Item 1. Business:
General
Possis Medical, Inc. is a developer, manufacturer and distributor of medical devices focused primarily on catheter-based therapies for the treatment of vascular disorders throughout the body. The company was incorporated in 1956 and has operated several businesses over the past 50 years. In 1990, the company decided to focus solely on medical products and, in 1993, changed its name to Possis Medical, Inc. Currently, the majority of the company's revenue is derived from sale of its proprietary AngioJet(R) Rheolytic(TM) Thrombectomy System, a catheter-based system used to remove thrombus (blood clots) from blood vessels. Currently the company has FDA marketing approval for AngioJet use in coronary arteries and bypass grafts, peripheral arteries and veins, and dialysis access grafts and fistulas. Since June 2006, Possis has expanded its product offering by adding new non-AngioJet endovascular products.
Development of Business
During fiscal 2007 we received FDA clearance for and introduced several products that are central to our growth plans and upon which our future products will be based, including, importantly, the new AngioJet Ultra Thrombectomy System. The Ultra System, which features a simple and fast set-up procedure, sleeker design, light weight and the flexibility to accommodate more varieties of catheters, is our next generation of central console. We received FDA clearance for the Ultra System in December 2006 and it was first used commercially on patients in January 2007. In fiscal 2007, we received FDA approval to begin marketing the new Spiroflex(TM) and Spiroflex(R) VG rapid exchange catheters to remove thrombus from coronary arteries and conduits. The Spiroflex 4 French catheter provides a highly flexible and kink-resistant catheter optimized for delivery to smaller vessels and complex anatomy (i.e., tight lesions, tortuous vessels, etc.). The slightly larger Spiroflex VG provides the same high performance design, but with increased thrombectomy power for slightly larger vessels and tougher thrombus. The Ultra Spiroflex thrombectomy set was also approved for coronary use with the new Ultra System in the last half of fiscal 2007; the Spiroflex VG thrombectomy set will soon be submitted for similar approval from the FDA.
In late November 2006, our Xpeedior(R) catheter, in conjunction with our AngioJet System, received FDA clearance to be marketed for removing large thrombus from upper- and lower-extremity peripheral veins. In October 2007, our DVX Catheter received the same market clearance. To date, AngioJet is the only device specifically cleared for venous thrombectomy which is a large underserved market.
To further expand the range of products we offer, we now market several new non-AngioJet products. The SafeSeal(TM) Hemostasis Patch was introduced throught a distribution agreement in late fiscal 2006 and is used to control bleeding from the puncture made to perform an endovascular procedure. We also launched the new Fetch Aspiration Catheter in the middle of fiscal 2007 and Fetch is now cleared by FDA for general arterial use and specifically for use in coronary arteries.
In addition, we currently have a third product, the .035" GuardDOG Occlusion Guidewire System, in limited market release. The GuardDOG System is designed to temporarily occlude blood flow through the treatment field during vascular interventions, offering physicians' greater control when employing endovascular catheter treatments such as AngioJet thrombectomy. We expect to launch the .035" GuardDOG System later in calendar 2007 and a companion .014" guidewire product later in fiscal 2008.
To further expand into complementary markets, we made an investment of $2.5 million in December 2006 in Rafael Medical Technologies, a company that is developing an inferior vena cava filter for thrombus. We have committed to invest up to an additional $1.5 million in Rafael and have a right, for three years, to purchase the remaining outstanding shares of Rafael.
Products
In fiscal 2007, 97 percent of our revenues was generated from sales of a single product line: the Angiojet(R) Rheolytic(TM) Thrombectomy System. The AngioJet System is a non-surgical, minimally invasive catheter system designed to rapidly remove blood clots with minimal vascular trauma.
The development of blood clots in various sites within the vascular system is common and is one of the leading causes of morbidity and death. Blood clots can be caused by a number of factors, including cardiovascular disease, trauma, impediment of normal flow during invasive procedures, or physical pressure that impedes venous return such as occurs during prolonged bed rest. If a blood clot becomes large enough, it can block a blood vessel, preventing oxygenated blood from reaching the organ or tissue it supplies, a condition called ischemia. In addition, if a blood clot breaks free, it can travel through the bloodstream (embolize) and block blood flow to other organs and tissue. Conditions caused by blood clots include: myocardial infarction (heart attack), stroke, limb threatening ischemia, hemodialysis access failure, deep vein thrombosis and pulmonary embolism.
