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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, 2000
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, 2000 was:
Common Stock $.01 par value 19,033,058 shares
<PAGE>
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
March 31, 2000 (unaudited) and
December 31, 1999
Statements of Operations - 4
Three Months Ended March 31, 2000 and
1999 (unaudited)
Statements of Cash Flows - 5
Three Months Ended March 31, 2000 and
1999 (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 13
Market Risk
PART II. OTHER INFORMATION 14
Signatures 15
<PAGE>
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------------------------------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 16,211,975 $ 4,030,641
Short-term investments 559,038 5,659,362
-------------------------------------------
16,771,013 9,690,003
Accounts receivable, less allowance of $210,000
in 2000 and $205,000 in 1999 6,811,447 6,159,624
Inventories 41,326,628 38,634,589
Prepaid expenses 385,122 427,834
-------------------------------------------
Total current assets 65,294,210 54,912,050
Furniture and equipment, net 767,970 801,443
Technology license 5,000,000 5,000,000
Other assets 407,992 403,192
-------------------------------------------
Total assets $ 71,470,172 $ 61,116,685
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,206,404 $ 2,022,302
Accrued payroll and expenses 353,531 252,785
-------------------------------------------
Total current liabilities 2,559,935 2,275,087
Long-term debt 0 0
Shareholders' equity:
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 19,026,621 & 17,909,010 at
Mar 31, 2000 and Dec 31, 1999, respectively 190,266 179,090
Additional paid-in capital 81,333,376 71,633,414
Accumulated other comprehensive income 0 43,494
Accumulated deficit (12,613,405) (13,014,400)
-------------------------------------------
Total shareholders' equity 68,910,237 58,841,598
-------------------------------------------
Total liabilities and shareholders' equity $ 71,470,172 $ 61,116,685
===========================================
</TABLE>
Note: The balance sheet at December 31, 1999 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 MARCH 31,
2000 1999
-----------------------------------
<S> <C> <C>
Net sales $ 4,127,355 $ 4,190,296
Less cost of goods sold 2,584,052 2,546,912
-----------------------------------
Gross profit 1,543,303 1,643,384
Expenses:
Research, development and engineering 421,075 281,010
Selling, general and administrative 842,591 927,305
-----------------------------------
Total expenses 1,263,666 1,208,315
-----------------------------------
Operating income 279,637 435,069
Interest income 121,359 252,943
-----------------------------------
Net income $ 400,996 $ 688,012
===================================
Net income per share:
Basic $ 0.02 $ 0.04
Diluted $ 0.02 $ 0.04
Weighted average number of shares outstanding:
Basic 17,932,322 17,833,545
Diluted 18,614,020 18,236,481
</TABLE>
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 400,996 $ 688,012
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 75,562 70,601
Changes in operating assets and liabilities:
Accounts receivable (651,823) (46,445)
Prepaid expenses 42,712 10,368
Other assets (4,800) (1,091)
Inventories (2,692,039) (2,088,251)
Accounts payable and accrued expenses 284,848 (404,523)
------------ ------------
Net cash used in operating activities (2,544,544) (1,771,329)
INVESTING ACTIVITIES
Purchase of marketable securities 0 (3,745,737)
Sale of marketable securities 5,100,324 5,820,528
Purchases of property, plant and equipment (42,089) (38,526)
------------ ------------
Net cash provided by investing activities 5,058,235 2,036,265
FINANCING ACTIVITIES
Net proceeds from sale of common stock 9,711,137 59,768
------------ ------------
Net cash provided by financing activities 9,711,137 59,768
Effect of exchange rate changes on cash (43,494) (223)
Increase in cash and cash equivalents 12,181,334 324,481
Cash and cash equivalents at beginning of period 4,030,641 7,754,077
------------ ------------
Cash and cash equivalents at end of period $ 16,211,975 $ 8,078,558
============ ============
</TABLE>
<PAGE>
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000
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, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ATS Medical, Inc. (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, 2000 decreased 1.5% to $4,127,355
compared to $4,190,296 for the quarter ended March 31, 1999. Unit sales
increased 5.2% in 2000 compared to 1999. During the quarter ended March 31, 2000
the Euro continued to decline to record low levels in exchange value against the
U.S. Dollar. Pressure continues to be applied by hospital administrators for
lower prices and the willingness of competitors to reduce prices will continue
to put pressure on revenue growth and margins. The average selling price of the
Valve decreased approximately 6% for the quarter ended March 31, 2000 compared
to the quarter ended March 31, 1999.
