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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3905 ANNAPOLIS LANE, SUITE 105 55447
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 553-7736
Former name, if changed since last report: N/A
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
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The number of shares outstanding of each of the registrant's classes of
common stock as of August 1, 1998 was:
Common Stock $.01 par value 17,772,829 shares
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ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
June 30, 1998 (unaudited) and
December 31, 1997
Statements of Operations - 4
Three Months and Six Months Ended
June 30, 1998 and 1997 (unaudited)
Statements of Cash Flows - 5
Six Months Ended June 30, 1998 and
1997 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk
PART II. OTHER INFORMATION 13
Signatures 15
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
JUNE 30, DECEMBER 31,
1998 1997
ASSETS ------------ ------------
(Unaudited) (Note)
CURRENT ASSETS
Cash & cash equivalents $ 4,910,394 $ 4,568,332
Marketable securities 19,108,494 20,982,176
------------ ------------
24,018,888 25,550,508
Accounts receivable, less allowance of $175,465
in 1998 and $260,000 in 1997 5,680,773 4,446,834
Inventories 24,757,532 22,686,273
Prepaid expenses 467,895 555,570
------------ ------------
TOTAL CURRENT ASSETS 54,925,088 53,239,185
FURNITURE, MACHINERY & EQUIPMENT 2,290,448 2,023,646
Less accumulated depreciation 1,299,884 1,247,459
------------ ------------
990,564 776,187
OTHER ASSETS 377,408 370,659
------------ ------------
TOTAL ASSETS $ 56,293,060 $ 54,386,031
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,710,164 $ 621,708
Accrued payroll and expenses 200,788 241,584
------------ ------------
TOTAL CURRENT LIABILITIES 1,910,952 863,292
LONG-TERM DEBT 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,770,329 & 17,589,058 at
June 30, 1998 and Dec 31, 1997, respectively 177,703 175,891
Additional paid-in capital 71,160,283 71,797,797
Other 41,202 40,306
Retained earnings (deficit) (16,997,080) (18,491,255)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 54,382,108 53,522,739
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 56,293,060 $ 54,386,031
============ ============
Note: The balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements.
See notes to condensed financial statements.
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
REVENUES ----------- ----------- ----------- -----------
Net sales $ 4,565,601 $ 3,695,230 $ 8,814,321 $ 7,139,880
Less cost of goods sold 2,814,975 2,297,583 5,454,949 4,469,671
----------- ----------- ----------- -----------
GROSS PROFIT 1,750,626 1,397,647 3,359,372 2,670,209
OPERATING EXPENSES
Research, development and engineering 383,478 261,266 740,756 496,760
Selling, general and administrative 898,157 801,909 1,822,202 1,521,328
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,281,635 1,063,175 2,562,958 2,018,088
Interest income 330,567 325,699 697,761 585,089
----------- ----------- ----------- -----------
NET INCOME $ 799,558 $ 660,171 $ 1,494,175 $ 1,237,210
=========== =========== =========== ===========
Net income per share:
Basic $ 0.04 $ 0.04 $ 0.08 $ 0.07
=========== =========== =========== ===========
Diluted $ 0.04 $ 0.04 $ 0.08 $ 0.07
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period:
Basic 17,769,818 17,559,084 17,694,873 16,992,428
=========== =========== =========== ===========
Diluted 18,177,065 18,139,842 18,175,602 17,610,370
=========== =========== =========== ===========
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,494,175 $ 1,237,210
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 125,560 122,151
Loss on disposal of equipment 1,420 1,242
Changes in operating assets and liabilities:
Accounts receivable (1,233,939) (891,261)
Prepaid expenses 87,675 189,488
Other assets (6,749) (41,570)
Inventories (2,071,259) (1,460,866)
Accounts payable and accrued expenses 1,047,660 49,367
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (555,457) (794,239)
INVESTING ACTIVITIES
Purchase of marketable securities (47,812,126) (23,531,358)
Sale of marketable securities 49,685,808 6,745,920
Purchases of property, plant and equipment (341,357) (56,497)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,532,325 (16,841,935)
FINANCING ACTIVITIES
Net proceeds from sale of common stock (635,702) 19,486,993
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (635,702) 19,486,993
Effect of exchange rate changes on cash 896 (7,079)
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INCREASE IN CASH AND CASH EQUIVALENTS 342,062 1,843,740
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,568,332 2,320,010
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,910,394 $ 4,163,750
============ ============
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
Note A - BASIS OF PRESENTATION
The accompanying unaudited 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.
