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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 April 30, 2005
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)
Minnesota 41-0783184
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification No.)
9055 Evergreen Blvd NW Minnesota MN 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 May 28, 2005 was 17,280,663.
POSSIS MEDICAL, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, April 30, 2005
and July 31, 2004................................................ 3
Consolidated Statements of Income and Comprehensive Income for
the three and nine months ended April 30, 2005 and 2004.......... 4
Consolidated Statements of Cash Flows for the
nine months ended April 30, 2005 and 2004 ....................... 5
Notes to Consolidated Financial Statements....................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ...... 18
ITEM 4. Controls and Procedures.......................................... 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 19
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 19
ITEM 5. Other Information................................................ 20
ITEM 6. Exhibits......................................................... 21
SIGNATURES....................................................... 22
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 30, 2005 July 31, 2004
-------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 3,203,322 $ 8,411,784
Marketable securities.......................................... 39,017,483 39,759,403
Trade receivables (less allowance for doubtful
accounts and returns of $632,000 and
$536,000, respectively)................................... 7,655,043 10,232,180
Inventories.................................................... 6,123,597 5,389,653
Prepaid expenses and other assets.............................. 671,407 958,616
Deferred tax asset............................................. 890,000 890,000
------------- -------------
Total current assets................................. 57,560,852 65,641,636
PROPERTY AND EQUIPMENT, net......................................... 5,063,387 5,073,775
DEFERRED TAX ASSET.................................................. 12,371,596 15,103,949
OTHER ASSET........................................................ 421,421 201,341
-------------- --------------
TOTAL ASSETS........................................................ $ 75,417,256 $ 86,020,701
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable......................................... $ 1,438,776 $ 1,791,694
Accrued salaries, wages, and commissions....................... 2,313,249 4,228,804
Other liabilities.............................................. 2,410,531 2,222,465
--------------- --------------
Total current liabilities............................. 6,162,556 8,242,963
OTHER LIABILITIES................................................... 421,421 160,536
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares
of $0.40 par value each; issued and outstanding,
17,280,663 and 18,254,942 shares, respectively........ 6,912,265 7,301,977
Additional paid-in capital.......................................... 75,167,465 88,434,540
Unearned compensation............................................... (24,000) (15,000)
Accumulated other comprehensive loss................................ (132,000) (136,000)
Retained deficit.................................................... (13,090,451) (17,968,315)
-------------- --------------
Total shareholders' equity................................ 68,833,279 77,617,202
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 75,417,256 $ 86,020,701
============== ==============
See notes to consolidated financial statements.
3
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
Three Months Ended Nine Months Ended
April 30, 2005 April 30, 2004 April 30, 2005 April 30, 2004
-------------- ---------------- ---------------- ----------------
Product sales $15,101,977 $19,329,399 $48,772,849 $52,380,364
Cost of sales and other expenses:
Cost of medical products 4,155,261 4,781,377 12,743,018 12,567,753
Selling, general and administrative 6,858,222 7,379,482 21,126,743 20,753,549
Research and development 2,589,657 2,408,544 7,631,492 6,514,655
-------------- ---------------- ---------------- ----------------
Total cost of sales and other expenses 13,603,140 14,569,403 41,501,253 39,835,957
-------------- ---------------- ---------------- ----------------
Operating income
1,498,837 4,759,996 7,271,596 12,544,407
Interest income 320,095 197,748 913,228 518,670
Loss on sale of securities (121,105) -- (101,074) (34,033)
-------------- --------------- ---------------- ----------------
Income before income taxes 1,697,827 4,957,744 8,083,750 13,029,044
Provision for income taxes 682,000 1,862,051 3,205,886 4,887,951
-------------- ---------------- ---------------- ----------------
Net Income 1,015,827 3,095,693 4,877,864 8,141,093
Other comprehensive income (loss), net of
tax:
Unrealized gain (loss) on securities 9,000 (155,000) 4,000 (4,000)
-------------- ---------------- ---------------- ----------------
Comprehensive income $1,024,827 $2,940,693 $4,881,864 $8,137,093
============== ================ ================ ================
Weighted average number of common shares
outstanding:
Basic 17,405,676 18,002,188 17,722,145 17,850,256
Diluted 17,871,140 19,791,622 18,470,555 19,397,477
Net income per common share:
Basic $0.06 $0.17 $0.28 $0.46
============== ================ ================ ================
Diluted $0.06 $0.16 $0.26 $0.42
============== ================ ================ ================
See notes to consolidated financial statements.
