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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 January 31, 2003
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number 0-944
POSSIS MEDICAL, INC.
(exact name of registrant as specified in its charter)
Minneapolis, Minnesota 41-0783184
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
9055 Evergreen Blvd NW 55433-8003
(Address of principal executive offices) (Zip Code)
783-780-4555
(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 for such short 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _X_ No ___
The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of March 11, 2003 was 17,531,988.
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, January 31, 2003
and July 31, 2002............................................. 3
Consolidated Statements of Operations for the three and six
months ended January 31, 2003 and 2002........................ 4
Consolidated Statements of Cash Flows for the
six months ended January 31, 2003 and 2002 ................... 5
Notes to Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................. 16
ITEM 4. Controls and Procedures....................................... 16
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders........... 18
ITEM 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES.................................................... 20
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
January 31, 2003 July 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $26,329,054 $18,556,663
Trade receivables (less allowance for doubtful
accounts and returns of $519,000 and
$582,000, respectively)...................................... 6,818,087 5,873,358
Inventories....................................................... 3,982,444 4,134,817
Prepaid expenses and other assets................................. 248,390 762,615
Deferred tax asset................................................ 646,000 646,000
Total current assets.................................... 38,023,975 29,973,453
PROPERTY AND EQUIPMENT, net............................................ 2,960,878 3,092,644
DEFERRED TAX ASSET..................................................... 9,584,950 11,623,000
TOTAL ASSETS........................................................... $50,569,803 $44,689,097
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................ $ 1,202,250 $ 1,262,711
Accrued salaries, wages, and commissions.......................... 2,036,053 2,471,557
Other liabilities................................................. 1,375,879 1,200,763
Total current liabilities............................... 4,614,182 4,935,031
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares
of $0.40 par value each; issued and outstanding,
17,515,270 and 17,274,222 shares, respectively............... 7,006,108 6,909,689
Additional paid-in capital........................................ 80,844,389 78,385,073
Unearned compensation............................................. (33,900) (18,900)
Retained deficit.................................................. (41,860,976) (45,521,796)
Total shareholders' equity.............................. 45,955,621 39,754,066
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $50,569,803 $44,689,097
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended Six Months Ended
Jan. 31, 2003 Jan. 31, 2002 Jan. 31, 2003 Jan. 31, 2002
Product sales........................................ $14,321,660 $10,223,788 $27,003,563 $19,809,056
Cost of sales and other expenses:
Cost of medical products........................ 3,853,761 3,210,495 7,242,459 6,210,477
Selling, general and administrative............. 5,571,717 4,458,549 11,339,419 9,148,014
Research and development........................ 1,539,385 990,719 2,691,581 2,022,039
Total cost of sales and other expenses.... 10,964,863 8,659,763 21,273,459 17,380,530
Operating income ................................... 3,356,797 1,564,025 5,730,104 2,428,526
Interest income................................. 61,369 61,324 127,716 135,351
Income before income taxes........................... 3,418,166 1,625,349 5,857,820 2,563,877
Provision for income taxes........................... 1,282,000 -- 2,197,000 --
Net income ......................................... $ 2,136,166 $ 1,625,349 $ 3,660,820 $ 2,563,877
Weighted average number of common
shares outstanding:
Basic....................................... 17,358,386 17,021,773 17,318,338 16,939,977
Diluted..................................... 18,960,549 18,775,412 18,612,394 18,514,403
Net income per common share:
Basic....................................... $0.12 $0.10 $0.21 $0.15
Diluted..................................... $0.11 $0.09 $0.20 $0.14
See notes to consolidated financial statements.
