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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 MARCH 31, 1999
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 _____
The number of shares outstanding of each of the registrant's classes of
common stock as of May 1, 1999 was:
Common Stock $.01 par value 17,842,657 shares
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
March 31, 1999 (unaudited) and
December 31, 1998
Statements of Operations - 4
Three Months Ended March 31, 1999 and
1998 (unaudited)
Statements of Cash Flows - 5
Three Months Ended March 31, 1999 and
1998 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 13
Market Risk
PART II. OTHER INFORMATION 14
Signatures 15
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
MARCH 31, DECEMBER 31,
1999 1998
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ASSETS (Unaudited) (Note)
Current assets:
Cash & cash equivalents $ 8,078,558 $ 7,754,077
Short-term investments 10,778,094 12,852,885
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18,856,652 20,606,962
Accounts receivable, less allowance of $190,000
in 1999 and $185,000 in 1998 5,867,144 5,820,699
Inventories 32,042,969 29,954,718
Prepaid expenses 448,295 458,663
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Total current assets 57,215,060 56,841,042
Furniture, machinery and equipment 2,634,837 2,596,311
Less accumulated depreciation 1,464,128 1,393,527
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1,170,709 1,202,784
Other assets 388,641 387,550
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Total assets $ 58,774,410 $ 58,431,376
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,880,838 $ 2,355,443
Accrued payroll and expenses 326,440 256,358
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Total current liabilities 2,207,278 2,611,801
Long-term debt 0 0
Shareholders' equity:
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,838,679 and 17,824,137 at
March 31, 1999 and Dec 31, 1998, respectively 178,387 178,241
Additional paid-in capital 71,309,469 71,249,846
Accumulated other comprehensive income 43,576 43,799
Accumulated deficit (14,964,300) (15,652,311)
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Total shareholders' equity 56,567,132 55,819,575
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Total liabilities and shareholders' equity $ 58,774,410 $ 58,431,376
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Note: The balance sheet at December 31, 1998 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 MARCH 31,
1999 1998
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Net sales $ 4,190,296 $ 4,248,720
Less cost of goods sold 2,546,912 2,639,975
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Gross profit 1,643,384 1,608,745
Expenses:
Research, development and engineering 281,010 357,278
Selling, general and administrative 927,305 924,045
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Total expenses 1,208,315 1,281,323
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Operating income 435,069 327,422
Interest income 252,943 367,195
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Net income $ 688,012 $ 694,617
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Net income per share:
Basic $ 0.04 $ 0.04
Diluted $ 0.04 $ 0.04
Weighted average number of shares outstanding:
Basic 17,833,545 17,622,319
Diluted 18,236,481 18,160,979
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1999 1998
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OPERATING ACTIVITIES
Net income $ 688,012 $ 694,617
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 70,601 61,596
Loss on disposal of equipment 0 800
Changes in operating assets and liabilities:
Accounts receivable (46,445) (60,459)
Prepaid expenses 10,368 (35,952)
Other assets (1,091) (4,600)
Inventories (2,088,251) (1,406,840)
Accounts payable and accrued expenses (404,523) 822,292
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Net cash provided by (used in) operating activities (1,771,329) 71,454
INVESTING ACTIVITIES
Purchase of marketable securities (3,745,737) (22,692,308)
Sale of marketable securities 5,820,528 22,709,577
Purchases of property, plant and equipment (38,526) (30,171)
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Net cash provided by (used in) investing activities 2,036,265 (12,902)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 59,768 (642,415)
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Net cash provided by financing activities 59,768 (642,415)
Effect of exchange rate changes on cash (223) 1,223
Increase (decrease) in cash and cash equivalents 324,481 (582,640)
Cash and cash equivalents at beginning of period 7,754,077 4,568,332
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Cash and cash equivalents at end of period $ 8,078,558 $ 3,985,692
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ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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 months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
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 March 31, 1999 decreased 1.4% to $4,190,296
compared to $4,248,720 for the quarter ended March 31, 1998. Unit sales
increased 3.3% in 1999 compared to 1998. One of the company's major
distributors/customers closed out its fiscal year on March 31 and did not make
its typical purchase for the quarter ended March 31, 1999. The continued
volatility in foreign exchange rates, the pressure from hospital administrators
for lower prices and the willingness of competitors to reduce prices is expected
to continue to put pressure on revenue growth and margins. The average selling
price of the Valve decreased approximately 4% for the quarter ended March 31,
1999 compared to the quarter ended March 31, 1998.