Operating results for the three month and six month periods ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
Note B - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares outstanding and dilutive common stock equivalents, if applicable. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal years ended after
December 15, 1997. All EPS amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and diluted earnings per
share:
Three Months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
----------------------- -----------------------
Numerator:
Net income $799,558 $660,171 $1,494,175 $1,237,210
Denominator:
Denominator for basic earnings per share-
weighted-average shares 17,769,818 17,559,084 17,694,873 16,992,428
Effect of dilutive securities:
Stock options 407,116 578,121 478,009 612,652
Warrants 331 2,637 2,720 5,290
----------------------- -----------------------
Diluted potential common shares
Denominator for diluted earnings per share 18,177,065 18,139,842 18,175,602 17,610,370
======================= =======================
Basic earnings per share $.04 $.04 $.08 $.07
Diluted earnings per share $.04 $.04 $.08 $.07
Note C - SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirement retroactively in 1998. Management has not
completed its review of Statement 131, but does not anticipate that the adoption
of this statement will have a significant effect on the Company's reported
segments.
The Company's only product is a prosthetic heart valve. "Segments" would involve
tabulation of geographically significant customers which tend to follow
worldwide market distribution for replacement heart valves.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ATS Medical, Inc. (the "Company") is engaged in the manufacturing and marketing
of a pyrolytic carbon bileaflet mechanical heart valve. The Company sells the
ATS Open Pivot(TM) valve (the "ATS Valve" or the "Valve") in international
markets and is conducting a clinical study in the United States for the purpose
of obtaining regulatory approval.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1998 increased 24% to $4,565,601
compared to $3,695,230 for the quarter ended June 30, 1997. Unit sales increased
31% in the second quarter 1998 compared to 1997. Sales growth can be attributed
to continued implant growth in Europe and in several lesser developed countries.
Net sales for the six months ended June 30, 1998 totaled $8,814,321 compared to
$7,139,880 for the six months ended June 30, 1997. Revenue increased about 24%
and unit sales increased about 27% for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997.
The Company sells the valve to stocking distributors in assigned markets around
the world. Pricing for heart valves is very competitive, with hospital prices
ranging from $800 to $4200. Pricing to each distributor is set to reflect local
market conditions. There are some markets where the Company cannot compete
because prices are below the Company's cost. There are a number of countries
considered "lesser developed countries" where the Company can sell valves
slightly above cost. Depending upon the volume of sales in each country and the
specific selling price in each country the average selling price may fluctuate
between quarters and other accounting periods.
Cost of sales for the second quarter of 1998 totaled $2,814,975 or 62% of sales
compared to $2,297,583 or 62% of sales for the second quarter of 1997. Cost of
sales for the six months ended June 30, 1998 totaled $5,454,949 or 62% of sales
compared to $4,469,671 or 63% of sales for the six months ended June 30, 1997.
The price of the carbon components contained in the Valves sold in the six
months ended June 30, 1998 decreased slightly as compared to the cost of carbon
components contained in the Valves sold in the six months ended June 30, 1997
because of the volume pricing schedule contained in the Company's supply
agreement.
Gross profit totaled $1,750,626 for the quarter ended June 30, 1998 or 38% of
sales, compared to gross profit of $1,397,647 or 38% of sales for the quarter
ended June 30, 1997. Gross profit totaled $3,359,372 or 38% of sales for the six
months ended June 30, 1998 compared to $2,670,209 or 37% of sales for the six
months ended June 30, 1997. The Company realized slightly lower component costs
in the six months ended June 30, 1998 sufficient to offset a slight decline in
the average selling prices compared to the six months ended June 30, 1997.
