_______________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 1998
Commission File Number 0-944
POSSIS MEDICAL, INC.
9055 Evergreen Blvd NW
Minneapolis, Minnesota 55433-8003
(612) 780-4555
A Minnesota Corporation IRS Employer ID No. 41-0783184
_________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___ The number of shares
outstanding of the Registrant's Common Stock, $.40 par value, as of February 27,
1998 was 12,208,966.
________________________________
<PAGE>
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, January 31, 1998
and July 31, 1997.......................................... 3
Consolidated Statements of Operations for three
months and six months ended January 31, 1998 and 1997...... 4
Consolidated Statements of Cash Flows for
six months ended January 31, 1998 and 1997................. 5
Notes to Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security-Holders........ 10
ITEM 6. Exhibits and Reports on Form 8-K........................... 11
SIGNATURES................................................. 13
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS January 31, 1998 July 31, 1997
CURRENT ASSETS: (Unaudited)
<S> <C> <C>
Cash and cash equivalents............................................... $2,680,068 $ 3,849,194
Marketable securities................................................... 5,993,437 10,964,170
Receivables:
Trade (less allowances for doubtful accounts:
$67,000 and $80,000, respectively)................................... 810,768 878,893
Other................................................................ 54,656 120,558
Inventories:
Parts................................................................ 1,259,995 1,242,580
Work-in-progress..................................................... 1,202,767 940,918
Finished goods....................................................... 1,495,575 1,191,870
Prepaid expenses and other assets....................................... 223,581 264,117
Total current assets......................................... 13,720,847 19,452,300
PROPERTY:
Leasehold improvements.................................................. 1,207,863 1,166,306
Machinery and equipment................................................. 3,532,592 3,317,391
Assets-in-construction.................................................. 110,396 51,753
Total property............................................... 4,850,851 4,535,450
Less accumulated depreciation........................................ 2,154,668 1,906,500
Property - net............................................... 2,696,183 2,628,950
OTHER ASSETS:
Goodwill................................................................ 305,922 341,922
TOTAL ASSETS................................................................. $16,722,952 $22,423,172
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................................. $ 536,193 $ 648,502
Accrued salaries, wages, and commissions................................ 800,641 762,587
Current portion of long-term debt....................................... 16,378 28,356
Clinical trials accrual................................................. 545,124 879,166
Other liabilities....................................................... 444,489 294,002
Total current liabilities................................... 2,342,825 2,612,613
OTHER LIABILITIES............................................................ 191,200 --
LONG-TERM DEBT............................................................... 178,413 10,213
SHAREHOLDERS' EQUITY:
Common stock - authorized, 100,000,000 shares of $.40 par value
each; issued and outstanding, 12,203,345 shares and 12,121,312
shares, respectively................................................ 4,881,338 4,848,525
Additional paid-in capital.............................................. 41,754,190 41,118,611
Unearned compensation .................................................. (651,143) --
Unrealized loss on investments.......................................... (706) (5,836)
Retained deficit........................................................ (31,973,165) (26,160,954)
Total shareholders' equity.................................. 14,010,514 19,800,346
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $16,722,952 $22,423,172
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For Three Months Ended For Six Months Ended
Jan. 31, 1998 Jan. 31, 1997 Jan. 31, 1998 Jan. 31, 1997
<S> <C> <C> <C> <C>
REVENUE:
Medical product sales................................. $1,214,669 $ 163,936 $2,582,652 $ 553,090
Sales agreement and other............................. -- 1,750,000 -- 1,750,000
Total revenues.................................... 1,214,669 1,913,936 2,582,652 2,303,090
COST OF SALES AND OTHER EXPENSES:
Cost of medical products.............................. 1,536,613 1,098,887 3,014,652 2,375,139
Selling, general and administrative................... 1,739,615 985,101 3,255,538 1,695,995
Research and development.............................. 1,086,216 1,058,140 2,457,680 2,135,936
Total cost of sales and other expenses............ 4,362,444 3,142,128 8,727,870 6,207,070
Operating loss............................................. (3,147,775) (1,228,192) (6,145,218) (3,903,980)
Interest income............................................ 137,963 269,942 318,844 525,098
Gain on sale of investments................................ 14,163 -- 14,163 7,109
Loss from continuing operations - net...................... (2,995,649) (958,250) (5,812,211) (3,371,773)
Income from discontinued operations-net.................... -- -- -- 111,539
Net loss................................................... $(2,995,649) $(958,250) $(5,812,211) $(3,260,234)
Weighted average number of common
shares outstanding.................................... 12,196,301 12,090,895 12,172,922 12,073,992
Basic and dilutive net income (loss)
per common share:
Loss from continuing operations........................ $(.25) $(.08) $(.48) $(.28)
Income from discontinued operations.................... -- -- -- .01
Net loss............................................... $(.25) $(.08) $(.48) $(.27)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For Six Months Ended
