_______________________________________________
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, 1999
Commission File Number 001-12567
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 6, 1999 was 15,015,304.
________________________________
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, October 31, 1999
and July 31, 1999............................................. 3
Consolidated Statements of Operations and Comprehensive
Loss for the three months ended October 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
three months ended October 31, 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 Disclosure about
Market Risks ................................................. 11-12
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)
October 31, 1999 July 31, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 6,508,239 $ 9,151,004
Receivables:
Trade (less allowance for doubtful
accounts and returns: $575,000 and
$489,000, respectively)................. 3,088,748 3,063,311
Inventories:
Parts................................... 1,363,377 1,218,910
Work-in-process......................... 1,664,227 1,596,313
Finished goods.......................... 1,507,184 1,556,482
Prepaid expenses and other assets......... 252,097 247,907
Total current assets.............. 14,383,872 16,833,927
PROPERTY:
Leasehold improvements.................... 1,303,451 1,274,814
Machinery and equipment................... 4,260,871 4,143,032
Assets in construction.................... 275,992 258,114
5,840,314 5,675,960
Less accumulated depreciation............. 3,009,566 2,887,025
Property - net.................... 2,830,748 2,788,935
OTHER ASSETS:
Goodwill:................................. 179,922 197,922
TOTAL ASSETS............................... $17,394,542 $19,820,784
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................... $ 675,089 $ 879,173
Accrued salaries, wages, and commissions.. 1,605,184 1,605,680
Current portion of long-term debt......... 92,153 92,490
Other liabilities......................... 1,031,711 616,840
Total current liabilities.................. 3,404,137 3,304,283
LONG-TERM DEBT............................. 98,855 99,728
OTHER LIABILITIES.......................... -- 102,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000
shares of $ .40 par value each;
issued and outstanding, 15,014,654 and
14,998,360 shares, respectively......... 6,005,862 5,999,344
Additional paid-in capital................ 60,734,578 60,608,623
Unearned compensation..................... (105,184) (141,467)
Retained deficit.......................... (52,743,706) (50,151,727)
Total shareholders'equity................. 13,891,550 16,314,773
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. $17,394,542 $19,820,784
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
1999 1998
Product sales........................................ $4,483,189 $1,859,560
Cost of sales and other expenses:
Cost of medical products........................ 2,098,395 1,534,259
Selling, general and administrative.................. 3,811,554 2,054,840
Research and development............................. 1,262,225 1,486,637
Interest............................................. 2,316 177,055
Total cost of sales and other expenses...... 7,174,490 5,252,791
Operating loss....................................... (2,691,301) (3,393,231)
Interest income...................................... 99,322 161,062
Net loss and comprehensive loss......................$(2,591,979) $(3,232,169)
Weighted average number of common shares outstanding. 15,005,810 12,252,543
Basic and dilutive net loss per common share:
Net loss........................................ $(.17) $(.26)
<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, 1999 AND 1998
(UNAUDITED)
1999 1998
OPERATING ACTIVITIES:
Net loss ................................... $(2,591,979) $(3,232,169)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on asset disposal................. -- (1,820)
Depreciation................................ 254,572 227,102
Amortization................................ 18,000 80,157
Stock compensation.......................... 68,533 127,103
Stock options issued to non-employees.. 14,500 --
Increase in receivables................ (25,437) (65,355)
Increase in inventories................ (270,683) (246,756)
(Increase) decrease in other assets.... (4,190) 74,962
Decrease in trade accounts payable.......... (204,084) (885,241)
Increase in accrued and other liabilities... 227,156 326,095
Net cash used in operating activities....... (2,513,612) (3,595,922)
INVESTING ACTIVITIES:
Additions to plant and equipment............ (188,785) (166,352)
Proceeds from the disposal of assets........ -- 2,800
Net cash used by investing activities....... (188,785) (163,552)
FINANCING ACTIVITIES:
Proceeds from notes payables................ -- 21,074
Repayment of long-term debt................. (1,210) (4,899)
Proceeds from issuance of stock and
exercise of options...................... 60,842 44,687
Deferred debt issues costs.................. -- (24,255)
Net cash provided by financing activities... 59,632 36,607
DECREASE IN CASH AND CASH EQUIVALENTS....... (2,642,765) (3,722,867)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF QUARTER............................... 9,151,004 13,841,793
CASH AND CASH EQUIVALENTS AT END OF QUARTER. $ 6,508,239 $10,118,926
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid............................... $ 347 $ 87
Issuance of restricted stock................ 32,250 --
Accrued payroll taxes related to
restricted stock........................ 24,881 35,768
Issuance of stock to settle litigation..... -- 225,000
<FN>
See notes to consolidated financial statements.
