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________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 2002
Commission File Number 0-944
POSSIS MEDICAL, INC.
9055 Evergreen Boulevard
Minneapolis, Minnesota 55433-8003
(763) 780-4555
A Minnesota Corporation IRS Employer ID No. 41-0783184
_________________________________
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 the Registrant's Common Stock, $0.40
par value, as of November 15, 2002 was 17,283,409.
________________________________
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, October 31, 2002
and July 31, 2002........................................ 3
Consolidated Statements of Operations for the three months
ended October 31, 2002 and 2001.......................... 4
Consolidated Statements of Cash Flows for the
three months ended October 31, 2002 and 2001 ............ 5
Notes to Consolidated Financial Statements............... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
ITEM 3. Quantitative and Qualitative Disclosure about
Market Risks ............................................ 14
ITEM 4. Controls and Procedures.................................... 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................... 16
SIGNATURES................................................. 17
CERTIFICATIONS............................................. 18
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 31, 2002 July 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 21,039,325 $ 18,556,663
Trade receivables (less allowance for doubtful
accounts and returns of $505,000 and
$582,000, respectively)...................................... 6,562,243 5,873,358
Inventories....................................................... 3,960,052 4,134,817
Prepaid expenses and other assets................................. 350,801 762,615
Deferred tax asset................................................ 646,000 646,000
Total current assets.................................... 32,558,421 29,973,453
PROPERTY AND EQUIPMENT, net............................................ 3,120,165 3,092,644
DEFERRED TAX ASSET..................................................... 10,728,400 11,623,000
TOTAL ASSETS........................................................... $ 46,406,986 $ 44,689,097
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................ $ 1,403,672 $ 1,262,711
Accrued salaries, wages, and commissions.......................... 2,186,331 2,471,557
Other liabilities................................................. 1,475,459 1,200,763
Total current liabilities............................... 5,065,462 4,935,031
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares
of $0.40 par value each; issued and outstanding,
17,282,159 and 17,274,222 shares, respectively............... 6,912,864 6,909,689
Additional paid-in capital............................................. 78,434,202 78,385,073
Unearned compensation.................................................. (8,400) (18,900)
Retained deficit....................................................... (43,997,142) (45,521,796)
Total shareholders' equity.............................. 41,341,524 39,754,066
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 46,406,986 $ 44,689,097
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
Product Sales........................................................... $ 12,681,903 $ 9,585,268
Cost of sales and other expenses:
Cost of medical products........................................... 3,388,698 2,999,982
Selling, general and administrative................................ 5,767,702 4,689,465
Research and development........................................... 1,152,196 1,031,320
Total cost of sales and other expenses................... 10,308,596 8,720,767
Operating income........................................................ 2,373,307 864,501
Interest income......................................................... 66,347 4,027
Income before income taxes.............................................. 2,439,654 938,528
Provision for income taxes.............................................. 915,000 --
Net income.............................................................. $ 1,524,654 $ 938,528
Net income per common share:
Basic.............................................................. $0.09 $0.06
Diluted............................................................ $0.08 $0.05
Weighted average number of common shares
assumed outstanding:
Basic.............................................................. 17,278,291 16,858,181
Diluted............................................................ 18,285,859 18,260,374
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
OPERATING ACTIVITIES:
Net income ....................................................................... $ 1,524,654 $ 938,528
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation................................................................. 537,828 508,159
Loss on disposal of assets................................................... 34,000 --
Stock compensation expense................................................... 19,100 26,100
Deferred taxes............................................................... 894,600 --
Expense reimbursement from city government................................... -- (67,788)
Writedown due to impairment of asset......................................... -- 70,000
Increase in receivables...................................................... (688,885) (69,762)
Increase in inventories...................................................... (30,186) (115,154)
Decrease in other current assets............................................. 411,814 142,337
Increase (decrease) in trade accounts payable................................ 140,961 (152,511)
(Decrease) increase in accrued expenses and other current liabilities........ (10,530) 300,850
Net cash provided by operating activities......................................... 2,833,356 1,580,759
INVESTING ACTIVITIES:
Additions to property and equipment............................................... (394,398) (340,601)
Net cash used in investing activities............................................. (394,398) (340,601)
FINANCING ACTIVITIES:
Proceeds from issuance of stock and exercise of options and warrants.............. 43,704 638,688
Repayment of long-term debt....................................................... -- (26,522)
Net cash provided by financing activities......................................... 43,704 612,166
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 2,482,662 1,852,324
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER................................. 18,556,663 9,515,751
CASH AND CASH EQUIVALENTS AT END OF QUARTER....................................... $ 21,039,325 $ 11,368,075
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Inventory transferred to property and equipment................................... $ 47,951 $ --
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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. The accompanying consolidated financial statements and notes
should be read in conjunction with the audited financial statements and
accompanying notes thereto included in the Company's 2002 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended October 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 2003.
3. INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market. Inventory balances were as follows:
October 31, July 31,
2002 2002
Finished goods.......... $1,232,798 $1,444,973
Work-in-process......... 953,107 805,911
Raw materials........... 1,774,147 1,883,933
$3,960,052 $4,134,817
4. PROPERTY AND EQUIPMENT
Property is carried at cost and depreciated using the straight-line method
over the estimated useful lives of the various assets. Property and equipment
balances and corresponding lives were as follows:
October 31, July 31,
2002 2002 Life
Leasehold improvements........... $1,454,833 $1,454,833 10 years
Equipment........................ 6,882,708 7,536,959 3 to 10 years
Assets in construction........... 199,863 138,271 N/A
8,537,404 9,130,063
Less accumulated depreciation.... 5,417,239 6,037,419
Property and equipment - net..... $3,120,165 $3,092,644
5. SEGMENT AND GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company's operations are in one business segment, the design,
manufacture and distribution of cardiovascular medical devices. Possis Medical,
Inc. evaluates revenue performance based on the worldwide revenues of each major
product line and profitability based on an enterprise-wise basis due to shared
infrastructures to make operating and strategic decisions.
Total revenues by United States and outside the United States for the three
months ended October 31, 2002 and 2001 are as follows:
2002 2001
United States..................... $12,399,421 $9,503,818
Outside the United States......... 282,482 81,450
Total revenues.................... $12,681,903 $9,585,268
6. NET INCOME PER COMMON SHARE
Basic income per common share is computed by dividing net income for the
period by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the treasury stock method
by dividing net income by the weighted average number of common shares plus the
dilutive effect of outstanding stock options, stock warrants and shares issuable
under the employee stock purchase plan.
7. COMMON STOCK
During the three months ended October 31, 2002, stock options for the
purchase of 7,937 shares of the Company's common stock were exercised at prices
between $3.94 and $10.82 per share.
8. NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 2003, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. There was no impact on the Company's
financial statements due to the adoption of SFAS No. 143.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-Q
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements can be identified by the use of terminology
such as "anticipate," "believe," "could," "estimate," "expect," "forecast,"
"intend," "may," "plan," "possible," "project," "should," "will," and similar
words or expressions. Our forward-looking statements relate to the Company's
ability to increase sales of disposable and capital equipment; its ability to
obtain additional FDA approvals; the ability to open up new foreign markets,
such as Japan; customer responses to the Company's marketing strategies; future
revenue levels, gross margins, expense levels; ability to retain and motivate
skilled employees especially sales positions; deferred tax asset valuation
allowance; earnings per share; future equity financing needs and the Company's
ability to develop new products and enhance existing ones. These forward-looking
statements are based on current expectations and assumptions and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Certain factors that
may affect whether these anticipated results occur include clinical and market
acceptance of our products; factors affecting the health care industry such as
restricting sales time at interventional labs; consolidation, cost containment
and trends toward managed care; changes in supplier requirements by group
purchasing organizations; delays, unanticipated costs or other difficulties and
uncertainties associated with lengthy and costly new product development and
regulatory clearance processes; changes in governmental laws and regulations;
changes in reimbursement; the development of new competitive products and
compounds that may make our products obsolete; sudden restrictions in supply of
key materials and deterioration of general market and economic conditions. We
also caution you not to place undue reliance on forward-looking statements,
which speak only as of the date made. Any or all forward-looking statements in
this report and in any other public statements we make may turn out to be
inaccurate or false. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Except as required by
federal securities laws, we undertake no obligation to update any
forward-looking statement. A discussion of these and other factors that could
impact the Company's future results are set forth in the risk factors included
in Exhibit 99 to the Company's Form 10-K for the year ended July 31, 2002 as
filed with the Securities and Exchange Commission.
