscal year.
In addition, the Company expects that increasing working capital investments in
trade receivables and inventory will be required to support growing product
sales.
Management believes that the Company's April 30, 1999 cash balance together
with proceeds from the $7.0 million private placement (see Subsequent Events)
will satisfy the Company's short term capital needs.
Subsequent Events
In May and early June 1999, the Company received an aggregate of $7.0
million from the issuance of 827,852 shares of Possis Common Stock in a private
placement offering. The institutional investors also received 106,509 warrants
exercisable at $11.43 and 17,669 warrants exercisable at $11.49.
Year 2000
The Company established a team in May 1998 to assess the possible exposures
related to the Y2K issue. The areas investigated include: product issues,
business computer systems and software, production equipment, vendor readiness
and contingency plans.
Products currently sold by the Company are Y2K compliant. The Company has
responded to all inquiries regarding Y2K compliance by customers and vendors.
The Company has noted an increase in requests from customers since January 1999.
The Company has taken steps to attach stickers to all drive units indicating Y2K
compliance.
The Company uses commercial software to manage the primary business
functions of production, finance and payroll. These systems have been certified
by the vendors as Y2K compliant on the software releases currently installed.
The Company has service contracts with these vendors so any additional changes
needed are obtained in service packs. The Company's network operating system is
certified as Y2K compliant and has been tested by the Company. Production and
quality control equipment do not use dates to control operations.
Certain personal computers were not Y2K compliant. The Company still has
about two dozen computers that are not Y2K compliant that will be replaced by
July, 1999 as planned spending necessary to maintain current technology. The
Company uses Microsoft software to operate its workstations and to provide
office productivity functions. It knows that not all of the current versions
used are fully Y2K ready. The Company is installing software to distribute
software upgrades as they become available, and this installation will be
completed by the end of June. In addition, the company plans to install
commercial tools to continuously monitor Y2K readiness of all office
productivity software on its computers. The company remains on target to have
nonconforming software upgraded by mid-1999.
The Company evaluated its suppliers of utility, telecommunications,
payroll, banking, and employee benefits services. It does not expect any
disruptions in these services. The Company replaced its voice mail system with
one that is Y2K compliant; the replacement was needed for other business reasons
so was not budgeted as a specific Y2K expense.
Company vendors have responded to questionnaires and follow-up phone calls
regarding their Y2K readiness. The Company continues to monitor key suppliers
and has incorporated Y2K readiness into its supplier certification process. In
May 1999 the Company began working on contingency plans for critical supplies.
This start was somewhat later than planned; the Company expects a timely
completion of the process. In the event any vendors are not or will not be Y2K
compliant, the Company plans to seek new vendors and/or stockpile inventory to
meet its production needs.
The Company budgeted approximately $50,000 for expenses directly related to
Y2K identification and remediation. Expenses to date are approximately $3,000;
total expenses are not expected to deviate significantly from the budget. The
Company has purchased continuation of business insurance and director and
officer liability insurance for the Y2K issue.
Although the Company does not at this time expect a significant effect on
its consolidated financial position, results of operations and cash flows, our
internal preparations are ongoing and there can be no assurance that the systems
of other companies or the systems of the Company itself will be converted on a
timely basis and will not have a corresponding adverse effect on the Company.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, including the discussion regarding Year 2000 compliance,
contain 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, 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, ability to raise additional capital and other risks identified
in Exhibit 99 to this Quarterly Report on Form 10-Q and detailed from time to
time in the Company's various Securities and Exchange Commission filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds. The
market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of April 1999, 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.
At April 30, 1999, all of the Company's outstanding long-term debt carries
interest at a fixed rate. There is no material market risk relating to the
Company's long-term debt.
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
July 31, 1994 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
99 Investment risk factors
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on form 8-K during the quarter ended
April 30, 1998.
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 10, 1999 BY: /s/ Robert G. Dutcher
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: June 10, 1999 BY: /s/ Russel E. Carlson
RUSSEL E. CARLSON
Vice President of Finance
Chief Financial and Accounting Officer
EXHIBIT 99
INVESTMENT RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following risk factors. This Exhibit contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below.