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 2003 AND 2002
(UNAUDITED)
2003 2002
OPERATING ACTIVITIES:
Net income...................................................................... $ 3,660,820 $ 2,563,877
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation.................................................................... 1,066,493 1,035,880
Loss (gain) on asset disposal................................................... 9,388 (5,661)
Stock compensation expense...................................................... 142,050 153,440
Deferred taxes.................................................................. 2,038,050 --
Expense reimbursement from city government...................................... -- (83,866)
Writedown due to impairment of assets........................................... -- 70,000
Increase in trade receivables................................................... (944,729) (863,317)
Increase in inventories......................................................... (204,578) (245,197)
Decrease in other assets........................................................ 514,225 124,728
Decrease in trade accounts payable.............................................. (60,461) (363,707)
(Decrease) increase in accrued and other liabilities............................ (260,388) 257,946
Net cash provided by operating activities................................. 5,960,870 2,644,123
INVESTING ACTIVITIES:
Additions to property and equipment............................................. (615,239) (467,608)
Proceeds from the disposal of assets............................................ 28,075 5,661
Shares repurchased.............................................................. (140,978) --
Net cash used in investing activities (728,142) (461,947)
FINANCING ACTIVITIES:
Proceeds from issuance and exercise of
options and warrants........................................................... 2,539,663 1,873,106
Repayment of long-term debt..................................................... -- (26,522)
Net cash provided by financing activities................................. 2,539,663 1,846,584
INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 7,772,391 4,028,760
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 18,556,663 9,515,751
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $26,329,054 $13,544,511
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Inventory transferred to property and equipment................................. $ 47,951 $ --
Issuance of restricted stock.................................................... 36,000 36,000
Accrued payroll taxes related to restricted stock............................... -- (12,600)
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 and six month periods ended January 31,
2003 are not necessarily indicative of the results that may be expected for the
year ending July 31, 2003.
3. ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121") and amends Accounting Principles Board Opinion No. 30, "Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less costs to sell. SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used, and (b) measurement of long-lived assets
to be disposed of by sale. The Company was required to adopt SFAS 144 on August
1, 2002. The adoption of SFAS 144 did not have a material impact on the
Company's consolidated balance sheet or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64. Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 rescinds Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which
required all gains and losses from extinguishment of debt to be classified as an
extraordinary item. SFAS 145 is effective for fiscal years beginning after May
15, 2002, with early adoption encouraged. The Company adopted SFAS 145 as of
August 1, 2002. The adoption of SFAS 145 did not have a material impact on the
Company's consolidated balance sheet or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force ("EITF") Issue No. 94-3. The Company was
required to apply SFAS 146 effective for any exit or disposal activities that
were initiated after December 31, 2002. The adoption of SFAS 146 did not have a
material impact on the Company's consolidated balance sheet or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15, 2002
(see Note 9).
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), which amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS 148 is not expected to have a
material impact on the Company's consolidated balance sheet or results of
operations. The Company will provide the interim disclosures required by SFAS
148 beginning in the third quarter of 2003.
4. INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market. Inventory balances were as follows:
January 31, July 31,
2003 2002
Finished goods................. $1,721,974 $1,883,933
Work-in-process................. 1,071,017 805,911
Raw materials................... 1,189,453 1,444,973
$3,982,444 $4,134,817
5. 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:
January 31, July 31,
2003 2002 Life
Leasehold improvements........... $1,501,358 $1,454,833 10 years
Equipment........................ 6,831,657 7,536,959 3 to 10 years
Assets in construction........... 135,120 138,271 N/A
8,468,135 9,130,063
Less accumulated depreciation.... 5,507,257 6,037,419
Property and equipment - net..... $2,960,878 $3,092,644
6. 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-wide basis due to shared
infrastructures to make operating and strategic decisions.
Total revenues by United States and outside the United States are as
follows:
Three Months Ended Six Months Ended
Jan. 31 Jan. 31 Jan. 31 Jan. 31
2003 2002 2003 2002
United States....... $14,082,151 $10,069,238 $26,481,572 $19,573,056
Non-United States... 239,509 154,550 521,991 236,000
Total revenues...... $14,321,660 $10,223,788 $27,003,563 $19,809,056
7. 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 income 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.
8. COMMON STOCK
During the six months ended January 31, 2003, stock options and warrants
for the purchase of 225,224 shares of the Company's common stock were exercised
at prices between $2.22 and $13.13 per share.
During the six months ended January 31, 2003, the Company issued 23,814
shares in connection with its employee stock purchase plan.
During the six months ended January 31, 2003, the Company issued 2,010
shares of restricted stock to the outside members of the Board of Directors.
During the six months ending January 31, 2003, the Company repurchased
10,000 shares in the public market at stock prices between $14.02 and $14.29 per
share.
