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 JUNE 30, 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: (763) 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 August 1, 2000 was:
Common Stock $.01 par value 21,871,649 shares
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ATS MEDICAL, INC.
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Statements of Financial Position - 3
June 30, 2000 (unaudited) and
December 31, 1999
Statements of Operations - 4
Three and Six Months Ended June 30, 2000 and
1999 (unaudited)
Statements of Cash Flows - 5
Three and Six Months Ended June 30, 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 12
Market Risk
PART II. OTHER INFORMATION 13
Signatures 15
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Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash & cash equivalents $10,670,081 $4,030,641
Short-term investments 3,153,116 5,659,362
-----------------------------------
13,823,197 9,690,003
Accounts receivable, less allowance of $215,000
in 2000 and $205,000 in 1999 5,606,452 6,159,624
Inventories 45,260,869 38,634,589
Prepaid expenses 342,794 427,834
-----------------------------------
Total current assets 65,033,312 54,912,050
Furniture, machinery and equipment 2,623,854 2,478,287
Less accumulated depreciation 1,828,519 1,676,844
-----------------------------------
Furniture and equipment, net 795,335 801,443
Technology license 5,000,000 5,000,000
Other assets 410,619 403,192
-----------------------------------
Total assets $71,239,266 $61,116,685
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,843,296 $2,022,302
Accrued payroll and expenses 287,143 252,785
-----------------------------------
Total current liabilities 2,130,439 2,275,087
Long-term debt 0 0
Shareholders' equity:
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 19,139,108 & 17,909,010 at
June 30, 2000 and Dec 31, 1999, respectively 191,391 179,090
Additional paid-in capital 81,764,986 71,633,414
Accumulated other comprehensive income 0 43,494
Accumulated deficit (12,847,550) (13,014,400)
-----------------------------------
Total shareholders' equity 69,108,827 58,841,598
-----------------------------------
Total liabilities and shareholders' equity $71,239,266 $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 June 30, Six months ended June 30,
2000 1999 2000 1999
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $2,704,180 $4,721,854 $6,831,535 $8,912,150
Less cost of goods sold 1,805,718 2,937,967 4,389,770 5,484,879
--------------- --------------- -------------- ---------------
Gross profit 898,462 1,783,887 2,441,765 3,427,271
Expenses:
Research, development and engineering 518,657 335,707 939,732 616,717
Selling, general and administrative 853,408 898,312 1,696,000 1,825,617
--------------- --------------- -------------- ---------------
Total expenses 1,372,065 1,234,019 2,635,732 2,442,334
--------------- --------------- -------------- ---------------
Operating income (loss) (473,603) 549,868 (193,967) 984,937
Interest income 239,459 229,650 360,818 482,593
--------------- --------------- -------------- ---------------
Net income (loss) ($234,144) $779,518 $166,851 $1,467,530
=============== =============== ============== ===============
Net income (loss) per share:
Basic ($0.01) $0.04 $0.01 $0.08
Diluted ($0.01) $0.04 $0.01 $0.08
Weighted average number of shares outstanding:
Basic 19,065,348 17,848,642 18,495,739 17,841,011
Diluted 19,065,348 18,256,947 19,182,873 18,246,925
</TABLE>
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $166,851 $1,467,530
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 151,674 142,810
Loss on disposal of equipment 0 186,037
Changes in operating assets and liabilities:
Accounts receivable 553,172 (279,283)
Prepaid expenses 85,040 76,693
Other assets (7,428) (5,709)
Inventories (6,626,279) (4,146,491)
Accounts payable and accrued expenses (144,648) (205,036)
----------- ----------
Net cash used in operating activities (5,821,618) (2,763,449)
INVESTING ACTIVITIES
Purchase of marketable securities (2,465,875) (7,431,973)
Sale of marketable securities 4,972,120 8,308,122
Purchases of property, plant and equipment (145,566) (79,534)
----------- ----------
Net cash provided by investing activities 2,360,679 796,615
FINANCING ACTIVITIES
Net proceeds from sale of common stock 10,143,873 133,158
----------- ----------
Net cash provided by financing activities 10,143,873 133,158
Effect of exchange rate changes on cash (43,494) (305)
----------- ----------
Increase (decrease) in cash and cash equivalents 6,639,440 (1,833,981)
Cash and cash equivalents at beginning of period 4,030,641 7,754,077
----------- ----------
Cash and cash equivalents at end of period $10,670,081 $5,920,096
=========== ==========
</TABLE>
<PAGE>
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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 and six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
Note B- Subsequent Event
On July 28, 2000, the Company completed the private sale of 2,727,273 shares of
common stock for $30,000,000 before deducting expenses of approximately
$2,000,000.
