UNITED STATES
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 April 30, 2007
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number 0-944
POSSIS MEDICAL, INC.
--------------------
(exact name of registrant as specified in its charter)
Minnesota 41-0783184
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
9055 Evergreen Blvd NW Minneapolis MN 55433-8003
- ------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
763-780-4555
- ------------
(Registrant's telephone number, including area code)
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 file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of May 28, 2007, was 17,105,187.
1
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements...........................................................................................3
Consolidated Balance Sheets, April 30, 2007 and July 31, 2006..................................................3
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended
April, 2007 and 2006...........................................................................................4
Consolidated Statements of Cash Flows for the nine months
ended April 30, 2007 and 2006..................................................................................5
Notes to Consolidated Financial Statements.....................................................................6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................................12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................................................18
ITEM 4. Controls and Procedures........................................................................................18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................................19
ITEM 1A. Risk Factors..................................................................................................19
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................................20
ITEM 3. Exhibits......................................................................................................21
SIGNATURES.....................................................................................................22
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POSSIS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS April 30, 2007 July 31, 2006
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents...........................................................$ 2,084,560 $ 3,505,796
Marketable securities............................................................... 41,247,100 44,610,130
Trade receivables (less allowance for doubtful accounts and returns of $899,000 and
$580,000, respectively)............................................................ 8,440,953 8,356,776
Inventories......................................................................... 8,051,592 5,915,950
Prepaid expenses and other assets................................................... 3,121,837 1,663,322
Deferred tax asset.................................................................. 1,331,000 1,331,000
------------------ -----------------
Total current assets............................................................ 64,277,042 65,382,974
PROPERTY AND EQUIPMENT, net......................................................... 4,752,370 5,090,198
DEFERRED TAX ASSET.................................................................. 11,152,648 10,756,000
INVESTMENT IN RAFAEL MEDICAL........................................................ 2,612,317 -
OTHER ASSET......................................................................... 1,066,463 723,262
------------------ -----------------
TOTAL ASSETS........................................................................$ 83,860,840 $ 81,952,434
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable..............................................................$ 2,163,808 $ 2,040,367
Accrued salaries, wages, and commissions............................................ 3,242,770 3,468,961
Other liabilities................................................................... 2,492,438 2,715,421
------------------ -----------------
Total current liabilities...................................................... 7,899,016 8,224,749
OTHER LIABILITES 1,118,317 823,975
COMMITMENTS AND CONTINGENCIES.......................................................
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares of $0.40 par value each; issued and
outstanding, 17,105,187 and 17,146,825 shares, respectively........................ 6,842,075 6,858,730
Additional paid-in capital.......................................................... 79,067,608 77,378,276
Accumulated other comprehensive loss................................................ (46,000) (329,000)
Retained deficit.................................................................... (11,020,176) (11,004,296)
------------------ -----------------
Total shareholders' equity................................................... 74,843,507 72,903,710
------------------ -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..........................................$ 83,860,840 $ 81,952,434
================== =================
See notes to consolidated financial statements.
3
POSSIS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2007 AND 2006
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------------- -----------------------------
April 30, 2007 April 30, 2006 April 30, 2007 April 30, 2006
----------------- --------------- -------------- --------------
Product sales............................................$ 16,239,689 $ 15,224,827 $ 47,649,655 $ 45,829,609
Cost of sales and other expenses:
Cost of medical products.............................. 5,193,346 4,399,791 14,338,940 12,532,922
Selling, general and administrative................... 9,279,024 8,409,593 28,360,467 24,314,577
Research and development.............................. 2,372,156 2,869,967 6,730,829 8,577,064
----------------- --------------- -------------- --------------
Cost of sales and other expenses.................. 16,844,526 15,679,351 49,430,236 45,424,563
----------------- --------------- -------------- --------------
Operating (loss) income.................................. (604,837) (454,524) (1,780,581) 405,046
Interest income...................................... 522,110 464,966 1,598,222 1,296,048
Loss on sale of securities........................... (10,244) (110,839) (29,561) (136,326)
----------------- --------------- -------------- --------------
Income (loss) before income taxes........................ (92,971) (100,397) (211,920) 1,564,768
(Benefit) provision for income taxes..................... (137,040) 177,211 (196,040) 1,235,211
----------------- --------------- -------------- --------------
Net income (loss)........................................ 44,069 (277,608) (15,880) 329,557
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities..................... 95,000 (18,000) 283,000 (98,000)
----------------- --------------- -------------- --------------
Comprehensive income (loss).............................. 139,069 $ (295,608) $ 267,120 $ 231,557
================= =============== ============== ==============
Weighted average number of common
shares outstanding:
Basic................................................ 17,157,499 17,166,955 17,162,532 17,237,723
Diluted.............................................. 17,791,654 17,166,955 17,162,532 17,700,222
Net income (loss) per common share:
Basic................................................$ 0.00 $ (0.02) $ 0.00 $ 0.02
================= =============== ============== ==============
Diluted..............................................$ 0.00 $ (0.02) $ 0.00 $ 0.02
================= =============== ============== ==============
See notes to consolidated financial statements.