Critical Accounting Policies
The consolidated financial statements include accounts of the Company and
all wholly-owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. In preparing these financial statements,
management has made its best estimates and judgments of certain amounts included
in the financial statements, giving due consideration to materiality. The
Company's most critical accounting policies are those described below. The
Company believes that the amounts reported will be materially accurate due to
the accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates.
Revenue Recognition
Revenues associated with products that are already maintained at customer
locations are recognized when the Company receives a valid purchase order from
the customer. At this time, ownership and risk of loss is transferred to the
customer. Revenues associated with products that are not maintained at the
customer locations are recognized and title and risk of loss is transferred to
the customer when a valid purchase order is received and the products are
received at the customer's location. Provisions for returns are recorded in the
same period the related revenues are recognized.
Allowance for Returns
Accounts receivable are reduced by an allowance for items that may be
returned in the future. The estimated allowance for returns is based upon
historical experience, information received from our customers and on
assumptions that are believed to be reasonable under the circumstances.
Management, on a quarterly basis, evaluates the adequacy of the allowance for
returns. Management believes the amount of the allowance for returns is
appropriate; however, actual returns incurred could differ from the original
estimate, requiring adjustments to the allowance.
Allowance for Doubtful Accounts
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. Substantially all of the Company's receivables are
due from health care facilities located in the United States. The estimated
allowance for doubtful accounts is based upon the age of the outstanding
receivables and the payment history and creditworthiness of each customer.
Management, on a quarterly basis, evaluates the adequacy of the allowance for
doubtful accounts. Management believes the amount of the allowance for doubtful
accounts is appropriate; however, nonpayment of accounts could differ from the
original estimate, requiring adjustments to the allowance.
Inventories
Inventories are valued at the lower of cost or market. On a quarterly
basis, management assesses the inventory quantities on hand to estimated future
usage and sales and, if necessary, writes down to market the value of inventory
deemed excess or obsolete.
Warranty Reserve
The Company provides a one-year limited warranty on its AngioJet System
drive unit and a limited warranty on AngioJet System disposable products. The
warranty reserve is established at the time products are sold and is based upon
historical frequency of claims relating to the Company's products and the cost
to replace disposable products and to repair drive units under warranty.
Management, on a quarterly basis, evaluates the adequacy of the warranty
reserve. Management believes the amount of the warranty reserve is appropriate;
however, actual claims incurred could differ from the original estimate,
requiring adjustments to the reserve.
Deferred Tax Asset Valuation Allowance
The Company became profitable starting in the third quarter of fiscal 2001.
It has maintained profitability for seven quarters, including the first quarter
of fiscal 2003. Prior to the fourth quarter of fiscal 2002, the Company had
reduced its net deferred tax asset to zero through a valuation allowance due to
the uncertainty of realizing such asset. In the fourth quarter of fiscal 2002,
the Company reassessed the likelihood that the deferred tax asset will be
recovered from future taxable income. Due to the previous two full years'
operating results projected forward, the Company reduced its valuation allowance
on the deferred tax asset by $12,269,000. Management will continue to assess the
likelihood that the balance of the deferred tax asset will be realizable and the
valuation allowance will be adjusted accordingly.
Results of Operations
Three Month Periods Ended October 31, 2002 and 2001
Total product sales for the three months ended October 31, 2002 increased
$3,097,000, or 32%, to $12,682,000 compared to $9,585,000 in the first quarter
of 2001. The Company recorded pre-tax net income for the quarter ended October
31, 2002 of $2,440,000, or $0.13 per diluted share. This compared to a pre-tax
net income of $939,000, or $0.05 per share, for the quarter ended October 31,
2001. The Company recorded after-tax net income for the quarter ended October
31, 2002 of $1,525,000, or $0.08 per diluted share. This compared to an
after-tax net income of $939,000, or $0.05 per share, for the quarter ended
October 31, 2001.