The Company sells to independent distributors with assigned territories
(generally a specific country or region) who in turn sell the Valve to hospitals
or clinics. The Company sells in U.S. dollars so currency risk is borne by the
distributor. 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. For the quarter ended March 31, 2000 the
Company's sales efforts were challenged by significant price competition from
other valve manufacturers and the increased strength of the U.S. dollar relative
to almost all foreign currencies. During 2000 and 1999 the Company was selling
Valves in most developed countries and several lesser developed countries
("LDC's").
Since January 1997, the Company has been conducting a clinical study of the
Valve at seventeen hospitals in the United States and three international
centers. During the study, Valves are provided to the hospitals at prices
designed to recover some of the costs of the clinical study.
Cost of sales for the three months ended March 31, 2000 totaled $2,584,052 or
62.6% of sales compared to $2,546,912 or 60.8% of sales for the three months
ended March 31,1999. The price of the carbon components contained in the Valves
sold in the first quarter of 2000 increased 3% as compared to the cost of carbon
components contained in the Valves sold in the first quarter of 1999. Based upon
the Company's internal sales projections, the price of the carbon contained in
Valves sold in the remainder of 2000 is expected to be approximately the same as
in 1999. The Company purchases pyrolytic carbon components for the Valve from
Sulzer Carbomedics, Inc. ("Carbomedics"). Approximately 80% of the total cost of
a valve is contained in the cost of the carbon components. The price of the
components is set under a multi-year supply agreement between the Company and
Carbomedics. The price was established in 1990, and varies according to annual
volume and is adjusted annually according to increases in the U.S. Department of
Labor Employment Cost Index. The Company uses the first-in first-out ("FIFO")
<PAGE>
method of accounting for inventory. All of the Valves sold in the first quarter
of 2000 were made with carbon purchased in 1997 (under FIFO). The cost of carbon
components, after giving effect to volume discounts and inflationary adjustments
decreased 7% in 1996, rose 3% in 1997, decreased 4.5% in 1998 and rose 3.8% for
1999 compared to each previous year, respectively. For 2000 (the eight contract
year) the Company expects to pay 6% less for carbon components than in 1999.
Gross profit totaled $1,543,303 for the quarter ended March 31, 2000 or 37.4% of
sales, compared to gross profit of $1,643,384 or 39.2% of sales for quarter
ended March 31, 1999. The average selling price per unit decreased in the first
quarter 2000 and the average cost per unit sold remained the same, causing the
gross margin to decline.
Research, development and engineering expenses totaled $421,075 for the quarter
ended March 31, 2000 versus $281,010 for the quarter ended March 31, 1999. The
major portion of the decrease is related to the costs associated with the
Company's U.S. clinical study. In February the Company received a letter from
the U. S. Food and Drug Administration requesting additional information, some
of which required additional testing of the Valve or components of the Valve.
Also during the quarter ended March 31, 2000 the Company began planning and
development of its own carbon manufacturing facility.
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 the cost of the Valve is eligible for
reimbursement by Medicare and most private pay insurance companies. The Company
is responsible for reimbursing the hospital for certain additional tests and
procedures required by the clinical protocol. The estimated total cost of
follow-up is accrued at the time of the sale as research and development
expense.