4
POSSIS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2007 AND 2006
(UNAUDITED)
2007 2006
------------- -------------
OPERATING ACTIVITIES:
Net (loss) income............................................................................$ (15,880) $ 329,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................................................... 2,148,257 1,892,534
Loss on asset disposal................................................................. 9,912 --
Stock-based compensation expense....................................................... 3,332,832 2,684,804
Loss on sale of marketable securities.................................................. 29,561 178,264
Deferred taxes......................................................................... (572,648) 986,001
Increase in trade receivables.......................................................... (84,177) (162,925)
Increase in inventories................................................................ (2,743,642) (216,131)
Increase in prepaid expenses and other assets.......................................... (1,714,374) (277,145)
Decrease in trade accounts payable..................................................... (2,559) (183,113)
Decrease in accrued and other liabilities.............................................. (406,366) (365,866)
------------- -------------
Net cash (used in) provided by operating activities................................... (19,084) 4,865,980
------------- -------------
INVESTING ACTIVITIES:
Investment in Rafael Medical............................................................ (2,612,317) --
Additions for property and equipment.................................................... (1,098,636) (1,282,348)
Proceeds from sale of fixed assets...................................................... 12,295 --
Proceeds from sale of marketable securities............................................. 69,756,206 35,478,379
Purchase of marketable securities....................................................... (66,051,079) (37,681,462)
------------- -------------
Net cash provided by (used in) investing activities................................... 6,469 (3,485,431)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of options.......................... 468,423 702,017
Excess tax benefits from stock based compensation....................................... -- (13,000)
Repurchase of common stock.............................................................. (1,877,044) (2,612,836)
------------- -------------
Net cash used in financing activities................................................. (1,408,621) (1,923,819)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS........................................................ (1,421,236) (543,270)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................................. 3,505,796 5,257,244
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................................$ 2,084,560 $ 4,713,974
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for income taxes..............................................................$ 496,700 $ 306,510
Issuance of restricted stock............................................................ 591,707 266,600
Fixed asset additions in accounts payable............................................... 126,000 116,619
Inventory transferred to property and equipment......................................... 57,000 7,736
See notes to consolidated financial statements.
5
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 accounting principles generally accepted in the
United States of America 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
accounting principles generally accepted in the United States of America
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 our
2006 Annual Report.
INTERIM FINANCIAL STATEMENTS
Operating results for the three and nine months ended April 30, 2007 are
not necessarily indicative of the results that may be expected for the year
ending July 31, 2007.
INVESTMENT IN RAFAEL MEDICAL
We invested in Rafael Medical Technologies, Inc. (Rafael), a company
developing an inferior vena cava (IVC) filter named SafeFlo(R). In December
2006, we invested $2.5 million in a series of preferred stock of Rafael
that represents a 15 percent ownership interest and also executed a stock
purchase agreement that provides us a right for a period of three-years to
purchase the remaining capital stock of Rafael that is or may become
outstanding. We have committed to provide up to an additional $1.5 million
as requested by Rafael in secured debt financing during this three year
period, none of which is outstanding at April 30, 2007. The preferred stock
purchase agreement provides us with a number of rights as an investor. The
total investment on the balance sheet of $2,612,000 reflects $112,000 of
transaction-related costs that were capitalized. As of April 30, 2007,
management determined that there was no impairment in the value of its
investment in Rafael which is accounted for under the cost method.
2. NET (LOSS) INCOME PER COMMON SHARE
Basic (loss) income per common share is computed by dividing net income for
the period by the weighted average number of common shares outstanding
during the period. Diluted income per share is computed using the treasury
stock method by dividing net income by the weighted average number of
common shares plus the dilutive effect of outstanding stock options, and
shares issuable under the employee stock purchase plan (ESPP).
6
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Numerator:
Net income (loss) $ 44,069 $ (277,608) $ (15,880) $ 329,557
============ ============ ============ ============
Denominator:
Weighted average common
shares outstanding 17,157,499 17,166,955 17,162,532 17,237,723
Effect of potentially dilutive securities:
Stock options and other 634,155 -- -- 462,499
------------ ------------ ------------ ------------
Weighted average common shares 17,791,654 17,166,955 17,162,532 17,700,222
============ ============ ============ ============
Basic earnings per share $ 0.00 $ (0.02) $ 0.00 $ 0.02
Diluted earnings per share $ 0.00 $ (0.02) $ 0.00 $ 0.02
Potential dilutive securities include stock options, non-vested share
awards, and shares issuable under our ESPP.
The computation of dilutive shares outstanding excluded options to purchase
1,011,000 and 1,924,000 shares of common stock for the three months ended
April 30, 2007 and 2006, and 1,016,000 and 1,844,000 shares of common stock
for the nine months ended April 30, 2007 and 2006, respectively. These
amounts were excluded because the option exercise prices were greater than
the weighted average closing market price of our common stock for the
periods presented and, therefore, the effect would be antidilutive (i.e.,
including such options would result in higher earnings per share.) In
addition, the computation of dilutive shares outstanding excluded options
to purchase an additional 381,000 shares of common stock for the three
months ended April 30, 2007 and 1,030,000 shares of common stock for the
nine months ended April 30, 2007 due to the Company having a net loss
during these periods.
3. STOCK-BASED COMPENSATION
We have a stock-based compensation plan under which we grant stock options
and restricted stock (non-vested share awards) and also have an Employee
Stock Purchase Plan (ESPP). All stock options issued prior to July 31, 2005
have a ten-year term. All stock options issued subsequent to July 31, 2005
have a five-year term. Although outstanding stock options issued to
employees generally vest over a four-year period, on occasion we have
issued options that vest based upon achieving corporate objectives or stock
price performance. Outstanding stock options issued to directors vest over
the following periods, depending on the basis for issuance: a) six months -
stock options in lieu of compensation for services rendered as directors,
b) four years - annual grants of stock options and c) stock price
performance with a five-year cliff period - service award options.
Directors also receive an annual non-vested share award that vests upon
continued service (time-based) of one year. Our ESPP permits employees to
purchase stock at 85 percent of the market price of our common stock at the
end of the quarterly purchase period.
On August 1, 2005, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment 123(R), requiring us to recognize expense related to
the fair value of our stock-based compensation awards. We elected the
modified prospective transition method as permitted by SFAS No. 123(R).
Under this transition method, stock-based compensation expense for the
three and nine months ended April 30, 2007 and 2006, includes: (a)
compensation expense for all stock-based compensation awards granted prior
to, but not yet vested, as of July 31, 2005, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation; and (b) compensation expense for
all stock-based awards granted subsequent to July 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). We recognized compensation expense for stock options and
non-vested share awards, which are either market-based or time-based, on a
straight-line basis over the vesting period of the award. Total stock-based
compensation expense included in our statement of income for the three
months ended April 30, 2007 and 2006, was $669,000, net of tax, and
$820,000, net of tax, respectively. Total stock-based compensation expense
included in our statement of income for the nine months ended April 30,
2007 and 2006, was $1,997,000, net of tax and $2,252,000, net of tax,
respectively.