Revenue - AngioJet System
U.S. AngioJet System revenue for the three months ended October 31, 2002
increased $2,896,000, or 30%, to $12,399,000 compared to $9,504,000 in the first
quarter of 2001. The Company markets the AngioJet(R) Rheolytic(TM) Thrombectomy
System (AngioJet System) worldwide. The AngioJet System consists of a drive unit
(capital equipment), which powers a disposable pump and a family of disposable
catheters, each aimed at a specific indication for use. The main factors in the
revenue increase were increased sales resulting from the Company commencing U.S.
marketing of the AngioJet System with additional catheter models. The Company
began marketing the XMI(R) (XMI) catheter for the removal of blood clots in leg
(peripheral) arteries in March 2001 and for coronary use in December 2001, the
XVG(R) in April 2002 for the removal of blood clots in peripheral arteries, and
the Xpeedior(R) Plus 120 in August 2002 to remove blood clots in peripheral
arteries. In addition, the Company's Xpeedior catheters continue to have
increased acceptance by physicians. The Xpeedior catheters are the first
catheters marketed by the Company based upon its proprietary Cross-Stream(R)
Technology. This exclusive technology platform intensifies the action at the tip
of the catheter, which doubles the clot removal rate and triples the treatable
vessel size compared to other available mechanical thrombectomy devices on the
market today. In addition, Cross-Stream Technology has been able to deal more
effectively with "mural thrombus," the older, more organized material that
adheres to vessel walls and can complicate patient results.
In April 2002, the Company released to the U.S. market the new 5 French XVG
catheter for use in removing blood clots from peripheral arteries greater than
or equal to 3mm in diameter. The 140cm XVG catheter becomes the highest power,
long catheter in the Possis product line, which includes the LF-140 and the XMI.
The XVG incorporates the proprietary Cross-Stream technology platform, and is
optimized for vessels 3-8mm in diameter. The combination of longer length,
Cross-Stream technology, higher clot removal rate, and improved pushability and
trackability should make this a versatile catheter for dealing with larger
vessels, more distal vessels, and older, more problematic clot burdens.
In August 2002, the Company released to the U.S. market the new Xpeedior
Plus 120 catheter for use in removing blood clots from peripheral arteries
greater than or equal to 3mm in diameter. The Xpeedior Plus 120 catheter is an
improved version of our Xpeedior 100. Compared to the Xpeedior 100, the new
catheter's longer length will allow the physician to treat more distal vessels.
The Xpeedior Plus 120 also has the added features of dual marker bands, a
braided shaft and a sleek tapered tip for greater ease of use.
As of October 31, 2002, the Company had a total of 898 domestic drive units
in the field, compared to 726 drive units at October 31, 2001, and 863 units as
of July 31, 2002. During the three-month periods ended October 31, 2002 and
2001, the Company sold approximately 9,500 and 7,500 catheters, respectively.
This was a 27% increase in unit catheter sales in the current year from the same
prior year period. The average catheter utilization rate per installed domestic
drive unit was 10.6 in the first quarter, compared to a rate of 10.5 in the same
prior year period, and compared to a rate of 10.9 in the fourth quarter of
fiscal 2002. The Company sold 46 and 44 U.S. domestic drive units during the
three months ended October 31, 2002 and 2001, respectively.
The Company employs a variety of flexible drive unit acquisition programs
including outright purchase and various evaluation programs. The purchasing
cycle for the AngioJet System drive unit varies depending on the customer's
budget cycle. The Company has signed contracts with six purchasing groups in
order to accelerate orders and increase market penetration. These purchasing
groups evaluate and screen new medical technologies on behalf of their members,
and once they recommend a technology, such as the AngioJet System, they
negotiate pre-determined discounts on behalf of their members. In return, the
Company receives access to the recommended vendor list, along with marketing
support provided by the purchasing group. The purchasing groups receive a
marketing fee on their member purchases from the Company. These discounts and
marketing fees have been offset by the increase in sales to the member hospitals
of the purchasing group. There has been no material negative effect on the
Company's margins due to these discounts and marketing fees. The discounts
reduce gross revenue on the income statement, while marketing fees are included
in selling, general and administrative expense on the income statement.