Jan 31, 1998 Jan 31, 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................................ $(5,812,211) $(3,260,234)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities....................... (14,163) (7,109)
Gain on asset disposal...................................... (2,100) (1,526)
Depreciation................................................ 298,736 241,454
Amortization of goodwill......................................... 36,000 36,000
Stock compensation............................................... 165,157 41,309
(Increase)decrease in receivables............................... 134,027 (1,682,924)
Increase in inventories.......................................... (642,225) (327,157)
(Increase)decrease in other assets.............................. 40,536 (83,291)
Increase (decrease) in trade accounts payable.................... (112,309) 42,238
Increase(decrease) in accrued and other liabilities............. (240,304) 99,233
Net cash used in operating activities............................ (6,148,856) (4,902,007)
INVESTING ACTIVITIES:
Additions to plant and equipment................................. (306,713) (345,060)
Proceeds from the disposal of assets............................. 2,100 20,953
Purchase of marketable securities................................ (7,162) (1,990,025)
Proceeds from sale/maturity of marketable securities............. 4,997,188 5,011,641
Net cash provided by investing activities ...................... 4,685,413 2,697,509
FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 175,000 --
Repayment of long-term debt...................................... (18,778) (45,164)
Proceeds from issuance of stock and exercise of options.......... 138,095 405,931
Net cash provided by financing activities........................ 294,317 360,767
DECREASE IN CASH AND CASH EQUIVALENTS ........................... (1,169,126) (1,843,731)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 3,849,194 7,688,507
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $2,680,068 $5,844,776
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.................................................... $ 4,807 $ 3,762
Inventory transferred to fixed assets............................ 9,588 30,386
Issuance of restricted stock..................................... 816,300 --
Accrued payroll taxes related to restricted stock................ 286,002 --
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying consolidated financial statements and notes
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1997 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three and six month periods ended January 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending July 31, 1998.
3. RECENTLY ISSUED ACCOUNTING STANDARD
Earnings per Share:
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15, Earnings per Share, and replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation for all entities with complex
capital structures and requires restatement of prior periods' earnings per share
calculations. The implementation of SFAS No. 128 did not impact earnings per
share because the Company had losses in all periods presented.
4. EARNINGS (LOSS) PER SHARE
The Company's outstanding stock options and stock warrants were not
included in the computation of earnings per share since the impact would have
been anti-dilutive because of the net loss.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three and Six Month Periods Ended January 31, 1998 and 1997
Total revenues for the three and six month periods ended January 31, 1998
were $1,215,000 and $2,583,000, respectively. This compared to total revenues of
$1,914,000 and $2,303,000 for the same periods the previous year. Second quarter
1997 total revenues included $1,750,000 from the termination and settlement of
the Company's Perma-Seal Graft Supply and Distribution Agreement. Product sales
for the three and six month periods ending January 31, 1998 increased $1,051,000
and $2,030,000, respectively, from the previous year.
The significant growth in product sales resulted from AngioJet Rapid
Thrombectomy System sales which received U.S. FDA marketing clearance for blood
clot removal in dialysis grafts in December 1996 and disposable product sales
began later that same month. AngioJet System drive unit and disposable sales in
the U.S. for the three and six month periods ended January 31, 1998 were
$1,077,000 and $2,366,000, respectively. This was an increase of $987,000 and
$2,276,000 from the same periods in the previous year.
The AngioJet System drive unit is a piece of capital equipment which
currently lists for $80,000 to U.S. hospitals. The average price for the ten
units sold is less than $80,000, reflecting customer discounts and financing
costs. The purchasing cycle for the AngioJet System drive unit, the Company
believes, will average nine to twelve months, depending on the customer's budget
cycle. The Company offers an AngioJet System evaluation program during which, in
return for free placement of the drive unit, the hospital purchases a minimum
number of disposable catheters and pumps. If the hospital requires additional
time to complete the purchase and chooses to keep the drive unit, monthly rent
or a charge for each procedure is generally made with a portion of rent or per
procedure payment applied to the final drive unit purchase price. Drive unit
rental programs are available and, through a third party, the Company offers
various drive unit financing plans including prime interest rate capital leases,
operating leases, deferred payment programs and a plan to acquire the drive unit
through the purchase of a minimum number of marked-up disposable products.
In December 1997 the Company received approval to commence a clinical study
of the AngioJet System for use in the treatment of stroke caused by blockage of
the carotid arteries, the main vessels supplying blood to the brain. The Company
believes that the treatment of stroke is a significant marketing opportunity for
the AngioJet System. The Company expects that U.S. AngioJet System sales will
grow primarily through the addition of sales people, the completion of clinical
trials designed to yield additional label-approved product uses, the publication
of clinical performance and cost effectiveness data and the introduction of
additional catheter designs.