7
The following table summarizes the stock option transactions for the nine
months ended April 30, 2007:
Options Weighted- Average Weighted-
Exercise Price Per Average Remaining
Share Contractual Term
(in years)
Outstanding on July 31, 2006 3,208,000 $ 11.55
Granted 394,000 $ 9.47
Exercised (40,000) $ 8.03
Forfeited/Canceled (220,000) $ 15.79
================== ====================
Outstanding on April 30, 2007 3,342,000 $ 11.10 4.70
================== ==================== =================
Exercisable on April 30, 2007 2,226,000 $ 10.62 4.30
================== ==================== =================
Note: At April 30, 2007, shares associated with our ESPP were not
significant and were excluded from the table above.
The aggregate intrinsic value of options (the amount by which the market
price of the stock on date of exercise exceeded the market price of the
stock on the date of grant) exercised during the three months ended April
30, 2007 and 2006, was $167,000 and $0, respectively; and during the nine
months ended April 30, 2007 and 2006, was $267,000 and $69,000,
respectively.
We estimated the fair values using the Actuarial Binomial option-pricing
model, modified for dividends and using the following assumptions:
Nine Months Ended
April 30,
------------------------------------------
2007(1) 2006(1)
-------------------- ---------------------
Risk-free rate(2) ............................................................ 4.7-4.9% 3.7 - 4.5%
Expected dividend yield ...................................................... 0% 0%
Expected stock price volatility(3) ........................................... 55-56% 38 - 55%
Expected life of stock options(4) ............................................ 4.15 years 3.86 - 8.5 years
Fair value per option ........................................................$ 4.17-$8.31 $ 4.38 - $6.86
1. Forfeitures are estimated based on historical experience.
2. Based on the U.S. Treasury interest rates whose term is consistent with the
expected life of our stock options.
3. We used an outside valuation advisor to assist us in projecting expected
stock price volatility. Historical market price data was used.
4. We estimate the expected life of stock options based upon historical
experience.
Net cash proceeds from the exercise of stock options were $251,000 and
$258,000 for the nine months ended April 30, 2007 and 2006, respectively.
The actual income tax benefit realized from stock option exercises was $0
and $13,000 for the nine months ended April 30, 2007 and 2006,
respectively.
Non-Vested Share Awards
The fair value of non-vested market-based and time-based share awards is
determined based on generally accepted valuation techniques and the closing
market price of our stock on the date of grant. A summary of the status of
our non-vested market-based and time-based share awards as of July 31, 2006
and changes during the nine-month period ended April 30, 2007, is as
follows:
8
Market-Based and Time-Based Share Awards Shares Fair Value
- ----------------------------------------------------------------------------------------------- ---------- -------------
Outstanding at July 31, 2006 3,594 $ 8.36
Granted 66,564 8.89
Vested (46,300) 8.77
Forfeited/Canceled (20,684) 8.66
---------- -------------
Outstanding at April 30, 2007 3,174 $ 12.94
========== =============
A total of 3,594 share awards based on time and 63,390 share awards vested
based on market during the nine months ended April 30, 2007. As of April
30, 2007, there was $29,000 of unrecognized compensation expense related to
non-vested time-based share awards that is expected to be recognized over
the next five months.
4. ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued FASB No. 155, "Accounting for Certain
Hybrid Financial Instruments". This Statement amends FASB Statements No.
133, Accounting for Derivative Instruments and Hedging Activities, and No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement resolves issues addressed in
Statement 133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets." This Statement is
effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006. The fair value election provided for in paragraph 4(c) of this
Statement may also be applied upon adoption of this Statement for hybrid
financial instruments that had been bifurcated under paragraph 12 of
Statement 133 prior to the adoption of this Statement. Earlier adoption is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year. Provisions of this
Statement may be applied to instruments that an entity holds at the date of
adoption on an instrument-by-instrument basis. Adoption is not expected to
have a material impact on our consolidated earnings, financial position or
cash flows.
In March 2006, the FASB issued FASB No. 157, "Fair Value Measurements."
This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will change current practice. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an
interim period within that fiscal year. Adoption is not expected to have a
material impact on our consolidated earnings, financial position or cash
flows.
9
In June 2006, The FASB issued FASB Interpretation No. 48. "Accounting for
Uncertainty in Income Taxes", an Interpretation of FASB Statement No.
109. This Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes.
This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The evaluation of a tax position in
accordance with this Interpretation is a two-step process. The first
step is recognition: The enterprise determines whether it is more
likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not
recognition threshold, the enterprise should presume that the position
will be examined by the appropriate taxing authority that has full
knowledge of all relevant information. The second step is measurement:
A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize
in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. This Interpretation is
effective for fiscal years beginning after December 15, 2006. Earlier
application of the provisions of this Interpretation is encouraged if
the enterprise has not yet issued financial statements, including
interim financial statements, in the period this Interpretation is
adopted. We are in the process of evaluating the impact of adopting
this interpretation and adoption is not expected to have a material
impact on our consolidated earnings, financial position or cash flows.
In September 2006, the FASB issued FASB No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans". This Statement improves financial reporting by requiring an
employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan)
as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization.
This Statement also improves financial reporting by requiring an
employer to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited exceptions.
This Statement is effective for financial statements issued for fiscal
years beginning after December 15, 2006, and interim periods within
those fiscal years. Earlier application is encouraged, provided that
the reporting entity has not yet issued financial statements for that
fiscal year, including financial statements for an interim period
within that fiscal year. Adoption is not expected to have a material
impact on our consolidated earnings, financial position or cash flows.
In February 2007, the FASB issued FASB No. 159, "The Fair Value Option
for Financial Assets and Liabilities". This Statement permits entities
to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term
measurement objectives for accounting for financial instruments. This
Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that
the reporting entity has not yet issued financial statements for that
fiscal year, including financial statements for an interim period
within that fiscal year. Adoption is not expected to have a material
impact on our consolidated earnings, financial position or cash flows.
