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 SEPTEMBER 30, 1997
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3905 ANNAPOLIS LANE, SUITE 105 55447
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 553-7736
Former name, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of each of the registrant's classes of
common stock as of November 1, 1997 was:
Common Stock $.01 par value 17,563,606 shares
<PAGE>
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
September 30, 1997 (unaudited) and
December 31, 1996
Statements of Operations - 4
Three Months and Nine Months Ended
September 30, 1997 and 1996 (unaudited)
Statements of Cash Flows - 5
Nine Months Ended September 30, 1997 and
1996 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
PART II. OTHER INFORMATION 12
Signatures 13
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS ------------ ------------
(Unaudited) (Note)
CURRENT ASSETS
Cash & cash equivalents $ 4,768,866 $ 2,320,010
Marketable securities 23,716,836 7,867,619
------------ ------------
28,485,702 10,187,629
Accounts receivable, less allowance of $245,000
in 1997 and $200,000 in 1996 3,836,457 3,139,559
Inventory 21,206,197 18,242,066
Prepaid expenses 247,495 468,249
------------ ------------
TOTAL CURRENT ASSETS 53,775,851 32,037,503
FURNITURE, MACHINERY & EQUIPMENT 2,009,637 2,014,439
Less accumulated depreciation 1,192,529 1,119,875
------------ ------------
817,108 894,564
OTHER ASSETS 430,068 388,233
------------ ------------
TOTAL ASSETS $ 55,023,027 $ 33,320,300
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,793,903 $ 1,190,958
Accrued payroll and expenses 317,446 202,603
------------ ------------
TOTAL CURRENT LIABILITIES 2,111,349 1,393,561
LONG-TERM DEBT 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,562,231 & 15,288,042 at
Sept 30, 1997 and Dec 31, 1996, respectively 175,622 152,880
Additional paid-in capital 71,750,917 52,313,315
Other 36,380 54,465
Retained earnings (deficit) (19,051,241) (20,593,921)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 52,911,678 31,926,739
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 55,023,027 $ 33,320,300
============ ============
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements.
See notes to condensed financial statements.
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 3,469,000 $ 2,758,825 $10,608,880 $ 8,425,525
Less cost of goods sold 2,252,546 1,654,064 6,722,217 5,209,100
----------- ----------- ----------- -----------
GROSS PROFIT 1,216,454 1,104,761 3,886,663 3,216,425
OPERATING EXPENSES
Research, development and engineering 284,053 137,618 780,812 466,632
Selling, general and administrative 991,389 746,986 2,512,717 2,313,818
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,275,442 884,604 3,293,529 2,780,450
Interest income 364,459 164,686 949,547 494,660
----------- ----------- ----------- -----------
NET INCOME $ 305,471 $ 384,843 $ 1,542,681 $ 930,635
=========== =========== =========== ===========
Net income per share:
Basic $ 0.02 $ 0.03 $ 0.09 $ 0.06
=========== =========== =========== ===========
Fully Diluted $ 0.02 $ 0.02 $ 0.09 $ 0.06
=========== =========== =========== ===========
Weighted average number of shares outstanding during the period:
Basic 17,562,231 15,152,021 17,184,472 15,149,080
=========== =========== =========== ===========
Fully Diluted 18,112,660 16,065,511 17,781,033 16,485,741
=========== =========== =========== ===========
</TABLE>
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,542,681 $ 930,635
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 186,478 174,232
Loss on disposal of equipment 48,225 14,996
Changes in operating assets and liabilities:
Accounts receivable (696,898) 516,230
Prepaid expenses 220,753 355,526
Other assets (41,835) (11,167)
Inventory (2,964,131) (3,249,492)
Accounts payable and accrued expenses 717,788 (685,567)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (986,939) (1,954,607)
INVESTING ACTIVITIES
Purchase of marketable securities (27,355,361) (6,611,381)
Sale of marketable securities 11,500,553 9,516,810
Purchases of property, plant and equipment (157,247) (178,149)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (16,012,055) 2,727,280
FINANCING ACTIVITIES
Notes payable 0 0
Net proceeds from sale of common stock 19,460,344 1,214,012
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,460,344 1,214,012
Effect of exchange rate changes on cash (12,494) (1,646)
INCREASE IN CASH AND CASH EQUIVALENTS 2,448,856 1,985,039
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,320,010 2,213,632
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,768,866 $ 4,198,671
============ ============
</TABLE>
<PAGE>
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1997
Note A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month and nine month periods ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997.
