_______________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 1998
Commission File Number 001-12567
POSSIS MEDICAL, INC.
9055 Evergreen Boulevard
Minneapolis, Minnesota 55433-8003
(612) 780-4555
A Minnesota Corporation IRS Employer ID No. 41-0783184
_________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of December 9, 1998 was 12,389,975.
________________________________
<PAGE>
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, October 31, 1998
and July 31, 1998.............................................. 3
Consolidated Statements of Operations for the three
months ended October 31, 1998 and 1997......................... 4
Consolidated Statements of Cash Flows for the
three months ended October 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............................ 7-11
ITEM 3. Quantitative and Qualitative Disclosure about
Market Risks .................................................. 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................... 12
SIGNATURES..................................................... 13
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................$10,118,926 $13,841,793
Receivables:
Trade (less allowance for doubtful accounts
and returns:
$190,000 and $150,000, respectively)......... 1,212,918 1,144,472
Other........................................ -- 3,091
Inventories:
Parts........................................ 1,075,225 1,085,236
Work-in-process.............................. 1,841,439 1,740,834
Finished goods............................... 2,016,246 1,913,084
Prepaid expenses and other assets............... 238,196 313,158
Total current assets...................... 16,502,950 20,041,668
PROPERTY:
Leasehold improvements.......................... 1,210,984 1,210,984
Machinery and equipment......................... 3,735,181 3,720,772
Assets-in-construction.......................... 264,057 113,094
Total property............................ 5,210,222 5,044,850
Less accumulated depreciation................ 2,492,793 2,343,691
Property - net............................ 2,717,429 2,701,159
OTHER ASSETS:
Deferred debt issue costs....................... 871,202 884,105
Goodwill ....................................... 251,922 269,922
TOTAL ASSETS........................................$20,343,503 $23,896,854
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable..........................$ 360,311 $ 1,245,552
Accrued salaries, wages, and commissions........ 1,016,674 1,060,687
Current portion of long-term debt .............. 97,474 97,713
Clinical trials accrual......................... 550,107 335,067
Litigation settlement........................... -- 200,000
Other liabilities............................... 732,024 504,624
Total current liabilities.................. 2,756,590 3,443,643
LONG-TERM DEBT ..................................... 11,534,074 11,492,661
OTHER LIABILITIES .................................. 108,100 216,200
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares of
$.40 par value each; issued and outstanding,
12,254,941 and 12,218,622 shares, respectively.. 4,901,976 4,887,449
Additional paid-in capital........................ 42,767,185 42,476,257
Unearned compensation............................. (361,957) (489,060)
Retained deficit..................................(41,362,465) (38,130,296)
Total shareholders' equity........................ 5,944,739 8,744,350
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..........$20,343,503 $23,896,854
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Product sales........................................ $1,859,560 $1,367,983
Cost of sales and other expenses:
Cost of medical products........................... 1,534,259 1,478,039
Selling, general and administrative................ 2,054,840 1,515,376
Research and development........................... 1,486,637 1,371,463
Interest........................................... 177,055 548
Total cost of sales and other expenses......... 5,252,791 4,365,426
Operating loss....................................... (3,393,231) (2,997,443)
Interest income...................................... 161,062 180,880
Net loss.............................................$(3,232,169) $(2,816,563)
Weighted average number of common shares outstanding. 12,252,543 12,149,544
Basic and dilutive net loss per common share:
Net loss....................................... $(.26) $(.23)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................. $(3,232,169) $(2,816,563)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on asset disposal........................... (1,820) (2,100)
Depreciation..................................... 227,102 122,714
Amortization..................................... 80,157 18,000
Stock compensation............................... 127,103 22,200
Increase in receivables.......................... (65,355) (195,710)
Increase in inventories.......................... (246,756) (314,097)
Decrease in other assets......................... 74,962 46,969
Increase (decrease) in trade accounts payable.... (885,241) 63,866
Increase (decrease) in accrued and other
liabilities.................................... 326,095 (32,090)
Net cash used in operating activities................. (3,595,922) (3,086,811)
INVESTING ACTIVITIES:
Additions to plant and equipment...................... (166,352) (172,294)
Proceeds from the disposal of assets.................. 2,800 2,100
Purchase of marketable securities..................... -- (3,116)
Proceeds from sale/maturity of marketable securities.. -- 2,000,000
Net cash (used in) provided by investing activities... (163,552) 1,826,690
FINANCING ACTIVITIES:
Proceeds from notes payables.......................... 21,074 175,000
Repayment of long-term debt.......................... (4,899) (11,695)
Proceeds from issuance of stock and exercise of
options............................................. 44,687 55,000
Deferred debt issues costs............................ (24,255) --
Net cash provided by financing activities............. 36,607 218,305
DECREASE IN CASH AND CASH EQUIVALENTS................. (3,722,867) (1,041,816)
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER..... 13,841,793 3,849,194
CASH AND CASH EQUIVALENTS AT END OF QUARTER........... $10,118,926 $2,807,378
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid......................................... $ 87 $ 548
Issuance of restricted stock.......................... -- 808,600
Accrued payroll taxes related to restricted stock..... (35,768) 283,000
Issuance of stock to settle litigation................ 225,000 --
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying consolidated financial statements and notes
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1998 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended October 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 1999.