History of Operating Losses and Lack of Profitable Operations
We incurred losses for fiscal years 1996, 1997 and 1998. As of April 30,
1999, we had accumulated a deficit of $47.7 million. We incurred a net operating
loss of $9.9 million for the year ended July 31, 1996, a net operating loss of
$9.6 million for the year ended July 31, 1997, and a net operating loss of $12.5
million for the year ended July 31, 1998.
We do not expect to become profitable unless we achieve significant sales
in the United States. We must convince health care professionals, third-party
payors and the general public of the medical and economic benefits of the
AngioJet(R) Rheolytic(TM) Thrombectomy System. We cannot assure you that we will
succeed in marketing is product and achieve significant sales. Even if we
accomplish this goal, we cannot assure you that we will operate profitably on a
consistent basis.
Limited Regulatory Approval for Our Products; Government Regulation
Our products and manufacturing activities are subject to extensive and
rigorous federal and state regulation in the United States and various
regulatory requirements in other countries, including Japan. Current United
States Food and Drug Administration ("FDA") enforcement policy strictly
prohibits the marketing of approved medical devices for unapproved uses.
Therefore, even if our products receive regulatory approval, regulators may
significantly limit the uses for which our products may be marketed. In
addition, the process of obtaining and maintaining required regulatory approvals
can be lengthy and expensive, and the outcome of the process can be uncertain.
Moreover, regulatory approvals may be withdrawn if we fail to comply with
regulatory standards or if unforeseen problems arise following the initial
marketing of a product.
Additionally, we are required to adhere to Quality System Regulations
relating to product design, development, manufacturing, servicing, testing and
documentation. Failure to comply with applicable Quality System Regulations or
other regulatory requirements may result in fines, delays or suspensions of
approvals, injunctions against further distribution of our products, seizures or
recalls of products, operating restrictions, criminal prosecutions or other
sanctions, in addition to adverse publicity. The adoption of new regulations or
changes in existing regulations could prevent us from obtaining, or affect the
timing of, future regulatory approvals and could adversely affect the marketing
of our existing products. We cannot assure you that we will be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in our
receipt of or failure to receive regulatory approvals, the loss of previously
received approvals or our failure to comply with regulatory requirements would
have a material adverse effect on our business, financial condition and results
of operations.
Uncertainty of Clinical and Marketing Acceptance and Technology
Because our products are new to the market, they are still unfamiliar to
many members of the medical community. The AngioJet System has only recently
begun to be used for the removal of vascular, cardiovascular and intercranial
blood clots (known to the medical community as "thrombus"). Similarly, the
medical community has only recently begun to use our Perma-Flow(R) Coronary
Bypass Graft to perform coronary artery bypass graft procedures and our
Perma-Seal(R) Dialysis Access Graft to provide A-V access for kidney dialysis
patients. Market acceptance of our AngioJet, Perma-Flow and Perma-Seal products
will depend largely on our ability to demonstrate to the medical community in
general, and to cardiologists and cardiac surgeons in particular, the efficacy,
relative safety and cost-effectiveness of treating cardiovascular disease using
our products, as well as on our ability to train cardiologists and cardiac
surgeons to perform necessary procedures using our products. We cannot assure
you that our products will provide benefits considered adequate by providers of
cardiovascular and vascular treatments, or that enough providers will use our
products to ensure their commercial success. Moreover, even if our products
become generally accepted by the medical community, physicians trained to use
our products may not use them or may recommend a competitor's products. We
cannot assure you that cardiologists, cardiac surgeons or other physicians will
determine that our AngioJet, Perma-Flow or Perma-Seal products are appropriate
courses of treatment for their patients or acceptable alternatives to other
therapies. Even if they are accepted by the medical community, our ability to
successfully market our products before they receive FDA approval may be limited
by FDA regulations, guidelines or policies. Lack of clinical and market
acceptance and significant restrictions on our marketing program would have a
material adverse effect on our business, financial condition and results of
operations.