<PAGE>
AngioJet System sales outside the United States were modest, $76,000 in the
most recent quarter. Capital equipment, such as the Company's drive unit, is
very difficult to sell in the price-sensitive European market. The Company is
interviewing potential AngioJet System independent distributors for the German
market and expects to have a German distributor in place in 1998. Actions the
Company is taking to improve AngioJet System sales in Europe include conducting
European cost effectiveness studies, a carotid artery study in Germany, a deep
vein thrombosis study in Italy and developing European physician advocates for
the AngioJet System. In Japan, the coronary AngioJet System clinical study is
nearing completion and a regulatory filing is planned for 1998 with the Japanese
Ministry of Health and Welfare. Registrations are currently being finalized in
Taiwan and the initial product shipments are expected in the fourth fiscal
quarter of 1998. The Company believes that the U.S. market will lead the
worldwide growth of AngioJet System sales revenue.
Vascular graft sales were $52,000 for the three and six month periods ended
January 31, 1998. This compared to $147,000 for the three and six month periods
ended January 31, 1997. Perma-Flow Coronary Bypass Graft sales were $53,000 and
$23,000 for the six months ended January 31, 1998 and 1997, respectively. In
October 1997 Baxter Healthcare Corporation, the Company's Perma-Flow Graft
worldwide distribution partner, launched the product within the European market
following the receipt of CE Mark regulatory approval. In November 1997 the
Company submitted a Humanitarian Device Exemption (HDE) application to the FDA
requesting approval for U.S. marketing of the Perma-Flow Coronary Bypass Graft.
This exemption will allow the Company to market the product in the U.S. for
patients who lack suitable vessels of their own to use for the surgery as it
completes the U.S. clinical study and PMA registration designed to provide broad
marketing approval. The Company expects a final decision on the HDE application
in the first half of 1998. The sales for the six months ended January 31, 1997
included $124,000 to the Company's worldwide Perma-Seal Dialysis Access Graft
distributor. This distributor agreement was terminated in January 1997. In
January 1998 the Company engaged Salomon Smith Barney to assist in the
development and implementation of a strategic plan designed to maximize the
value of the Company's vascular graft business.
The Company is planning for continued growth in product sales for the
remainder of fiscal 1998 and beyond and believes that most of this growth will
come from AngioJet System sales in the U.S. marketplace.
Cost of medical products increased 40% and 27% in the 1998 three and six
month periods, respectively, over the same periods in the previous year.
AngioJet System production costs increased $378,000 and $558,000, respectively,
in the 1998 three and six month periods as compared to the previous year. The
increase is primarily due to the significant growth in the AngioJet System
product sales. Although still negative, medical product gross margins improved
by $613,000 and $1,390,000, respectively, in the 1998 three and six month
periods, as compared to the previous year. The Company believes that
manufacturing costs per unit will be reduced and gross margins will continue to
improve as product sales and related production volumes continue to grow.
<PAGE>
Selling, general and administrative expenses, in the three and six months
ended January 31, 1998, increased $755,000 and $1,560,000, respectively,
compared to the same periods a year ago. The primary factor is increased sales
and marketing expense related to the establishment of a direct U.S. sales
organization to sell the AngioJet Rapid Thrombectomy System and expenses of
marketing the product in the United States. The Company plans to continue to
grow its field sales organization during fiscal 1998, and sales and marketing
expenditures are expected to grow significantly in the current year and beyond.
Research and development expenses, in the three and six months ended
January 31, 1998, increased 3% and 15%, respectively, over the previous year.
The increase is primarily due to increased expenses of conducting the AngioJet
System U.S. coronary clinical trial and the cost of developing new AngioJet
System applications. Vascular graft research and development expenses decreased
22% and 8%, respectively, from the prior year. The decrease is primarily due to
the Company's Perma-Seal Dialysis Graft clinical trial completing it's
enrollment in May 1997. The Company believes that research and development
expenses will continue to increase as it completes the development of its
current products, invests in the development of new AngioJet Thrombectomy System
applications, new vascular grafts and new AngioJet technology-based products.
Interest income has decreased in the most recent periods due to the use of
the Company's cash reserves in funding the Company's operations.
The Company recorded the final income relating to the sale of its Technical
Service division during the first quarter of fiscal 1997.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled $8,674,000 at
January 31, 1998 versus $14,813,000 at July 31, 1997.
Net cash usage for the six months end January 31, 1998 averaged $1,023,000
per month, consistent with the Company's expectations. Most of the $6,149,000
cash used in operations in the most recent six month period is due to the
$5,812,000 net loss. The other primary use of cash is the increase in inventory.