The Company sells to independent distributors with assigned territories
(generally a specific country or region) who in turn sell the Valve to hospitals
or clinics. The Company sells in U.S. dollars so currency risk is borne by the
distributor. As the dollar increases in value against the distributor's local
currency, the cost of the Valve increases for the distributor even though ATS
does not change the selling price. For the quarter ended March 31, 1999 the
Company's sales efforts were challenged by significant price competition from
other valve manufacturers and the increased strength of the U.S. dollar relative
to almost all foreign currencies. During 1999 and 1998 the Company was selling
Valves in most developed countries and several lesser developed countries
("LDC's").
Since January 1997, the Company has been conducting a clinical study of the
Valve at fifteen hospitals in the United States. During the study, Valves are
provided to the hospitals at prices designed to recover some of the costs of the
clinical study.
Cost of sales for the three months ended March 31,1999 totaled $2,546,912 or
60.8% of sales compared to $2,639,975 or 62.1% of sales for the three months
ended March 31,1998. The price of the carbon components contained in the Valves
sold in the first quarter of 1999 decreased 6% as compared to the cost of carbon
components contained in the Valves sold in the first quarter of 1998. Based upon
the Company's internal sales projections, the price of the carbon contained in
Valves sold in the remainder of 1999 is expected to be 3% higher than in 1998.
The Company purchases pyrolytic carbon components for the Valve from
CarboMedics, Inc. ("CMI"). Approximately 80% of the total cost of a valve is
contained in the cost of the carbon components. The price of the components is
set under a multi-year supply agreement between the Company and CMI. The price
was established in 1990, and varies according to annual volume and is adjusted
annually according to increases in the U.S. Department of Labor Employment Cost
Index. The Company uses the first-in first-out ("FIFO") method of
accounting for inventory. All of the valves sold in the first quarter of 1999
were made with carbon purchased in 1996 (under FIFO). The cost of carbon
components, after giving effect to volume discounts and inflationary adjustments
decreased 7% in 1996, rose 3% in 1997 and decreased 4.5% in 1998 compared to
each previous year, respectively. For 1999 (the seventh contract year) the
Company expects to pay 3.8% more for carbon components than in 1998.
Gross profit totaled $1,643,384 for the quarter ended March 31, 1999 or 39.2% of
sales, compared to gross profit of $1,608,745 or 37.9% of sales for quarter
ended March 31, 1998. Although the average selling price per unit decreased in
the first quarter 1999, the average cost per unit sold decreased more improving
gross margin.
Research, development and engineering expenses totaled $281,010 for the quarter
ended March 31, 1999 versus $357,278 for the quarter ended March 31, 1998. The
major portion of the decrease is related to the costs associated with the
Company's U.S. clinical study. Approximately 15% and 23% of research and
development expenses for the quarters ended March 31, 1999 and 1998,
respectively, were for testing and outside consulting services related to the
Valve.
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 the cost of the Valve 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. The estimated total cost of
follow-up is accrued at the time of the sale as research and development
expense.
Selling, general and administrative expenses totaled $927,305 for the three
months ended March 31, 1999, an increase from the $924,045 reported for the
three months ended March 31, 1998. The Company had 83 employees at March 31,
1999 compared to 63 employees at March 31, 1998.
Interest income totaled $252,943 for the quarter ended March 31, 1999 compared
to $367,195 for the quarter ended March 31, 1998. The decrease in interest
income in 1999 was the result of lower average investable cash balances during
1999 and lower interest rates. Cash on hand at March 31, 1999 is less than the
amount on hand at December 31, 1998. Interest income in 1999 is expected to be
approximately 50% less than in 1998. The Company is investing cash in carbon and
the completion of a large quantity of valves in anticipation of the market
release of the Valve in the United States.