5. MARKETABLE SECURITIES
During the quarters ended April 30, 2007 and 2006, we primarily invested
excess cash and cash equivalents in a professionally managed portfolio of
marketable securities. All securities in this portfolio are classified as
available-for-sale and consist primarily of U.S. government securities and
corporate bonds. These investments are reported at fair value. The
unrealized gain, net of taxes, on these investments, of approximately
$95,000 and $283,000 for the three and nine months ended April 30, 2007, is
included within other comprehensive income. The unrealized loss, net of
taxes, on these investments of approximately $18,000 and $98,000 for the
three and nine months ended April 30, 2006, is included within other
comprehensive loss. The net unrealized loss included in shareholders'
equity as of April 30, 2007 and 2006 was $46,000 and $338,000, net of tax.
6. INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market. Inventory balances were as follows:
April 30, 2007 July 31, 2006
---------------- --------------
Finished goods...........................................................................$ 3,097,591 $ 2,021,448
Work-in-process.......................................................................... 2,205,937 1,381,157
Raw materials............................................................................ 2,748,064 2,513,345
---------------- --------------
$ 8,051,592 $ 5,915,950
================ ==============
10
7. PROPERTY AND EQUIPMENT
Property is carried at cost and depreciated using the straight-line method
over the estimated useful lives of the various assets. Property and
equipment balances and corresponding lives were as follows:
April 30, 2007 July 31, 2006 Life
-------------- ----------------- ----------------
Leasehold improvements................................................$ 2,850,324 $ 2,805,467 7-10 years
Equipment............................................................. 12,406,134 11,532,405 3 to 10 years
Assets in construction................................................ 347,881 482,071 N/A
-------------- -----------------
15,604,339 14,819,943
Less accumulated depreciation......................................... (10,851,969) (9,729,745)
-------------- -----------------
Property and equipment - net..........................................$ 4,752,370 $ 5,090,198
============== =================
8. SEGMENT AND GEOGRAPHIC INFORMATION
Our operations are in one business segment: the design, manufacture and
distribution of endovascular medical devices. We evaluate revenue
performance based on the worldwide revenues of each major product line and
profitability based on an enterprise-wide basis due to shared
infrastructures to make operating and strategic decisions.
Total revenues from sales in the United States and outside the United
States are as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
United States........................................................$15,735,076 $14,764,000 $46,217,365 $44,437,327
Non-United States.................................................... 504,613 460,827 1,432,290 1,392,282
------------ ------------ ------------ ------------
Total Revenues.......................................................$16,239,689 $15,224,827 $47,649,655 $45,829,609
============ ============ ============ ============
9. COMMON STOCK
During the nine months ended April 30, 2007, stock options for the purchase
of 40,000 shares of the Company's common stock were exercised at prices
between $2.22 and $12.57 per share resulting in proceeds of $251,000.
During the nine months ended April 30, 2006, stock options for the purchase
of 29,000 shares of the Company's common stock were exercised at prices
between $3.94 and $12.44 per share resulting in proceeds of $258,000.
During the nine months ended April 30, 2007 and 2006, we issued 22,000 and
52,000 shares in connection with our employee stock purchase plan.
On August 15, 2006, we issued 63,390 shares of restricted stock to
executives and key management as part of the fiscal 2006 management
incentive program. The fair market value of the restricted stock was
$549,000. The restricted stock carried vesting terms of four years or
earlier if the stock price closed at $11.26 or greater for twenty
consecutive trading days. On December 22, 2006 the restricted stock vested
due to the Company's stock price closing for the twentieth consecutive day
greater than $11.26. In the nine months ended April 30, 2007, $567,500 was
expensed as compensation expense. We cancelled 20,684 shares of restricted
stock due to the executives and key management electing to receive fewer
shares in lieu of paying the withholding taxes.
On August 29, 2005, we issued 18,353 shares of restricted stock to
executives as part of the fiscal 2005 management incentive program. The
fair market value of the restricted stock was $230,600. The restricted
stock vested if our stock price closed at $13.00 or greater and became
vested on August 31, 2005 when our stock price closed at $13.03.
Accordingly, the full $230,600 was expensed in fiscal 2005 as compensation
expense. We cancelled 6,289 shares of restricted stock due to the
executives electing to receive fewer shares in lieu of paying the
withholding taxes.
11
During the nine months ended April 30, 2007, we purchased 150,000 shares
in the public market at stock prices between $11.81 and $13.26 per share
for $1,877,000. During the nine months ended April 30, 2006, we repurchased
250,000 shares in the public market at prices between $9.89 and $11.06 per
share for $2,613,000.
10. ACCRUED WARRANTY COSTS
We estimate the amount of warranty claims on sold product that may be
incurred based on current and historical data. The actual warranty expense
could differ from the estimates made by the Company based on product
performance. The following table presents the changes in our product
warranty liability:
Accrued warranty costs at July 31, 2006 $ 91,500
Payments made for warranty costs.............................................................................. (429,600)
Provision for product costs................................................................................... 445,600
----------
Accrued warranty costs at April 30, 2007......................................................................$ 107,500
==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
We make a number of forward-looking statements in this Management's Discussion
and elsewhere in this 10-Q that are based on our current expectations and on
assumptions that may not prove correct. The realization of these forward-looking
statements is subject to various risks and uncertainties that are identified in
our Form 10-K for the year ended July 31, 2006 under Item 1A Risk Factors and
are summarized below under in Part II, Item 1A of this Form 10-Q. You should
read these factors when assessing these forward looking statements.
Our Business
Possis Medical, Inc., develops, manufactures, and markets pioneering medical
devices for mechanical thrombectomy in native coronary arteries and coronary
bypass grafts, leg arteries, upper- and lower- extremity peripheral veins and in
kidney dialysis access grafts. Our primary product, the AngioJet(R) RheolyticTM
Thrombectomy System (AngioJet System) uses miniaturized waterjet technology,
which enables interventional cardiologists, interventional radiologists,
vascular surgeons, and other specialists to rapidly, safely and effectively
remove blood clots throughout the body.