The Company expects U.S. AngioJet System sales to continue to grow
primarily through obtaining additional FDA-approved product uses, introduction
of new catheter models for existing indications, more face time selling to
existing accounts, peer-to-peer selling, and the publication of clinical
performance and cost-effectiveness data.
Foreign sales of the AngioJet System for the three months ended October 31,
2002 and 2001 were $282,000 and $81,000, respectively. The increase in sales is
primarily due to the introduction of the XMI and XVG catheters and the increase
in drive unit sales in the European market. The Company is currently negotiating
with one of its current European distributors to expand their distribution
territory in Europe. In Japan, the coronary AngioJet System clinical study was
completed in April 1998 and a regulatory filing was completed in November 1999
with the Japanese Ministry of Health and Welfare (MHW). The Company believes
that we have assembled all the information required by the MHW in support of our
LF140 coronary catheter submission. Our prospective Japanese distributor must
make the submission of this information to MWH. Our prospective Japanese
distributor had made this final submission dependent on reaching a commercial
agreement with the Company. The Company is currently negotiating with its
prospective Japanese distributor to resolve key issues relating to regulatory
submissions, ownership of regulatory approvals for our coronary products and
distribution following regulatory approval. The Company also is exploring
possible alternative regulatory and distribution in case the key issues
associated with its prospective Japanese distributor can not be resolved.
The Company believes that the treatment of blood clots in the coronary
vessels, peripheral vessels, vessels in the brain and vascular grafts, provide
significant worldwide marketing opportunities for the AngioJet System.
Cost of Medical Products
Cost of medical products increased $389,000 to $3,389,000 in the three
month period ended October 31, 2002 over the same period in the previous year.
This increase is primarily due to the significant growth in the U.S. AngioJet
System product sales. Medical product gross margins improved by $2,708,000 for
the three months ended October 31, 2002 over the same period in the previous
year. This resulted in gross margins of 73% and 69%, respectively, for the three
months ended October 31, 2002 and 2001. The improvement in gross margins was
driven by higher volumes of the XMI, XVG and Xpeedior catheters, and an
improvement in the long and middle catheter product mix in the three months
ended October 31, 2002 as compared to same period in the previous fiscal year.
This was offset by the impact of higher international sales versus the prior
year period. The Company believes that gross margins will be in the low to mid
seventies, as a percent of sales, for the remainder of fiscal 2003.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $1,078,000 for the
three months ended October 31, 2002, compared to the same period in the previous
year. The primary factors in the expense increase for the three months ended
October 31, 2002 were the $375,000 additional expenses associated with the
growth in the sales force versus a year ago, sales meeting expense of $105,000,
increased marketing fees of $121,000 paid to our purchasing groups, additional
$83,000 of patient enrollment expenses associated with marketing clinical trials
and higher medical insurance expense of $170,000. The Company expects that
selling, general and administrative expense will increase in fiscal 2003 due to
the anticipated growth in U.S. AngioJet System revenue.
Research and Development Expense
Research and development expense increased $121,000, or 12%, to $1,152,000,
in the three months ended October 31, 2002, when compared to the same period in
the prior year. This increase was primarily due to the shifting of priorities
between various development projects. The Company believes that research and
development expense for AngioJet System applications will increase for the
remainder of fiscal 2003 as the Company completes the development of its current
products and invests in the development of new AngioJet System thrombectomy
applications and related products including its occlusion guidewire, including
the initiation of new investigational clinical trials.
Interest Income
Interest income decreased $8,000 in the three months ended October 31,
2002, when compared to the same period in the prior year. The decrease is due to
declining market interest rates. The Company expects interest income on a
quarterly basis to remain the same during the remainder of fiscal 2003 as cash
is generated from operations but is offset by lower interest rates.