Note B - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares outstanding and dilutive common stock equivalents, if applicable. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year ended
December 31, 1997. For the quarter ended September 30, 1997, the basic net
income per share under Statement 128 is $.02 per share on 17,562,231 weighted
average shares outstanding for the period. For the nine months ended September
30, 1997, the basic net income per share under Statement 128 is $.09 per share
on 17,184,472 weighted average shares outstanding for the period.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ATS Medical, Inc. ("ATS" or the "Company") is engaged in the manufacturing and
marketing of a pyrolytic carbon bileaflet mechanical heart valve. The Company
sells the ATS Open Pivot TM valve (the "ATS Valve" or the "Valve") in
international markets and has recently initiated a clinical study in the United
States for the purpose of obtaining regulatory approval.
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1997 increased 26% to $3,469,000
compared to $2,758,825 for the quarter ended September 30, 1996. Unit sales
increased 38% in the third quarter 1997 compared to the third quarter 1996.
Sales growth can be attributed to continued implant growth in Europe, Japan and
other Asia Pacific countries. This growth in sales is notable because the
quarter which ends September 30 is usually the weakest quarter each year, not
only for the Company but also for other implantable medical device companies, as
European surgical activity slows during vacation season.
Net sales for the nine months ended September 30, 1997 totaled $10,608,880
compared to $8,425,525 for the nine months ended September 30, 1996. Revenue
increased about 26% and unit sales increased about 31% for the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996.
For both the third quarter and the nine months of 1997 this sales growth over
the corresponding period was acheived in spite of significant price competition
from other valve manufacturers and the increased strength of the U.S. dollar
relative to almost all European currencies. ATS Medical, Inc. sells the Valve to
distributors throughout the world in U.S. dollars. As the dollar increases in
value against the distributor's local currency, the cost of the Valve increases
for the distributor even though ATS does not change the selling price. The table
below highlights the impact in 1997 of the continued strengthening of the
dollar. Since most of the Company's sales are outside of the United States,
increasing sales in spite of the strengthening dollar has been a challenge for
the Company and its distributors.
- ---------------------------------------------------------------------
ATS MEDICAL, INC.
Dollar vs. Currencies of Certain Foreign Markets at September 30, 1997
- ---------------------------------------------------------------------
U.S. Dollar's % Chg vs. Currency
Currency per --------------------------------
Country Currency U.S. Dollar 3 Mos. 9 Mos. 1 Year
- ---------------------------------------------------------------------
Belgium Franc 36.49 1.45% 15.07% 16.06%
- ---------------------------------------------------------------------
Britian Pound 0.6205 3.31% 6.24% -2.88%
- ---------------------------------------------------------------------
France Franc 5.9335 0.99% 14.26% 14.83%
- ---------------------------------------------------------------------
Germany Mark 1.7671 1.34% 14.84% 15.72%
- ---------------------------------------------------------------------
Greece Drachma 279.04 1.62% 12.99% 15.64%
- ---------------------------------------------------------------------
Italy Lira 1,726 1.57% 13.63% 13.27%
- ---------------------------------------------------------------------
Japan Yen 120.71 5.32% 4.27% 8.11%
- ---------------------------------------------------------------------
Korea Won 917 3.03% 8.20% 10.95%
- ---------------------------------------------------------------------
Netherlands Guilder 1.9982 1.79% 15.70% 16.68%
- ---------------------------------------------------------------------
Spain Peseta 149.33 1.38% 14.99% 16.20%
- ---------------------------------------------------------------------
Switzerland Franc 1.4548 -0.40% 8.65% 15.87%
- ---------------------------------------------------------------------
<PAGE>
In seven of the Company's nine top markets, the effective selling price of the
ATS Valve has increased by 15% or more because of currency rate changes. Because
the Company sells in dollars it does not record currency translation
adjustments. However, the Company has had to extend payment terms and/or reduce
prices on a select basis to accomodate customers.
The average selling price for the Valve declined in the three months ended
September 30, 1997 by 8.65% compared to the average selling price for the three
months ended September 30, 1996. For the nine months ended September 30, 1997
the decline in average selling price compared to the nine months ended September
30, 1996 was 3.65%.
