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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3905 ANNAPOLIS LANE, SUITE 105 55447
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 553-7736
Former name, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of each of the registrant's classes of
common stock as of May 1, 1998 was:
Common Stock $.01 par value 17,769,579 shares
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<PAGE>
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
March 31, 1998 (unaudited) and
December 31, 1997
Statements of Operations - 4
Three Months Ended
March 31, 1998 and 1997 (unaudited)
Statements of Cash Flows - 5
Three Months Ended March 31, 1998 and
1997 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
PART II. OTHER INFORMATION 12
Signatures 13
<PAGE>
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
ASSETS ------------ ------------
(Unaudited) (Note)
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 3,985,692 $ 4,568,332
Marketable securities 20,964,907 20,982,176
------------ ------------
24,950,599 25,550,508
Accounts receivable, less allowance of $265,000
in 1998 and $260,000 in 1997 4,507,293 4,446,834
Inventories 24,093,113 22,686,273
Prepaid expenses 591,522 555,570
------------ ------------
TOTAL CURRENT ASSETS 54,142,527 53,239,185
FURNITURE, MACHINERY & EQUIPMENT 1,979,925 2,023,646
Less accumulated depreciation 1,235,964 1,247,459
------------ ------------
743,961 776,187
OTHER ASSETS 375,259 370,659
------------ ------------
TOTAL ASSETS $ 55,261,747 $ 54,386,031
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,443,517 $ 621,708
Accrued payroll and expenses 242,067 241,584
------------ ------------
TOTAL CURRENT LIABILITIES 1,685,584 863,292
LONG-TERM DEBT 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,768,079 & 17,589,058 at
March 31, 1998 and Dec 31, 1997, respectively 177,681 175,891
Additional paid-in capital 71,153,592 71,797,797
Other equity 41,529 40,306
Retained earnings (deficit) (17,796,639) (18,491,255)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 53,576,163 53,522,739
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 55,261,747 $ 54,386,031
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 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)
Three months ended March 31,
--------------------------------
1998 1997
----------- -----------
REVENUES
Net sales $ 4,248,720 $ 3,444,650
Less cost of goods sold 2,639,975 2,172,088
----------- -----------
GROSS PROFIT 1,608,745 1,272,562
OPERATING EXPENSES
Research, development and engineering 357,278 235,494
Selling, general and administrative 924,045 719,419
----------- -----------
TOTAL EXPENSES 1,281,323 954,913
Interest income 367,195 259,390
NET INCOME $ 694,617 $ 577,039
=========== ===========
Net income per share:
Basic $ 0.04 $ 0.04
=========== ===========
Diluted $ 0.04 $ 0.03
=========== ===========
Weighted average number of shares
outstanding during the period:
Basic 17,622,319 16,406,453
=========== ===========
Diluted 18,160,979 17,139,668
=========== ===========
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 694,617 $ 577,039
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 61,596 60,501
Loss on disposal of equipment 800 0
Changes in operating assets and liabilities:
Accounts receivable (60,459) (1,329,842)
Prepaid expenses (35,952) 122,858
Other assets (4,600) (2,884)
Inventories (1,406,840) (1,405,448)
Accounts payable and accrued expenses 822,292 81,089
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 71,454 (1,896,687)
INVESTING ACTIVITIES
Purchase of marketable securities (22,692,308) (18,512,062)
Sale of marketable securities 22,709,577 3,876,756
Purchases of property, plant and equipment (30,171) (13,145)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (12,902) (14,648,451)
FINANCING ACTIVITIES
Net proceeds from sale of common stock (642,415) 19,473,853
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (642,415) 19,473,853
Effect of exchange rate changes on cash 1,223 (11,041)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (582,640) 2,917,674
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,568,332 2,320,010
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,985,692 $ 5,237,684
============ ============
</TABLE>
<PAGE>
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
Note A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
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, 1998. For the quarter ended March 31, 1998, the basic net income
per share under Statement 128 is $.04 per share on 17,622,319 weighted average
shares outstanding for the period.
Note C - SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
company will adopt the new requirement retroactively in 1998. Management has not
completed its review of Statement 131, but does not
<PAGE>
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments.
The Company's only product is a prosthetic heart valve. "Segments" would involve
tabulation of geographically significant customers which tend to follow
worldwide market distribution for replacement heart valves.
<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 is conducting a clinical study in the United States
for the purpose of obtaining regulatory approval.
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 1998 increased 23% to $4,248,720
compared to $3,444,650 for the quarter ended March 31, 1997. Unit sales
increased 22% in the first quarter 1998 compared to the first quarter 1997.
Sales growth can be attributed to continued implant growth in select European
countries and Japan.
For the first quarter of 1998 this sales growth over the corresponding 1997
period was achieved in spite of significant price competition from other valve
manufacturers and the increased strength of the U.S. dollar relative to almost
all international currencies. ATS sells the Valve to distributors throughout the
world in U.S. dollars.
Cost of sales for the first quarter of 1998 totaled $2,639,975 or 62% of sales
compared to $2,172,088 or 63% of sales for the first quarter of 1997. The price
of the carbon components contained in the Valves sold in the three months ended
March 31, 1998 decreased 4% as compared to the cost of carbon components
contained in the Valves sold in the three months ended March 31, 1997. Based
upon the Company's internal sales projections, the price of the carbon contained
in Valves sold during the remainder of 1998 is expected to be 4% lower than in
1997.
Gross profit totaled $1,608,745 for the quarter ended March 31, 1998 or 38% of
sales, compared to gross profit of $1,272,562 or 37% of sales for the quarter
ended March 31, 1997. The modest (2%) increase in average selling prices was the
key factor in the improvement in gross profit.
