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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 JUNE 30, 1997
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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.
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(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)
7611 NORTHLAND DRIVE, MINNEAPOLIS, MINNESOTA 55428
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(Address of principal executive offices) (Zip Code)
(612) 391-9000
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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 August 4, 1997, there were 7,939,833 shares of the registrant's
$.01 par value Common Stock outstanding.
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INDEX
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Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited)
and December 31, 1996 3
Consolidated Statements of Operations for the three and six month
periods ended June 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the six month periods
ended June 30, 1997 and 1996 (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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
EXHIBIT INDEX 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, December 31,
1997 1996
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Current assets: (Unaudited)
Cash and cash equivalents $2,108,000 $ 6,114,000
Short-term investments 4,890,000 2,638,000
Accounts receivable, net 8,756,000 7,298,000
Inventories 10,267,000 9,476,000
Deferred tax asset 1,274,000 1,274,000
Other current assets 458,000 744,000
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Total current assets 27,753,000 27,544,000
Restricted cash and investments - 4,450,000
Property, plant and equipment, net 14,558,000 4,808,000
Long-term investments 1,546,000 -
Other assets 506,000 359,000
Total assets $44,363,000 $37,161,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,153,000 $ 2,790,000
Accrued expenses 3,466,000 3,091,000
Accrued litigation settlement 1,100,000 1,100,000
Current portion of long-term debt 258,000 -
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Total current liabilities 7,977,000 6,981,000
Deferred grant 176,000 205,000
Deferred tax liability 37,000 37,000
Long-term debt 4,823,000 -
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 7,927,000 and 7,812,000
shares at June 30, 1997 and
December 31, 1996, respectively 79,000 78,000
Additional paid-in capital 29,735,000 29,024,000
Retained earnings 1,399,000 609,000
Cumulative translation adjustment 137,000 227,000
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Total shareholders' equity 31,350,000 29,938,000
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Total liabilities and shareholders' equity $44,363,000 $37,161,000
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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)
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Three months ended Six months ended
June 30, June 30,
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1997 1996 1997 1996
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Net sales $11,961,000 $11,145,000 $24,004,000 $21,438,000
Cost of sales 6,900,000 6,443,000 13,960,000 12,394,000
----------- ----------- ----------- -----------
Gross profit 5,061,000 4,702,000 10,044,000 9,044,000
Operating expenses:
Selling, general and
administrative 3,482,000 2,994,000 6,832,000 5,850,000
Litigation expense - 3,700,000 - 4,205,000
Research and development 974,000 862,000 2,076,000 1,703,000
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Operating income (loss) 605,000 (2,854,000) 1,136,000 (2,714,000)
Interest income 129,000 194,000 273,000 403,000
Interest expense (105,000) - (176,000) -
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Income (loss) before
income taxes 629,000 (2,660,000) 1,233,000 (2,311,000)
Income tax provision (benefit) 226,000 (783,000) 443,000 (647,000)
----------- ----------- ----------- -----------
Net income (loss) $403,000 $(1,877,000) $ 790,000 ($1,664,000)
----------- ----------- ----------- -----------
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Net income (loss) per share $0.05 ($0.24) $0.10 ($0.22)
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Weighted average common
and common equivalent
shares outstanding 7,977,000 7,775,000 7,961,000 7,737,000
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The accompanying notes are an integral part of the consolidated
financial statements.