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We believe the AngioJet System represents a rapid, safe, medically effective and potentially cost-effective approach to the removal of blood clots from arteries, veins and grafts. The AngioJet System has demonstrated the ability to safely and effectively remove blood clots within seconds to minutes without surgical intervention or the risk of uncontrolled bleeding.
The AngioJet System consists of a reusable console used in combination with various disposable thrombectomy sets designed for use in various vascular territories. To operate the system, a physician threads a catheter over a guidewire down a patient's blood vessel to the site of the blood clot. The AngioJet System console is then activated, which pressurizes sterile saline to approximately 10,000 pounds per square inch (psi) at the source and sends it down the length of the catheter to the tip of the device. Saline jets enclosed within the catheter spray from the catheter tip back up the catheter at several hundred miles per hour. The operation of the high-speed jets inside the catheter creates a localized low-pressure zone around the catheter's tip. The difference between the low pressure at the catheter tip and the normal blood pressure in the vessel draws the blood clot into the catheter through openings near the tip. The jets then break apart and pulverize the blood clot into microscopic fragments, which are then propelled down the length of the catheter and into a disposable collection bag. Throughout the procedure, the system console ensures patient safety by monitoring and regulating the saline flow rate and extraction of blood clots and excess saline from the patients body.
In December 2006, we received FDA approval for a redesigned version of the AngioJet System, the AngioJet Ultra System. The new AngioJet Ultra System provides improved ease-of-use and allows faster set up by physicians and hospital staff. The new system consists of a new microprocessor-based console and integrated disposable thrombectomy sets which combine the separate disposable catheter and pump kit from the previous system into a single thrombectomy set. In addition to ease of use, the new Ultra System console provides an unlimited number of operating modes, compared to just three modes available on the previous electro-mechanical system. We believe that these unlimited modes will allow for more rapid development and introduction of new and improved thrombectomy sets and also new interventional tools beyond thrombectomy. We are currently focused on converting our current install base from the previous generation system to the new Ultra System and has implemented various conversion options for customers. These options include outright capital purchase plans, trade-in programs, and also non capital purchase options combined with adjusted pricing and minimum purchase requirements for disposable thrombectomy sets.
Each surgical procedure using our thrombectomy system requires a disposable thrombectomy set - consisting of specialized catheters designed for specific forms of procedures and, with the older console, a pump kit. Currently, we market the XMI(R) (Over the Wire version - OTW), XMI-RX (Rapid Exchange version), XMI RX +, Spiroflex, XVG(R), Spiroflex VG(R), Xpeedior(R), DVX(TM) and AVX(R) lines of catheters. Each of these catheters feature our patented Cross-Stream(R) Technology. This technology 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 than previous catheters with "mural thrombus," the older, more organized material that adheres to vessel walls and can complicate patient outcomes.
We also market products that are complementary to our AngioJet System. In May 2006, we introduced the SafeSeal(TM) Hemostasis Patch. The SafeSeal Patch is a topical wound dressing that decreases the time it takes to control bleeding from the puncture made in a blood vessel to perform an endovascular procedure. Designed to assist manual compression and complement invasive vessel closure techniques, the SafeSeal Patch specifically targets the more than 7 million diagnostic and therapeutic procedures performed annually in the U.S. for coronary and peripheral applications. We estimate the U.S. market potential for the SafeSeal Patch to be $65 to $85 million in 2008.. The SafeSeal Patch is marketed in the U.S. to interventional catheterization labs, physicians and staff by our sales team pursuant to a multi-year distribution agreement with Medafor.
Markets and Applications
The AngioJet System is designed to remove intravascular blood clots in a variety of clinical applications. It is typically used in conjunction with other medical devices, such as angioplasty balloons and stents (both bare metal and drug eluting), and drugs, such as thrombolytics and platelet inhibitors.
Our marketing analysis and cumulative clinical experience indicate that the AngioJet System may be effective for the treatment of various blood clot-induced conditions beyond its current approved indications. Our goal is to extend the reach of our technology over time to these additional indications through additional regulatory clearances, predominately in the United States (U.S.).