The original proprietary AngioJet System consists of the first generation 3000
drive unit (capital equipment), a disposable pump set that delivers pressurized
saline to a catheter, and a variety of disposable catheters that are
specifically designed for particular clinical indications. We recently received
approval from the FDA for the new AngioJet Ultra Thrombectomy System. The
AngioJet Ultra System consists of the next-generation Ultra Console (capital
equipment) and a combined single disposable Thrombectomy Set (catheter and pump)
that delivers pressurized saline. Thrombectomy Set models are specifically
designed to treat particular clinical indications. The new Ultra System is
simpler and faster to setup, is compatible with a broad range of catheters, is
sleeker and lighter, and significantly easier to maneuver than the first
generation drive unit. AngioJet coronary catheters are Class III medical devices
marketed in the U.S. under an approved pre-market approval (PMA). The AngioJet
AV-Access and peripheral arterial catheters are Class II devices that are
marketed in the U.S. under 510(k) clearance.
We expect U.S. AngioJet Systems sales to grow primarily through obtaining
additional FDA approved product uses, introduction of new catheter models for
existing indications, introduction of Ultra System and other AngioJet
System-related products, more face-time selling to existing accounts,
peer-to-peer selling, and the publication of clinical performance and
cost-effectiveness data.
The new combined disposable Thrombectomy Sets that are used with the Ultra
Console can not be used with the prior generation 3000 Drive Unit. In addition,
the first generation separate pump and catheters that are used with the 3000
Drive Unit can not be used with the new Ultra Console. We believe that the new
Ultra Console will replace the 3000 Drive Unit over the next several years.
12
To further expand the range of products we offer, in May 2006 we began selling
the SafeSeal(TM) Hemostasis Patch, which is designed to control bleeding from
the puncture made to perform endovascular procedures. In October 2006, we
started selling a manual aspiration device, the Fetch(TM) Aspiration Catheter,
as an alternative for the aspiration of small, fresh blood clots.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related footnotes. In
preparing these financial statements, we have made our best estimates and
applied our best judgment of certain amounts included in the financial
statements, giving due consideration to materiality. Our most critical
accounting policies are those described below. Application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
Revenue Recognition
Revenues associated with AngioJet drive units and the Ultra Consoles
maintained at customer locations are recognized, and title and risk of
loss on those drive units and consoles is transferred to the customer,
when we receive a valid purchase order from the customer. Revenue is
not recognized for AngioJet drive units and Ultra Consoles that are
maintained at customer locations as evaluation drive units and
consoles. We do not lease AngioJet drive units and Ultra Consoles.
Revenues associated with products that are shipped to customers from
our facilities are recognized, and title and risk of loss are
transferred to the customer, when a valid purchase order is received
and the products are received at the customer's location. Revenue
recognition for drive unit and Ultra Console extended warranties are
amortized on a straight-line basis over the life of the warranty
period, generally twelve months.
Allowance for Returns
We record an allowance for returns that reduces the amount of product
sales and of trade receivables. We estimate the appropriate allowance
at the time the account receivable is recorded by estimating the
likelihood of returns. The estimate is based upon our historical
product return experience, customer complaint rates, information
received from our customers and other assumptions that we believe are
reasonable under the circumstances. We review, on a quarterly basis,
the actual returns for the previous quarter and evaluate the adequacy
of the allowance for future returns. Although we believe the amount of
the allowance for returns is appropriate, actual returns incurred could
differ from our original estimate, requiring adjustments to the
allowance that effect the results during the period of adjustment.
Allowance for Doubtful Accounts
Substantially all of our trade receivables are due from health care
facilities located in the United States. We provide for an allowance
for uncollectible or "doubtful" accounts based upon the age of our
outstanding receivables and the payment history and creditworthiness of
each customer. We evaluate the adequacy of the allowance for doubtful
accounts on a quarterly basis. Although we believe the amount of the
allowance for doubtful accounts is appropriate, nonpayment of accounts
could differ from our original estimate, requiring adjustments to the
allowance.
Inventories
We value inventories at the lower of cost or market. In order to
determine the market value of inventory, on a quarterly basis, we
assess the inventory on hand to estimate future usage and sales and
provide for additions to an obsolescence reserve for inventory that is
deemed obsolete or that is carried at a value in excess of estimated
market value. Although we believe the amount of the reserve for
inventory obsolescence is appropriate, the amount of our inventory that
becomes obsolete may differ from our original estimate, requiring
adjustments to the reserve.
13
Warranty Reserve
We provide a one-year limited warranty on our AngioJet System 3000
Drive Unit (first generation) and Ultra Console (new generation) and a
limited warranty on AngioJet System disposable products. We establish a
warranty reserve at the time products are sold that is based upon
historical frequency of claims relating to our products and the cost to
replace disposable products and to repair drive units under warranty.
We evaluate the adequacy of the warranty reserve on a quarterly basis.
Although we believe the amount of the warranty reserve is appropriate
given our historical experience, if actual claims incurred differ from
historical experience, we would be required to adjust the reserve.
Results of Operations
Three and Nine Month Periods Ended April 30, 2007 and 2006
Summary
Total product sales for the three months ended April 30, 2007 increased
$1,015,000, or 7%, to $16,240,000 compared to $15,225,000 for the comparable
period in fiscal 2006. Total product sales for the nine months ended April 30,
2007 increased $1,820,000, or 4%, to $47,650,000 compared to $45,830,000 for the
comparable period in fiscal 2006. The revenue increase included $1,044,000 of
peripheral (medium length catheters) sales, partially offset by a reduction in
coronary (long length catheters) sales of $261,000 and AV (short length
catheters) sales of $294,000. In addition, the increase was partially due to the
introduction of the SafeSeal Hemostasis Patch and Fetch Aspiration Catheter.