9. ACCRUED WARRANTY COSTS
The Company estimates the amount of warranty claims on sold product that
may be incurred based on current and historical data. The actual warranty
expense could differ from the estimates made by the Company based on product
performance. The following table presents the changes in the Company's product
warranty liability:
Accrued warranty costs at July 31, 2002............. $123,000
Payments made for warranty costs.................... (94,200)
Accrual for product costs........................... 157,700
Accrued warranty costs at January 31, 2003.......... $186,500
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 product 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; ability to
expand the sales force; deferred tax asset valuation allowance; its outlook
including 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 99.1 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 of
America 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 and ownership and risk of loss are transferred to the
customer when the Company receives a valid purchase order from the customer.
Revenues associated with products that are not maintained at the customer
locations are recognized and title and risk of loss are 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 allowance requires us to make estimates at the time
the account receivable is recorded concerning the likelihood for returns in the
future. The estimate 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
At the time accounts receivable are recorded, they 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. In order to
determine the market value of inventory on a quarterly basis, management
assesses the inventory quantities on hand to estimated future usage and sales
and, if necessary, writes down inventory deemed excess or obsolete to estimated
market value.
Warranty Reserve
The Company provides a one-year limited warranty on its AngioJet(R) System
drive unit and a limited warranty on AngioJet System disposable products. The
Company establishes a warranty reserve 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 eight quarters, including the second 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 and Six Month Periods Ended January 31, 2003 and 2002
Total product sales for the three months ended January 31, 2003 increased
$4,098,000, or 40%, to $14,322,000 compared to $10,224,000 for the comparable
period in fiscal 2002. Total product sales for the six months ended January 31,
2003 increased $7,195,000, or 36%, to $27,004,000 compared to $19,809,000 for
the comparable period in fiscal 2002. The Company recorded pre-tax income for
the quarter ended January 31, 2003 of $3,418,000, or $0.18 per diluted share.
This compared to pre-tax income in fiscal 2002 of $1,625,000, or $0.09 per
diluted share. For the six months ended January 31, 2003, the Company recorded
pre-tax income of $5,858,000, or $0.31 per diluted share. This compared to
pre-tax income in fiscal 2002 of $2,564,000, or $0.14 per diluted share. The
Company recorded after tax net income for the quarter ended January 31, 2003 of
$2,136,000, or $0.11 per diluted share, compared to net income of $1,625,000, or
$0.09 per diluted share, in the comparable quarter in 2002. For the six months
ended January 31, 2003, the Company recorded net income of $3,661,000 or $0.20
per diluted share, compared to net income of $2,564,000, or $0.14 per diluted
share, in the same period in 2002.
Revenue - AngioJet System
U.S. AngioJet System revenue for the three months ended January 31, 2003
increased 40% to $14,082,000 from $10,069,000 for the same period in 2002. U.S.
AngioJet System revenue for the six months ended January 31, 2003 increased 35%
to $26,482,000 from $19,573,000 in 2002. 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.
The main factors in the revenue increase were increased sales resulting from
continuing customer acceptance of our improved coronary and peripheral product
lines. The Company began marketing the XVG(R) catheter in April 2002 for the
removal of blood clots in peripheral arteries and the Xpeedior(R) Plus 120
catheter in August 2002 to remove blood clots in peripheral arteries. In
addition, the Company's Xpeedior catheters, including the XMI(R) (XMI) catheter
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 its 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 XMI. The XVG
incorporates the proprietary Cross-Stream technology platform, and it is
optimized for vessels 3-8mm in diameter. The combination of longer length,
Cross-Stream technology, higher clot removal rate, and improved pushability and
tractability 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 braid
shaft and a sleek tapered tip for greater ease of use.
As of January 31, 2003, the Company had a total of 932 domestic drive units
in the field, compared to 771 drive units at January 31, 2002, and 898 units as
of October 31, 2002. During the three month period ended January 31, 2003, the
Company's catheter sales increased approximately 29% to approximately 10,400
catheters versus approximately 8,100 catheters in the same prior year period.