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AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the six months ended June 30,
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1997 1996
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Cash flows from operating activities:
Net income (loss) $ 790,000 $(1,664,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 737,000 692,000
Accretion of discount on investments (170,000) (302,000)
Changes in operating assets and liabilities:
Accounts receivable (1,524,000) (1,846,000)
Inventories (782,000) (3,514,000)
Other current assets 277,000 (899,000)
Accounts payable 758,000 745,000
Accrued expenses 393,000 1,380,000
Accrued litigation settlement - 2,200,000
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Net cash provided by (used in) operating
activities 479,000 (3,208,000)
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Cash flows from investing activities:
Purchase of property, plant and equipment (9,911,000) (1,057,000)
Purchase of investments (8,768,000) (7,919,000)
Proceeds upon sale or maturity of short-term
investments 5,140,000 6,921,000
Cash and investments restricted as to use 3,450,000 -
Increase in other assets (154,000) (33,000)
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Net cash used in investing activities (10,243,000) (2,088,000)
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Cash flows from financing activities:
Net proceeds from sales of common stock 130,000 117,000
Net proceeds from options exercised 582,000 (161,000)
Net proceeds from warrants excercised - 525,000
Borrowings on long-term debt 5,167,000 -
Principal payments on long-term debt (86,000) -
Grant proceeds - 101,000
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Net cash provided by financing activities 5,793,000 582,000
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Effect of exchange rates on cash (35,000) -
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Net decrease in cash and cash equivalents (4,006,000) (4,714,000)
Cash and cash equivalents at beginning of period 6,114,000 9,178,000
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Cash and cash equivalents at end of period $ 2,108,000 $ 4,464,000
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Significant non-cash investing and
financing transactions:
Use of restricted funds for purchase
of the U.S. facility $ 1,000,000
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</TABLE>
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 unaudited consolidated
interim financial statements should be read in conjunction with the financial
statements and related notes included in the Company's 1996 Annual Report on
Form 10-K as filed with the SEC.
The consolidated interim financial statements presented herein as of
June 30, 1997 and for the three and six month periods ended June 30, 1997 and
1996 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 and cash flows 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 for heart/lung
bypass surgery and long-term respiratory support.
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.
3. LONG-TERM INVESTMENTS
Long-term investments consist of a corporate bond and a U.S. treasury
note. The Company's long-term investments are considered by management to be
"available for sale."
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4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1997 1996
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(Unaudited)
Raw materials $3,747,000 $3,424,000
Work-in-process 2,202,000 2,343,000
Finished goods 4,318,000 3,709,000
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$10,267,000 $9,476,000
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5. 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. No one independent
distributor accounted for 10% or more of the Company's net sales for the six
months ended June 30, 1997 and 1996.
Total export sales from the U.S. to unaffiliated entities (primarily to
Europe and payable in U.S. dollars) were $1,248,000 and $2,563,000,
respectively, for the three and six month periods ended June 30, 1997.
At June 30, 1997, consolidated accounts receivable include $4,818,000
due from customers located outside of the U.S.
6. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, a new standard for computing and presenting earnings per
share. The Company is required to adopt the new standard in the fourth
quarter of 1997; earlier adoption is not permitted. The Company expects that
earnings per share computed under the new standard will approximate earnings
per share currently reported.
7. PATENT MATTERS
In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held
by a competing manufacturer of blood oxygenators and other medical devices,
and requesting a determination that the Company's Affinity oxygenator does
not infringe the competitor's patent. The Company filed suit in response to
a December 1996 letter from the competitor, alleging that the Affinity
oxygenator infringes certain claims under the competitor's patent, and
requesting discussion regarding a possible license agreement. The Company
reviewed the subject patent and concluded, based on
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an opinion from its patent counsel, that none of the claims in the patent are
infringed by the Affinity oxygenator, and that the patent is, in any event,
invalid. However, the expense and effort potentially required to bring this
action, as well as the outcome of any counterclaim successfully brought
against the Company by the competitor, could have a material adverse effect
on the Company's business, financial condition and results of operations.
See Part II, Item 1, "Legal Proceedings".
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 six month periods ended June 30, 1997 compared
with the three and six month periods ended June 30, 1996 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 and in June 1991
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 wholly-owned 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. Since
that time, the Company has been successful in developing and obtaining
marketing clearance for a number of its proprietary products, with the goal
of developing and marketing a more complete line of proprietary products used
in the heart/lung bypass circuit. The Company began marketing its Myotherm
cardioplegia delivery system in October 1991, and began marketing its
Signature custom tubing packs in July 1993 following receipt of marketing
clearance from the U.S. Food and Drug Administration (the FDA). The Company
began marketing its Affinity oxygenator internationally in July 1993 and in
the United States in February 1994, following receipt of marketing clearance
from the FDA in November 1993. The Company received marketing clearance from
the FDA to market its Affinity blood reservoirs and Affinity arterial filter
in July 1994 and October 1995, respectively. In connection with the
Company's continuing efforts to offer a more complete line of proprietary
heart/lung bypass circuit products, the Company has developed an improved
Myotherm cardioplegia system and a new blood pump. In July and August 1997,
clearances were received from the FDA to market the improved Myotherm
cardioplegia system and the new blood pump, respectively.