The AngioJet System currently has FDA clearance for marketing in four clinical applications: (1) for removal of blood clots in access grafts and native fistulas used by patients in kidney dialysis (received in December 1996), (2) for removal of clots in native coronary arteries and coronary bypass grafts (received in March 1999), (3) for removal of blood clots in peripheral arteries (received in April 2000) and (4) for the removal of blood clots in peripheral veins (received in November 2006).
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The following table shows the vascular territories and indications for which we currently market the AngioJet System or are seeking an indication or researching. In addition, the table indicates the estimated annual incidence rate in the U.S. and our estimated Realizable Market Opportunity for the AngioJet System and adjunctive devices offered by the Company.
Product Clinical Estimated Realizable U.S. Reported Market Opportunity* Annual U.S. (Procedures) (in millions Incidence of dollars) - -------------------- ------------------- ---------- -------------- ------------- Thrombectomy Coronary Thrombosis (Native Arteries and Bypass Grafts 2,700,000 100,000 $160 - $180 Peripheral Arterial Thrombosis 2,500,000 80,000 $100 - $120 Hemodialysis Graft Thrombosis 370,000 370,000 $220 - $240 Venous Thrombosis 650,000 60,000 $80 - $100 Pulmonary Embolism (1) 200,000 40,000 $60 - $100 Ischemic Stroke (2) 640,000 ** ** TOTAL Thrombectomy 7,215,000 650,000 $620 - $740 Aspiration Aspiration of soft *** emboli and thrombi from the arterial system 120,000 $40 - $60 Temporary Occlusion Temporary vessel **** occlusion 80,000 $80 - $100 Access Site Topical dressing Hemostasis for vascular access sites 1,500,000 1,500,000 $65 - $85 Total $805 - $985 - -------------------------------------------------------------------------------- (1) Pending FDA approval. (2) In research and development phase.
* Realizable market opportunity dollar estimates are for products and clinical indications projected to be commercially available in fiscal year 2008. ** To be determined. *** Estimated incidence same as for coronary thrombosis listed above. **** Estimated incidence same as for peripheral thrombosis listed above. - --------------------------------------------------------------------------------
We estimated the total number of cases for a given indication in the foregoing table based on statistics from industry sources and then estimated the number of procedures that might be amenable to treatment with the AngioJet System, in conjunction with other therapies, both devices and drugs. In making these estimates for the number of cases amenable to treatment with the AngioJet System, we have relied on our own estimates, as well as estimates based on data provided by physician consultants, presentations at medical industry conferences, peer-reviewed journal articles, security analyst publications, and publications by industry trade and consulting groups. We believe that the totality of these sources provides estimates that are directionally and relatively accurate, although the Company cannot guarantee their accuracy.
Clinical Science
Over the years we have sponsored several investigational clinical studies of AngioJet in order to obtain new market approvals from FDA. In addition, we sponsor and participate in various marketing clinical studies to better establish the clinical value of our AngioJet System in various clinical settings.
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Our most active area has been in coronary use. From 1996 through 1998, we sponsored VeGAS 2, an investigational randomized clinical trial which compared the AngioJet System to the approved thrombolytic drug, Urokinase(R), for the treatment of intracoronary thrombus. The AngioJet System proved to be medically safe and effective and cost-effective compared to Urokinase. The results were compelling enough that the FDA granted expedited regulatory review and approval without convening a Panel review by outside experts. Treatment in the trial with AngioJet cost an average of $5,000 less per patient than did treatment with Urokinase. These results have been presented by physician investigators at major medical meetings and have been published in the October 2001 issue of the American Heart Journal, and the February 2002 issue of the American Journal of Cardiology, both peer reviewed publications.
From 2001 through 2004, we sought to expand the use of AngioJet in all-comer heart attack patients including those in whom thrombus was not visible by sponsoring the randomized AiMI study. The initial results were released in August 2004. Unfortunately, the results failed to show that use of AngioJet in all-comer heart attack patients (more than two-thirds of whom did not have visible thrombus) was effective in reducing final average infarct size.