Net income totaled $688,012 for the quarter ended March 31,1999 compared to
$694,617 for the quarter ended March 31, 1998. The $107,647 increase in
operating income in the first quarter of 1999 as compared to 1998 was offset by
the $114,252 decrease in interest income.
The Company has accumulated approximately $15 million of net operating loss
carryforwards for U.S. tax purposes. The Company believes that its ability to
fully utilize the existing net operating loss carryforwards will be restricted
to approximately $3 million per year. Although the Company can offset a
significant portion of pretax income with the net operating losses from
prior years the Company is subject to alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by $1,750,310 from
$20,606,962 at December 31, 1998 to $18,856,652 at March 31, 1999. Inventory
purchases and the pay-down in accounts payable, caused the Company to have
negative cash flow from operations.
During 1999 the Company is obligated to purchase $14.4 million of components in
accordance with the terms of its long-term supply agreement with CarboMedics,
Inc. (the "Supply Agreement"). The Company is obligated to purchase $18.6
million of components in the year 2000. These minimum purchases under the Supply
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.
After the Company purchases the minimum required Valves under the CMI Supply
Agreement for the Year 2000, the Company will be obligated under the Supply
Agreement only to buy what it sells.
Accounts receivable increased from $5,820,699 at December 31, 1998 to $5,867,144
at March 31, 1999. 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 accounts receivable, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
At December 31, 1998 and March 31, 1999, the account balance for one customer
was 26% of outstanding receivables. The Company has done business with this
customer since 1992 and the size of the receivable, while substantial, is
consistent with the growth of business in this market and in line with the size
of the customer's overall business.
Current liabilities decreased from $2,611,801 at December 31, 1998 to $2,207,278
at March 31, 1999. The majority of the decrease is in accounts payable and is
related to the amount owing to 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 should be
cash flow positive or at worst cash flow neutral barring a significant change in
the Company's business plan.
The Company does not use derivatives and therefore does not face market risk
from currency or interest rate changes on these types of instruments. There
would be no impact on the Company's operations from interest rate changes on
debt instruments since the Company has not used debt to finance its operations.
Assuming that interest rates on investment grade securities were to decrease by
10%, the Company's annual interest income would decrease by approximately
$100,000 based on the level of investable funds available to the Company at
December 31, 1998.
YEAR 2000 SITUATION
The "Year 2000 Problem" refers to a complex set of problems which may arise when
computer hardware or software is unable to distinguish between 21st century
dates and 20th century dates because the date code fields have been abbreviated
into two digits, i.e. 00. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with Year 2000 requirements. The potential global impact of the Year 2000
problem is not known, and, if not corrected in a timely manner, could affect the
Company and the U.S. and world economy generally.
The Company's products, including the ATS Medical heart valve, do not contain
any electronics or software and therefore will not be affected by the "Year 2000
Problem".
The Company's internal financial, manufacturing and other computer systems are
being reviewed to assess and remediate Year 2000 problems. The Company's
assessment of internal systems includes its information technology ("IT") as
well as non-IT systems (systems which contain embedded technology and are used
in manufacturing or process control equipment containing microprocessors or
other similar circuitry). As a result of this review the Company determined that
some of its equipment and software needed to be upgraded or replaced. During
1998 the Company spent approximately $59,000 on hardware and software some of
which was necessary to eliminate potential Year 2000 problems. During the
quarter ended March 31, 1999 the company purchased $27,900 of computer equipment
and software. Shortly after the close of the quarter ended March 31, 1999 the
Company took delivery on custom measuring equipment valued at $375,000. The
primary purpose of this equipment is to improve processing of the Company's
products but it will also contain Year 2000 compliant software. The Company's
1999 budget for hardware and software is $164,528 including the replacement or
upgrade of personal computers, workstations and software which are not currently
Year 2000 compliant.