4
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
--------------- -----------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,877,864 $8,141,093
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,729,323 1,304,988
Loss (gain) on asset disposal . . . . . . . . . . . . . . . . . . . . . . 24,454 (52,318)
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . 150,000 132,646
Loss on sale of marketable securities . . . . . . . . . . . . . . . . . . 118,585 34,033
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,732,776 4,631,030
Decrease (increase) in trade receivables . . . . . . . . . . . . . . . . 2,577,137 (1,941,302)
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . (1,182,302) (1,452,352)
Decrease (increase) in prepaid expenses and other assets . . . .. . . 67,129 (80,645)
(Decrease) increase in trade accounts payable . . . . . . . . . . . . . . (352,918) 1,047,049
(Decrease) in accrued and other liabilities . . . . . . . . . . . . . . . (1,466,604) (187,502)
--------------- -----------------
Net cash provided by operating activities . . . . . . . . . . . . . 9,275,444 11,576,720
INVESTING ACTIVITIES:
Additions to property and equipment . . . . . . . . . . . . . . . . . . . (1,303,891) (2,087,502)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . 8,860 55,110
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . 49,395,440 17,004,534
Purchase of marketable securities . . . . . . . . . . . . . . . . . . . . (48,768,528) (24,503,052)
--------------- -----------------
Net cash used in investing activities . . . . . . . . . . . . . . . (668,119) (9,530,910)
FINANCING ACTIVITIES:
Proceeds from issuance and exercise of options and warrants . . . . 925,241 5,538,948
Repurchase of common stock . . . . . . . . . . . . . . . . . . . (14,741,028) (5,020,016)
--------------- -----------------
Net cash (used in) provided by financing activities . . . . . . . . . (13,815,787) 518,932
--------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . (5,208,462) 2,564,742
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . 8,411,784 4,782,942
--------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . $3,203,322 $7,347,684
=============== =================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 593,600 $ 153,900
Issuance of restricted stock . . . . . . . . . . . . . . . . . . . . . . . 36,000 36,000
Inventory transferred to property and equipment . . . . . . . . . . . . . 39,358 -
See notes to consolidated financial statements.
5
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 fiscal 2004 Annual Report on Form 10-K.
2. STOCK OPTIONS
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, we apply the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, to our stock options and other
stock-based compensation plans.
In accordance with APB Opinion No. 25, compensation cost for stock options
is recognized in income based on the excess, if any, of the quoted market
price of the stock at the grant date of the award or other measurement date
over the amount an employee must pay to acquire the stock. The exercise
price for stock options granted to employees equals the fair market value
of our common stock at the date of grant, thereby resulting in no
recognition of compensation expense.
The following table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation.
Three Months Ended Nine Months Ended
----------------------------- --------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
--------------- ----------- ----------- ------------
Net Income - as reported...................... $1,015,827 $3,095,693 $4,877,864 $8,141,0933
Less estimated stock-based
Employee compensation determined under
fair value based method, net of tax... (671,000) (1,495,000) (1,959,000) (2,796,0000)
--------------- ----------- ----------- ------------
Net income - pro forma $344,827 $1,600,693 $2,918,864 $5,345,0933
=============== =========== =========== ============
Earnings per share:
Basic - as reported...................... $0.06 $0.17 $0.28 $0.466
Less estimated stock-based
Employee compensation determined under
fair value based method, net of tax... (0.04) (0.08) (0.12) (0.16)
--------------- ----------- ----------- ------------
Basic - pro forma........................ $0.02 $0.09 $0.16 $0.30
=============== =========== =========== ============
Diluted - as reported.................... $0.06 $0.16 $0.26 $0.42
Less estimated stock-based
Employee compensation determined under
fair value based method, net of tax... (0.04) (0.08) (0.10) (0.14)
--------------- ----------- ----------- ------------
Diluted - pro forma...................... $0.02 $0.08 $0.16 $0.28
=============== =========== =========== ============
Weighted average common shares outstanding
Basic.................................. 17,405,676 18,002,188 17,722,145 17,850,256
Diluted................................ 17,871,140 19,791,622 18,470,555 19,397,477
6
We estimated the fair values using the Black-Scholes option-pricing model,
modified for dividends and using the following assumptions:
2005 2004
------------- -------------
Risk-free rate................................ 4.1-4.5% 3.9-4.6%
Expected dividend yield....................... 0% 0%
Expected stock price volatility............... 54-68% 58-64%
Expected option term.......................... 10 Years 10 years
Fair value per option......................... $6.04-19.88 $11.38-20.22
For purposes of determining the pro forma amounts, the fair value of options is
amortized to expense over the option-vesting period in determining the pro forma
impact. The option-vesting period is six months to four years.
Beginning with our fiscal year 2006, in accordance with SFAS 123(R), the Company
will be required to recognize the compensation costs relating to share-based
transactions in the consolidated statement of operations. See note 4.