<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 June 30, 2000 decreased 43% to $2,704,180
compared to $4,721,854 for the quarter ended June 30, 1999. Unit sales for the
second quarter decreased 36% in 2000 compared to the same period in 1999. During
the quarter ended June 30, 2000 the Euro continued to decline to record low
levels in exchange value against the U.S. Dollar.
Net sales for the six months ended June 30, 2000 totaled $6,831,535 compared to
$8,912,150 for the six months ended June 30, 1999. 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 11% for
the quarter ended June 30, 2000 compared to the quarter ended June 30, 1999 and
declined approximately 8% for the six months ended June 30, 2000 compared to the
six months ended June 30, 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 and six months ended June 30,
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 June 30, 2000 totaled $1,805,718 or 67%
of sales compared to $2,937,967 or 62% of sales for the three months ended June
30,1999. Cost of sales for the six months ended June 30, 2000 totaled $4,389,770
compared to $5,484,879 for the six months ended June 30, 1999. The cost of the
carbon components contained in the Valves sold in the first half of 2000 was
approximately the same as the cost of carbon components contained in the Valves
sold in the first half of 1999. Based upon the Company's internal sales
projections,
<PAGE>
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") method of accounting for
inventory. All of the Valves sold in the first half 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 Company expects to pay 6% less
for carbon components than in 1999.
Gross profit totaled $898,462 for the quarter ended June 30, 2000 or 33% of
sales, compared to gross profit of $1,783,887 or 38% of sales for quarter ended
June 30, 1999. For the six months ended June 30, 2000 gross profit totaled
$2,441,765 or 36% of sales compared to gross profit for the six months ended
June 30, 1999 of $3,427,271 or 38% of sales. The average selling price per unit
decreased in the first half 2000 and the average cost per unit sold remained the
same, causing the gross margin to decline.
Research, development and engineering expenses totaled $518,657 for the quarter
ended June 30, 2000 versus $335,707 for the quarter ended June 30, 1999. For the
six months ended June 30, 2000 research, development and engineering expenses
totaled $939,732 an increase of 52% over the $616,717 research, development and
engineering expense reported for the six months ended June 30, 1999. The major
portion of the increase 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 six months ended June 30, 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 $853,408 for the three
months ended June 30, 2000, a decrease from the $898,312 reported for the three
months ended June 30, 1999. The Company had 89 employees at June 30, 2000
compared to 88 employees at June 30, 1999. The Company accrued $200,000 for a
management bonus program in the six months ended June 30, 1999. No accrual was
made in the quarter and six months ended June 30, 2000 as the Company is not
meeting the financial targets of the bonus plan.
<PAGE>
Interest income totaled $239,459 for the quarter ended June 30, 2000 compared to
$229,650 for the quarter ended June 30, 1999. Interest income for the six months
ended June 30, 2000 totaled $360,818 compared to $482,593 for the six months
ended June 30, 1999. Changes in interest income in 2000 were the result of
average investable cash balances during 2000 as compared to 1999.
The Company incurred a net loss of $234,144 for the quarter ended June 30, 2000
compared to net income of $779,518 for the quarter ended June 30, 1999. For the
six months ended June 30, 2000, net income totaled $166,851 compared to net
income of $1,467,530 for the six months ended June 30, 1999. The decrease in
revenues, the erosion of gross margin and the increase in research and
development spending were the main factors in the decrease in net income.