Due to the recent AngioJet(R) Ultra Thrombectomy System launch, Possis' expense
for sales returns has increased from approximately 1 percent of gross revenue to
3.3 percent of gross revenue in the fiscal 2007 third quarter. This increase is
due to the expected rise in returns of customers' disposable product inventory
usable only with the previous generation AngioJet System. Gross revenue in the
third quarter increased 9 percent to $16.8 million, versus the same period one
year ago; gross revenue was up 5 percent sequentially from the fiscal 2007
second quarter.
We recorded net income for the three months ended April 30, 2007 of $44,000, or
$0.00 per diluted share, and a net loss for the nine months ended April 30, 2007
of $16,000, or $0.00 per diluted share. This compared to a net loss of $278,000,
or $0.02 per diluted share for the three months ended April 30, 2006 and net
income of $330,000, or $0.02 per diluted share for the nine months ended April
30, 2006.
Net income for the three and nine months ended April 30, 2007 and 2006, reflects
the impact of adopting SFAS No.123(R), which resulted in stock-based
compensation expense, net of tax, of $669,000 and $820,000 for the three months
ended April 30, 2007 and 2006. Stock based compensation was $1,997,000, and
$2,602,000 for the nine months ended April 30, 2007 and 2006, respectively.
We have not restated our financial statements for periods commencing prior to
July 31, 2005, for the impact of stock compensation expense. Consistent with
SFAS No. 123(R), we have used the modified prospective transition method of
implementing the changes required by SFAS 123(R). Our operations have been
recovering for several years from the negative impact of a clinical study for a
previously approved and marketed product, and we believe it is important for
investors to be able to compare our financial results for periods ending prior
to July 31, 2005 with periods ending after that date. Accordingly, we believe
that also presenting net income, and individual line items in our income
statement, that were effected by the equity compensation expense under SFAS
123(R) enhances the ability of investors to evaluate the trends in or business.
14
Operating Expenses
The following table compares dollars (in thousands) and percentage changes in
the Statements of Income between 2007 and 2006.
For the Three Months Ended For the Nine Months Ended
------------------------------------ ------------------------------------
April 30, Increase (Decrease) April 30, Increase (Decrease)
2007 2006 Dollars Percent 2007 2006 Dollars Percent
Product Sales $16,240 $ 15,225 $ 1,015 6.7% $47,650 $45,830 $ 1,820 4.0%
Operating expenses
Cost of medical products 5,194 4,400 794 18.0% 14,339 12,533 1,806 14.4%
Selling, general and administrative 9,279 8,410 869 10.3% 28,360 24,315 4,045 16.6%
Research and development 2,372 2,870 (498) -17.4% 6,731 8,577 (1,846) -21.5%
Total 16,845 15,680 1,165 7.4% 49,430 45,425 4,005 8.8%
Operating (loss) income (605) (455) (150) 33.0% (1,780) 405 (2,185) -539.5%
Other income 512 354 158 44.6% 1,568 1,160 408 35.2%
Income before income taxes (93) (101) 8 -7.9% (212) 1,565 (1,777) -113.5%
Income tax (provision) benefit 137 (177) 314 -177.4% 196 (1,235) 1,431 -115.9%
Net income (loss) $ 44 $ (278)$ 322 -115.8% $ (16)$ 330 $ (346) -104.8%
Diluted Shares 17,792 17,167 17,163 17,700
Diluted EPS $ 0.00 $ (0.02) $ (0.00)$ 0.02
The following tables show the Statement of Income as a percentage of product
sales for the three and nine months ended April 30, 2007 and 2006.
For the Three Months For the
Ended Nine Months Ended
------------------------- ---------------------
2007 2006 2007 2006
------------- ----------- ---------- ----------
Product sales 100.0% 100.0% 100.0% 100.0%
Operating expenses
Cost of medical products 32.0% 28.9% 30.1% 27.3%
Selling, general and administrative 57.1% 55.2% 59.5% 53.1%
Research and development 14.6% 18.9% 14.1% 18.7%
Total 103.7% 103.0% 103.7% 99.1%
Operating income (3.7%) (3.0%) (3.7%) 0.9%
Other income 3.2% 2.3% 3.3% 2.5%
Income before income taxes (0.6%) 0.7% (0.4%) 3.4%
Income taxes provision 0.8% (1.2%) 0.4% (2.7%)
Net income 0.3% (1.8%) 0.0% 0.7%
Revenue
U.S. product sales for the three months ended April 30, 2007 increased 7 percent
to $15,735,000 from $14,764,000 for the same period in 2006. For the nine months
ended April 30, 2007, U.S. product sales increased 4 percent to $46,217,000 from
$44,437,000 the comparable period in 2006. The revenue increase during fiscal
2007 relates to increased peripheral (medium length catheters) sales partially
offset by a reduction in coronary (long length catheters) and AV sales. The
increase was also partially due to the introduction of the SafeSeal Hemostasis
Patch and Fetch Aspiration Catheter.
15
The following table shows the domestic Ultra Consoles and the first generation
drive units placed with customers as of April 30, 2007, January 31, 2007, and
April 30, 2006:
April 30, 2007 January 31, 2007 April 30, 2006
---------------------------------------------------
Ultra Console 109 22 -
First generation drive unit 1,668 1,697 1,645
---------------------------------------------------
Total 1,777 1,719 1,645
===================================================
The following table shows the domestic Ultra Consoles and first generation drive
units sold for the three and nine months ended April 30, 2007 and 2006:
Three Months Ended Nine Months Ended
-------------------------- ------------------------
4/30/2007 4/30/2006 4/30/2007 4/30/2006
-------------------------- ------------------------
Ultra Console 36 - 46 -
First generation drive unit 8 46 56 116
-------------------------- ------------------------
Total 44 46 102 116
========================== ========================
During the three month period ended April 30, 2007, our catheter sales increased
approximately 1 percent to 11,200 catheters versus 11,100 catheters the same
period last year. During the nine month period ended April 30, 2007, we sold
34,800 catheters versus 34,600 catheters in the same period last year.
