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UNITED STATES
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, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-21330
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AVECOR CARDIOVASCULAR INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1695729
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13010 COUNTY ROAD 6, MINNEAPOLIS, MINNESOTA 55441
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(612) 559-9504
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(Registrant's telephone number, including area code)
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 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.
[ X ] Yes [ ] No
As of November 5, 1996, there were 7,804,118 shares of the registrant's
$.01 par value Common Stock outstanding.
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INDEX
Part I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1996 (Unaudited) and December 31, 1995 3
Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1996 and
1995 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
EXHIBIT INDEX 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED BALANCE SHEETS
________________________
ASSETS September 30, December 31,
1996 1995
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Current assets: (Unaudited)
Cash and cash equivalents $ 3,944,000 $ 9,178,211
Short-term investments 7,610,241 7,757,232
Accounts receivable, net 7,881,126 6,207,354
Inventories 9,357,577 5,933,487
Other current assets 2,068,868 1,067,760
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Total current assets 30,861,812 30,144,044
Equipment and improvements, net 3,841,592 3,065,506
Other assets 336,948 309,676
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Total assets $35,040,352 $33,519,226
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,045,361 $ 2,224,601
Accrued expenses 2,744,931 1,853,216
Accrued litigation settlement 1,100,000
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Total current liabilities 5,890,292 4,077,817
Deferred grant 200,447 119,848
Shareholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none issued
Common stock, par value $.01 per share;
authorized 20,000,000 shares; issued and
outstanding shares 7,803,904 and 7,663,833
shares at September 30, 1996 and
December 31, 1995, respectively 78,039 76,638
Additional paid-in capital 28,759,041 28,123,763
Accumulated earnings 139,100 1,175,294
Cumulative translation adjustments (26,567) (54,134)
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Total shareholders' equity 28,949,613 29,321,561
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Total liabilities and shareholders'
equity $35,040,352 $33,519,226
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The accompanying notes are an integral part of the consolidated
financial statements.
3
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AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
Net sales $11,314,282 $8,529,269 $32,752,776 $24,216,485
Cost of sales 6,780,455 4,560,620 19,174,497 13,118,739
----------- ---------- ----------- -----------
Gross profit 4,533,827 3,968,649 13,578,279 11,097,746
Operating expenses:
Selling, general and
administrative 2,806,308 2,170,546 8,657,285 6,439,516
Litigation expense 53,000 4,204,825 123,000
Research and development 908,237 692,929 2,611,194 2,021,481
----------- ---------- ----------- -----------
Operating income (loss) 819,282 1,052,174 (1,895,025) 2,513,749
Interest income 166,479 231,560 569,831 353,218
----------- ---------- ----------- -----------
Income (loss) before
income taxes 985,761 1,283,734 (1,325,194) 2,866,967
Income tax provision (benefit) 358,000 270,000 (289,000) 580,000
----------- ---------- ----------- -----------
Net income (loss) $627,761 $1,013,734 ($1,036,194) $2,286,967
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net income (loss) per share $0.08 $0.13 ($0.13) $0.32
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average common
and common equivalent
shares outstanding 8,026,176 7,898,818 7,755,030 7,107,288
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
The accompanying notes are an integral part of the consolidated
financial statements.