The July 2006 issue of the Journal of Invasive Cardiology included a supplement with observational studies of AngioJet(R) Thrombectomy System use in treating selected heart attack patients. The supplement detailed "real-world" results from five patient registries and one randomized trial presented by a panel of leading interventional cardiologists during the March 2006 annual convention of the American College of Cardiology (ACC) in Atlanta. These results led the Panel to conclude in part that "use of the AngioJet with primary percutaneous catheter-based intervention (PCI) is safe and suggest that the AngioJet may improve procedural and clinical outcomes in a broad spectrum of real-world ST-elevation myocardial infarction (STEMI) patients treated with primary PCI."
In August 2007, the Journal of the American College of Cardiology (JACC) published a clinical study showing favorable results for AngioJet treatment of heart attack patients with large thrombus (blood clot). The study was conducted by Dr. George Sianos and colleagues at the ThoraxCenter in Rotterdam, the Netherlands. The Sianos study demonstrated that AngioJet use to remove large thrombus prior to placement of a drug-eluting stent (DES) in heart attack patients is associated with significantly lower rates of subsequent death, heart attack, and stent thrombosis.
We note that drug-eluting stents (DES) were introduced in the United States in 2003 and grew to represent almost 90 percent of stent placements in the U.S. by 2006. However, starting in 2006 concerns were raised about whether DES carried an increased risk for stent thrombosis, a sudden, unpredictable, and potentially fatal event. We believe the Sianos study represents important new real-world clinical evidence of the positive role AngioJet can play in reducing DES stent thrombosis.
We are currently sponsoring the JETSTENT study of AngioJet treatment in heart attack patients with visible thrombus. This European based multi-centered randomized trial is led by co-principal investigators Dr. David Antoniucci of the Careggi Institute in Florence, Italy, and Dr. Antonio Colombo of San Raffaele Hospital, Milan. Enrollment began in December 2005 and 200 patients were enrolled through July 31, 2007. A total of 500 patients are planned to complete the study. Our sponsorship of this trial is, in part, intended to reconfirm the safety and effectiveness of the AngioJet System in heart attack patients with visible thrombus.
With respect to other FDA-cleared marketing indications such as peripheral arteries, the Company believes that the AngioJet System offers a unique combination of clinical benefit and cost-effectiveness when compared to medical management and thrombolytic therapy. While the Company and some clinical scientists have assembled considerable data demonstrating these cost-savings, it is noted that these savings have been documented only in non-randomized patient sets.
Research and Development
Our product development efforts are focused on product enhancements for existing approved indications, new products for existing indications, new products for new clinical indications and general upgrades to the AngioJet System. We are also working on developing new endovascular products that are beyond the AngioJet family, of which the GuardDOG distal occlusion guidewire is the furthest along example. Research and development expenses are generally incurred for product prototyping and design, development and qualification, development and validation of manufacturing processes, conduct of investigational clinical trials, and seeking and obtaining governmental approvals. In fiscal 2008, our research and development expenses are expected to be between 12 percent to 13 percent of product revenue. We will continue to expand the current realizable market for the AngioJet System and expand into new areas, such as distal embolic protection.
As of August 31, 2007, we employed approximately 30 full-time employees in research and development, including 27 in new product concept screening, prototype building, product and process development and validation, and three in regulatory and clinical affairs. Technical staff from other engineering departments, such as manufacturing, quality and process engineering also support R&D efforts. We perform substantially all of our research and development activities at our headquarters in Minnesota. We spent $9,258,000, $10,907,000, and $10,502,000, in fiscal 2007, 2006 and 2005, respectively, on medical product research and development.
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Manufacturing
We assemble and test our entire AngioJet product line in-house and have vertically integrated a number of processes in an effort to provide increased quality and reliability. Many of the processes are proprietary. Most of our raw materials and components and select subassemblies used in our products are purchased from outside suppliers and are generally readily available from multiple sources; however, some of the raw material items are available only from single-source suppliers.
Starting in fiscal 2007, several of our products, including our new AngioJet Ultra System, were manufactured by outside contractors. Although we believe we have selected reliable manufacturers, we will generally have less control over the quality of the manufacturing process for these products and could be subject to increased rates of return, to other quality problems, or to delivery delays if our contract manufacturers do not perform.