3. INTERIM FINANCIAL STATEMENTS
Operating results for the three and nine month periods ended April 30, 2005
are not necessarily indicative of the results that may be expected for the
year ending July 31, 2005.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2003 and March 2004, the Emerging Issues Task Force (EITF)
reached a consensus on EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments." The consensus reached requires companies to apply new
guidance for evaluating whether an investment is other-than-temporarily
impaired and also requires quantitative and qualitative disclosure of debt
and equity securities, classified as available-for-sale or
held-to-maturity, that are determined to be only temporarily impaired at
the balance sheet date. The Company incorporated the required disclosures
for investments accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as required in the fourth
7
quarter of fiscal year 2004. In September 2004, the consensus was
indefinitely delayed as it relates to the measurement and recognition of
impairment losses for all securities in the scope of paragraphs 10-20 of
EITF 03-1. The disclosures prescribed by EITF No. 03-1 and guidance related
to impairment measurement prior to the issuance of this consensus continue
to remain in effect. Adoption is not expected to have a material impact on
the Company's consolidated earnings, financial position or cash flows.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" (FAS No. 123(R)), which amends FASB Statement Nos.
123 and 95. FAS No. 123(R) requires all companies to measure compensation
expense for all share-based payments (including employee stock options) at
fair value and recognize the expense over the related service period.
Additionally, excess tax benefits, as defined in FAS No. 123(R), will be
recognized as an addition to paid-in capital and will be reclassified from
operating cash flows to financing cash flows in the Consolidated Statements
of Cash Flows. In April 2005, the effective date of FAS No. 123(R) was
delayed until the first quarter of fiscal 2006. We are currently evaluating
the effect that FAS No. 123(R) will have on our financial position, results
of operations and operating cash flows. See the "Stock-Based Compensation"
discussion in Note 2, which includes the pro forma impact of recognizing
stock-based compensation under SFAS No. 123, on the Company's net income
and income per common share for the three months and nine months ended
April 30, 2005 and 2004.
In April 2005, the FASB issued FIN No. 47 to clarify the scope and timing
of liability recognition for conditional asset retirement obligations
pursuant to SFAS No. 143 - "Accounting for Asset Retirement Obligations".
The interpretation requires that a liability be recorded for the fair value
of an asset retirement obligation, if the fair value is estimable, even
when the obligation is dependent on a future event. FIN No. 47 further
clarified that uncertainty surrounding the timing and method of settlement
of the obligation should be factored into the measurement of the
conditional asset retirement obligation rather than affect whether a
liability should be recognized. Implementation is required to be effective
no later than the end of fiscal years ending after Dec. 15, 2005.
Additionally, FIN No. 47 will permit but not require restatement of interim
financial information during any period of adoption. Both recognition of a
cumulative change in accounting and disclosure of the liability on a pro
forma basis are required for transition purposes. The Company is evaluating
the impact of FIN No. 47, however, it is not expected to have a material
impact on results of operations or financial position.
5. MARKETABLE SECURITIES
During the quarter ended April 30, 2005, the Company invested its excess
cash and cash equivalents in a professionally managed portfolio of
marketable securities. All securities in this portfolio as of April 30,
2005 were classified as available-for-sale and consisted primarily of U.S.
government securities and corporate bonds. These investments are reported
at fair value.
For the three and nine months ended April 30, 2005, the unrealized gain,
net of taxes, on these investments of approximately $9,000 and $4,000,
respectively, is included within other comprehensive income (loss). For the
three and nine months ended April 30, 2004, the unrealized loss, net of
taxes, on these investments, of approximately $155,000 and $4,000,
respectively, is included within other comprehensive income (loss).
8
The net unrealized loss included in shareholders' equity as of April 30,
2005 was $132,000, net of tax and the net unrealized loss included in
shareholders' equity as of April 30, 2004 was $104,000, net of tax.
6. INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market. Inventory balances were as follows:
April 30, July 31,
2005 2004
-------------- ---------------
Finished goods.......... $ 2,510,575 $ 2,018,152
Work-in-process......... 1,174,439 1,260,449
Raw materials........... 2,438,583 2,111,052
-------------- ---------------
$ 6,123,597 $ 5,389,653
============== ===============
7. 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:
April 30, July 31,
2005 2004 Life
----------- ----------- -----------
Leasehold improvements......... $ 2,223,769 $ 2,189,955 10 years
Equipment...................... 10,275,336 9,525,117 3 to 10 years
Assets in construction......... 515,934 526,793 N/A
----------- -----------
13,015,039 12,241,865
Less accumulated depreciation.. 7,951,652 7,168,090
----------- ----------
Property and equipment - net... $ 5,063,387 $ 5,073,775
============ ============
8. 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. The Company
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 from sales in the United States and outside the United
States are as follows:
Three Months Ended Nine Months Ended
April 30, 2005 April 30, 2004 April 30, 2005 April 30, 2004
------------------ ------------------- --------------------- ------------------
United States. . . . . $ 14,689,690 $ 18,898,765 $ 47,505,552 $ 51,217,024
Non-United States. . . 412,287 430,634 1,267,297 1,163,340
------------------ ------------------- --------------------- ------------------
Total Revenues . . . . $ 15,101,977 $ 19,329,399 $ 48,772,849 $ 52,380,364
================== =================== ===================== ==================
9
9. 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.