Dependence on AngioJet Products
We have focused our resources on the continued development and refinement
of our AngioJet System. If we fail to obtain necessary regulatory approvals, or
the medical community rejects the use of the AngioJet System for multiple
purposes, our business, financial condition and results of operations would be
materially and adversely affected.
Rapid Technological Change and Intense Competition
The medical products market is characterized by rapidly evolving technology
and intense competition. Our future success depends on our ability to keep pace
with advancing technology and competitive innovations. Potential competitors
have developed or are in the process of developing technologies that are, or in
the future may be, the basis for competitive products, some of which may
accomplish desired therapeutic effects through entirely different methods than
the products we are developing.
We believe our AngioJet System will face intense competition from a variety
of treatments for the removal of blood clots, including clot-dissolving
(thrombolytic) drug therapies, surgical intervention, balloon embolectomy,
mechanical and laser thrombectomy devices, ultrasound ablators, and other
thrombectomy devices based on waterjet systems that are currently being
developed by other companies. We know of a small number of synthetic grafts
being developed that could compete with our Perma-Flow Graft. However, we
believe we are the first developer to obtain FDA approval for U.S. clinical
trials with a synthetic coronary bypass graft and the first to obtain CE Mark
approval for marketing such a product in Europe. Our Perma-Seal Graft competes
with expanded polytetrafluoroethylene synthetic grafts (also known as "ePTFE"
grafts) and other synthetic grafts with needle sealing properties.
Many of the companies developing competing devices have substantially
greater capital and substantially greater resources for and experience in
research and development, regulatory matters, manufacturing and marketing than
we have. These companies will be serious competitors for us and may succeed in
developing products that are more effective and/or less costly than the AngioJet
System or the Perma-Flow and Perma-Seal Grafts. Furthermore, these companies may
be more successful than we are in manufacturing and marketing their products.
Our competitors or others may develop technologies, products or procedures that
are more effective or less invasive than any we are developing or that may
render our technology and products obsolete or noncompetitive. The advent of new
devices, procedures or new pharmaceutical agents could hinder our ability to
compete effectively and could have a material adverse effect on our business,
financial condition and results of operations.
Reliance on Patents and Proprietary Rights
Our success depends and will continue to depend in part on our ability to
maintain patent protection for our products and processes, to preserve our trade
secrets and to operate without infringing the proprietary rights of third
parties. We attempt to protect our technology by filing patent applications for
technology that we consider important to the development of our business, among
other measures. We currently hold five United States patents and eighteen
foreign patents related to the Perma-Flow Graft, and we have two additional
patent applications pending in the United States and one patent application
pending in foreign jurisdictions relating to the Perma-Flow Graft. We currently
hold three United States patents relating to the AngioJet System, and we have
twelve United States and numerous foreign patent applications pending relating
to the AngioJet System. The European Patent Office has accepted three of our
AngioJet System patent applications. In connection with the Perma-Seal Graft, we
hold two United States patents, with three pending foreign patent applications.
Claims relating to medical technology patents involve complex legal and factual
questions. Therefore, their outcomes are highly uncertain. We cannot assure you
that our pending applications will result in patents being issued to us or that
either our new patents or our existing patents will give us a competitive
advantage. Moreover, our competitors may design around any patents issued to us,
third parties may receive patent protection on their own waterjet devices, and
others may hold or receive patents containing claims that may cover products
developed by us.
We require all our employees to execute non-disclosure agreements when they
join Possis Medical. These agreements generally provide that all confidential
information developed or made known to the employee by us during the course of
his or her employment with Possis Medical must be kept confidential and not
disclosed to third parties. We cannot assure you, however, that these
non-disclosure agreements and other safeguards will protect our proprietary
information and know-how, or that they will provide us adequate remedies in the
event of unauthorized use or disclosure of confidential information. We also
cannot assure you that others will be unable to develop such information
independently.