Our manufacturing facilities are subject to periodic inspections by regulatory authorities, including the FDA Quality System Regulations (QSR), compliance inspections by the FDA and a Notified Body, a private sector audit and test house designated by European Union competent authorities (Ministries of Health) to determine whether a product may display the CE mark, which is necessary for marketing in the European Union. We have undergone and have consistently passed all inspections by the FDA and/or our Notified Body each year.
Marketing and Sales
We market our AngioJet System primarily to interventional cardiologists, interventional radiologists and vascular surgeons and secondarily to physician specialty groups, such as nephrologists and osteopaths. Revenue from AngioJet System sales in the United States was approximately 97%, 96% and 98% of fiscal 2007, 2006, and 2005 overall revenue, respectively.
We currently market the AngioJet System for blood clot removal in coronary arteries and bypass grafts, peripheral arteries, peripheral veins, hemodialysis dialysis access grafts and fistulas. We anticipate marketing the AngioJet System in the future for pulmonary embolism (PE) and potentially for stroke treatment if and when FDA marketing approvals are obtained.
We currently market the AngioJet System through our own direct sales force in the United States. A single sales force calls on all the distinct specialties listed above; for example, the Company does not have separate coronary or peripheral sales forces.
Outside the United States, and with the exception of Germany, we market the AngioJet System using an independent distributor network. We hired an outside consultant to assist it in selling the AngioJet System in Germany in August 2004. Generally, our distributorship agreements provide that the distributors, at their own expense, will investigate, negotiate and obtain regulatory approvals for our products in the specified territory. All sales made to our independent distributors are denominated in United States dollars.
Our promotional activities are designed primarily to enlist the support of key medical opinion leaders in the United States and abroad. We believe that publications in medical journals and presentations at medical meetings are important in encouraging acceptance of our products. Other marketing activities include medical journal advertising, participating in medical meetings, and supporting physician courses and studies designed to gather clinical and cost effectiveness data of our products compared to conventional treatment.
Patents, Patent Applications, Licenses and Proprietary Rights
Our success depends, and will continue to depend, in part on our ability to maintain patent protection for products and processes, to preserve trade secrets and to operate without infringing the proprietary rights of third parties. Our policy is to attempt to protect our technology by, among other things, filing patent applications for technology that we consider important to the development of our business. Patents that we consider material and that have issued to us, and for which we continue to apply, describe method and apparatus claims related to thrombectomy and atherectomy devices, distal occlusion devices, and other related inventions. We made our first atherectomy/thrombectomy-related patent application in 1990 and currently hold 31 United States patents and six foreign patents relating to our waterjet thrombectomy business and related technology. In addition, we have 25 United States and 35 foreign patent applications pending relating to the AngioJet System. The validity and breadth of claims covered in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain.
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We require all employees to execute non-disclosure agreements upon commencement of their employment. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's employment with us is to be kept confidential and not disclosed to third parties.
Competition
We believe that the AngioJet System will face increasing competition from a variety of treatments for the reduction and removal of blood clots, including thrombolytic drug therapies, particulate capture systems, such as occlusion balloons, filters and combined systems, direct stenting, surgical intervention, balloon embolectomy, mechanical and laser thrombectomy devices, ultrasound ablators, and other thrombectomy devices based on waterjet systems that may currently be under development by other companies. The medical products market is characterized by rapidly evolving technology and increased competition. Our future success will depend on our ability to keep pace with advancing technology and competitive innovations. Many of our potential competitors have significantly greater research and development capabilities, more experience in obtaining regulatory approvals, established marketing and greater financial and managerial resources. Many potential competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products, some of which may employ an entirely different approach or means of accomplishing the desired therapeutic effect than the products we develop.
Currently, the three primary methods of removing intravascular blood clots are surgery, dissolution with drugs (thrombolysis) and various catheter-based mechanical methods. We believe our AngioJet System competes effectively with thrombolytic drug treatment on the basis of cost, speed, effectiveness and side effects. Although certain drugs may be considered by some physicians to be easier to administer than the AngioJet system, thrombolytic drug treatment involves the administration of a drug designed to soften or dissolve the blood clot in an intensive care setting. Thrombolytic drugs may require prolonged infusion to be effective and may require significant time to take effect, which is costly in an intensive or critical care setting, and then may only partially remove the clot. In addition, thrombolytic drugs may cause uncontrolled, life-threatening bleeding. Other classes of drugs, specifically platelet glycoprotein llb/llla inhibitors, prevent blood clots from forming during coronary interventional procedures but have no proven benefit against clots already formed.