International product sales were $505,000 for the three months ended April 30,
2007 and $461,000 for the three months ended April 30, 2006. International
product sales of $1,432,000 for the nine months ended April 30, 2007 and
$1,392,000 for the nine months ended April 30, 2006.
Cost of Medical Products/Gross Profit Margin
Cost of medical products increased $794,000 to $5,193,000 in the three month
period ended April 30, 2007 over the same period in the previous year, and
increased $1,806,000 to $14,339,000 for the nine month period ending April 30,
2007, over the same period last year. The increases relate to higher sales
volumes and unfavorable product cost mix combined with the impact of higher
start-up costs for new products, and higher production overhead. The higher new
product start-up costs are primarily for the Ultra Console and disposable
Thrombectomy Sets.
Gross profit margin increased by $221,000 to $11,046,000, or 68.0 percent of
product sales, for the three months ended April 30, 2007, from $10,825,000 or
71.1 percent of product sales in the same period last year. Non-recurring new
product cost issues impacted gross profit margins negatively by 1.5 percent to
2.0 percentage points for the three months ended April 30, 2007. Gross profit
margin increased by $14,000 to $33,311,000, or 69.9 percent of product sales,
for the nine months ended April 30, 2007, from $33,297,000 or 72.7 percent of
product sales in the same period last year. The decrease in the gross profit
margin percentage for the nine month period ended April 30, 2007 as compared to
nine month period ended April 30, 2006 was primarily due to the impact of higher
start-up costs for new products, higher production overhead, and discontinued
production of drive units.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $869,000 to $9,279,000 for
the three months ended April 30, 2007, from 8,410,000 in the comparable period
in the prior year. Sales force commissions and additional sales staff, as well
as higher marketing expenses to support new product launches, contributed to the
increase. Selling, general and administrative expenses include stock-based
compensation expense relating to SFAS No. 123(R) of $613,000 for the three
months ended April 30, 2007 and $665,000 for the three months ended April 30,
2006.
Selling, general and administrative expenses increased $4,046,000 to $28,360,000
for the nine months ended April 30, 2007, compared to the same period in the
previous year. The expense increase for the nine months ended April 30, 2007
relates primarily to higher sales expense under our new compensation plan,
additional sales staff, and an increase in management incentive compensation.
Selling, general and administrative expenses include stock-based compensation
expense relating to SFAS No. 123(R) of $1,784,000 for the nine months ended
April 30, 2007 and $1,699,000 for the nine months ended April 30, 2006.
16
Research and Development Expense
Research and development expense decreased $498,000 to $2,372,000 or 14.6
percent of sales, in the three months ended April 30, 2007, from $2,870,000 or
18.9 percent of sales in the same period in the prior year. Research and
development expense decreased $1,846,000 to $6,731,000 or 14.1 percent of sales,
in the nine months ended April 30, 2007, from $8,577,000 or 18.7 percent of
sales in the same period in the prior year. The decrease in both the fiscal 2007
three and nine month periods was due to the completion of the Ultra Console
System (including the console and disposable Thrombectomy Sets) research
projects. Current research and development projects include distal occlusion
guidewires and other AngioJet-related projects.
Research and development expenses include stock-based compensation expense
relating to SFAS No. 123(R) of $174,000 for the three months ended April 30,
2007 and $197,000 for the months ended April 30, 2006. Research and development
expenses include stock-based compensation expense relating to SFAS No. 123(R) of
$523,000 for the nine months ended April 30, 2007 and $582,000 for the nine
months ended April 30, 2006.
Interest Income
Interest income increased $57,000 in the three months ended April 30, 2007 to
$522,000 and increased $302,000 in the nine months ended April 30, 2007 to
$1,598,000. The increased interest income in fiscal 2007 is attributable to
higher interest rates. The majority of excess cash is invested in a portfolio of
marketable securities. Future levels of interest income in fiscal 2007 is
dependent on investment balances and fluctuating interest rates.
Loss On Sale of Securities
Loss on sales of securities was $10,000 for the three months ended April 30,
2007 and $111,000 for the three months ended April 30, 2006. Loss on sales of
securities was $30,000 for the nine months ended April 30, 2007 and $136,000 for
the nine months ended April 30, 2006. The losses in fiscal 2007 and 2006 were
due to interest rate increases that reduced the fair market value of the
investments in marketable securities. Future gain (loss) on sale of securities
is dependent on interest rate fluctuations.
Provision For Income Taxes
The effective income tax rate differed from the U.S. federal statutory rate for
each of the three and nine months ended April 30, 2007 and 2006 as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
2007 2006 2007 2006
-------------------- ---------------------
Tax (benefit) expense on (loss) income from continuing operations computed at
statutory rate of 34% $ (32,000)$ (34,000) $ (72,000)$ 532,000
Research and development tax credits 27,000 292,000 81,000 876,000
FASB 123(R) compensation expense (109,000) (187,000) (343,000) (570,000)
Other (23,040) 106,211 137,960 397,211
-------------------- ---------------------
Total income (benefit) expense $(137,040)$ 177,211 $(196,040)$1,235,211
==================== =====================
Percent of income (loss) before income taxes 147% 177% 93% 79%
==================== =====================
Approximately 37 percent of our outstanding options as of April 30, 2007 are
ISO's so the impact on Possis Medical's effective tax rate is significant.
17
We continue to maintain a valuation allowance of $1,413,000 against our deferred
tax asset because we believe it is more likely than not that this amount of the
deferred tax asset will not be realizable due to the expiration of research and
development tax credits.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities totaled $43,332,000 at
April 30, 2007 versus $48,116,000 at July 31, 2006.