4
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AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
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Cash flows from operating activities:
Net (loss) income ($1,036,194) $2,286,967
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 987,822 746,815
Accretion of discount on investments (412,047) (97,804)
Changes in operating assets and liabilities:
Accounts receivable (1,650,211) (1,283,631)
Inventories (3,418,744) (1,473,639)
Other current assets (1,000,692) (151,286)
Accounts payable (182,284) 105,389
Accrued expenses 882,249 393,543
Accrued litigation settlement 1,100,000
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Net cash (used in) provided by operating
activities (4,730,101) 526,354
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Cash flows from investing activities:
Purchase of equipment and improvements (1,775,563) (908,037)
Purchase of investments (8,406,849) (945,626)
Proceeds upon sale or maturity of short-term
investments 8,965,887 1,000,000
Increase in other assets (32,703) (95,204)
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Net cash used in investing activities (1,249,228) (948,867)
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Cash flows from financing activities:
Net proceeds from sales of common stock 188,800 13,176,320
Net proceeds from options exercised (77,103) (438,005)
Net proceeds from warrants excercised 524,982
Grant proceeds 101,367
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Net cash provided by financing activities 738,046 12,738,315
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Effect of exchange rates on cash 7,072 (12,390)
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Net (decrease) increase in cash and cash equivalents (5,234,211) 12,303,412
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Cash and cash equivalents at beginning of period 9,178,211 2,035,281
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Cash and cash equivalents at end of period $3,944,000 $14,338,693
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The accompanying notes are an integral part of the consolidated
financial statements.
5
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AVECOR CARDIOVASCULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------------------
1. BASIS OF PRESENTATION
The consolidated financial statements included in this Form 10-Q have
been prepared by AVECOR Cardiovascular Inc. (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to
these rules and regulations. The year-end balance sheet was derived from
audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 1995 Annual Report on Form 10-K as
filed with the SEC.
The consolidated financial statements presented herein as of September
30, 1996 and for the three and nine month periods ended September 30, 1996
and 1995 reflect, in the opinion of management, all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation
of financial position and the results of operations for the periods
presented. The results of operations for any interim period are not
necessarily indicative of results for the full year.
2. ORGANIZATION
The Company was incorporated on December 13, 1990. The Company designs,
develops, manufactures and markets specialty medical devices used to treat
cardiovascular disease.
The consolidated financial statements include the accounts of AVECOR
Cardiovascular Inc. and its wholly owned subsidiaries, AVECOR Cardiovascular
Ltd. and AVECOR Foreign Sales Corporation after elimination of all
significant intercompany transactions and accounts.
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3. INVENTORIES
Inventories consist of:
September 30, December 31,
1996 1995
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(Unaudited)
Raw materials $3,333,117 $2,506,496
Work-in-process 2,265,743 1,339,921
Finished goods 3,758,718 2,087,070
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$9,357,577 $5,933,487
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4. INDUSTRY SEGMENT INFORMATION
The Company distributes its products through its direct sales force and
independent sales representatives. Additionally, the Company distributes its
products through domestic and foreign independent distributors who then
market the products directly to medical institutions. Sales to distributors
accounting for 10% or more of the Company's net sales for the nine month
periods ended September 30, 1996 and 1995 were as follows:
1996 1995
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(Unaudited) (Unaudited)
Distributor # 1 (1) $2,555,000
(1) Less than 10% of net sales
5. NET INCOME PER SHARE
Net income per common and common equivalent share has been computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding. Common equivalent shares relate to stock
options and stock warrants when their effect is not antidilutive. The
difference between primary and fully diluted earnings per share was not
significant in any period presented.
7
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6. SHAREHOLDERS' EQUITY
The Company's 1991 Stock Incentive Plan (the Plan) provides for granting
to eligible employees and certain other individuals nonqualified and
incentive options. The Company had reserved 750,000 shares of common stock
for issuance under the Plan. In January 1996, the Company's Board of
Directors authorized, and on May 7, 1996, the Company's shareholders
approved, an additional 300,000 shares of common stock to be reserved for
issuance under the Plan.
On May 7, 1996, the Company's shareholders also approved the reserve of
250,000 shares of the Company's common stock for issuance pursuant to the
1995 Non-Employee Director Plan (the 1995 Director Plan) established by the
Board of Directors on August 1, 1995. Options to purchase 42,000 and 10,500
shares of common stock were granted during 1995 and on May 7, 1996,
respectively. Also on May 7, 1996, the 52,500 granted options were approved
by the Company's shareholders.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). The Company has elected to continue
following the guidance of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for measurement and recognition of
stock-based transactions with employees. The Company will adopt the
disclosure provisions of SFAS 123 in 1996.