We believe the AngioJet System competes effectively against mechanical clot removal systems on the basis of reduced surgical intervention, reduced trauma and reduced hospitalization. Mechanical devices such as the Fogarty-type catheter operate by inflating a balloon past the point of the blood clot and then pulling the balloon along the artery, essentially dragging the blood clot out of the patient's body. Fogarty-type catheters require surgical intervention, which may result in overnight hospital stays, are more limited in their applications and may cause significant vascular trauma.
For native coronary arteries, coronary bypass grafts, and peripheral arteries, there are several catheter-based mechanical devices marketed in the U.S., including low-pressure manual aspiration/suction catheters, laser catheters, and passive debris capture devices such as embolic protection guidewires. The manual aspiration/suction catheters seek to show a price advantage relative to the AngioJet System because they do not require a drive unit in order to evacuate clot. Our research and clinical experience shows that these devices are not as effective in removing clots, particularly in acute settings with large thrombus burdens. Debris capture devices, such as embolic protection guidewires, often have associated manual aspiration devices sold with the guidewires; to the extent that these devices can show a reduction in MACE (major adverse cardiac events) rates with their use, this can result in lost sales for the AngioJet System, which is currently an active thrombectomy system. The coronary and peripheral markets are very sensitive to clinical data and device safety and effectiveness, and they are less price sensitive.
In the AV-access area, there are numerous mechanical devices, under many different trade names; no individual device has a dominant share of the market. This latter market is extremely price sensitive, so devices do not necessarily gain share because of improved performance and effectiveness alone.
Government Regulation
Government regulation in the United States and other countries is a significant factor in both our products and our activities, which are regulated by the U.S. FDA under a number of statutes, including the Food, Drug and Cosmetic ("FDC") Act.
FDA regulations place our products in either Class II or III (the highest level of relative risk), based on the extent of both the pre-market approvals and post-market controls deemed necessary to assure that they are safe and effective. For example, Class II devices such as the AngioJet System for AV- access graft thrombectomy are subject to pre-market notification (510(k) submission) to the FDA, whereas use of the AngioJet System for treating coronary thrombus is subject to pre-market approval ("PMA") by the FDA, and subsequent annual and other PMA supplemental reporting requirements. While the FDA attempts to complete review of these different types of pre-market submissions within specific timeframes (90 days for a 510(k); 180 days for a PMA), final action by the FDA may take considerably longer. Any adverse determination or request for additional information could delay market introduction and have a materially adverse effect on our continued operations.
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In addition, either a 510(k) or PMA may require the inclusion of data and analyses from the conduct of investigational clinical trials. Generally, such clinical trials may be conducted only under an Investigational Device Exemption ("IDE") approved by the FDA. The FDA monitors and oversees the conduct of clinical trials under an IDE. Such clinical trials typically take several years to conduct, and can cost several million dollars. Many of our products were the subject of such clinical trials in the past, and we expect that some of our future products will also require investigational clinical trials.
The AngioJet Coronary catheter is a Class III device and is marketed in the U.S. under an approved PMA. The AngioJet AV-access and peripheral arterial thrombus catheters are Class II devices and are marketed in the U.S. under cleared 510(k) submissions.
Once a product is cleared for marketing in the U.S., product labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA imposes other post-marketing controls on, such as annual establishment registration, annual product listings, and administration of complaint and medical device reporting files. Failure to meet these pervasive FDA requirements could subject us and/or our employees to injunction, prosecution, civil fines, seizure or recall of products, prohibition of sales or suspension or withdrawal of any previously granted approvals.
We received clearance of the AngioJet Ultra System through an FDA 510(k) application in December 2006, The AngioJet System received its first clearance for the U.S. market through a 510(k) pre-market notification cleared by the FDA in December 1996, for use in treating thrombosed AV access grafts. In March 1999, the AngioJet System received FDA approval of a PMA application for treating thrombus in coronary arteries and saphenous vein bypass grafts. In May 2000, the AngioJet System received FDA market clearance via another 510(k) pre-market notification for treating thrombus in leg arteries.