During the nine months ended April 30, 2007, we used $19,000 of cash in
operating activities, which resulted primarily from an increase in the deferred
tax asset of $573,000, an increase in inventory of $2,744,000, an increase in
prepaid expenses and other assets of $1,714,000 combined with a decrease in
accrued and other liabilities of $406,000. These uses of cash from operations
were partially offset by depreciation of $2,148,000 and stock-based compensation
expense of $3,333,000. We depreciate company-owned first generation drive units
and Ultra Consoles at customer locations, as well as property and equipment. The
accounts receivable increase is due to an increase in sales during the last
month of the fiscal quarter. Inventory increased to support the market launch of
new products including the Ultra System. The increases in prepaid expenses and
other assets were due to advance payments to a third party manufacturer of the
Ultra Consoles and the timing of insurance premium payments. The decreases in
accrued liabilities were due to the timing of payments.
Cash provided in investing activities was $6,000 including the net proceeds from
the sale of marketable securities of $3,705,000. The cash provided in investing
activities was partially offset by the investment in Rafael of $2,612,000 and
the purchase of $1,099,000 of property and equipment.
Net cash used in financing activities was $1,409,000, which resulted from the
repurchase of 150,000 shares of our stock in open market transactions for
$1,877,000; partially offset by the cash received in connection with the
exercise of stock options of $468,000.
In December 2006 (fiscal 2007 second quarter), we invested $2,500,000 in Rafael
and have committed to lend up to an additional $1.5 million to Rafael as needed
in the future. We contract with a third-party to manufacture our Ultra Console
and have committed to purchases of the Ultra Console from that third party
manufacturer of $9 million over the next 15 months. Except with respect to these
commitments, their have been no changes in our capital or contractual
commitments. We expect our cash on hand and funds from operations to be
sufficient to cover both short-term and long-term operating requirements of our
business and the repurchase of our common stock as authorized by our Board of
Directors.
Off-Balance Sheet Obligations
We do not have any material off-balance-sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash in a professionally managed, institutional fixed
income portfolio of short duration. The market risk on a diversified portfolio
of relatively short duration is minimal, while enhancing returns above money
market levels.
Our foreign product sales are in U.S. Dollars ("USD") except for product sales
in Germany, which are in euro's. The German product sales were minimal during
the third quarter. We have a foreign bank account in which the German product
sales receipts are deposited and immediately transferred to the operating bank
account in the United States. The balance in the German bank account was zero as
of April 30, 2007.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
- ------------------------------------------------
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, in a manner that allows timely decisions regarding required
disclosure.
18
Changes in internal control over financial reporting
- ----------------------------------------------------
During the fiscal quarter ended April 30, 2007, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were served with a shareholder lawsuit filed with the United States District
Court for the District of Minnesota on June 3, 2005, alleging that Possis
Medical, Inc. and named individual officers violated federal securities laws.
Based upon our motion to dismiss, the lawsuit captioned In re Possis Securities
Litigation, was dismissed with prejudice on February 1, 2007. On March 2, 2007,
we were served with the Plaintiffs' notice of appeal of the dismissal to the
United States Court of Appeals for the Eighth District . We believe the judicial
court acted properly and intend to vigorously contest the appeal.
ITEM 1A. RISK FACTORS
We identify a number of risks that affect our operations and are
"forward-looking" in our annual report on Form 10-K under Item 1A. There have
been no material changes in those risks, which are summarized below, since the
filing of our Form 10-K. You should read the Form 10-K for a complete
description of the risks of our business. Among the risks we have identified
are:
o our dependence on a single product line--the AngioJet Rheolytic System;
o the effects of adverse clinical studies;
o the effects of extensive regulation of our product development, product
manufacturing and product sales;
o our dependence on our current manufacturing facility;
o unanticipated costs or other difficulties and uncertainties associated with
lengthy and costly new product development and regulatory clearance
processes;
o the existence of larger entities in our industry which may develop new
competitive products such as inexpensive aspiration devices, combined
aspiration/occlusion products and compounds with which we would have
difficulty competing or that may make our products obsolete;
o the effect of changes in the health care industry generally, such as
restrictions imposed on sales time at interventional labs, consolidation of
industry participants, cost containment and trends toward managed care;
o the cost and effectiveness of our intellectual property protection;
o the effects of changes in reimbursement;
o our ability to retain key personnel and motivate skilled employees,
especially for sales positions;
o the possibility of medical product liability issues;
o possible sudden restrictions in supply of key materials; and
o the effectiveness of our sales and marketing efforts in re-establishing
coronary product usage.
19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Company Repurchases of Equity Securities
(d) Maximum Number (or
Approximate Dollar
(c) Total Number of Shares Value) of Shares that
(a) Total Number Purchased as Part of May Yet Be Purchased
of Shares (b) Average Price Publicly Announced Plans Under the Plans or
Period Purchased (1) Paid per Share or Programs Programs (1)
February 1, 2007 to February
28, 2007 - - - -
March 1, 2007 to March 31,
2007 134,738 $ 12.48 134,738 -
April 1, 2007 to
April 30, 2007 15,000 $ 13.05 15,000 $ 13,123,000
Total 149,738 $ 12.54 149,738 $ 13,123,000
(1) In December 2006, our Board of Directors authorized the repurchase of up to
an additional $15,000,000 of our common stock in open-market transactions
through December 2008. The shares were purchased in open market transactions.
20
ITEM 6. EXHIBITS
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 Description
- --------------------------------------------------------------------------------
3.1 Amended Bylaws (incorporated by reference to Exhibit 99.1 to the
Form 8-K filed March 1, 2007).
4.1 Amended and Restated Rights Agreement, effective as of December 23,
2006 between the Company and Wells Fargo Bank, NA, which includes as
Exhibit B thereto the form of Right Certificate (incorporated by
reference to Exhibit 4.1 to the Form 8-A/A filed December 21, 2006).
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
21
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 8, 2007 By: /s/ Robert G. Dutcher
------------------------------------------
ROBERT G. DUTCHER
Chairman, President and Chief Executive
Officer
DATE: June 8, 2007 By: /s/ Jules L. Fisher
------------------------------------------
JULES L. FISHER
Vice President of Finance and Chief
Financial Officer
22
EXHIBIT INDEX
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 Description
- --------------------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
23