The Company believes that product sales of the AngioJet System, primarily in the
U.S., will yield meaningful sales growth going forward. Concurrently, sales and
marketing expenditures are planned to increase with the sales growth. Research
and development expenditures are expected to grow as well. The Company expects
to report a loss for the last two quarters of the current fiscal year. In
addition, the Company expects that increasing working capital investments in
trade receivables and inventory will be required to support growing product
sales.
<PAGE>
The Company is currently evaluating its options for raising capital.
Additional capital will be sought in fiscal 1998.
Year 2000
The Company plans to form a team in the current quarter, that will assess
and address the possible exposures related to the year 2000 issue. The Company
does not use internally developed computer software and is therefore not
anticipating major reprogramming efforts. The Company's primary financial and
operational system has been assessed and is certified "Year 2000 Compliant." The
financial impact of the year 2000 issue is not expected to be material to the
Company's consolidated financial position, results of operations and cash flows.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance, including the submission of
applications to the FDA, revenue and expense levels and future capital
requirements, are forward-looking statements that involve risks and
uncertainties, including the Company's ability to meet its timetable for FDA
submissions, the review time at the FDA which is out of the Company's control,
changes in the Company's marketing strategies, the Company's ability to
establish product distribution channels, changes in manufacturing methods,
market acceptance of the AngioJet System, changes in the levels of capital
expenditures by hospitals, the levels of sales of the Company's products that
can be achieved and other risks detailed from time to time in the Company's
various Securities and Exchange Commission filings.
Part II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
a. The 1997 annual meeting of shareholders of Possis Medical, Inc. was held
on December 9, 1997.
<PAGE>
b. By the following vote, management's nominees were elected as directors
of the Corporation for one year or until their successors are elected and
qualified:
FOR AGAINST
Donald C. Wegmiller 10,439,836 226,882
Dean Belbas 10,459,088 207,630
Seymour J. Mansfield 10,474,004 192,714
Demetre M. Nicoloff, MD 10,482,620 184,098
Robert G. Dutcher 10,429,757 236,961
Ann M. Possis 10,438,878 227,840
c. By a vote of 4,687,786 in the affirmative, 1,387,972 in the negative,
120,462 abstaining and 4,468,498 being counted as broker non-votes, the proposed
amendment to the Corporation's "1992 Stock Compensation Plan" (the "Plan") was
ratified. The amendment increases the number of shares to the Plan each year
from 2% to 3% of the total number of shares outstanding and to increase the
maximum number of shares of Common Stock that may be issued pursuant to
Incentive Stock Options to 2,000,000 shares.
d. By a vote of 5,966,559 in the affirmative, 352,593 in the negative,
104,052 abstaining and 4,243,514 being counted as broker non-votes, the proposed
amendment to the Corporation's "1991 Employee Stock Purchase" (the "Purchase
Plan") was ratified. The purpose of the Purchase Plan is to encourage equity
ownership by all employees by providing an opportunity to purchase the
Corporation's Common Shares at an attractive price. The amendment shortens the
eligibility waiting period so that full-time employees as of the first day of
each Purchase Plan Year shall be eligible to participate in the Purchase Plan
for that year. Previously, an additional one-year waiting period was imposed.
e. By a vote of 10,527,777 in the affirmative, 70,207 in the negative and
68,734 abstaining, ratified the appointment of Deloitte & Touche LLP as the
Company's certified public accountants.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated on the following pages.
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as
July 31, 1994 amended and restated to date.
3.2 S-2 Amendment No. 1 Bylaws as amended and
August 9, 1994 restated to date
27 Financial data schedule.
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
January 31, 1998.
<PAGE>
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: March 5, 1998 BY: /s/ Robert G. Dutcher
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: March 5, 1998 BY: /s/ Russel E. Carlson
RUSSEL E. CARLSON
Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,680,068
<SECURITIES> 5,993,437
<RECEIVABLES> 932,424
<ALLOWANCES> 67,000
<INVENTORY> 3,958,337
<CURRENT-ASSETS> 13,720,847
<PP&E> 4,850,851
<DEPRECIATION> 2,154,668
<TOTAL-ASSETS> 16,772,952
<CURRENT-LIABILITIES> 2,342,825
<BONDS> 0
0
0
<COMMON> 4,881,338
<OTHER-SE> 9,129,176
<TOTAL-LIABILITY-AND-EQUITY> 16,722,952
<SALES> 2,582,652
<TOTAL-REVENUES> 2,582,652
<CGS> 3,014,652
<TOTAL-COSTS> 3,014,652
<OTHER-EXPENSES> 5,713,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,812,211)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,812,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,812,211)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