During the six month period ended January 31, 2003, the Company's catheter sales
increased approximately 28% to approximately 19,900 catheters versus
approximately 15,600 catheters in the same prior year period. The average
catheter utilization rate per installed domestic drive unit was 11.0 in the
second quarter of fiscal 2003, compared to a rate of 10.6 in the same prior year
period, and compared to a rate of 10.6 in the first quarter of fiscal 2003. The
Company sold 63 and 117 drive units during the three and six months ended
January 31, 2003, respectively, compared to 42 and 87 drive units in the same
periods in the prior year, 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. The benefit for
the Company is 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 and six month periods
ended January 31, 2003 were $240,000 and $522,000, respectively. This compared
to foreign sales of the AngioJet System of $155,000 and $236,000, respectively,
for the same periods the previous year. 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 has recently expanded the sales
territory of one of its existing European distributors to expand product
penetration in Europe. In Japan, the Company has discontinued negotiations with
its prospective Japanese distributor. The Company has decided to independently
pursue an alternative regulatory strategy that will utilize our U.S. coronary
clinical trial results and extensive body of published clinical studies to
secure regulatory approval and satisfactory reimbursement for the AngioJet
System with the XMI catheter by the second quarter of fiscal 2004.
The Company believes that the treatment of blood clots in 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 $643,000 to $3,854,000 in the three
month period ended January 31, 2003 over the same period in the previous year,
and increased $1,032,000 to $7,242,000 for the six month period ended January
31, 2003 over the same period in the previous year. These increases are
primarily due to the significant growth in the U.S. AngioJet System product
sales. For the three months ended January 31, 2003, gross profit improved by
$3,455,000 to $10,468,000 over the same period in the previous year. This
resulted in a gross profit margin of 73% as a percentage of product sales. The
gross margin rate in the second quarter of fiscal 2003 was negatively impacted
by approximately 1% by manufacturing issues that resulted in higher scrap and
rework rates. Gross margins improved $6,163,000 to $19,761,000, or 73% as a
percentage of product sales, for the six month period ended January 31, 2003
over the same period in the previous year. This compares to gross margins as a
percentage of product sales of 69% for each of the three and six month periods
ended January 31, 2002. The improvement in gross margins was driven by higher
volumes of the XMI, XVG and Xpeedior catheters, an improvement in the long and
middle catheter product mix in the three and six months ended January 31, 2003
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 to
sales, for the remainder of fiscal 2003.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $1,113,000 to
$5,572,000 for the three months ended January 31, 2003 and increased $2,191,000
to $11,339,000 for the six months ended January 31, 2003, compared to the same
periods in the previous year. The primary factors in the expense increase for
the three months ended January 31, 2003 were the $450,000 additional expenses
associated with the growth in the sales force versus a year ago, sales meetings
and conventions of $141,000, increased expenses associated with marketing
studies of $172,000 and higher medical insurance expense of $160,000. The
primary factors for the expense increase for the six months ended January 31,
2003 were the $825,000 additional expenses associated with the growth in the
sales force versus a year ago, sales meetings and conventions of $276,000,
increased expenses associated with marketing studies of $255,000 and higher
medical insurance expense of $330,000. The Company expects selling, general and
administrative expense to increase for the remainder of fiscal 2003 as a result
of the Company's plan to hire an additional twelve sales clinical specialists to
enhance marketing penetration and due to the anticipated growth in U.S. AngioJet
System revenue.
Research and Development Expense
Research and development expense increased $549,000 to $1,539,000, in the
three months ended January 31, 2003, when compared to the same period in the
prior year. Research and development expense increased $670,000 to $2,692,000 in
the six months ended January 31, 2003. These increases were 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
distal protection device.
Interest Income
Interest income was $61,000 in the three months ended January 31, 2003 and
2002. Interest income decreased $8,000 in the six months ended January 31, 2003,
when compared to the same period in the prior year. The decrease is due to the
declining market interest rates which was only partially offset by the increase
in cash and cash equivalents. The Company expects interest income on a quarterly
basis to increase slightly during the remainder of fiscal 2003 as cash is
generated from operations.
Provision For Income Taxes
The Company recorded a provision for income taxes of $1,282,000 and
$2,197,000 or 37.5% of income before income taxes for the three and six months
ended January 31, 2003. The tax provision for the three and six months ended
January 31, 2002 was reduced to zero due to the reduction of the Company's
deferred tax asset valuation allowance.
The Company became profitable starting in the third quarter of fiscal 2001.
It has maintained profitability for eight quarters, including the second quarter
of fiscal 2003. Prior to the fourth quarter of fiscal 2002, the Company 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. $11,526,000 is 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 $26.3 million
at January 31, 2003 versus $18.6 million at July 31, 2002.