10. COMMON STOCK
During the nine months ended April 30, 2005, stock options for the purchase
of 97,787 shares of the Company's common stock were exercised at prices
between $3.88 and $16.66 per share resulting in proceeds of $494,000.
During the nine months ended April 30, 2004, stock options and warrants for
the purchase of 526,535 shares of the Company's common stock were exercised
at prices between $2.22 and $20.60 per share resulting in proceeds of
$5,165,000.
During the nine months ended April 30, 2005 and 2004, the Company issued
37,580 and 24,612 shares in connection with its employee stock purchase
plan.
During the nine months ended April 30, 2005 and 2004, the Company issued
2,754 and 1,884 shares of restricted stock to the outside members of the
Board of Directors. Board of Directors compensation expense included in
Selling, General & Administrative Expense was $27,000 and $27,000 for the
nine months ended April 30, 2005 and 2004, respectively.
During the nine months ended April 30, 2005, the Company repurchased
1,112,400 shares in the public market at stock prices between $9.35 and
$18.34 per share for $14,741,000. During the nine months ended April 30,
2004, the Company repurchased 243,400 shares in the public market at stock
prices between $15.65 and $27.78 per share for $5,020,000.
11. 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, 2004....... $ 293,500
Payments made for warranty costs.............. (337,700)
Provision for warranty costs.................. 188,500
-----------
Accrued warranty costs at April 30, 2005...... $ 146,500
===========
10
12. SUBSEQUENT EVENT
The Company is aware of a shareholder lawsuit filed June 3, 2005 in the
federal courts of the State of Minnesota alleging that Possis Medical, Inc.
and named individual officers violated federal securities laws during a
period beginning in 2002. The Complaint seeks class action status and
unspecified damages. At this time the Company has not been served with a
copy of the complaint. Possis Medical believes that the allegations of the
lawsuit are without merit and intends to contest the lawsuit vigorously.
We do not believe that the amount of any potential liability associated
with these matters can be estimated at this time, but an unfavorable
resolution of these matters is possible and could have a material adverse
effect on our results of operations, financial condition or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our Business
Possis Medical Inc. develops, manufactures, and markets pioneering medical
devices for mechanical thrombectomy in native coronary arteries and coronary
bypass grafts, leg arteries and in kidney dialysis access grafts. Our primary
product, the AngioJet(R) RheolyticTM Thrombectomy System (AngioJet System) uses
miniaturized waterjet technology, which enables interventional cardiologists,
interventional radiologists, vascular surgeons, and other specialists to
rapidly, safely and effectively remove blood clots throughout the body.
The proprietary AngioJet System consists of a drive unit (capital equipment), a
disposable pump set that delivers pressurized saline to a catheter, and a
variety of disposable catheters that are specifically designed for particular
clinical indications. The AngioJet coronary catheter is a Class III medical
device and is marketed in the U.S. under an approved PMA. The AngioJet av-access
and peripheral arterial catheters are Class II devices are marketed in the U.S.
under cleared 510(k) submissions.
The Company expects U.S. AngioJet System sales to grow primarily through
obtaining additional FDA approved product uses, introduction of new catheter
models for existing indications, introduction of AngioJet System-related
products, more face-time selling to existing accounts, peer-to-peer selling, and
the publication of clinical performance and cost-effectiveness data.
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.
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.
11
Revenue Recognition
Revenues associated with AngioJet drive units that are maintained at customer
locations are recognized, and title and risk of loss on those drive units is
transferred to the customer, when the Company receives a valid purchase order
from the customer. Revenue is not recognized for AngioJet drive units that are
maintained at customer locations as evaluation drive units. The Company does not
lease AngioJet drive units. Revenues associated with products that are shipped
to customers from the Company's facilities 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. Revenue
recognition for drive unit extended warranties is amortized on a straight-line
basis over the life of the warranty period.
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 product return experience,
customer complaint rates, information received from our customers and
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
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, sets up a obsolescence reserve for inventory deemed excess or
obsolete to estimated market value. Management believes the amount of the
reserve for inventory obsolescence is appropriate; however, actual obsolete
inventory could differ from the original estimate, requiring adjustments to the
reserve.