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 $37,057 to
cover state and federal income taxes for the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by $4,133,194 from
$9,690,003 at December 31, 1999 to $13,823,197 at June 30, 2000. On March 31,
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. On
July 28, 2000 the Company completed the private sale of 2.7 million shares of
common stock at $11.00 per share. After expenses the Company realized $28
million. The Company is investing cash in a carbon manufacturing capability, and
the completion of a large quantity of valves in anticipation of the market
release of the Valve in the United States.
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, we renegotiated our supply agreement with Carbomedics. The
Supply Agreement, as amended, provides for significant reductions in our minimum
purchase requirements and unit costs for the years 2001 through 2007. We
estimate that our 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, we have agreed to pay Carbomedics a
license fee of $41 million in installments over the next seven years. In
addition to granting us an exclusive worldwide right and license to use its
carbon coating technology to manufacture pyrolytic carbon components for the
Valve under this
<PAGE>
agreement, Carbomedics has agreed to assist us in designing, building and
commencing operations in our own pyrolytic carbon production facility in
Minneapolis, Minnesota.
Accounts receivable decreased from $6,159,624 at December 31, 1999 to $5,606,452
at June 30, 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 decreased from $2,275,087 at December 31, 1999 to $2,130,439
at June 30, 2000. The majority of the decrease is in accounts payable and is
related to the amount owing to Sulzer Carbomedics, Inc. under the Supply
Agreement.
Based upon our current rate of sales, our 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 we expect the cash on hand after the equity sale in
July, 2000 to last through 2002.
THE SINGLE EUROPEAN CURRENCY
A significant portion of our 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. We sell to all of our customers in U.S. Dollars and
do not expect to have accounting system issues relative to currency translation.
Our selling prices are similar to most of our 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 25%. Several of our 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. Our
European revenue declined almost 43% in the second quarter 2000 compared to the
second quarter 1999. We 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 36% in 2000
compared to 1999. Europe is a very important market for us. Disruption or loss
of a portion of our European business could have a material and adverse impact
on our 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
<PAGE>
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, the
risk of product repurchases 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 any future filing 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
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Shareholders of the Company was held on
May 4, 2000 at which time (i) five nominees were elected to
the Board of Directors for one-year terms, (ii) the ATS
Medical, Inc. 2000 Stock Incentive Plan was adopted and (iii)
the appointment of Ernst & Young LLP as the independent
auditors of the Company was approved. Proxies for the Company
were solicited pursuant to Section 14(a) of the Securities
Exchange act of 1934, as amended, and there was no
solicitation in opposition to management's solicitations. All
nominees for directors as listed in the proxy statement were
elected. The voting results were as follows:
Broker
For Against Withheld Non-Votes
--- ------- -------- ---------
Election of Directors:
Manuel A. Villafana 14,234,336 0 33,364 0
Richard W. Kramp 14,237,552 0 30,148 0
Charles F. Cuddihy, Jr. 14,235,875 0 31,825 0
David L. Boehnen 14,236,800 0 30,900 0
A. Jay Graf 14,235,035 0 32,665 0
Adoption of Stock
Incentive Plan 4,959,730 1,587,259 66,152 7,654,559
Approval of Independent
Auditors 14,233,093 17,107 17,500 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<PAGE>
Number Description
10.1 Lease Agreement between the Company and St. Paul
Properties, Inc., dated April 29, 2000.
10.2 Amendment No. 7 to Lease Agreement between the
Company and St. Paul Properties, Inc., dated May 18,
2000.
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: August 9, 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
------ -----------
10.1 Lease Agreement between the Company and St. Paul
Properties, Inc., dated April 29, 2000.
10.2 Amendment No. 7 to Lease Agreement between the
Company and St. Paul Properties, Inc., dated May 18,
2000.
27.1 Financial Data Schedule