Provision For Income Taxes
The Company recorded a provision for income taxes of $915,000 or 37.5% of
income before income taxes for the three months ended October 31, 2002. The tax
provision for the three months ended October 31, 2001 was reduced to zero due to
the utilization of a net operating loss carry-forward and because the related
deferred tax asset was fully reserved.
The Company became profitable starting in the third quarter of fiscal 2001.
It has maintained profitability for seven quarters, including the first quarter
of fiscal 2003. Prior to the fourth quarter of fiscal 2002, the Company had
reduced its net deferred tax asset to zero through a valuation allowance due to
the uncertainty of realizing such asset. In the fourth quarter of fiscal 2002,
the Company reassessed the likelihood that the deferred tax asset will be
recovered from future taxable income. Due to the previous two full years'
operating results projected forward, the Company has reduced its valuation
allowance on the deferred tax asset by $12,269,000. Approximately $11,526,000
was recorded as a tax benefit in fiscal 2002. The remaining $743,000 relates to
disqualified stock options that are recorded in the Consolidated Statement of
Changes in Shareholders' Equity. Management will continue to assess the
likelihood that the balance of the deferred tax asset will be realizable and the
valuation allowance will be adjusted accordingly. The Company expects that if
operations continue to improve in fiscal 2003, the remaining valuation allowance
will be reduced to zero by the end of fiscal 2003.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled approximately $21.0 million
at October 31, 2002 versus $18.6 million at July 31, 2002.
The $2,483,000 net increase in cash and cash equivalents in the most recent
three-month period was primarily due to the net cash provided by operating
activities of $2,833,000. Net cash provided by operating activities was
primarily due to the net income of $1,525,000, depreciation of $538,000, a
decrease in deferred tax asset of $895,000, a decrease in other assets of
$412,000 and an increase in accounts payables of $141,000. This net cash
provided by operating activities was partially offset by an increase in trade
receivables of $689,000. Depreciation includes company-owned drive units at
customer locations, as well as property and equipment. The decrease in the
deferred tax asset was due to the utilization of the net operating loss
carryovers to offset current taxes payable. The decrease in other assets was due
to the collection of a grant receivable and the reduction of prepaid insurance.
The Company received a grant from the National Institute of Neurological
Disorders and Stroke in the amount of $248,000. The grant helped fund
development of the AngioJet NV150 catheter for ischemic stroke. The increase in
accounts payable was due to the timing of the payment of accounts payables.
Trade receivables increased due to the increase in revenue for the three month
period ending October 31, 2002 as compared to revenue for the last three months
of fiscal 2002. Cash used in investing activities of $394,000 was for the
purchase of property and equipment. Net cash provided by financing activities
was $44,000, which resulted from the cash received in connection with the
exercise of stock options.
The Company announced that its Board of Directors has authorized a common
share repurchase program for up to $4 million of its common shares to offset
potential dilution from employee stock options. Under the repurchase plan,
Possis may buy back shares of its outstanding stock from time to time in the
open market, commencing immediately and extending until April 30, 2004. The
timing of any purchases and the number of shares to be purchased will depend on
a number of factors, including management's assessment of market conditions and
the Company's cash position. The stock repurchase program does not include any
specific price targets and may be suspended or terminated at any time.
Outlook
The Company expects that overall revenue from the AngioJet System,
primarily in the United States, will be in the range of $54 million to $57
million in fiscal 2003. Gross margin for fiscal 2003 is expected to be between
70% and 75% of total sales. The Company expects selling, general and
administrative expenses to increase in fiscal 2003 due to anticipated growth in
revenue. Research and development expenditures are expected to increase from the
fiscal 2002 level as the Company completes development of projects and invests
in development of new AngioJet System thrombectomy applications and related
products including clinical trials. The Company expects diluted earnings per
share before income taxes for the full year in the range of $0.54 to $0.64.