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 Company
establishes a warranty reserve at the time products are sold, which 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,
given our historical experience; however, actual claims incurred could differ
from the original estimate, requiring adjustments to the reserve.
12
Results of Operations
Three and Nine Month Periods Ended April 30, 2005 and 2004
Summary
Total product sales for the three months ended April 30, 2005 decreased
$4,227,000 or 22%, to $15,102,000 compared to $19,329,000 for the comparable
period in fiscal 2004. Total product sales for the nine months ended April 30,
2005 decreased $3,607,000, or 7%, to $48,773,000 compared to $52,380,000 for the
comparable period in fiscal 2004.
The Company recorded net income for the quarter ended April 30, 2005 of
$1,016,000, or $0.06 per diluted share, compared to net income of $3,096,000, or
$0.16 per diluted share, in the comparable quarter in 2004. For the nine months
ended April 30, 2005, the Company recorded net income of $4,878,000 or $0.26 per
diluted share, compared to net income of $8,141,000, or $0.42 per diluted share,
in the same period in 2004.
Revenue
U.S. product sales for the three months ended April 30, 2005 decreased 22% to
$14,690,000 from $18,888,000 for the same period in 2004. U.S. product sales for
the nine months ended April 30, 2005 decreased 7% to $47,506,000 from
$51,199,000 for the same period in 2004. The main factor in the revenue decrease
during both periods is the negative impact from the results of the AiMI
post-marketing study.
As of April 30, 2005, the Company had a total of 1,461 domestic drive units in
the field, compared to 1,255 drive units at April 30, 2004, and 1,422 units as
of January 31, 2005. During the three month period ended April 30, 2005, the
Company's catheter sales decreased approximately 14% to approximately 11,600
catheters versus approximately 13,500 catheters in the same prior year period.
During the nine month period ended April 30, 2005, the Company's catheter sales
decreased approximately 3% to approximately 36,600 catheters versus
approximately 37,800 catheters in the same prior year period. The average
catheter utilization rate per installed domestic drive unit was 7.8 in the third
quarter of fiscal 2005, compared to a rate of 10.8 in the same prior year
period, and compared to a rate of 8.3 in the second quarter of fiscal 2005. The
Company sold 50 and 165 drive units during the three and nine months ended April
30, 2005, respectively, compared to 88 and 194 drive units in the same periods
in the prior year, respectively.
Foreign product sales for the three months ended April 30, 2005 decreased 4% to
$412,000 from $431,000 for the same period in 2004. Foreign product sales for
the nine months ended April 30, 2005 increased 9% to $1,267,000 from $1,163,000
for the same period in 2004. The Company has recently hired an outside
consultant to expand product penetration in Germany. Limited foreign sales are
primarily due to cost constraints in overseas markets.
13
Cost of Medical Products
Cost of medical products decreased $626,000 to $4,155,000 in the three-month
period ended April 30, 2005 over the same period in the previous year. The
decrease was primarily due to the reduction in AngioJet System product unit
sales offset by higher production overhead on lower units produced combined with
an increase in overhead costs. Cost of medical products increased $175,000 to
$12,743,000 for the nine-month period ended April 30, 2005 over the same period
in the previous year. This increase is primarily due to the increase in overhead
offset by the reduction in AngioJet System product unit sales.
Gross profit decreased by $3,601,000 to $10,947,000, or 72% of product sales,
for the three months ended April 30, 2005, from $14,548,000 or 75% of product
sales in the same period in the previous year. Gross profit decreased by
$3,783,000 to $36,030,000, or 74% of product sales, for the nine months ended
April 30, 2005, from $39,813,000 or 76% of product sales for the nine months
ended April 30, 2004. The decrease in the gross profit margin for the three and
nine months ending April 30, 2005 was primarily due to lower revenue and to a
shift to products carrying a lower gross profit margin compared to the same
periods in the previous year. The Company believes that gross margins as a
percent of sales will be in the lower to mid seventies for the remainder of
fiscal 2005.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $521,000 to $6,858,000 or
45% of product sales, for the three months ended April 30, 2005 from $7,379,000
or 38% of product sales for the three months ended April 30, 2004. Selling,
general and administrative expense increased $373,000 to $21,127,000 or 43% of
product sales for the nine months ended April 30, 2005, compared to $20,475,000
or 40% of product sales for the nine months ended April 30, 2004.