RESULTS OF OPERATIONS
NET SALES
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
Net sales increased 7% to $11,961,000 for the three months ended June
30, 1997 from $11,145,000 for the three months ended June 30, 1996. This
increase was principally the result of a higher volume of product shipments
of the Company's Signature custom tubing packs and
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Affinity product line. Overall, average prices of product shipments
declined slightly when compared to the corresponding period in 1996.
Sales from Signature custom tubing packs and the Affinity product line
accounted for approximately 87% and 54% of the overall increase in net sales,
respectively. These increases were partially offset by decreases in the
silicone membrane oxygenator line, as expected, and the Myotherm cardioplegia
line which decreased by $256,000, or 31% of the overall increase in net
sales, and $128,000, or 16% of the overall increase in net sales,
respectively, for the three months ended June 30, 1997 when compared to the
corresponding period in 1996. Management believes the decline in net sales
of the Myotherm cardioplegia line for the three months ended June 30, 1997 to
be temporary as customers delay their purchasing decisions in anticipation
of the Company's launch of its new version of the Myotherm cardioplegia
system, which received marketing clearance from the FDA in July 1997.
Over the past two years, one of the Company's competitors has purchased
three companies that provide contract perfusion services to hospitals. The
Company believes that such control has had and will continue 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. The Company believes this negative impact will be further affected
by any future acquisitions of contract perfusion groups by its competitors
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 contract perfusion groups
controlled by one of the Company's competitors decreased $206,000 to $352,000
for the three months ended June 30, 1997 from $558,000 for the three months
ended June 30, 1996.
Sales to customers located outside of the United States were
approximately 40% of net sales for the three month period ended June 30, 1997
compared to 39% of net sales for the corresponding period in 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
Net sales increased 12% to $24,004,000 for the six months ended June 30,
1997 from $21,438,000 for the six months ended June 30, 1996. This increase
was principally the result of a higher volume of product shipments of the
Company's Signature custom tubing packs and Affinity product line. Overall,
average prices of product shipments declined slightly when compared to the
corresponding period in 1996.
Sales from Signature custom tubing packs and the Affinity product line
accounted for approximately 60% and 56% of the overall increase in net sales,
respectively. As expected, the silicone membrane oxygenator line net sales
decreased by $365,000 offsetting 14% of the overall
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increase in net sales for the six months ended June 30, 1997 when compared to
the corresponding period in 1996.
Sales to contract perfusion groups controlled by one of the Company's
competitors decreased $398,000 to $716,000 for the six months ended June 30,
1997 from $1,114,000 for the six months ended June 30, 1996.
Sales to customers located outside of the United States were
approximately 40% of net sales for the six month period ended June 30, 1997
compared to 39% of net sales for the corresponding period in 1996.
COST OF SALES / GROSS PROFIT
Cost of sales as a percentage of net sales decreased slightly to 57.7%
for the three months ended June 30, 1997 from 57.8% for the three months
ended June 30, 1996. The cost of sales percentage for the six months ended
June 30, 1997 increased slightly to 58.2% from 57.8% for the six months ended
June 30, 1996. The cost of sales percentage for the three and six month
periods ended June 30, 1997 were favorably impacted by improved raw material
costs and increased overall manufacturing efficiencies due to the Company's
move into one facility. These improvements were largely offset for the three
month period ended June 30, 1997 and were exceeded for the six month period
ended June 30, 1997 by significant increases in sales of the Company's
lower-margin Signature custom tubing pack line, as well as competitive
pricing pressures in the marketplace. The mix of products sold in any period
will influence the cost of sales and gross profit for the period.