Research, development and engineering expenses totaled $383,478 for the quarter
ended June 30, 1998 versus $261,266 for the quarter ended June 30, 1997. For six
months ended June 30, 1998 research, development and engineering expenses
totaled $740,756 compared to $496,760 for six months ended June 30, 1997. The
Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and is eligible for reimbursement by Medicare
and most private pay insurance companies. The Company is responsible for
reimbursing the hospital for certain additional tests and procedures required by
the clinical protocol and accrues the estimated total cost of follow-up at the
time the sale is recorded as research and development expense. Approximately 77%
and 53% of research and development expense for the quarters ended June 30, 1998
and 1997, respectively, were for clinical costs.
Selling, general and administrative expenses totaled $898,157 for the quarter
ended June 30, 1998, a increase from the $801,909 reported for the quarter ended
June 30, 1997. Salaries, wages and benefits increased nearly $308,000 or
approximately 22% during the first six months of 1998. The Company had 58
employees at June 30, 1997 compared to 65 employees at June 30, 1998.
There was no interest expense incurred in the quarters or six month periods
ended June 30, 1998 and 1997.
Interest income totaled $330,567 for the quarter ended June 30, 1998 compared to
$325,699 for the quarter ended June 30, 1997. For the first half of 1998
interest income totaled $697,761 compared to $585,089 for the first six months
of 1997. The average daily balance of cash, cash equivalents and investments was
greater for the six months ended June 30, 1998 than the six months ended June
30, 1997 because the Comany received the proceeds from a $ 14.75 million private
placement of common shares in February, 1997. The Company expects the average
daily balance of cash, cash equivalents and investments to be lower for the
remaining quarters and second half of 1998 when compared to the corresponding
periods of 1997. The Company also expects interest rates on cash, cash
equivalents and investments to be at or below 1997 rates and therefore expects
the amount of interest income during the upcoming quarters and remainder of 1998
to be less than interest income in the third and fourth quarters of 1997.
Net income totaled $799,558 for the quarter ended June 30, 1998 versus net
income of $660,171 for the quarter ended June 30, 1997. Net income totaled
$1,494,175 for the six months ended June 30, 1998 compared to $1,237,210 for the
six months ended June 30, 1997. The $689,163 increase in gross profit in the
first half of 1998 as compared to the first half of 1997 was greater than the
$544,870 increase in operating expenses, which resulted in $796,414 operating
income for the six months ended June 30, 1998 and increased net income compared
to the first six months of 1997.
Earnings per share totaled $.04 for the quarter ended June 30, 1998 compared to
$.04 for the quarter ended June 30, 1997. Earnings per share for the first six
months of 1998 totaled $.08 compared to $.07 for the first six months of 1997.
The weighted average number of shares outstanding fluctuated more in 1997
because of the February, 1997 private sale of 1,568,940 shares of common stock
for $14.75 million.
YEAR 2000 SITUATION
The Company has been assessing the software and hardware used in daily
operations so that all systems will function properly with respect to dates in
the Year 2000 and beyond. Until recently, computer programs were written to
store only two digits of date-related information in order to more efficiently
handle and store data. Thus, some software programs are unable to distinguish
between the year 1900 and the year 2000. This is frequently referred to as the
"Year 2000 Problem."
Utilizing internal and external resources, the Company determined that
modification or replacement of various programs would be necessary so that all
software, hardware and instrumentation systems are Year 2000 compliant.
Business applications and data for the Company are stored on a local area
network and accessed by personal computers when necessary. A significant number
of employee workstations and manufacturing hardware were upgraded and are now
Year 2000 compliant. All future hardware purchases are required to be Year 2000
compliant.
The Company has purchased "off the shelf" manufacturing and accounting software
supported by vendors who provide updated versions of the software program. These
vendors have indicated that the software upgrades available will be Year 2000
compliant.
The Company also has custom software programs and databases that are used for
manufacturing. These programs are being reviewed and tested for Year 2000
issues. As a part of this process, the Company has been negotiating conversion
of these programs. Requirements of the software programming include testing and
revision for Year 2000 issues.