7. SHAREHOLDER RIGHTS PLAN
On June 26, 1996 the Company adopted a shareholder rights plan, pursuant
to which the Company declared a dividend distribution of one Preferred Share
Purchase Right on each share of the Company's Common Stock outstanding on
August 2, 1996. Each Right will entitle the holder to buy one-thousandth of
a share of the Company's Series A Junior Preferred Stock, or a combination of
securities and assets of equivalent value, at an exercise price of $80.00,
subject to adjustment. The description and terms of the Rights are set forth
in a Rights Agreement dated June 26, 1996 between the Company and Norwest
Bank Minnesota, N.A., as Rights Agent.
8. CONTINGENCY SETTLEMENT
On July 17, 1996, the Company reached an agreement with COBE
Laboratories Inc. (COBE) to settle COBE's patent suit against the Company.
The settlement was entered into as an expeditious and cost effective means of
ending the protracted litigation and without admission of liability or
infringement by either party.
The terms of the settlement with COBE provide for the Company to make
net payments totalling $2,200,000, of which a net $1,100,000 was paid in
August 1996, for settlement of the suit as well as certain license rights.
The net settlement costs of $2,200,000 were recognized as a charge to
operations, in addition to the associated legal costs, in the period ended
June 30, 1996. The remaining amount is payable on or about August 6, 1997,
subject to COBE's active enforcement of its claimed patent rights with
respect to other manufacturers.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and financial
condition for the three and nine month periods ended September 30, 1996
compared with the three and nine month periods ended September 30, 1995 and
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.
OVERVIEW
The Company was incorporated on December 13, 1990. In June 1991, the
Company acquired the business and assets and assumed certain liabilities of
the surgical division of SCIMED Life Systems, Inc. (the Predecessor
Business). On December 1, 1992, the Company exchanged 160,000 shares of its
Common Stock for all of the outstanding shares of AVECOR Cardiovascular Ltd.
(formerly Cardio Med Ltd.) pursuant to which AVECOR Cardiovascular Ltd.
became a wholly owned subsidiary of the Company. AVECOR Cardiovascular Ltd.
had formerly been a distributor for the Company in the United Kingdom. In
October 1995, the Company opened a sales office in France which is organized
as a subsidiary of AVECOR Cardiovascular Ltd.
The assets acquired by the Company from the Predecessor Business
included the Company's line of solid silicone membrane oxygenators. In
October 1991, the Company introduced its MYOtherm cardioplegia delivery
system. The Company began marketing its Signature custom tubing packs in
July 1993 upon the receipt of marketing clearance from the U.S. Food and Drug
Administration (the FDA). Also in July 1993, the Company began international
marketing of the Affinity oxygenator. In November 1993, the Company received
marketing clearance from the FDA to begin U.S. marketing of the Affinity
oxygenator, and the Company released the device to the U.S. market in
February 1994. In July 1994, the Company received marketing clearance from
the FDA to market its Affinity blood reservoirs. In October 1995, the
Company received marketing clearance from the FDA to market its Affinity
arterial filter.
RESULTS OF OPERATIONS
NET SALES
Three Months Ended September 30, 1996 Compared To
The Three Months Ended September 30, 1995
- -------------------------------------------------------------------------------
Net sales increased 33% to $11,314,000 for the three months ended
September 30, 1996 from $8,529,000 for the three months ended September 30,
1995. This increase was principally the result of a higher volume of product
shipments of the Company's Affinity product line and Signature custom tubing
packs.