The primary factors in the changes in the expense for the three months ended
April 30, 2005 were the reduction in incentives of $267,000, reduced commissions
of $176,000, decrease in sales materials of $237,000, decrease in contract labor
of $143,000 decrease in sales demos of $121,000, a decrease in patent attorney
fees of $103,000 a decrease in supplies of $100,000. These decreases were offset
by $218,000 of additional expenses associated with the growth in the sales
force, increased medical insurance expense of $315,000 and increased
Sarbanes-Oxley related professional fees of $217,000.
The primary factors for the expense increase for the nine months ended April 30,
2005 were the $841,000 additional expenses associated with the growth in the
sales force, increased employee medical benefit costs of $739,000, increase in
professional fees of $319,000, increase in executive benefit plan expense of
$180,000, increase in depreciation of $290,000, and an increase in building rent
and operating costs of $176,000. This increase was partially offset by a
reduction in expenses associated with marketing clinical trials of $562,000, a
reduction of incentives of $482,000, a decrease in sales materials and sales
demos of $339,000, a decrease in outside services of $301,000 and a decrease in
contract labor of $218,000.
Research and Development Expense
Research and development expense increased $181,000 to $2,590,000, or 17% of
product sales in the three months ended April 30, 2005, from $2,409,000 or 13%
of product sales in the three months ended April 30, 2004. Research and
development expense increased $1,117,000 to $7,631,000, or 16% of product sales
in the nine months ended April 30, 2005, from $6,515,000 or 12% of product sales
in the nine months ended April 30, 2004. The increases were largely due to the
timing of expenses incurred for various research and development projects
including the new drive unit, an associated project to combine the pump and
catheter, 6 French peripheral catheter and projects relating to the improvement
of the rapid exchange catheter and the distal occlusion guidewires. We expect
research and development expense to remain relatively stable for the balance of
the fiscal year.
14
Interest Income
Interest income increased $122,000 in the three months ended April 30, 2005 to
$320,000, when compared to the same period in the prior year. Interest income
increased $395,000 in the nine months ended April 30, 2005, when compared to the
same period in the prior year. The increase was due to the recent interest rate
increases and the increase in the amount of cash available for investments.
Excess cash is invested in an enhanced cash management portfolio of marketable
securities. The Company expects interest income to increase in fiscal 2005 as
compared to fiscal 2004 as cash is generated from operations.
Loss On Sale of Securities
Loss on sales of securities was $121,000 in the three months ended April 30,
2005. There was no loss on sale of securities for the three months ended April
30, 2004. Loss on sale of securities for the nine months ended April 30, 2005
and 2004 was $101,000 and $34,000, respectively. The losses were due to the
recent interest rate increases that reduced the fair market value of the
investments in marketable securities. Future gain (loss) on sale of securities
is dependent on interest rate fluctuations.
Provision For Income Taxes
The Company recorded a provision for income taxes of $682,000 and $1,862,000 for
the three months ended April 30, 2005 and 2004, respectively. The Company
recorded a provision for income taxes of $3,206,000 and $4,888,000 for the nine
months ended April 30, 2005 and 2004, respectively.
During the second quarter of fiscal 2005 the Company determined it had nexus in
states in which it had not previously filed corporate state income tax returns.
The Company will file the appropriate corporate state income tax returns in
these states, including returns for prior years to obtain the appropriate net
operating loss carry-forwards. The Company expensed an additional $165,000 of
corporate state income tax expense relating to the filing of these state
corporate income tax returns during the nine months ended April 30, 2005. For
the remainder of fiscal 2005, the corporate income tax rate is expected to be
approximately 40.2%.
The Company became profitable in the third quarter of fiscal 2001 and has
maintained profitability since that time. In fiscal 2004 and 2003, the Company
increased its deferred tax asset by an additional $2,578,000 and $2,777,000,
respectively. These increases were related to tax benefits from disqualified
stock options that are recorded directly in the Consolidated Statement of
Changes in Shareholders' Equity. Management believes the remaining valuation
allowance is necessary as it is more likely than not that $690,000 of the
deferred tax asset will not be realizable due to the expiration of research and
development tax credits.
15
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities totaled
approximately $42,221,000 at April 30, 2005 versus $48,171,000 at July 31, 2004.
The $5,950,000 net decrease in cash, cash equivalents and marketable securities
in the most recent nine-month period was primarily due to the use of $14,741,000
of cash to repurchase common stock offset by net cash provided by operating
activities of $9,275,000. Net cash provided by operating activities was
primarily due to net income of $4,878,000, depreciation of $1,729,000, non-cash
stock compensation expense of $150,000, a decrease in the deferred tax asset of
$2,577,000 and a decrease in accounts receivable of $2,733,000. This net cash
provided by operating activities was partially offset by an increase in
inventory of $1,182,000, a decrease in accounts payable of $353,000 and a
decrease in accrued and other liabilities of $1,467,000. 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 carryforwards to offset current taxes payable. The
decrease in accounts receivable was due to the reduced revenue in the second and
third quarter of fiscal 2005 compared to the first quarter of fiscal 2005.