Affinity oxygenator product costs continue to improve due to efficiency
and material cost improvements, although these improvements were largely
offset, primarily by an ongoing decrease in average selling prices.
The Company's future gross profit margin percentages will be influenced
by the ongoing pressures of the competitive pricing environment, changes in
the sales mix, new product introductions and the extent of further product
cost improvements through increased manufacturing efficiencies and reduced
material costs, if any. Given the uncertainty associated with new product
introductions, the ultimate realization of any such product cost improvements
and the continuing price pressures in the Company's markets, the Company
cannot be certain if its gross profit margin percentage will be maintained,
improve or decline.
SELLING, GENERAL AND ADMINISTRATIVE AND LITIGATION EXPENSE
Selling, general and administrative expenses increased 16% to $3,482,000
for the three months ended June 30, 1997 from $2,994,000 for the three months
ended June 30, 1996. Selling, general and administrative expenses increased
17% to $6,832,000 for the six months ended June 30, 1997 from $5,850,000 for
the six months ended June 30, 1996. 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, seasonal trade show costs and costs incurred in
anticipation of FDA approval of the new blood pump. As a percent of sales,
selling, general and administrative expenses increased to 29.1% and
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28.5% for the three and six month periods ended June 30, 1997, respectively,
from 26.9% and 27.3% for the three and six month periods ended June 30, 1996,
respectively.
Management anticipates that selling, general and administrative expenses
for the year ended December 31, 1997 will be higher than the year ended
December 31, 1996 and will be slightly higher than 1996 as a percentage of
sales. 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 in August 1997. The Company expensed
professional fees, in connection with the COBE suit, of approximately
$3,700,000 and $4,205,000 for the three and six month periods ended June 30,
1996, respectively. No related expenses were incurred for the three and six
month periods ended June 30, 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 13% to $974,000 and 22% to
$2,076,000 for the three and six month periods ended June 30, 1997,
respectively, from $862,000 and $1,703,000 for the three and six month
periods ended June 30, 1996, 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 an
improved Myotherm cardioplegia system and a new blood pump, which received
marketing clearances from the FDA in July and August 1997, respectively.
There can be no assurance that the improved Myotherm cardioplegia system or
the pump will become commercially successful.
The Company anticipates that research and development expenses for 1997
will increase approximately 20% over 1996 levels, 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. 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 improved Myotherm
cardioplegia system and blood pump, the Company is developing proprietary
systems coatings that will improve blood handling, scheduled for third
quarter 1997 FDA submission and new oxygen saturation/hematocrit technology
that is expected to be submitted to the FDA late in the fourth quarter of
1997 or in early 1998. There can be no assurance, however, that the
Company's research and development efforts will result in additional
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
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regulatory scheme for such products, and the Company's assessment of the cost
and anticipated benefit of such submissions.
INTEREST INCOME AND EXPENSE
Interest income decreased to $129,000 for the three months ended June
30, 1997 from $194,000 for the three months ended June 30, 1996. Similarly,
interest income decreased to $273,000 for the six months ended June 30, 1997
from $403,000 for the six months ended June 30, 1996. The decrease in
interest income for the three and six month periods ended June 30, 1997 when
compared to the three and six month periods ended June 30, 1996 is primarily
due to the use of cash and cash equivalents and investments for the Company's
new facility. Interest income during the three and six month periods ended
June 30, 1997 was earned primarily from the investment of the remaining net
proceeds from the Company's June 1995 stock offering. At June 30, 1997, the
majority of these proceeds were invested with two investment portfolio
managers who invested in U.S. government securities, agency paper, money
markets, commercial paper and corporate obligations.
Interest expense for the three and six month periods ended June 30, 1997
was $105,000 and $176,000, respectively, and exclusively due to the mortgage
on the new facility. The closing on the facility purchase occurred in late
January 1997.
INCOME TAX PROVISION
For the three and six month periods ended June 30, 1997, tax provisions
of $226,000 and $443,000 were recorded compared to tax benefits $783,000 and
$647,000 for the three and six month periods ended June 30, 1996. The tax
provisions and benefits recorded correspond to the pretax income and losses
for those respective periods.