Over the past two years, one of the Company's competitors has purchased
three companies that provide contract perfusion services to hospitals. For the
three months ended September 30, 1996, the Company estimates that sales to
contract perfusion groups controlled by the
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Company's competitor declined by approximately $100,000 when compared to the
three months ended September 30, 1995, and by approximately $200,000 when
compared to the three month period ended June 30, 1996. The Company believes
that such control, as well as any future acquisitions of contract perfusion
groups by its competitors are likely to have a negative impact on the
Company's ability to market its products to perfusionists controlled by
competitors or to hospitals or other medical providers that contract with
competitor-controlled groups for perfusion services, and could have a
material adverse affect on the Company's business, financial condition and
results of operation. This forward looking statement is subject to the
degree of control exerted by the Company's competitors with respect to
purchasing decisions made by controlled groups of perfusionists, the extent
of future acquisitions of contract perfusion groups by the Company's
competitors, the breadth of the Company's product offerings relative to those
competitors controlling contract perfusion groups, and the degree to which
the Company's research and development and marketing efforts result in the
successful commercialization of products with enhanced or superior
performance characteristics.
Sales to customers located outside of the United States were
approximately 40% of net sales for the three month period ended September 30,
1996 compared to 43% of net sales for the corresponding period in 1995.
Nine Months Ended September 30, 1996 Compared To
The Nine Months Ended September 30, 1995
- -------------------------------------------------------------------------------
Net sales increased 35% to $32,753,000 for the nine months ended
September 30, 1996 from $24,216,000 for the nine months ended September 30,
1995. This increase was principally the result of a higher volume of product
shipments of the Company's Affinity product line and Signature custom tubing
packs.
Sales from the Affinity product line and Signature custom tubing packs
accounted for approximately 64% and 34% of the overall increase in net sales,
respectively. Although the Company continues to anticipate declining
shipments of the silicone membrane oxygenator line, net sales of the silicone
line increased by $67,000 for the nine months ended September 30, 1996 when
compared to the corresponding period in 1995. The silicone membrane
oxygenator line's net sales increase for the nine months ended September 30,
1996 was primarily due to a large non-recurring shipment of approximately
$290,000 occurring in January 1996.
Sales to customers located outside of the United States were
approximately 39% of net sales for the nine month period ended September 30,
1996 compared to 42% of net sales for the corresponding period in 1995.
COST OF SALES/GROSS PROFIT
Cost of sales as a percentage of net sales increased to 59.9% for the
three months ended September 30, 1996 from 53.5% for the three months ended
September 30, 1995. Similarly, the cost of sales percentage increased to
58.5% for the nine months ended September 30, 1996 from 54.2% for the nine
months ended September 30, 1995. The cost of sales percentages for the three
and nine month periods ended September 30, 1996 were unfavorably impacted by
the
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significant increases in sales of the Company's lower-margin Signature custom
tubing pack line. The mix of products sold in any period will influence the
cost of sales and gross profit for the period.
Higher production volumes continued to improve Affinity oxygenator
product costs, although, these improvements were offset, primarily by an
ongoing decrease in average selling prices and, in the three months ended
September 30, 1996, by scrap and other costs associated with production of
the Affinity oxygenator. The Affinity oxygenator production issue has been
rectified, but cost approximately $100,000 in scrap and related costs during
the three months ended September 30, 1996. Also, volume-related
manufacturing efficiencies have not yet been achieved for the Company's
Affinity arterial filter. Production of the Affinity arterial filter began
on or about December 31, 1995.
SELLING, GENERAL AND ADMINISTRATIVE AND LITIGATION EXPENSE
Selling, general and administrative expenses increased 29% to $2,806,000
for the three months ended September 30, 1996 from $2,171,000 for the three
months ended September 30, 1995. Selling, general and administrative
expenses increased 34% to $8,657,000 for the nine months ended September 30,
1996 from $6,440,000 for the nine months ended September 30, 1995. These
increases are attributed to costs associated with the continuing development
of a direct sales force in certain of the Company's territories formerly
served by distributors and independent sales representatives, the addition of
a Chief Operating Officer and the overall increase in the Company's sales
levels. In connection with the Company's development of a direct sales
force, in October 1995, the Company opened a sales office in France from
which it fields a direct sales force to serve the French market. As a
percent of sales, selling, general and administrative expenses decreased to
24.8% for the three month period ended September 30, 1996 from 25.4% for the
three month period ended September 30, 1995. This decrease as a percent of
sales is primarily due to fixed costs being covered by increased revenue
levels.