Inventory increased to meet the anticipated increase in demand of the AngioJet
System. This demand was less than expected due to the AiMI post-marketing study
results. The decrease in accounts payable and accrued liabilities were due to
the timing of payments. This decrease included the payment of fiscal 2004
corporate incentives in September 2004.
Cash provided in investing activities was $668,000 including net proceeds from
sales of marketable securities of $627,000 and the purchase of $1,304,000 of
property and equipment. Net cash used in financing activities was $13,816,000,
which resulted from the repurchase of 1,112,400 shares of the Company's stock in
open market transactions for $14,741,000, offset partially by the cash received
in connection with the exercise of stock options of $925,000.
The Company expects its cash on hand and funds from operations to be sufficient
to cover both short-term and long-term operating requirements of its current
AngioJet business and the repurchase of its common stock as authorized by the
Board of Directors.
Off-Balance Sheet Obligations
The Company does not have any material off-balance-sheet arrangements.
Outlook
The Company expects overall revenue from the AngioJet System, primarily in the
United States, will be approximately $65 million in fiscal 2005. Gross margin as
a percent of sales for fiscal 2005 is expected to be in the low to mid
seventies. The Company expects selling, general and administrative expenses to
be slightly higher in the fourth quarter of fiscal 2005 as compared to the third
quarter of fiscal 2005. Research and development expenditures are expected to be
consistent with the levels during the first three quarters of fiscal 2005. The
Company expects net income per diluted share for the full year in the range of
$0.32 to $0.35.
For the 2006 fiscal year, the Company has preliminary indicated that it
anticipates sales in the range of $69-$74 million, with gross margins in the
mid-70s, as a percent of sales. Selling, General and Administrative and Research
16
and Development expense levels are dependent upon clinical trials that are
planned for fiscal 2006. Preliminary estimates for diluted EPS in fiscal 2006
are in the range of $0.40-$0.50 per share. The EPS guidance for fiscal 2006
excludes the impact of implementing FAS No. 123(R), which requires all companies
to measure compensation expense for all share-based payments (including employee
stock options) at fair value and recognize the expense over the related service
period.
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, and
particularly the statements made in the section captioned "Outlook," are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements relate to among other
things, financial projections such as anticipated gross margins, overall
revenue, expected expense levels, anticipated revenue increases and investment
levels.
Forward-looking statements in this 10-Q are based on the Company's 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. Factors that could affect the realization of
forward-looking statements include:
o changes in clinical and market acceptance of our products;
o changes in the health care industry generally, such as restrictions
imposed on sales time at interventional labs; consolidation of
industry participants, cost containment and trends toward managed
care;
o changes in supplier requirements by group purchasing organizations;
o unanticipated costs or other difficulties and uncertainties associated
with lengthy and costly new product development and regulatory
clearance processes;
o changes in governmental laws and regulations;
o changes in reimbursement;
o the development of new competitive products such as inexpensive
aspiration devices, combined aspiration/occlusion products and
compounds that may make our products obsolete;
o sudden restrictions in supply of key materials;
o the effectiveness of our sales and marketing efforts in
re-establishing coronary product usage,
o our ability to effectively manage new product development timelines,
o our ability to effectively manage marketing and investigational device
exempt clinical trials
o our ability to generate suitable clinical registry data to support
growing use of the AngioJet in coronary applications,
o our the ability to obtain additional regulatory approvals on a timely
basis;
o our ability to obtain regulatory clearance in new foreign markets and
o our ability to retain and motivate skilled employees, especially for
sales positions.
Undue reliance should not be placed 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 our 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, 2004 as filed with the Securities and Exchange
Commission.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in a professionally managed, institutional
fixed income portfolio of short duration. The market risk on a diversified
portfolio of relatively short duration is minimal, while enhancing returns above
money market levels.
The product sales for the Company's foreign subsidiary are in U.S. Dollars
("USD") except for product sales in Germany, which are in Euro's. The German
product sales were minimal during the third quarter. The Company has a foreign
bank account in which the German product sales receipts are deposited and
immediately transferred to the operating bank account in the United States. The
balance in the German bank account was zero as of April 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
- ------------------------------------------------
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in applicable rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, in a manner that allows timely decisions regarding required
disclosure.
Changes in internal control over financial reporting
- ----------------------------------------------------
During the fiscal quarter ended April 30, 2005, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is likely to materially
affect, our internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM. 1 LEGAL PROCEEDINGS
The Company is aware of a shareholder lawsuit filed June 3, 2005 in the federal
courts of the State of Minnesota alleging that Possis Medical, Inc. and named
individual officers violated federal securities laws during a period beginning
in 2002. The Complaint seeks class action status and unspecified damages. At
this time the Company has not been served with a copy of the complaint. Possis
Medical believes that the allegations of the lawsuit are without merit and
intends to contest the lawsuit vigorously.