The $7,772,000 net increase in cash and cash equivalents in the most recent
six-month period was primarily due to the net cash provided by operating
activities of $5,961,000. Net cash provided by operating activities was
primarily due to the net income of $3,661,000, depreciation of $1,066,000, stock
compensation expense of $142,000, a decrease in deferred tax asset of
$2,038,000, and a decrease in other assets of $514,000. This net cash provided
by operating activities was partially offset by an increase in trade receivables
of $945,000, an increase in inventory of $205,000 and a decrease in accounts
payable and accrued liabilities of $321,000. Depreciation includes company-owned
drive units at customer locations, as well as corporate-owned property and
equipment. The decrease in 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. Trade
receivables increased due to the increase in revenue for the three-month period
ending January 31, 2003 as compared to revenue for the last three months of
fiscal 2002. Inventory was increased to meet the increase in demand of the
AngioJet System. The decrease in accounts payable was due to the timing of the
payment of accounts payables. The decrease in accrued liabilities was due to the
timing of the payments of accrued liabilities and the payment of fiscal 2002
corporate incentives in September 2002. Cash used in investing activities was
$728,000. This includes the purchase of $615,000 of property and equipment and
the repurchase of 10,000 shares for $141,000 of the Company's stock in the
public stock market. Net cash provided by financing activities was $2,540,000,
which resulted from the cash received in connection with the exercise of stock
options and warrants.
Outlook
The Company expects that overall revenue from the AngioJet System,
primarily in the United States, will be in the range of $55 million to $58
million in fiscal 2003. Gross margin for fiscal 2003 is expected to be in the
low to mid seventies, as a percent of sales. The Company expects selling,
general and administrative expenses to increase further in fiscal 2003 as a
result of the Company's plans to hire an additional twelve sales clinical
specialists during the fiscal 2003 third quarter to enhance market penetration.
Research and development expenditures are expected to continue 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 pre-tax, diluted
earnings per share for the full year in the range of $0.62 to $0.68. Income
after tax diluted earnings per share is estimated to be in the range of $0.39 to
$0.43, not including any potential tax benefit related to a further reduction of
the deferred tax asset valuation allowance. The quarterly earnings for the
balance of the fiscal year will depend on the timing of the hiring of the
additional twelve sales clinical specialists and 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, stock repurchases
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 January 2003, 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.
The Company does not have any debt or off balance sheet liabilities.
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 January 31, 2003, (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 January
31, 2003, 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 4. Submission of Matters to a Vote of Security Holders
a. The 2002 annual meeting of shareholders of Possis Medical, Inc. was held
on December 11, 2002.
b. By the following vote, management's nominees were elected as directors
of the Corporation for one year or until their successors are elected and
qualified:
FOR WITHHELD
Robert G. Dutcher ................. 15,478,061 991,524
Mary K. Brainerd................... 15,861,784 607,801
Seymour J. Mansfield............... 15,910,504 559,081
William C. Mattison, Jr............ 15,916,106 553,479
Whitney A. McFarlin................ 15,873,844 595,741
Donald C. Wegmiller................ 15,963,432 506,153
Rodney A. Young.................... 14,455,659 2,013,926
The names of each Director whose term of office as a Director continued
after the meeting are as follows: Robert G. Dutcher, Mary K, Brainerd, Seymour
J. Mansfield, William C. Mattison, Jr., Whitney A. McFarlin, Donald C.
Wegmiller, and Rodney A. Young.
c. By a vote of 15,899,572 in the affirmative, 464,122 in the negative and
105,891 abstaining, the appointment of Deloitte & Touche LLP as the
Corporation's certified public accountants was ratified.
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 referenace 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)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on Form 8-K during the quarter ended
January 31, 2003.
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: March 17, 2003 BY: /s/
ROBERT G. DUTCHER
Chairman, President and Chief Executive Officer
DATE: March 17, 2003 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: March 17, 2003 /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 ading with respect to the period covered by this quarterly
report;
3. Based on meriods 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: March 17, 2003 /s/
Eapen Chacko
Chief Financial Officer
Vice President of Finance
EXHIBIT 99.1
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 January 31, 2003 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.
March 17, 2003 /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 January 31, 2003 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.
March 17, 2003 /s/
Eapen Chacko
Chief Financial Officer