Cost of sales for the third quarter of 1997 totaled $2,252,546 or 65% of sales
compared to $1,654,064 or 60% of sales for the second quarter of 1996. Cost of
sales for the nine months ended September 30, 1997 totaled $6,722,217 or 63% of
sales compared to $5,209,100 or 62% of sales for the nine months ended September
30, 1996. The price of the carbon components contained in the Valves sold in the
nine months ended September 30, 1997 increased 3% as compared to the cost of
carbon components contained in the Valves sold in the nine months ended
September 30, 1996. Based upon the Company's internal sales projections, the
price of the carbon contained in Valves sold during the remainder of 1997 is
expected to be 3% higher than in 1996.
Gross profit totaled $1,216,454 for the quarter ended September 30, 1997 or 35%
of sales, compared to gross profit of $1,104,761 or 40% of sales for the quarter
ended September 30, 1996. Gross profit totaled $3,886,663 or 37% of sales for
the nine months ended September 30, 1997 compared to $3,216,425 or 38% of sales
for the nine months ended September 30, 1996. The Company achieved manufacturing
efficiencies in the nine months ended September 30, 1997, but the savings were
not sufficient to offset the decline in the average selling prices and the
increase in the cost of carbon components compared to the nine months ended
September 30, 1996.
Research, development and engineering expenses totaled $284,053 for the quarter
ended September 30, 1997 versus $137,618 for the quarter ended September 30,
1996. For the nine months ended September 30, 1997 research, development and
engineering expenses totaled $780,812 compared to $466,632 for the nine months
ended September 30, 1996. Approximately 43% and 49% of research and development
expenses for the quarters ended September 30, 1997 and 1996, respectively, were
for testing and outside consulting services related to the Valve. A large
component of the year to year increase is development work on an aortic valved
graft ("AVG"). The AVG is a standard ATS replacement aortic heart valve sutured
at the end of a dacron tube. This product extension is used in surgeries where
the patient's aorta is damaged or degenerated. Most other valve manufacturers
provide a similar product. This product should be commercially available outside
the U.S. in late 1997 or early 1998 as well as being available for use in the
Company's clinical trials in the U.S.
The Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and is eligible for reimbursement by Medicare
and most private insurance
<PAGE>
companies. The Company is responsible for reimbursing the hospital for certain
additional tests and procedures required by the clinical protocol and accrues
the estimated total cost of follow-up at the time the sale is recorded as
research and development expense.
Selling, general and administrative expenses totaled $991,389 for the quarter
ended September 30, 1997, an increase from the $746,986 reported for the quarter
ended September 30, 1996. The Company held the Second Symposium on the ATS Valve
in the fourth quarter of 1996. Commitments and deposits were required throughout
1996 for this meeting so the Company accrued $100,000 in the quarter ended
September 30, 1996 and $300,000 for the first nine months of 1996. There is no
symposium or comparable expense expected in 1997. The Company announced in
October, 1997 that it was closing its Subsidiary located in Glasgow, Scotland at
September 30, 1997. The Company accrued $225,000 in the quarter ended September
30, 1997 for one time expenses associated with the closing. Salaries, wages and
benefits increased nearly $388,000 (of which approximately 40% was for
separation pay for the employees of the U.K. subsidiary) or approximately 20%
during the first nine months of 1997. The Company had 52 employees at September
30, 1996 compared to 58 employees at September 30, 1997.
There was no interest expense incurred in the quarters or nine month periods
ended September 30, 1997 and 1996.
Interest income totaled $364,459 for the quarter ended September 30, 1997
compared to $164,686 for the quarter ended September 30, 1996. For the first
nine months of 1997 interest income totaled $949,547 compared to $494,660 for
the first nine months of 1996. The increase in interest income for the nine
months of 1997 was the result of more cash on hand to invest than the first nine
months of 1996. Cash on hand at September 30, 1997 is significantly greater than
the amount on hand during 1996, due primarily to the sale of equity and exercise
of warrants in the first quarter of 1997. Interest income for the fourth quarter
1997 is expected to be greater than the fourth quarter of 1996.