We do not believe that the amount of any potential liability associated with
these matters can be estimated at this time, but an unfavorable resolution of
these matters is possible and could have a material adverse effect on our
results of operations, financial condition or cash flows.
ITEM. 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Company Repurchases of Equity Securities
- ----------------------- ---------------------- ----------------------- -------------------------- --------------------------
(d) Maximum Number (or
(c) Total Number of Approximate Dollar
Shares Purchased as Part Value) of Shares that
(a) Total Number of (b) Average Price of Publicly Announced May Yet Be Purchased Under
Period Shares Purchased (1) Paid per Share Plans or Programs the Plans or Programs (1)
- ----------------------- ---------------------- ----------------------- -------------------------- --------------------------
February 1, 2005 to - - - -
February 28, 2005
- ----------------------- ---------------------- ----------------------- -------------------------- --------------------------
March 1, 2005 to - - - -
March 31, 2005
- ----------------------- ---------------------- ----------------------- -------------------------- --------------------------
April 1, 2005 to
April 30, 2005 172,000 $9.42 172,000 $13,380,000
- ----------------------- ---------------------- ----------------------- -------------------------- --------------------------
Total 172,000 $9.42 172,000 $13,380,000
- ----------------------- ---------------------- ----------------------- -------------------------- --------------------------
(1) The Company repurchased an aggregate of 172,000 shares of its common stock
pursuant to the repurchase program that it publicly announced on February
23, 2005 providing for the repurchase of shares having a value of up to
$15,000,000 through December 2006. The shares were purchased in open market
transactions.
19
ITEM 5. CHANGE IN CONTROL TERMINATION PAY PLAN
On September 15, 1999, the Board of Directors approved a Change in Control
Termination Pay Plan (the Plan) that provides, at the discretion of the Board,
salary and benefits continuation payments to executive officers and selected key
management and technical personnel in the event they are terminated within
twenty-four months of a change in control. Since its inception, the Board of
Directors has committed to a three-year salary and benefits continuation for the
Chief Executive Officer and two-year salary and benefits continuations for other
executive officers. Additional key management and technical personnel are
entitled to salary and benefits continuation ranging in duration from six to
twenty-four months. The Board of Directors also approved, in 2001, additional
payments upon a change in control notwithstanding employment status following a
change in control pursuant to Section 4.3 of the Plan entitled, "Cash
Transaction Bonus." This provision provides that these payments are to be
awarded if the Company achieves "substantial growth" as determined by the Board
based on the value of the Possis at the time of the change in control and the
Board's assessment of performance and growth. The amount of the pool available
for such payments was limited, in aggregate, to between five-eighths of one
percent (.625%) and a maximum of four percent (4%) of the value of the Company
at the time of the change in control. By action on June 6, 2005, the Board of
Directors approved an amendment to the Cash Transaction Bonus such that the
amount of funds available for payment under Section 4.3 of the Plan is
determined based on the extent that the value of the Company, as determined at
the time of the change in control transaction is greater than a baseline amount
equal to the 30 day trailing closing stock price average multiplied by the
number of issued and outstanding shares on the date of public disclosure of
change in control discussions (the "Transaction Premium"). The applicable
Transaction Premium and Bonus Percentages are as follows:
Transaction Premium Bonus Percentage
11-20% 2.0%
21-30% 2.5%
31-40% 3.0%
41-50% 3.5%
50+% 4.0%
Allocation of the Cash Transaction Bonus is subject to amendment at the
discretion of the Board of Directors based on changes in each recipient's job
responsibilities, employment status or other reasonable circumstances. Current
allocations are as follows:
Robert G. Dutcher, Chairman, President and Chief Executive Officer - 30%
Irving R. Colacci, Vice President and General Counsel - 10%
James D. Gustafson, Vice President, Research, Development and Engineering - 10%
Shawn F. McCarrey, Vice President, Worldwide Sales and Marketing - 10%
Robert J. Scott, Vice President, Manufacturing Operations and IT - 10%
Unallocated at this time - 30%
20
ITEM 6. EXHIBITS
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
- --------------------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
21
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: May 28, 2005 BY:
-----------------------
ROBERT G. DUTCHER
Chairman, President and
Chief Executive Officer
DATE: May 28, 2005 BY:
------------------------
JULES L. FISHER
Vice President of Finance and
Chief Financial Officer
22
EXHIBIT INDEX
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
- --------------------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
23