We also rely on unpatented proprietary technology and trade secrets that we
seek to protect in part through confidentiality agreements with employees and
other parties. We cannot assure you that the employees and other parties will
comply with these agreements, that we will have adequate remedies for any breach
or that we can meaningfully protect our rights to unpatented proprietary
technology in any other way. We also cannot assure you that others will be
unable independently to develop or otherwise acquire substantially equivalent
proprietary technology and trade secrets, or that they will keep the technology
secret. The disclosure of this type of information could have a material adverse
effect on our business, financial condition and results of operations.
The medical device industry has seen much litigation with respect to patent
and other intellectual property rights. Litigation may be necessary for us to
enforce our patents, to protect our trade secrets and know-how, to defend
against claimed infringement of others' rights or to determine the ownership,
scope or validity of the proprietary rights of Possis and others. However,
litigation also could be extremely costly to us and could divert our resources
and efforts away from our products and day-to-day business matters. If the
litigation had an adverse outcome, it could subject us to substantial
liabilities to third parties, require us to seek licenses from third parties and
prevent us from manufacturing, selling or using our products. Any of these
results could have a material adverse effect on our business, financial
condition and results of operations.
Potential Limitations on Third-Party Reimbursement
Health care providers (such as hospitals and physicians) that purchase
medical devices like the AngioJet System or the Perma-Seal and Perma-Flow Grafts
for the treatment of patients generally rely on third-party payors like
Medicare, Medicaid and private insurance plans to reimburse all or part of the
costs associated with the health care services they provide. In certain foreign
markets, the pricing of and profits generated by health care products are
subject to government control. In some states, Medicare and Medicaid payors
reimburse hospitals for inpatient medical procedures at a pre-determined rate
based on diagnosis-related groups. If these rates do not include, and
third-party payors do not otherwise provide, adequate reimbursement to health
care providers for the cost of our products, our products will not gain wide
market acceptance and our financial results will suffer.
The Health Care Financing Administration ("HCFA") is the federal agency
responsible for administering the Medicare system. HCFA has prohibited Medicare
from paying for procedures that are still under investigation or that are not
deemed safe and effective for the condition being treated. Therefore, even if a
device has FDA approval, Medicare payors may deny reimbursement if they conclude
that the device is experimental or that it will not improve the condition being
treated.
The market for our products also could be adversely affected by future
legislation to reform the nation's health care system or by changes in industry
practices regarding reimbursement. We cannot assure you that the reimbursement
rates of third-party payors will allow us to price our products at levels
sufficient to realize an appropriate return on our investment in product
development.
Dependence on Key Personnel
We depend greatly on a limited number of key management and technical
personnel. Moreover, because of the highly technical nature of our business, our
ability to continue our technological developments and to market our products --
and thereby develop a competitive edge in the marketplace -- depends in large
part on our ability to attract and retain qualified technical and key management
personnel. Competition for qualified personnel is intense, and we cannot assure
you that we will be able to attract and retain the individuals we need. The loss
of key personnel, or our inability to hire or retain qualified personnel, could
have a material adverse effect on our business, financial condition and results
of operations.
Product Liability and Possible Insufficiency of Insurance
The manufacture and sale of our products may subject us to product
liability claims. In a recent decision, the United States Supreme Court held
that, despite a company's compliance with FDA regulations, it may not be
shielded from common-law negligent-design claims or manufacturing and labeling
claims based on state laws. Product liability insurance is expensive and in the
future may not be available on acceptable terms, if at all. We cannot assure you
that the coverage limits of our product liability insurance policies will be
adequate if a product liability claim is brought against us. A successful claim
or series of claims against us that exceeds our insurance coverage could have a
material adverse effect on our business, financial condition and results of
operations. Moreover, whether or not successful, product liability litigation
would likely divert the attention of our key personnel and could adversely
affect our reputation and the marketability of our technology and products.
Consequently, any product liability litigation could have a material adverse
effect on our business, financial condition and results of operations.