</FN>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with 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
accompanying notes thereto included in the Company's 1999 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended October 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 2000.
3. SEGMENT AND GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company's operations are in one business segment, the design,
manufacture and distribution of cardiovascular and vascular medical devices.
Possis Medical, Inc. evaluates revenue performance based on the worldwide
revenues of each major product line and profitability based on an
enterprise-wise basis due to shared infrastructures to make operating and
strategic decisions.
Total revenues by United States and non-United States for the three months
ended October 31, 1999 and 1998 are as follows:
1999 1998
United States...................... $ 4,406,084 $ 1,830,620
Non-United States.................. 77,105 28,940
Total revenues..................... $ 4,483,189 $ 1,859,560
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, 1999 and 1998
Total product sales for the quarter ended October 31, 1999 increased
$2,623,000, or 141%, to $4,483,000 compared to $1,860,000 in the first quarter
of 1998. The main factor in the revenue increase was the March 1999 U.S. Food
and Drug Administration ("FDA") clearance to commence U.S. marketing of the
AngioJet(R) RheolyticTM Thrombectomy System, with labeling claims for removal of
blood clots in symptomatic native coronary arteries and coronary bypass grafts.
The Company recorded a net loss of $2,592,000,or $.17 per diluted share,
compared to a net loss of $3,232,000, or $.26 per diluted share, in the
prior-year fiscal first quarter.
Revenue - AngioJet
AngioJet revenue for the first quarter ended October 31, 1999 increased
121% to $4,103,000 compared to $1,860,000 in the first quarter of 1998. U.S.
AngioJet revenue was 98% of the total revenue for each period.
As of October 31, 1999, the Company had a total of 342 domestic drive units
in the field, compared to 203 drive units at the end of the prior year period,
and 300 units at the end of fiscal 1999. Approximately 3,200 catheters and pump
sets were sold worldwide in the quarter, compared to 1,500 sets sold in the
prior year first quarter, a 113% year-over-year increase. The average catheter
utilization rate per installed domestic drive unit was 9.4 in the first quarter,
compared to a rate of 7.5 in the prior year period, and to a rate of 10.8 in the
fourth quarter of fiscal 1999. The Company sold 32 drive units in the quarter
compared to 16 units in the like quarter a year ago.
Currently the Company lists its AngioJet System drive unit, considered
capital equipment, at $35,000 to hospitals in the U.S. The Company employs a
variety of flexible drive unit acquisition programs including outright purchase,
rental, lease and fee-per-procedure. Management believes the purchasing cycle
for the AngioJet System drive unit will vary from purchasing the drive unit with
no evaluation to an evaluation period of up to six months, depending on the
customer's budget cycle.
The Company expects that U.S. AngioJet System sales will continue to grow
primarily through the addition of sales people, the completion of clinical
trials designed to yield additional FDA approved product uses, the publication
of clinical performance and cost effectiveness data, and the introduction of
additional catheter designs. The current sales increases are believed to be
generated primarily from the FDA coronary approval received in March 1999.