Since substantially all of this hardware and software is being purchased from
large, industry-leading vendors (i.e. Compaq, Lotus, and Microsoft), the Company
will rely on vendor certification and internal tests to determine Year 2000
compliance as opposed to hiring consultants to perform reviews. Such
certifications and tests are scheduled to be obtained or completed by the end of
the second quarter 1999.
In addition, during the first quarter of 1999 the Company has requested
assurances from its major suppliers that they are addressing the Year 2000
problem and that products purchased by the Company from such suppliers will
function properly in the Year 2000. The Company has a significant inventory of
product components on hand, however, certain key components for the Valve are
available from a single supplier and a protracted Year 2000 problem for this
vendor could have an adverse impact on the Company. Contacts are also being made
with the Company's major customers. These contacts with the Company's suppliers
and customers are intended to help mitigate the possible external impact of the
Year 2000 problem. However, it is
impossible to fully assess the potential consequences in the event service
interruption from suppliers occur or in the event that there are disruptions in
such infrastructure areas as utilities, communications, transportation, banking
and government.
The total estimated cost for resolving the Company's Year 2000 issues is
approximately $598,500, of which approximately $272,000 has been spent through
March 31, 1999. The total cost estimate includes the cost of replacing
non-compliant systems as a remediation cost in cases where the Company has
accelerated plans to replace such systems. Estimates of Year 2000 costs are
based on numerous assumptions, and there can be no assurance that the estimates
are correct or that actual costs will not be materially greater than
anticipated.
Based upon its assessments to date, the Company believes it will not experience
any material disruption in its operations as a result of Year 2000 problems to
internal financial, manufacturing and other process control systems, or in its
interface with major customers and suppliers. However, if major suppliers,
including those providing component parts, electricity, communications and
transportation services, experience difficulties resulting in disruption of
critical supplies or services to the Company, a shutdown of the Company's
operations could occur for the duration of the disruption. The Company has not
yet developed contingency plans to help provide continuity of normal business
operations in the event that problem scenarios arise, but it will assess the
need to develop such plans based on the outcome of compliance areas currently
under review, and the results of remaining survey feedback from its major
suppliers and customers. Assuming no major disruption in service from critical
third party providers, the Company believes that it will be able to manage the
Year 2000 transition without any material effect on the Company's results of
operations or financial position. There can be no assurance, however, that
unexpected difficulties will not arise and, if so, that the Company will be able
to timely develop and implement an effective contingency plan.
THE SINGLE EUROPEAN CURRENCY
A significant portion of the Company's sales occur in Europe. Effective January
1, 1999 various European countries began utilizing a single currency, the
"Euro". From January 1999 through December 2001, merchants will be encouraged to
discontinue using local country currencies and begin using the Euro to transact
business. Beginning in 2002, it will be required that business in the European
Community be conducted using the Euro. The Company sells to all of its customers
in U.S. Dollars and does not expect to have accounting system issues relative to
currency translation. The Company's selling prices are similar to most of its
European distributors and therefore should not cause significant disruption
whether in dollars or Euros. The Company and its distributors have not completed
an analysis of what actions competitors might take as a result of the Euro.
Europe is a very important market for the Company's Valve. Disruption or loss of
a portion of the Company's European business could have a material and adverse
impact on the Company's financial position.
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, the
actions of the Company's supplier of pyrolytic carbon components for the Valve
and the effect of the Year 2000 problem on the Company, its suppliers and its
customers. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivatives and therefore does not face market risk
from currency or interest rate changes on these types of instruments. There
would be no impact on the Company's operations from interest rate changes on
debt instruments since the Company has not used debt to finance its operations.
Assuming that interest rates on investment grade securities were to decrease by
10%, the Company's annual interest income would decrease by approximately
$100,000 based on the level of investable funds available to the Company at
December 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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None
Item 2. Changes in Securities
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None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Number Description
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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: May 12, 1999 ATS MEDICAL, INC.
By: /s/ John H. Jungbauer
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John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)
EXHIBIT INDEX
Number Description
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27.1 Financial Data Schedule