Diluted earnings per share after income taxes is estimated to be in the range of
$0.34 to $0.40, not including any potential tax benefit related to a further
reduction of the deferred tax asset valuation allowance. The quarterly earnings
progression will depend on the timing of various R&D expenses including clinical
trials. In addition, the Company expects that increasing working capital
investments in trade receivables and inventory will be required to support
growing product sales. The Company's primary source of cash is from its product
sales. Collections of the trade receivables resulting from the product sales are
reviewed monthly to ensure that the customers are paying in a timely manner. The
Company's use of cash is for payment of normal trade accounts payable, capital
equipment purchases, employee compensation and other normal business expenses,
all on terms that are customary in the industry. The Company is current with its
vendors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds. The
market risk on such investments is minimal.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD"). At the end of October 2002, the amount of currency held in foreign
exchange was approximately $1,000 USD. The market risk on the Company's foreign
subsidiary operations is minimal.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The term "disclosure
controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of the
Securities and Exchange Act of 1934 ("Exchange Act"). These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our chief executive officer and our chief financial
officer have evaluated the effectiveness of the Company's disclosure controls
and procedures as of October 31, 2002, (the "Evaluation Date"), and they have
concluded that, as of the Evaluation Date, such controls and procedures were
effective at ensuring that required information will be disclosed on a timely
basis in our reports filed under the Securities Exchange Act of 1934, as
amended.
(b) Changes in internal controls. We maintain a system of internal
accounting controls that are designed to provide reasonable assurance that our
books and records accurately reflect our transactions and that our established
policies and procedures are carefully followed. For the quarter ended October
31, 2002, there were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls, and we have not
identified any significant deficiencies or material weaknesses in our internal
controls.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated below.
Exhibit Description
3.1 Articles of incorporation as amended and restated to date (incorporated
by reference to Exhibit [3.1] of the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1994).
3.2 Bylaws as amended and restated to date (incorporated by reference to
Exhibit [3.2] of the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1999)
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
October 31, 2002.
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.
POSSIS MEDICAL, INC.
DATE: November 26, 2002 BY: /s/
ROBERT G. DUTCHER
Chairman, President and
Chief Executive Officer
DATE: November 26, 2002 BY: /s/
EAPEN CHACKO
Vice President of Finance and
Chief Financial Officer
Certification of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Robert G. Dutcher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Possis Medical,
Inc. (Possis Medical);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Possis
Medical as of, and for, the periods presented in this quarterly report;
4. Possis Medical's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to Possis Medical, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of Possis Medical's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Possis Medical's other certifying officer and I have disclosed, based on
our most recent evaluation, to Possis Medical's auditors and the audit committee
of Possis Medical's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Possis Medical's ability to record,
process, summarize and report financial data and have identified for Possis
Medical's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in Possis Medical's internal controls; and
6. Possis Medical's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 26, 2002 /s/
Robert G. Dutcher
Chairman, President and
Chief Executive Officer
Certification of Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Eapen Chacko, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Possis Medical,
Inc. (Possis Medical);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Possis
Medical as of, and for, the periods presented in this quarterly report;
4. Possis Medical's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to Possis Medical, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of Possis Medical's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Possis Medical's other certifying officer and I have disclosed, based on
our most recent evaluation, to Possis Medical's auditors and the audit committee
of Possis Medical's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Possis Medical's ability to record,
process, summarize and report financial data and have identified for Possis
Medical's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in Possis Medical's internal controls; and
6. Possis Medical's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 26, 2002 /s/
Eapen Chacko
Chief Financial Officer
Vice President of Finance
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Possis Medical, Inc. on Form
10Q for the period ended October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof ("the Report"), I, Robert G. Dutcher,
Chief Executive Officer of Possis Medical, Inc., certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations of Possis
Medical, Inc.
November 26, 2002 /s/
Robert G. Dutcher
Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Possis Medical, Inc. on Form
10Q for the period ended October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof ("the Report"), I, Eapen Chacko, Chief
Financial Officer of Possis Medical, Inc., certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations of Possis
Medical, Inc.
November 26, 2002 /s/
Eapen Chacko
Chief Financial Officer