3. RECENTLY ISSUED ACCOUNTING STANDARD
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Incom" (SFAS 130), which
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity during the
period from transactions and other events and circumstances from non-owner
sources. Implementation of SFAS 130 did not have an effect on the Company's
consolidated financial statements because comprehensive income (loss) is the
same as the Company's net income (loss).
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
Quarters Ended October 31, 1998 and 1997
Total product sales for the three months ended October 31, 1998 and 1997
were $1,860,000 and $1,368,000, respectively. The significant revenue growth
resulted from growing physician acceptance and sales of the AngioJet(R)
Rheolytic(TM) Thrombectomy System drive units and disposable catheters and pumps
in the United States. Sixteen drive units were sold in the current quarter
compared to four in the same quarter in 1997, and 1,522 catheters and pump sets
were sold in the most recent three month period, compared to 877 in the same
quarter in 1997. In December 1996 the Company received FDA clearance to commence
U.S. marketing of the AngioJet Rheolytic Thrombectomy System, with labeling
claims for removal of blood clots from grafts used by patients on kidney
dialysis.
Revenue - AngioJet Systems
Since the U.S. market introduction of the AngioJet System, the Company has
listed its AngioJet System drive unit, considered capital equipment, at $80,000
to hospitals. Despite employing a variety of flexible drive unit acquisition
programs including outright purchase, rental, lease and fee-per-procedure, the
Company only sold 4 drive unit during the first quarter of fiscal 1998. In April
1998, the AngioJet System drive unit list price was reduced to $25,000 after a
successful test of the lower price. The Company sold 16 AngioJet System drive
units during the first quarter of fiscal 1999. A lower drive unit sales price is
intended to improve the competitive position of the AngioJet System, facilitate
evaluation of the technology, ease sale closure on units currently under
evaluation and provide added time for the Company's direct sales force to
encourage use of the systems currently in the field.
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 neurovascular stoke is a significant marketing
opportunity for the AngioJet System. In May 1998 the Company introduced its AV60
AngioJet Catheter. The AV60 Catheter has been designed specifically to more
effectively and efficiently remove blood clots from dialysis access grafts - the
indication for use for which Possis received FDA marketing approval in December
1996. In September 1998, Possis submitted to the FDA a pre-market approval
("PMA") application seeking approval to market its AngioJet System to remove
blood clots from coronary blood vessels and bypass grafts. The FDA targets
completion of its review and a response to the Company within 180 days. However,
recent actual average elapsed time from Company submission to FDA approval is 12
months. In November 1998 the FDA granted the Company expedited review status to
its pending PMA. In addition, the FDA indicated that no panel meeting will be
<PAGE>
necessary to evaluate device safety and effectiveness. The coronary PMA presents
the results of a 349 patient randomized trial comparing AngioJet System
treatment to intracoronary infusion of the blood clot-dissolving drug urokinase
for patients with demonstrated clot in native coronary arteries and saphenous
vein bypass grafts. The randomized trial showed that AngioJet System treatment
had significantly better outcomes than the urokinase treatment for procedure
success and device success. AngioJet System treatment also had lower in-hospital
major cardiac complications, including fewer bleeding complications and vascular
complications. Also, the preliminary results of a cost-effectiveness trial run
concurrently with the coronary AngioJet trials show that the AngioJet treatment
costs are on average $3,000 - $3,500 lower than those associated with the use of
urokinase. The Company believes that the treatment of blood clots in coronary
vessels and bypass grafts 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 FDA label-approved product uses, the
publication of clinical performance and cost effectiveness data and the
introduction of additional catheter designs.