Future Capital Needs; Uncertainty of Additional Funding
We anticipate that cash on hand, the interest expected to be earned on such
cash and expected revenues will be sufficient to finance our operations for at
least the next six to twelve months. However, we cannot assure you that
additional capital will not be needed sooner. We anticipate that we may need to
raise additional funds in the future. We cannot assure you that additional
capital will be available to us or that it will be available on satisfactory
terms. Raising additional capital through equity financing may dilute the equity
interests of the shareholders of the company, and debt financing may involve
restrictive covenants. Failure to secure additional financing if and when needed
could have a material adverse effect on our business, financial condition and
results of operations.
Volatile Securities Market Factors and Possible Wide Fluctuations in Stock Price
The market price of our stock has in the past been subject to significant
fluctuations. Moreover, the markets for equity securities in general, and for
those of medical device manufacturers in particular, have been volatile in the
past, and the price of our common stock in the future could be subject to wide
fluctuations in response to quarterly variations in operating results, news and
product announcements, trading volume, general market trends and other factors.
We cannot assure you that our common stock will trade in the future at market
prices in excess of its current market price.
Anti-Takeover Provisions
Of the 100 million shares of capital stock authorized by our amended and
restated articles of incorporation, 79 million shares are undesignated. Our
board of directors may issue the undesignated shares on terms and with the
rights, preferences and designations determined by the board without shareholder
action. In addition, we have adopted a shareholder rights plan that provides for
the exercise of preferred share purchase rights when a person becomes the
beneficial owner of 15% or more of our outstanding common stock (subject to
certain exceptions). We also are subject to provisions of the Minnesota Business
Corporation Act that limit the voting rights of shares acquired in specified
types of acquisitions and that restrict specified types of business
combinations. The existence or issuance of "blank check" stock, the existence of
our shareholder rights plan and the effect of anti-takeover provisions under
Minnesota law, individually or in the aggregate, may discourage potential
takeover attempts and delay, defer or prevent a change in control. They also may
make the removal of management more difficult, which could deprive our
shareholders of opportunities to sell their shares at prices higher than
prevailing market prices.
Dependence on Single Source Suppliers
We depend on single source suppliers for some of the raw materials used in
the manufacture of our products. If we cannot obtain key raw materials from our
suppliers, we cannot assure you that the materials will be available from other
suppliers, that other suppliers will agree to supply the materials to us, or
that our use of the other suppliers would be approved by the FDA. Although we
believe our supply of raw materials currently is adequate for the needs of our
business, we cannot assure you that new sources of supply will be available when
needed. Any interruption in our supply of raw materials could have a material
adverse effect on our ability to manufacture our products until a new source of
supply is located and, therefore, could have a material adverse effect on our
business, financial condition and results of operations.
Non-Payment of Dividends
We have never paid cash dividends on our common stock. We currently intend
to retain all future earnings, if any, for use in our business and do not
anticipate paying cash dividends in the near future.
Year 2000 Risks
In May 1998 we established a team to assess and address our possible
exposure related to the Year 2000 computer software issue (which we call the
"Y2K" issue). The team investigated areas including product issues and our
business computer systems, production equipment, vendor readiness and
contingency plans. Products currently sold by us are Y2K compliant. We do not
use internally developed computer software and therefore do not anticipate major
reprogramming efforts. Our primary financial and operational system has been
assessed and is certified Y2K compliant. The equipment we use for production and
quality control does not use dates to control operations. However, several of
our personal productivity applications are not Y2K compliant. We are working to
make them compliant and expect them to be compliant by mid-calendar year 1999.
Also, a number of our personal computers are not Y2K compliant. We plan to
replace these computers as part of our technology update strategy. However, to
the extent the applications and computers are not made Y2K compliant during
1999, problems arising as a result of noncompliance could have a material
adverse effect on our business, financial condition and results of operations.
Moreover, if our significant vendors are not Y2K compliant, their inability
to provide services to us in a timely and efficient manner could adversely
affect our business and, consequently, our financial conditions and results of
operations. Although at this time we do not expect the Y2K issue to have a
significant impact on our business, financial condition or results of
operations, our internal preparations and the preparations of our vendors are
not yet complete. Therefore, we cannot assure you that our systems will be
converted on a timely basis or that our operations will be unaffected by the Y2K
issue.