While the Company believes that its planning efforts are adequate to address
Year 2000 concerns, there is no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. Costs of the Year 2000
initiatives are not expected to be material to the Company's results of
operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by $1,531,620 from
$25,550,508 at December 31, 1997 to $24,018,888 at June 30, 1998. Inventory
purchases and accounts receivable growth caused the Company to have negative
cash flow from operations.
During 1998 the Company is required to purchase $13.9 million of heart valve
components in accordance with the terms of its long term supply agreement with
CarboMedics, Inc. (the "Supply Agreement"). During the two contract years after
1998 the Company is obligated to purchase an aggregate of approximately $33
million of components. The minimum purchases under the Suppy Agreement are not
tied to sales of the Company's Valve and the Company does
not expect sales of the Valve to exceed the minimum purchase requirements under
the Supply Agreement until the Valve is approved for sale in the United States
by the Food and Drug Administration.
Accounts receivable increased from $4,446,834 at December 31, 1997 to $5,680,773
at June 30, 1998. Most of the Company's sales have been to customers in
international markets and while the Company attempts to set standard 60 day
terms for receivables, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
The Company received payment from one customer of $533,556 on July 7, 1998.
Accounts payable increased from $621,708 at December 31, 1997 to $1,710,164 at
June 30, 1998. The majority of the increase in accounts payable is related to
the timing of purchases from CarboMedics, Inc. under the Supply Agreement.
Based upon the Company's current rate of sales, its expected obligations under
the Supply Agreement and its expected expenses, the Company anticipates that
existing cash, cash equivalents and short-term investments will be sufficient to
satisfy its capital requirements through 2000. Beyond 2000 the Company must
continue to substantially increase revenues to meet its capital requirements.
Should revenues not increase sufficiently, the Company may be required to raise
additional equity capital. There can be no assurance that equity would be
available to the Company at favorable terms, if at all.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. ATS Medical, Inc.
desires to take advantage of the safe harbor provisions with respect to any
forward-looking statements it may make in this filing, other filings with the
Securities and Exchange Commission and any public oral statements or written
releases. The words or phrases "will likely," "is expected," "will continue,"
"is anticipated," "estimate," "projected," "forecast," or similar expressions
are intended to identify forward-looking statements within the meaning of the
Act. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
In accordance with the Act, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, and
the actions of the Company's supplier of
pyrolytic carbon components for the Valve. This list is not exhaustive, and the
Company may supplement this list in any future filing or in connection with the
making of any specific forward-looking statement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Shareholders of the Company was held on
April 30, 1998 at which time (i) five nominees were elected to
the Board of Directors for one-year terms, (ii) the ATS
Medical, Inc. 1998 Employee Stock Purchase Plan was adopted
and (iii) the appointment of Ernst & Young LLP as the
independent auditors of the Company was approved. Proxies for
the Company were solicited pursuant to Section 14(a) of the
Securities Exchange act of 1934, as amended, and there was no
solicitation in opposition to management's solicitations. All
nominees for directors as listed in the proxy statement were
elected. The voting results were as follows:
Broker
For Against Withheld Non-Votes
--- ------- -------- ---------
Election of Directors:
Manuel A. Villafana 13,645,422 0 24,268 0
Richard W. Kramp 13,645,122 0 24,568 0
Charles F. Cuddihy, Jr 13,638,872 0 30,818 0
David L. Boehnen 13,634,672 0 35,018 0
A. Jay Graf 13,641,322 0 28,368 0
Adoption of the Employee
Stock Purchase Plan 13,380,787 125,552 46,614 116,727
Approval of Independent
Auditors 13,628,945 20,700 20,045 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
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10.1 New consulting agreement with Manuel A. Villafana
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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.
Date: August 12, 1998 ATS MEDICAL, INC.
By: /s/ John H. Jungbauer
-------------------------------------
John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)
EXHIBIT INDEX
Number Description
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10.1 New consulting agreement with Manuel A. Villafana
27.1 Financial Data Schedule