Research, development and engineering expenses totaled $357,278 for the quarter
ended March 31, 1998 versus $235,494 for the quarter ended March 31, 1997.
Approximately 23% and 42% of research and development expenses for the quarters
ended March 31, 1998 and 1997, respectively, were for testing and outside
consulting services related to the Valve.
The Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and is eligible for reimbursement by Medicare
and most private insurance 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. Approximately 77% and
58%
<PAGE>
of research and development expenses for the quarters ended March 31, 1998 and
1997, respectively, were for clinical costs.
Selling, general and administrative expenses totaled $924,045 for the quarter
ended March 31, 1998, an increase from the $719,419 reported for the quarter
ended March 31, 1997. Most of the increase was for salaries, benefits and
related payroll expenses. The Company had 63 employees at March 31, 1998
compared to 56 employees at March 31, 1997. In September, 1997 the Company
announced the closing of its Glasgow, Scotland facility, so all expenses were
incurred by the Company in its Minneapolis, MN facility.
There was no interest expense incurred in the quarters ended March 31, 1998 and
1997.
Interest income totaled $367,195 for the quarter ended March 31, 1998 compared
to $259,390 for the quarter ended March 31, 1997. Cash on hand during the first
quarter is significantly greater than the average amount on hand during the
first quarter of 1997, due primarily to the sale of equity and exercise of
warrants in the first quarter of 1997. Interest income for the remainder of 1998
is expected to be less than the interest income for the corresponding periods of
1997 as cash balances decline relative to 1997.
Net income totaled $694,617 for the quarter ended March 31, 1998 versus net
income of $577,039 for the quarter ended March 31, 1997.
Earnings per share totaled $.04 for the quarter ended March 31, 1998 compared to
$.03 for the quarter ended March 31, 1997. The weighted average number of shares
of common stock outstanding increased 6% for the three months ended March 31,
1998 over March 31, 1997 primarily due to the issuance of shares in a February
1997 private sale of common stock.
YEAR 2000 SITUATION
The Company has been assessing the software and hardware used in daily
operations so that all systems will function properly with respect to dates in
the Year 2000 and beyond. Until recently, computer programs were written to
store only two digits of date-related information in order to more efficiently
handle and store data. Thus, some software programs are unable to distinguish
between the year 1900 and the year 2000. This is frequently referred to as the
"Year 2000 Problem."
Utilizing internal and external resources, the Company determined that
modification or replacement of various programs would be necessary so that all
software, hardware and instrumentation systems are Year 2000 compliant.
Business applications and data for the Company are stored on a local area
network and accessed by personal computers when necessary. In 1997, a
significant number of employee workstations and manufacturing hardware were
upgraded and are now Year 2000 compliant. All future hardware purchases are
required to be Year 2000 compliant.
<PAGE>
The Company has purchased "off the shelf" manufacturing and accounting software
supported by vendors who provide updated versions of the software program. These
vendors have indicated that the software upgrades available will be Year 2000
compliant.
The Company also has custom software programs and databases that are used for
manufacturing. These programs are being reviewed and tested for Year 2000
issues. As a part of this process, the Company has been negotiating conversion
of these programs. Requirements of the software programming include testing and
revision for Year 2000 issues.
While the Company believes that its planning efforts are adequate to address
Year 2000 concerns, there is no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. Costs of the Year 2000
initiatives are not expected to be material to the Company's results of
operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by $599,909 from
$25,550,508 at December 31, 1997 to $24,950,599 at March 31, 1998. Inventory
increased by $1,406,840 from $22,686,273 at December 31, 1997 to $24,093,113 at
March 31, 1998. During 1998 the Company is required to purchase $13.9 million of
heart valve components under its long term supply agreement with CarboMedics,
Inc. (the "Supply Agreement"). During the two contract years after 1998 the
Company is obligated to purchase an aggregate of approximately $33 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 prior to
the time that the Valve is approved for sale in the United States by the Food
and Drug Administration.
Accounts receivable increased from $4,446,834 at December 31, 1997 to $4,507,293
at March 31, 1998. 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.
Average Days Sales Outstanding at March 31, 1998 were 96 compared to 112 days
sales outstanding at December 31, 1997.
Accounts payable increased from $863,292 at December 31, 1997 to $1,685,584 at
March 31, 1998. 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
<PAGE>
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. The Company desires to
take advantage of the safe harbor provisions with respect to any forward-looking
statements it may make in this filing, other filings with the Securities and
Exchange Commission and any public oral statements or written releases. The
words or phrases "will likely," "is expected," "will continue," "is
anticipated," "estimate," "projected," "forecast," or similar expressions are
intended to identify forward-looking statements within the meaning of the Act.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. The Company cautions
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.
In accordance with the Act, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, 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 and Use of Proceeds
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: May 13, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,985,692
<SECURITIES> 20,964,907
<RECEIVABLES> 4,772,293
<ALLOWANCES> 265,000
<INVENTORY> 24,093,113
<CURRENT-ASSETS> 54,142,527
<PP&E> 1,979,925
<DEPRECIATION> 1,235,964
<TOTAL-ASSETS> 55,261,747
<CURRENT-LIABILITIES> 1,685,584
<BONDS> 0
0
0
<COMMON> 177,681
<OTHER-SE> 53,398,482
<TOTAL-LIABILITY-AND-EQUITY> 55,261,747
<SALES> 4,248,720
<TOTAL-REVENUES> 4,248,720
<CGS> 2,639,975
<TOTAL-COSTS> 2,639,975
<OTHER-EXPENSES> 914,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 694,617
<INCOME-TAX> 0
<INCOME-CONTINUING> 694,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 694,617
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