Management anticipates that selling, general and administrative expenses
for the year ended December 31, 1996 will be higher than the year ended
December 31, 1995. However, these costs should continue to decline as a
percentage of sales dollars. These forward looking statements will be
influenced by revenue increases achieved by the Company, its ability to
attract and retain qualified sales personnel as the Company continues to
develop its direct sales force, and the timing and extent of promotional
activities associated with new product introductions, if any.
On July 17, 1996, the Company reached an agreement with COBE
Laboratories Inc. (COBE) to settle COBE's patent suit against the Company.
The terms of the settlement with COBE provide for the Company to make net
payments totalling $2,200,000, of which a net $1,100,000 was paid in August
1996. The remaining amount is payable on or about August 6, 1997, subject to
COBE's active enforcement of its claimed patent rights with respect to other
manufacturers. The Company expensed settlement costs and professional fees,
in connection with the COBE suit, of approximately $4,205,000 for the nine
month period ended September 30, 1996, compared to $123,000 for the
corresponding period in 1995. See Consolidated Financial Statements - Note 8
"Contingency Settlement".
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RESEARCH AND DEVELOPMENT
Research and development expenses increased 31% to $908,000 and 29% to
$2,611,000 for the three and nine month periods ended September 30, 1996,
respectively, from $693,000 and $2,021,000 for the three and nine month
periods ended September 30, 1995, respectively. This increased research and
development spending is a result of the Company's ongoing efforts to pursue a
number of potential product opportunities. These opportunities include a new
blood pump for which the Company submitted a 510(k) application with the FDA
late in September 1996, although there can be no assurance that the
appropriate marketing clearance from the FDA will be received on a timely
basis, if at all, or, if received, that this device will become commercially
successful.
The Company anticipates that research and development expenses for the
remainder of 1996 will approximate the spending level for the three months
ended September 30, 1996, as the Company moves to expand and improve its
proprietary line of disposable medical devices. This forward looking
projection is dependent upon the extent and timing of new product development
and the impact of the regulatory process in obtaining marketing clearance for
new products, including the new blood pump. The need or desire to modify the
Company's existing products could also influence the level of research and
development expenses. In addition to the aforementioned blood pump, the
Company is developing an improved Myotherm cardioplegia system, scheduled for
FDA submission in the first quarter of 1997; proprietary systems coatings
that will improve blood handling, scheduled for mid-year 1997 FDA submission;
and new oxygen saturation/hematocrit technology that is expected to be
submitted to the FDA late in the third quarter of 1997. There can be no
assurance, however, that the Company's research and development efforts will
result in regulatory submissions to the FDA as set forth above, if at all, or
will result in any commercially successful products. The forward looking
statements regarding anticipated regulatory submissions contained in this
paragraph will be impacted by the results of the Company's development
efforts, the availability of any required clinical data, any changes in the
regulatory scheme for such products, and the Company's assessment of the cost
and anticipated benefit of such submissions.
INTEREST INCOME
Interest income decreased to $166,000 for the three months ended
September 30, 1996 from $232,000 for the three months ended September 30,
1995. Interest income increased to $570,000 for the nine months ended
September 30, 1996 from $353,000 for the nine months ended September 30,
1995. The decrease in interest income for the three month period ended
September 30, 1996 when compared to the three month period ended September
30, 1995 is primarily the result of decreases in investments due to the use
of cash during 1996 for increases in accounts receivable and inventory, which
correlate to the Company's growth, and the COBE litigation and settlement,
which absorbed cash of approximately $3,100,000 in 1996. Interest income
during the three and nine month periods ended September 30, 1996 was earned
primarily from the investment of the remaining net proceeds from the
Company's June 1995 stock offering. At September 30, 1996, the majority of
these proceeds were invested with one investment portfolio manager who
invested in U.S. government securities, agency paper, money markets,
commercial paper and corporate obligations.