Additional sales growth is planned upon FDA approval for AngioJet System use in
leg arteries and bypass grafts. In July 1997, the Company submitted a 510(k)
application to the FDA seeking clearance for the AngioJet System to be used in
leg arteries and bypass grafts. The Company is currently responding to issues
raised by the FDA and expects approval for peripheral AngioJet System in the
first half of calendar 2000. In October 1999, the Company received full approval
for its Investigational Device Exemption (IDE) application for the clinical
trial of the AngioJet System in the treatment of severe acute cerebrovascular
stroke. The first patient is expected to be enrolled in this clinical trial by
the end of January 2000. Due to the start of the cerebrovascular stroke clinical
trial, the Company has stopped enrolling patients in the clinical trial of the
AngioJet System for use in the treatment of stroke caused by the blockage of the
carotid arteries, the main vessels supplying blood to the brain. A total of five
patients were enrolled in the carotid stroke clinical trial (ReACT). The Company
believes that the treatment of blood clots in coronary vessels, peripheral
arteries and bypass grafts, veins and neuro vessels are significant worldwide
marketing opportunities for the AngioJet System.
Foreign sales of the AngioJet System during the three months ended October
31, 1999 and 1998 were $77,000 and $29,000, respectively. In Japan, the coronary
AngioJet System clinical study enrollment was completed in April 1998 and a
regulatory filing was done in November 1999 with the Japanese Ministry of Health
and Welfare. Japanese approval for coronary use of the AngioJet System is
expected by the end of calendar 2000.
Revenue - Vascular Grafts
Vascular graft sales were $380,000 and $0 for the quarter ended October 31,
1999 and 1998, respectively. All of the vascular graft sales were Perma-Seal
Dialysis Access Grafts. In September 1998 the Company received FDA marketing
approval for its Perma-Seal Dialysis Access Graft. In December 1998 the Company
entered into an exclusive worldwide supply and distribution agreement with
Horizon Medical Products, Inc. for its Perma-Seal Dialysis Access Graft. The
first shipment under this agreement was made in January 1999.
In April 1998, the Company received Humanitarian Device Exemption (HDE)
approval from the FDA, allowing U.S. marketing of the Perma-Flow Coronary Bypass
Graft for patients who require coronary bypass survey but who have inadequate
blood vessels of their own for use in the surgery. In March 1999 a distribution
agreement with the Company's independent distributor expired. Currently 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 grafts. ePTFE
synthetic grafts are the most commonly used synthetic grafts in peripheral
vessel bypass procedures. These products are planned to be marketed and sold by
a marketing partner or independent distributor.
A goal of the Company is to maximize the value of its vascular graft
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 vascular graft products and technologies. While the Company works toward
completing these activities, it has placed vascular graft product development on
hold, including enrollment into the Perma-Flow Coronary Bypass Graft clinical
trial.
The Company is planning for continued growth in product sales for the
remainder of fiscal 2000 and beyond and continues to believe 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 37% or $564,000 compared to the same
period a year ago. The increase is primarily due to the significant growth in
the AngioJet System product sales. Medical product gross margins improved by
$2,059,000 compared to the same period a year ago. This resulted in gross
margins of 53% and 17% for the quarters ended October 31, 1999 and 1998,
respectively. The improvement in gross margins was driven by volume increases,
and a favorable mix of coronary catheters sold, partially offset by some
manufacturing inefficiencies. 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 and as identified product and
process improvements are made.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the three months ended
October 31, 1999 increased $1,757,000, compared to the same period a year ago.
The primary factors are increased sales and marketing expenses related to the
establishment of a U.S. 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. sales and marketing organization
from 36 employees in October 1998, to 53 employees in October 1999. The Company
plans to further increase the direct U.S. sales force and its sales and
marketing expenditures to meet the growing demand for the Company's AngioJet
System.
Research and Development Expense
Research and development expenses decreased 15% from last year, due mainly
to a shutdown of graft product development. The reduction in graft product
development was offset by an increase in development of new AngioJet System
applications. The Company believes that research and development expenses for
AngioJet System applications will increase as it completes the development of
its current products and invests in development of new AngioJet System
thrombectomy applications and new waterjet technology-based products.
Interest Income and Expense
Interest income has decreased $62,000 in the most recent period due to the
use of the Company's cash reserves to fund the Company's operations. The gross
proceeds of $7,000,000 received from the private placement offering in May and
June 1999 had a modest impact on interest income for the quarter ended October
31, 1999. The $12,000,000 gross proceeds received from the issuance of
5%convertible debentures received in July 1998 had a modest impact on interest
income for the quarter ended October 31, 1998.