Selling, general and administrative expenses totaled $842,591 for the three
months ended March 31, 2000, a decrease from the $927,305 reported for the three
months ended March 31, 1999. The Company had 88 employees at March 31, 2000
compared to 83 employees at March 31, 1999. The Company accrued $100,000 for a
management bonus program in the quarter ended March 31, 1999. No accrual was
made in the quarter ended March 31, 2000 as the Company is not meeting the
financial targets of the bonus plan.
Interest income totaled $121,359 for the quarter ended March 31, 2000 compared
to $252,943 for the quarter ended March 31, 1999. The decrease in interest
income in 2000 was the result of lower average investable cash balances during
2000. Average cash on hand during the quarter ended March 31, 2000 was less that
the average cash on hand during the quarter ended March 31, 1999 so interest
income was less in 2000. Cash on hand for the remainder of 2000 is expected to
be below the levels of the corresponding periods of 1999, so interest income for
the remainder of 2000 is expected to be approximately one third the amount of
interest earned in 1999. The Company is investing cash in carbon and the
completion of a large quantity of valves in anticipation of the market release
of the Valve in the United States.
Net income totaled $400,996 for the quarter ended March 31, 2000 compared to
$688,012 for the quarter ended March 31, 1999. The $155,432 decrease in
operating income when added to the
<PAGE>
$131,584 decrease in interest income results in a $287,016 decrease in net
income for the first quarter 2000 compared to the first quarter 1999.
The Company has accumulated approximately $13 million of net operating loss
carryforwards for U.S. tax purposes. The Company believes that its ability to
fully utilize the existing net operating loss carryforwards will be restricted
to approximately $3 million per year. Although the Company can offset a
significant portion of pretax income with the net operating losses from prior
years the Company is subject to alternative minimum taxes and accrued $18,357 to
cover state and federal income taxes for the quarter ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by $7,081,010 from
$9,690,003 at December 31, 1999 to $16,771,013 at March 31, 2000. On March 30,
2000, the Company completed the private sale of 1.1 million shares of common
stock at $9.00 per share. After expenses, the Company realized $9.6 million.
During 2000 the Company is obligated to purchase $16.5 million of components in
accordance with the terms of its long-term supply agreement with Carbomedics,
Inc. (the "Supply Agreement"). These 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
In December 1999, the Company renegotiated its supply agreement with
Carbomedics. The Supply Agreement, as amended, provides for significant
reductions in the Company's minimum purchase requirements and unit costs for the
years 2001 through 2007. The Company estimates that its minimum purchase
requirements under the Supply Agreement from 2001 through 2007 will total
approximately $39 million. Under the new carbon agreement entered into in
December 1999, the Company has agreed to pay Carbomedics a license fee of $41
million in installments over the next seven years. In addition to granting the
Company an exclusive worldwide right and license to use its carbon coating
technology to manufacture pyrolytic carbon components for the Valve under this
agreement, Carbomedics has agreed to assist the Company in designing, building
and commencing operations in its own pyrolytic carbon production facility in
Minneapolis, Minnesota.
Accounts receivable increased from $6,159,624 at December 31, 1999 to $6,811,447
at March 31, 2000. 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 accounts receivable, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
Current liabilities increased from $2,275,087 at December 31, 1999 to $2,559,935
at March 31, 2000. The majority of the increase is in accounts payable and is
related to the amount owing to Carbomedics, Inc. under the Supply Agreement.
<PAGE>
Based upon the current rate of sales, the anticipated purchase obligations under
the Supply Agreement, the license fee payments under the carbon agreement, the
expenses associated with establishing a direct sales force in the United States
and other expected expenses, the Company anticipates that it will need
substantial additional capital after March, 2001. The Company cannot be certain
that additional capital will be available or that, if available, it will be on
terms favorable to the Company.
The Company does not use derivatives and therefore does not face market risk
from currency or interest rate changes on these types of instruments. There
would be no impact on the Company's operations from interest rate changes on
debt instruments since the Company has not used debt to finance its operations.
Assuming that interest rates on investment grade securities were to decrease by
10%, the Company's annual interest income would decrease by approximately
$25,000 based on the level of investable funds available to the Company at
December 31, 1999.