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INCOME TAX PROVISION
For the three and nine month periods ended September 30, 1996, a tax
provision of $358,000 and a tax benefit of $289,000 was recorded,
respectively, compared to a tax provision of $270,000 and $580,000 for the
three and nine month periods ended September 30, 1995, respectively. The tax
provision and benefit recorded corresponds to the pretax income and loss
incurred for those respective periods. The loss for the nine months ended
September 30, 1996 is primarily due to the litigation expense, including
settlement, incurred during the six month period ended June 30, 1996 in
connection with the COBE lawsuit.
NET INCOME (LOSS)
Net income was $628,000 or $.08 per share and net loss was $1,036,000 or
$.13 per share for the three and nine month periods ended September 30, 1996,
respectively, compared to net income of $1,014,000 or $.13 per share and
$2,287,000 or $.32 per share for the three and nine month periods ended
September 30, 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996, the Company used
$4,730,000 in operating activities compared to $526,000 of net cash generated
from operating activities for the same period in 1995. The net change of
approximately $5,256,000 is primarily the result of reduced net income,
including approximately $3,100,000 in litigation and settlement expenses, and
increasing levels of accounts receivable and inventory resulting from
increasing revenues. The Company believes that its existing cash and
investments as well as anticipated cash generated from operations will be
sufficient to satisfy the Company's cash requirements for the foreseeable
future.
Capital expenditures totaled $1,776,000 for the nine months
ended September 30, 1996, compared to $908,000 for the nine months
ended September 30, 1995. These expenditures were primarily related
to the addition of equipment, molds and tooling necessary to further
the production of the Affinity oxygenator, related blood reservoirs
and arterial filter. The 1996 capital expenditures also include
approximately $254,000 related to the Company's construction of a new
facility, as discussed below, and $167,000 related to the equipment,
molds and tooling for the production of the Company's new blood pump.
The Company's capital expenditures for 1996 are expected to be
approximately $1,800,000, not including any capital expenditures
which may be required in connection with a new facility, as
discussed below. The actual amount of this forward looking
projection of capital expenditures will depend on the progress of
the Company's product development efforts and the timing of the
receipt of FDA marketing clearance for any future products,
including the new blood pump.
Leases for the Company's U.S. manufacturing, research and development
and administrative facilities expire on December 31, 1996. The Company is
constructing a new facility into which it will consolidate its four separate
facilities, and has elected to purchase the facility after completion. The
estimated cost of this facility is $8,500,000, plus an additional $1,000,000
for the purchase of furniture, fixtures and manufacturing equipment for the
facility. To finance the $9,500,000 total cost of the project, the Company
has a bank commitment to provide $5,200,000 of fixed rate long-term financing
and, of the remaining $4,300,000,
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approximately $254,000 has already been spent by the Company with the balance
to be paid in cash upon closing. Closing is expected on or about December
31, 1996.
The Company anticipates that resulting depreciation expense should
approximate the Company's facilities rental expense for 1996, thus not
significantly impacting 1997 cost of goods sold, selling, general and
administrative expense or research and development costs. Annual interest
income is expected to be reduced approximately $250,000 as a result of this
transaction and an estimated $475,000 of interest expense is expected to be
added in 1997. The Company estimates that the overall 1997 after-tax impact
of constructing, financing and moving into this new facility will be
approximately $.01 per share each quarter. All relocation and lease
abandonment costs, estimated at about $200,000, will be recorded upon the
expiration of the leases, as a charge to the Company's 1996 operating
statement. These forward looking statements relating to the amount of
capital expenditures, ultimate cash usage and future income statement impact
due to the new facility are dependent on final construction specifications
and the financing terms negotiated in the ultimate loan agreement.