NET INCOME
Net income was $403,000 or $.05 per share and $790,000 or $.10 per share
for the three and six month periods ended June 30, 1997, respectively,
compared to net losses of $1,877,000 or $.24 per share and $1,664,000 or $.22
per share for the three and six month periods ended June 30, 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1997, $479,000 was provided by the
Company in operating activities compared to $3,208,000 used in operating
activities for the same period in 1996. The net change of approximately
$3,687,000 is primarily the result of changed investment in inventories,
$1,300,000 spent during the corresponding period in 1996 related to the COBE
litigation and a decrease to other current assets. These were partially
offset by a use of cash in 1997, when compared to 1996, for reduced accrued
expenses. The Company believes that its existing cash and cash equivalents
and investments as well as anticipated cash generated from operations will be
sufficient to satisfy the Company's cash requirements for the foreseeable
future.
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Cash expenditures for capital additions, other than the purchase of the
new facility, totaled $2,670,000 for the six months ended June 30, 1997
compared to $1,057,000 for the six months ended June 30, 1996. These
expenditures were primarily related to equipment, molds and tooling necessary
to begin the production of the Affinity blood pump and improved Myotherm
cardioplegia system, and to further the production of the Affinity oxygenator
and related blood reservoirs. These expenditures also include approximately
$760,000 of furniture, fixtures and equipment additions for the Company's new
U.S. manufacturing, research and development and administrative facility.
Leases for the Company's U.S. manufacturing, research and development
and administrative facilities expired on December 31, 1996. In January, the
Company consolidated its four separate facilities into a newly constructed
facility, which the Company has purchased. The cost of this facility was
approximately $8,600,000, plus an additional $1,050,000 for the purchase of
furniture, fixtures and manufacturing equipment for the facility. To finance
the $9,650,000 total cost of the project, the Company entered into a
$5,167,000 bank note payable agreement in January 1997 and, in addition,
funded $4,483,000 out of corporate funds. Closing occurred on January 30,
1997.
The note payable agreement bears interest at 8.11% and requires monthly
principal payments of $21,531, plus interest, through January 2002 with the
remaining principal and interest due February 2002. The note payable is
collateralized by the new corporate headquarters and manufacturing facility
and, among other things, requires the Company to meet certain ratios related
to leverage, debt service and cash flow. As of June 30, 1997, the Company
was in compliance with the ratios required by the note payable.
Additionally, the bank note payable agreement prohibits the Company from
distributing dividends to its shareholders.
At June 30, 1997, the Company had no restricted cash or investments. Of
the $4,450,000 which was restricted at December 31, 1996 for payment of the
U.S. facility, $1,000,000 was used for the purchase of the facility and
$3,450,000 became unrestricted, was reinvested and is being used for general
corporate purposes, research and development and working capital.
The Company's capital expenditures for 1997 are expected to be
approximately $3,000,000, excluding any capital expenditures which were
required in connection with the new facility, as discussed above. This
estimate includes additional equipment, molds and tooling for the new blood
pump, an improved Myotherm cardioplegia system and new oxygen
saturation/hematocrit technology.
The foregoing forward-looking statements relating to the amount of
capital expenditures and ultimate cash usage are dependent on the progress of
the Company's product development efforts and the timing of the receipt of
FDA marketing clearances for any future products.
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.
14
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, a new standard for computing and presenting earnings per
share. The Company is required to adopt the new standard in the fourth
quarter of 1997; earlier adoption is not permitted. The Company expects that
earnings per share computed under the new standard will approximate earnings
per share currently reported.