Foreign sales of the AngioJet System for the three months ended October 31,
1998 and 1997 were $29,000 and $78,000, respectively. The Company is evaluating
its European AngioJet System distribution options. Distribution outside the U.S.
is currently done through 15 independent distributors. Actions the Company are
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
enrollment was completed in April 1998 and a regulatory filing is planned for
early 1999 with the Japanese Ministry of Health and Welfare.
Revenue - Vascular Grafts
There were no vascular graft sales in the current quarter and vascular
graft sales for the three months ended October 31, 1997 were $1,000. The Company
has a Perma-Flow(R) Coronary Bypass Graft Distribution Agreement which expires
in March 1999. On December 14, 1998, the Company announced an exclusive
worldwide Supply and Distribution Agreement with Horizon Medical Products, Inc.
for its Perma-Sea(R) Dialysis Access Graft. The Agreement is subject to minimum
sales performance requirements and has an initial term of three years.
In April 1998, the Company received Humanitarian Device Exemption ("HDE")
approval from the FDA, clearing the way for U.S. marketing of the Perma-Flow
Coronary Bypass Graft for patients who require coronary bypass surgery but who
have inadequate blood vessels of their own for use in the surgery. In September
1998, the Company received a PMA from the FDA for its Perma-Seal Graft. The
Perma-Flow and Perma-Seal Grafts have received CE Mark approval to allow sales
in the European Community. In December 1998, the Company submitted a 510(k)
application to the FDA requesting marketing clearance for three expanded
polytetrafluoroethylene ("ePTFE") synthetic vascular grafts. The FDA generally
responds to 510(k) submissions in approximately 90 days. ePTFE vascular grafts
are the primary synthetic graft used for peripheral grafting today including
dialysis access grafts.
<PAGE>
In January 1998, the Company engaged the investment banking firm 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. This
plan and ensuing third party discussions have involved exploring a wide range of
options, including the possible sale of the entire vascular graft business.
Based on results from those discussions, we have decided to first establish
independent worldwide distribution for each graft product, while continuing to
explore other options.
The Company is planning for continued growth in product sales for the
remainder of fiscal 1999 and beyond and believes that most of this growth will
come from AngioJet System sales in the U.S. marketplace.
Cost of Medical Products
Cost of medical products in the current period increased 4% or $56,000
compared to the same period a year ago. The increase is primarily due to the
significant growth in the AngioJet System product sales. Medical product gross
margins improved by $435,000 compared to the same period a year ago. This
resulted in a positive gross margin of 17% for the quarter ended October 31,
1998. 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.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the three months ended
October 31, 1998 increased $539,000 compared to the same period a year ago. The
primary factors are increased sales and marketing expenses related to the
establishment of a direct sales organization to sell the AngioJet System and
expenses of marketing the product in the United States. Based upon early
physician interest, the Company has grown the U.S. AngioJet System sales and
marketing organization from 26 employees in October 1997 to 36 employees in
October 1998. Concurrent with the AngioJet System receiving FDA approval for
coronary use, the Company plans to further increase the direct U.S. sales force
to meet the expected demand for the Company's AngioJet System. The Company plans
on increasing its sales and marketing expenditures in the current year.
Research and Development Expense
Research and development expenses increased 8% or $115,000 in the most
recent three-month period, compared to the same period a year ago. The increase
is primarily due to increased expenses in the development of new AngioJet System
thrombectomy applications. This increase was partially offset by a reduction of
expenses relating to the Perma-Seal Graft and the Coronary AngioJet System
clinical trials. The Company believes that research and development expenses
will continue at its current level as it completes the development of its
current products, invests in development of new AngioJet Thrombectomy System
applications and new AngioJet technology-based products.
<PAGE>
Interest Income and Expense
Interest income decreased slightly in the most recent period due to the use
of the Company's cash reserves to fund the Company's operations. The decrease
was partially offset by interest earned on the $12,000,000 received in July 1998
from the issuance of 5% convertible subordinated debentures. Interest expense
increase was due to issuance of the 5% convertible subordinated debentures.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled $10,119,000 at
October 31, 1998 versus $13,842,000 at July 31, 1998.