In March 1996, net cash proceeds of approximately $525,000 were
generated from an exercise of the Company's stock warrants. At September 30,
1996, the majority of these proceeds, along with a significant portion of the
net proceeds from the Company's offering of common stock in June 1995,
remained in cash and cash equivalents and short-term investments and will be
used for general corporate purposes, including research and development,
working capital and possible acquisitions.
As discussed above under "Results of Operations - Selling, General and
Administrative and Litigation Expense", on July 17, 1996, the Company reached
an agreement with COBE to settle COBE's patent suit against the Company. The
terms of the settlement provide for the Company to make net payments
totalling $2,200,000, of which a net $1,100,000 was paid in August 1996. The
remaining amount is payable on or about August 6, 1997, subject to COBE's
active enforcement of its claimed patent rights with respect to other
manufacturers. See Consolidated Financial Statements - Note 8 "Contingency
Settlement".
FOREIGN CURRENCY TRANSACTIONS
Transactions by the Company's international subsidiaries are negotiated,
invoiced and paid in various foreign currencies, primarily pounds sterling,
and U.S. dollars. Accordingly, the Company is currently subject to risks
associated with fluctuations in exchange rates between the various currencies.
Substantially all of the Company's other international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates in
other countries may therefore reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of the
countries in which the products are sold.
14
<PAGE>
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). The Company has elected to continue
following the guidance of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for measurement and recognition of
stock-based transactions with employees. The Company will adopt the
disclosure provisions of SFAS 123 in 1996.
15
<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.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits to this Quarterly Report on Form 10-Q are
listed in the Exhibit Index beginning on page 18 of this
Report.
(b) Reports on Form 8-K:
On July 19, 1996, the Registrant filed a Current Report on
Form 8-K, dated June 26, 1996, as amended by Amendment No. 1
to Current Report on Form 8-K/A Filed on July 31, 1996,
reporting Item 5 - Other Information.
16
<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.
AVECOR CARDIOVASCULAR INC.
November 11, 1996 By /s/ Anthony Badolato
- --------------------------- --------------------------------
Date Anthony Badolato
Chief Executive Officer
November 11, 1996 By /s/ Gregory J. Melsen
- --------------------------- --------------------------------
Date Gregory J. Melsen
Vice President-Finance,
Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
AVECOR CARDIOVASCULAR INC.
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended September 30, 1996
<TABLE>
<CAPTION>
Item No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
4.1 Specimen form of the Company's Common
Stock Certificate Filed herewith electronically
11.1 Statement regarding computation of
earnings per share Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK COMMON STOCK
[EAGLE]
NUMBER SHARES
[GRAPHIC] [GRAPHIC]
AVECOR CARDIOVASCULAR INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 053547 10 5
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
OF THE PAR VALUE OF $.01 PER SHARE, OF
AVECOR CARDIOVASCULAR INC.
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR
BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER
AGENT AND REGISTRAR.
WITNESS THE FACSIMILE SIGNATURES OF THE DULY AUTHORIZED OFFICERS OF THE
CORPORATION.
COUNTERSIGNED AND REGISTERED
NORWEST BANK MINNESOTA, N.A.
(MINNEAPOLIS, MINNESOTA)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
DATED:
/s/ Richard G. Larcan /s/ Anthony Badolato
SECRETARY CHIEF EXECUTIVE OFFICER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS OR SERIES.