Interest expense decreased $175,000 in the most recent period due to the 5%
convertible subordinated debentures being converted into the Company's common
stock in March 1999. The Company expects interest expense to stay at low levels
unless asset based financing is obtained. If asset based financing is obtained,
interest expense will approximate last year's expense.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $6,508,000 at October 31,
1999 versus $9,151,000 at July 31, 1999.
Net cash usage for the three months ended October 31, 1999 averaged
$881,000 per month. The $2,514,000 cash used in operations in the most recent
three month period was due to the net loss of $2,592,000, a $271,000 increase in
inventory and $204,000 decrease in accounts payable, partially offset by
depreciation, stock compensation and an increase in accrued liabilities of
$550,000.
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 the Company
completes the development of its current products and invests in development of
new AngioJet System thrombectomy applications and new waterjet technology-based
products. Possis expects to report a loss for the current fiscal year, which is
expected to be less than the fiscal 1999 loss. A modest profit is anticipated
for fiscal 2001. In addition, the Company expects that increasing working
capital investments in trade receivables and inventory will be required to
support growing product sales.
The Company has retained the investment banking firm of Gerard Klauer
Mattison and Co. to lead a private placement, the proceeds from which would be
used to accelerate research and development on new products, to conduct clinical
trials, and for general corporate purposes. Market conditions permitting, the
Company hopes to complete an offering within the next three months. There is no
guarantee that the Company will secure financing, or reach an agreement to sell
its common stock, at terms acceptable to the Company.
Year 2000 ("Y2K")
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 has
completed the replacement of these computers as planned spending necessary to
maintain current technology.
The Company uses Microsoft software to operate its workstations and to
provide office productivity functions. The Company installed software to
automatically distribute software updates. It has upgraded the personal
productivity software to Y2K compliant versions, as provided by the software
manufacturers. It has installed commercial software to check hardware, software,
and data files for potential Y2K problems. The Company expects no significant
problems with applications software.
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. The
Company's contingency planning includes monitoring of suppliers and market
conditions to ensure a constant supply of materials. As the result of the
continuing evaluation, The Company made advanced purchases of selected materials
to cover a possible 6 week disruption related to Y2K. The effect on the
financial statements is expected to be negligible since the carrying costs on
the additional $260,000 of materials is essentially offset by discounts on the
quantity purchases. All materials are for current production, therefore will be
used within the forecast period.
The Company budgeted and spent approximately $50,000 for expenses directly
related to Y2K identification and remediation. The Company purchased directors'
and officers' liability insurance related to 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
related to Y2K, 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.
While it is impossible to evaluate every aspect of Y2K compliance, we
believe that either of two events would be our most likely Y2K worst case
scenario. The first would be from one or more of our sole or limited source
suppliers to fail to be Y2K compliant or to have its business negatively
impacted by Y2K issues of others. The second would be delays in receiving orders
or payments from customers due to Y2K problems they experience or their concerns
relating to Y2K. At the present time, it is not possible to determine whether
any of these events is likely to occur, or to quantify any potential negative
impact they may have on our future results of operations and financial
condition.
Forward-Looking Statements
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,
anticipated FDA approvals, the timing of FDA approvals, revenue and expense
levels, profitability and future capital requirements, and the timing and method
of raising additional capital, are forward-looking statements that involve risks
and uncertainties, including the Company's ability to meet its timetable for FDA
submissions, the review time and process at the FDA, results of clinical trials,
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 set forth
in the cautionary statements included in Exhibit 99 to the Company's report on
Form 10-Q dated April 30, 1999, filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds. The
market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of October 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 October 31, 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 amended
July 31, 1994 and restated to date.
3.2 10-K Fiscal year ended Bylaws as amended and restated
July 31, 1999 to date.
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, 1999.
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 14, 1999 BY: /s/
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: December 14, 1999 BY: /s/
RUSSEL E. CARLSON
Vice President of Finance and
Chief Financial Officer