THE SINGLE EUROPEAN CURRENCY
A significant portion of the Company's sales occur in Europe. Effective January
1, 1999 various European countries began utilizing a single currency, the
"Euro". From January 1999 through December 2001, merchants will be encouraged to
discontinue using local country currencies and begin using the Euro to transact
business. Beginning in 2002, it will be required that business in the European
Community be conducted using the Euro. The Company sells to all of its customers
in U.S. dollars and does not expect to have accounting system issues relative to
currency translation. The Company's selling prices are similar to most of its
European distributors and therefore should not cause significant disruption
whether in dollars or Euros. From its introduction in January 1999, the rate of
exchange for the Euro versus the U.S. dollar declined by as much as 22%. Several
of the Company's European distributors were unable to increase their local
currency selling price for the valve. These distributors complained to us that
their profits were being squeezed. The Company's European revenue declined
almost 15% in the first quarter 2000 compared to the first quarter 1999. The
Company did offer volume price discounts to some distributors who met or
exceeded quota. The decline in the Euro offset the potential positive effect of
these discounts and units sold in Europe decreased 7.1% in 2000 compared to
1999. Europe is a very important market for the Company. Disruption or loss of a
portion of the European business could have a material and adverse impact on the
Company's financial position.
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 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
<PAGE>
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, the
risk of product returns in connection with distributor terminations, the actions
of the Company's supplier of pyrolytic carbon components for the Valve and
difficulties the Company may encounter establishing and operating their own
pyrolytic carbon manufacturing capability. This list is not exhaustive, and the
Company may supplement this list in filings with the Securities and Exchange
Commission (e.g., Exhibit 99 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999) or in connection with the making of any specific
forward-looking statement.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivatives and therefore does not face market risk
from currency or interest rate changes on these types of instruments. There
would be no impact on the Company's operations from interest rate changes on
debt instruments since the Company has not used debt to finance its operations.
Assuming that interest rates on investment grade securities were to decrease by
10%, the Company's annual interest income would decrease by approximately
$25,000 based on the level of investable funds available to the Company at
December 31, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On March 30, 2000, the Company sold 1.1 million shares of
common stock at $9.00 per share for aggregate proceeds of $9.9
million. The purchasers were three private investment funds
all of which are managed by Masters Capital Management LLC.
The issuance and sale of the shares was effected without
registration under the Securities Act in reliance on Section
4(2) of the Securities Act as a transaction by an issuer not
involving a public offering. The purchasers were given access
to information about the Company, represented that they were
able to bear the economic risk of loss of the investment and
represented that the shares were being acquired for investment
purposes only and not with a view to or for sale in connection
with any distribution.
Item 3. Defaults Upon Senior Securities
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
Form 8-K filed on January 13, 2000 to report under
Item 2 the renegotiation and execution of agreements
with Sulzer Carbomedics, Inc. relating to the
Company's supply of carbon components. The event
reported in the Form 8-K occurred on December 29,
1999. There were no financial statements required to
be filed with the Form 8-K.
<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 12, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 16,211,975
<SECURITIES> 559,038
<RECEIVABLES> 7,021,447
<ALLOWANCES> 210,000
<INVENTORY> 41,326,628
<CURRENT-ASSETS> 65,294,210
<PP&E> 2,520,376
<DEPRECIATION> 1,752,406
<TOTAL-ASSETS> 71,470,172
<CURRENT-LIABILITIES> 2,559,935
<BONDS> 0
0
0
<COMMON> 190,266
<OTHER-SE> 68,719,971
<TOTAL-LIABILITY-AND-EQUITY> 71,470,172
<SALES> 4,127,355
<TOTAL-REVENUES> 4,127,355
<CGS> 2,584,052
<TOTAL-COSTS> 2,584,052
<OTHER-EXPENSES> 1,263,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 400,996
<INCOME-TAX> 0
<INCOME-CONTINUING> 400,996
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 400,996
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