THE BOARD OF DIRECTORS OF THE CORPORATION HAS THE AUTHORITY TO DETERMINE THE
RELATIVE RIGHTS AND PREFERENCES OF SUCH CLASS OR SERIES. THE CORPORATION WILL
FURNISH TO ANY SHAREHOLDER UPON REQUEST MADE TO THE SECRETARY OF THE CORPORATION
AND WITHOUT CHARGE A FULL STATEMENT (A) OF THE DESIGNATIONS, RELATIVE RIGHTS,
PREFERENCES AND LIMITATIONS OF THE SHARES OF EACH CLASS AND SERIES AUTHORIZED TO
BE ISSUED, INSOFAR AS THE SAME HAVE BEEN DETERMINED, AND (B) OF THE AUTHORITY OF
THE BOARD OF DIRECTORS TO DIVIDE THE SHARES INTO CLASSES OR SERIES AND TO
DETERMINE AND CHANGE THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF ANY
CLASS OR SERIES.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT --......Custodian.....
(Cust) (Minor)
TEN ENT - as tenants by the under Uniform Gifts to Minors
entireties
JT TEN - as joint tenants with
right of survivorship and ACT ....................
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED _____ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
ATTORNEY
- -----------------------------------------------------------------------
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
----------------------------------------
----------------------------------------
NOTICE THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
SIGNATURE GUARANTEED BY:
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS
AS SET FORTH IN THE RIGHTS AGREEMENT BETWEEN AVECOR CARDIOVASCULAR INC. (THE
"COMPANY") AND NORWEST BANK MINNESOTA, N.A. (THE "RIGHTS AGENT") DATED AS OF
JUNE 26, 1996 (THE "RIGHTS AGREEMENT"), AND AS THE SAME MAY BE AMENDED FROM
TIME TO TIME, THE TERMS OF WHICH (INCLUDING RESTRICTIONS ON THE TRANSFER OF SUCH
RIGHTS) ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. UNDER CERTAIN
CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE
EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS
CERTIFICATE. THE COMPANY SHALL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF
THE RIGHTS AGREEMENT, AS IN EFFECT ON THE DATE OF MAILING, WITHOUT CHARGE AFTER
RECEIPT OF A WRITTEN REQUEST THEREFOR FROM SUCH HOLDER. UNDER CERTAIN
CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD
BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON, AN ADVERSE PERSON OR
ANY AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT), AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS, WHETHER CURRENTLY HELD BY
OR ON BEHALF OF SUCH PERSON OR ANY SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 11.1 - STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET INCOME $628 $1,014 ($1,036) $2,287
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
PER SHARE DATA:
Net income per common equivalent
share, primary $0.08 $0.13 ($0.13) $0.32
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per common equivalent
share, fully diluted $0.08 $0.13 ($0.13) $0.32
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT SHARES:
Primary:
Weighted average number of common
shares outstanding 7,791 7,601 7,755 6,842
Common equivalent shares:
Warrants 3 46 0 42
Options 232 252 0 223
------------- ------------- ------------- -------------
8,026 7,899 7,755 7,107
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Fully diluted:
Weighted average number of common
shares outstanding 7,791 7,601 7,755 6,842
Commoon equivalent shares:
Warrants 3 48 0 48
Options 244 262 0 262
------------- ------------- ------------- -------------
8,038 7,910 7,755 7,152
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,944,000
<SECURITIES> 7,610,241
<RECEIVABLES> 8,001,126
<ALLOWANCES> 120,000
<INVENTORY> 9,357,577
<CURRENT-ASSETS> 30,861,812
<PP&E> 7,948,712
<DEPRECIATION> 4,107,120
<TOTAL-ASSETS> 35,040,352
<CURRENT-LIABILITIES> 5,890,287
<BONDS> 200,447
0
0
<COMMON> 78,039
<OTHER-SE> 28,871,574
<TOTAL-LIABILITY-AND-EQUITY> 35,040,352
<SALES> 32,752,776
<TOTAL-REVENUES> 32,752,776
<CGS> 19,174,497
<TOTAL-COSTS> 34,647,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (569,831)
<INCOME-PRETAX> (1,325,194)
<INCOME-TAX> (289,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,036,194)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