CERTAIN IMPORTANT FACTORS
Except for the historical financial information contained herein, this
Form 10-Q contains certain forward-looking statements. For this purpose, any
statements contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", or "continue," the negative or other variations thereof, or
comparable terminology, are intended forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors,
including the progress of product development and clinical studies, the
timing of and ability to attain regulatory approvals, the availability of
third party reimbursement, the extent to which the Company's products gain
market acceptance, litigation regarding patent and other intellectual
property rights, the introduction of competitive products by others, and
other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the quarter ended June 30, 1997, there were no material
developments in the Company's suit seeking to invalidate a newly
issued U.S. patent held by a competing manufacturer of blood
oxygenators and other medical devices, and requesting a determination
that the Company's Affinity oxygenator does not infringe the
competitor's patent. Further information regarding the suit was
previously reported in the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
ITEM 2. CHANGES IN SECURITIES.
Effective as of July 22, 1997 the Company entered into an amendment
(the "Amendment") to the Rights Agreement, dated June 26, 1996,
between the Company and Norwest Bank Minnesota, N.A., governing the
Company's Preferred Stock Purchase Rights.
The Amendment modifies the definition of an "Acquiring Person" under
the Rights Agreement to provide that the threshold level for
determining a person to be an Acquiring Person is increased from 15%
to 19% of the issued and outstanding shares of the Company's common
stock, $.01 par value per share ("Common Stock"), in the case of the
collective beneficial ownership of Common Stock by LeRoy C. Kopp and
Kopp Investment Advisors, Inc. ("KIA"). The Amendment does not
otherwise impact the ability of the Company's Board of Directors to
determine Mr. Kopp or KIA, individually or collectively, to be an
"Adverse Person" for purposes of the Rights Agreement.
Prior to the Amendment, Mr. Kopp and KIA beneficially owned an
aggregate of approximately 14.7% of the issued and outstanding stock.
These shares were primarily held by KIA in a representative and
fiduciary capacity for the benefit of its clients. The effect of the
Amendment is to allow Mr. Kopp and KIA to increase their collective
beneficial ownership of Common Stock up to 19% of the issued and
outstanding shares without triggering a "Distribution Date" under the
Rights Agreement. In connection with the Amendment, the Company
entered into an agreement with Mr. Kopp and KIA, pursuant to which
Mr. Kopp and KIA made certain representations and warranties and
agreed to certain terms and conditions regarding the Amendment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders of AVECOR Cardiovascular Inc.,
held May 14, 1997, the shareholders voted as follows on the election
of the following Directors, which was the only matter considered at
the meeting:
Affirmative Votes Withhold Authority
----------------- ------------------
Anthony Badolato 7,077,383 30,023
David W. Stassen 7,074,778 32,628
Edward E. Strickland 7,079,996 27,410
J. Gordon Wright 7,080,596 26,810
There were no abstentions or broker non-votes.
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 19 of this
Report.
(b) Reports on Form 8-K:
None
17
<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.
August 12, 1997 By /s/ Anthony Badolato
--------------- ----------------------------------
Date Anthony Badolato
Chief Executive Officer
August 12, 1997 By /s/ Gregory J. Melsen
--------------- ----------------------------------
Date Gregory J. Melsen
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
AVECOR CARDIOVASCULAR INC.
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended June 30, 1997
Item No. Description Method of Filing
- -------- ----------- ----------------
4.1 Amendment to Rights Agreement between
the Company and Norwest Bank Minnesota,
N.A., dated July 22, 1997 Filed herewith electronically
11.1 Statement regarding computation of
earnings per share Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
19
<PAGE>
AMENDMENT TO RIGHTS AGREEMENT
This Amendment To Rights Agreement (this "Amendment") is between AVECOR
Cardiovascular Inc., a Minnesota corporation (the "Company") and Norwest Bank
Minnesota, N.A., a national banking association (the "Rights Agent"), effective
as of July 22, 1997.
A. The Company and the Rights Agent have entered into a Rights Agreement,
dated as of June 26, 1996 (the Rights Agreement"). Capitalized terms used and
not otherwise defined herein will have the meaning given in the Rights
Agreement.
B. Section 27 of the Rights Agreement provides that, prior to a
Distribution Date, the Company may amend the Rights Agreement, including the
definition of an Acquiring Person as set forth in Section 1(a) thereof, upon
the approval of at least a majority of the Continuing Directors, and that,
upon any such amendment, the Rights Agent shall amend the Rights Agreement as
the Company directs.