Net cash usage for the three months ended October 31, 1998 averaged
$1,241,000 per month, consistent with the Company's expectations. Most of the
$3,596,000 cash used in operations in the most recent three month period was due
to the $3,232,000 net loss. The other primary use of cash is the payment of
$720,000 in transaction fees and expenses relating to the issuance of the
convertible debentures issued in July 1998. 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 continue at its current level. The Company expects to report a loss
for 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.
The Company is currently evaluating its options for raising capital.
Additional capital will likely be sought in fiscal 1999.
Year 2000 ("Y2K")
The Company established a team in May 1998 to assess and address the
possible exposures related to the Y2K issue. The areas under investigation
include product issues, business computer systems, production equipment, vendor
readiness and contingency plans. Products currently sold by the Company are Y2K
compliant. 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 "Y2K
Compliant." There are several personal productivity applications that are not
currently Y2K compliant. The Company expects them to be compliant by
mid-calendar 1999. Various personal computers are not currently Y2K compliant.
These computers are planned to be replaced as part of the Compan's technology
update strategy. None of these replacements have been accelerated and they have
no material effect on the Company consolidated financial statements. Equipment
used for production or quality control does not use dates to control operations.
<PAGE>
The Company mailed questionnaires to each of its significant vendors in
October 1998 to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Y2K issues. This assessment will
be completed by the end of calendar 1998. In addition, the Company has
investigated its utility providers and believes they will be Y2K compliant. The
Company anticipates developing a contingency plan once it has completed its
assessment of significant vendor compliance which will be no later than the
first quarter of calendar 1999. A contingency plan will be developed to minimize
the Company's exposure to work slowdowns or business disruptions. In the event
any vendors are not Y2K compliant the Company will seek new vendors to meet its
production needs.
The Company has budgeted approximately $50,000 for expenses directly
related to Y2K identification and remediation of internal systems. It has also
purchased continuation of business and director's liability related to the Y2K
issue.
Although the Company does not at this time expect a significant impact on
its consolidated financial position, results of operations and cash flows, our
internal review has not been completed and there can be no assurance that the
systems of other companies or the systems of the Company itself will be
converted on a timely basis and will not have a corresponding adverse effect on
the Company.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, including the discussion regarding Year 2000 compliance,
contain certain "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Such statements relating to future
events and financial performance, including the submission of applications to
the FDA, 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, changes in the Company's marketing strategies, the Company's ability to
establish product distribution channels, changes in manufacturing methods,
market acceptance of the AngioJet System, changes in the levels of capital
expenditures by hospitals, the levels of sales of the Company's products that
can be achieved, ability to raise additional capital and other risks set forth
in the cautionary statements included in Exhibit 99 to the Company's report on
Form 10-Q dated April 30, 1998, filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds. The
market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of October 1998, the amount of currency held in foreign
exchange was approximately $1,000 USD. The market risk on the Company's foreign
subsidiary operations is minimal.
<PAGE>
At October 31, 1998, all of the Company's outstanding long-term debt carry
interest at a fixed rate. There is no material market risk relating to the
Company's long-term debt. The Company's 5% convertible subordinated debentures,
issued July 15, 1998, carry a fixed interest rate of 5%; are due July 15, 2004;
and are convertible into common stock at a price calculated per predetermined
formulas based on the market price of the Company's common stock over a
specified period of time.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated below.
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as amended
July 31, 1994 and restated to date.
3.2 S-2 Amendment No. 1 Bylaws as amended and restated
August 9, 1994 to date.
27 Financial Data Schedule
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
October 31, 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: December 14, 1998 BY: /s/
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: December 14, 1998 BY: /s/
RUSSEL E. CARLSON
Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 10,118,926
<SECURITIES> 0
<RECEIVABLES> 1,402,918
<ALLOWANCES> 190,000
<INVENTORY> 4,932,910
<CURRENT-ASSETS> 16,502,950
<PP&E> 5,210,222
<DEPRECIATION> 2,492,793
<TOTAL-ASSETS> 20,343,503
<CURRENT-LIABILITIES> 2,756,590
<BONDS> 11,534,074
0
0
<COMMON> 4,901,976
<OTHER-SE> 1,042,763
<TOTAL-LIABILITY-AND-EQUITY> 20,343,503
<SALES> 1,859,560
<TOTAL-REVENUES> 1,859,560
<CGS> 1,534,259
<TOTAL-COSTS> 1,534,259
<OTHER-EXPENSES> 3,541,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177,055
<INCOME-PRETAX> (3,393,231)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,393,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,232,169)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