Net income totaled $305,471 (after the $225,000 accrual for the Scotland
closing) for the quarter ended September 30, 1997 versus net income of $384,843
for the quarter ended September 30, 1996. Net income totaled $1,542,681(after
the $225,000 accrual for the Scotland closing) for the nine months ended
September 30, 1997 compared to $930,635 for the nine months ended September 30,
1996.
Earnings per share totaled $.02 for the quarter ended September 30, 1997
compared to $.03 for the quarter ended September 30, 1996. Earnings per share
for the first nine months of 1997 totaled $.09 compared to $.06 for the first
nine months of 1996. The weighted average number of shares outstanding increased
8% for the nine months ended September 30, 1997 over 1996 primarily due to the
issuance of shares in the February, 1997 private sale of common stock.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by $18,298,073 from
$10,187,629 at December 31, 1996 to $28,485,702 at September 30, 1997. Inventory
purchases and accounts receivable growth caused the company to have negative
cashflow from operations. On February 10, 1997 the Company announced the sale of
1,568,940 shares of common stock to ITOCHU Corporation of Japan raising $14.75
million in new cash. The Company also collected $5,203,818 during the first
quarter of 1997 from the exercise of warrants.
During 1997 the Company is required to purchase $11.4 million of heart valve
components in accordance with the terms of its long term supply agreement with
CarboMedics, Inc. (the "Supply Agreement"). During the three contract years
after 1997 the Company is obligated to purchase an aggregate of approximately
$50 million of components. The minimum purchases under the Supply Agreement are
not tied to sales of the Company's Valve and the Company does not expect sales
of the Valve to exceed the minimum purchase requirements under the Supply
Agreement until the Valve is approved for sale in the United States by the Food
and Drug Administration. Deliveries under the terms of the Supply Agreement are
expected to be larger in the fourth quarter 1997 than in previous quarters of
1997 which will cause cash, cash equivalents and marketable securities to
decline.
Accounts receivable increased from $3,139,559 at December 31, 1996 to $3,836,457
at September 30, 1997. Most of the Company's sales have been to customers in
international markets and while the Company attempts to set standard 60 day
terms for receivables, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
Accounts payable increased from $1,190,958 at December 31, 1996 to $1,793,903 at
September 30, 1997. The majority of the increase in accounts payable is related
to the amount owing to CarboMedics, Inc. under the Supply Agreement.
Based upon the Company's current rate of sales, its expected obligations under
the Supply Agreement and its expected expenses, the Company anticipates that
existing cash, cash equivalents and short-term investments will be sufficient to
satisfy its capital requirements through 2000. Beyond 2000 the Company must
continue to substantially increase revenues to meet its capital requirements.
Should revenues not increase sufficiently, the Company may be required to raise
additional equity capital. There can be no assurance that equity would be
available to the Company at favorable terms, if at all.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. ATS Medical, Inc.
desires to take
<PAGE>
advantage of the safe harbor provisions with respect to any forward-looking
statements it may make in this filing, other filings with the Securities and
Exchange Commission and any public oral statements or written releases. The
words or phrases "will likely," "is expected," "will continue," "is
anticipated," "estimate," "projected," "forecast," or similar expressions are
intended to identify forward-looking statements within the meaning of the Act.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. The Company cautions
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.
In accordance with the Act, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, and
the actions of the Company's supplier of pyrolytic carbon components for the
Valve. This list is not exhaustive, and the Company may supplement this list in
any future filing or in connection with the making of any specific
forward-looking statement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<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.
Date: November 13, 1997 ATS MEDICAL, INC.
By: /s/ John H. Jungbauer
-------------------------------------
John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,768,866
<SECURITIES> 23,716,836
<RECEIVABLES> 4,081,457
<ALLOWANCES> 245,000
<INVENTORY> 21,206,197
<CURRENT-ASSETS> 53,775,851
<PP&E> 2,009,637
<DEPRECIATION> 1,192,529
<TOTAL-ASSETS> 55,023,027
<CURRENT-LIABILITIES> 2,111,349
<BONDS> 0
0
0
<COMMON> 175,622
<OTHER-SE> 52,736,056
<TOTAL-LIABILITY-AND-EQUITY> 55,023,027
<SALES> 10,608,880
<TOTAL-REVENUES> 10,608,880
<CGS> 6,722,217
<TOTAL-COSTS> 6,722,217
<OTHER-EXPENSES> 2,343,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,542,681
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,542,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,542,681
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