C. The Company desires, and hereby directs the Rights Agent, to amend the
definition of an Acquiring Person, and the Rights Agent agrees to such
amendment, on the terms and conditions hereof.
Accordingly, the Company and the Rights Agent agree as follows:
1. Representations and Warranties. The Company represents and warrants to the
------------------------------
Rights Agent that:
(a) to the best knowledge of the Company, a Distribution Date has not
occurred prior to the effective date hereof; and
(b) this Amendment is authorized pursuant to the requirements of
Section 27 of the Rights Agreement, having been approved by a
majority of the Company's Continuing Directors.
2. Amendment of Section 1(a). Section 1(a) of the Rights Agreement, a copy of
-------------------------
which as currently in effect is attached hereto as Exhibit A, is hereby amended
by adding the following additional sentence to the end of such Section:
Notwithstanding the foregoing, with respect to the beneficial
ownership of Common Shares by LeRoy C. Kopp, an individual, and
Kopp Investment Advisors, Inc., a Minnesota corporation,
collectively as a single Person, each reference in this Section to
beneficial ownership of 15% or more of the Common Shares shall be
deemed to be modified to refer to beneficial ownership of 19% or
more of the Common Shares.
3. No Other Changes. Except as specifically amended by this Amendment, all
----------------
other provisions of the Rights Agreement remain in full force and effect. This
Amendment
<PAGE>
shall not constitute or operate as a waiver of, or estoppel with respect to,
any provisions of the Rights Agreement by any party hereto.
4. Counterparts. This Amendment may be executed in one or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same agreement.
The Company and the Rights Agent have caused this Amendment to be duly
executed on their behalf by their respective duly authorized representatives
as of the date first written above.
AVECOR CARDIOVASCULAR, INC. NORWEST BANK MINNESOTA, N.A.
By: /s/ Anthony Badolato By: /s/ Karri L. Van Dell
------------------------------- -------------------------
Anthony Badolato Karri L. Van Dell
Its: Chief Executive Officer Its: Corporate Officer
<PAGE>
EXHIBIT 11.1 - STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET INCOME $ 403 $(1,877) $ 790 $(1,664)
-------- -------- ------- --------
-------- -------- ------- --------
PER SHARE DATA:
Net income per common equivalent share,
primary $ 0.05 $ (0.24) $0.10 $ (0.22)
-------- -------- ------- --------
-------- -------- ------- --------
Net income per common equivalent share,
fully diluted $ 0.05 $ (0.24) $0.10 $ (0.22)
-------- -------- ------- --------
-------- -------- ------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES:
Primary:
Weighted average number of common
shares outstanding 7,914 7,775 7,879 7,737
Common equivalent shares:
Warrants 2 0 2 0
Options 61 0 80 0
-------- -------- ------- --------
7,977 7,775 7,961 7,737
-------- -------- ------- --------
-------- -------- ------- --------
Fully diluted:
Weighted average number of common
shares outstanding 7,914 7,775 7,879 7,737
Common equivalent shares:
Warrants 2 0 2 0
Options 100 0 100 0
-------- -------- ------- --------
8,016 7,775 7,981 7,737
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<CASH> 2,108,000
<SECURITIES> 4,890,000
<RECEIVABLES> 8,943,000
<ALLOWANCES> 187,000
<INVENTORY> 10,267,000
<CURRENT-ASSETS> 27,753,000
<PP&E> 19,769,000
<DEPRECIATION> 5,211,000
<TOTAL-ASSETS> 44,363,000
<CURRENT-LIABILITIES> 7,977,000
<BONDS> 176,000
0
0
<COMMON> 79,000
<OTHER-SE> 31,271,000
<TOTAL-LIABILITY-AND-EQUITY> 44,363,000
<SALES> 24,004,000
<TOTAL-REVENUES> 24,004,000
<CGS> 13,960,000
<TOTAL-COSTS> 22,868,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (97,000)
<INCOME-PRETAX> 1,233,000
<INCOME-TAX> 443,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 790,000
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