Our manufacturing and quality systems are also subject to FDA regulations requiring compliance with the FDA's current Quality System Regulations ("QSR"). The FDA conducts periodic on-site inspections of manufacturing facilities. We have successfully undergone several such inspections in the past. We are obliged to address any deficiency noted during such inspections. If the FDA detects violations of applicable regulations, the continued marketing of our products may be adversely affected. Such regulations are subject to change and depend heavily on regulatory interpretations.
We conduct sales and marketing activities in various foreign countries. The time required to obtain approval to market a product in a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. The AngioJet System displays the CE Mark, allowing import into the European Union and certain other countries that accept the CE Mark. Approval to display the CE Mark is dependent, in part, on annual inspections by representatives of European Notified Bodies to successfully demonstrate compliance with the ISO 9001 Quality Standards.
Employees
As of August 31, 2007, we had 282 full-time employees, seven part-time employees and 13 contract employees. Of these full-time employees, 30 are in research and development, 96 are in manufacturing and production, 17 are in quality assurance, eight are in facilities/maintenance, 104 are in sales and marketing and 27 are in management or administrative positions. None of our employees are covered by a collective bargaining agreement, and management considers its relations with its employees to be good.
Available Information
We maintain a website at www.possis.com. We make available on our website under "Investors"--"SEC Filings" and "Financial Results," free of charge, our Annual Report to shareholders, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and any amendments thereto; and the SEC filings of its directors and executive officers (Forms 3, 4, and 5) under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These links are automatically updated, so the filings and any amendment thereto also are available immediately after they are made publicly available by the SEC. These filings also are available by the SEC through the SEC's EDGAR system at www.sec.gov.
Item 1A:
Item 1A: Risk Factors
Our operations are subject to a number of risks and uncertainties that may effect our financial results, our accounting, and the accuracy of the forward making statements we make in this Form 10-K. We make statements regarding the timing of product introductions and regulatory approval or permission to market our products; the size of the potential markets for our products; our ability to increase sales of disposable product and capital equipment in the face of new product introductions from competitors; our ability to obtain regulatory clearance in new foreign markets; the responses of customer to our marketing strategies; our ability to retain and motivate skilled employees especially sales positions; our ability to expand our sales force; the valuation of our deferred tax asset allowance; our future revenue, earnings, earnings per share and expense levels; our future equity financing needs; and our ability to develop new products and enhance existing ones. These forward-looking statements are based on our current expectations and assumptions and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Our actual results may vary from these expectations because of a number of factors that affect our business, the most important of which include the following:
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o Because we derive virtually all of our revenue from a single product line, factors affecting that product line will adversely affect our overall results. We have focused our resources on the continued development and refinement of our AngioJet (R) System. If we fail to obtain additional regulatory approvals, a new competitor emerges, or the medical community rejects the use of the AngioJet System for multiple purposes, our business, financial condition and results of operations would be materially and adversely affected.
o Although we attempt to establish the clinical value of our products with clinical studies, adverse results from those studies have had, and could have in the future, a significantly adverse impact on our business. In order to support regulatory filings related to new applications for our products, and to encourage greater use of our products in applications, we periodically sponsor clinical studies. The studies are normally designed to be independent and not influenced by the sponsor. If the data from an independent study indicates or implies that our products are ineffective, or less effective than anticipated, our business would likely be negatively affected. For example, we sponsored a three year study on the use of our AngioJet System in treating cardiac infarct where visible thrombosis was not required that ended in the summer of 2004. When the study did not indicate that the AngioJet System had a positive impact on final infarct size, the marketplace began questioning the value of our system generally, particularly in heart treatment. The negative publicity from these results significantly impacted our results for the 2005 and 2006 fiscal years. If future studies generated similar results, our operations would be further negatively impacted.
o Because our products are subject to extensive governmental regulation, we might not be able to pursue opportunities rapidly or effectively and failure to comply with regulatory requirements could subject us to fines, penalties and prosecution. Our products and manufacturing activities are subject to extensive and rigorous federal and state regulation in the United States and various regulatory requirements in other countries. Current United States Food and Drug Administration (FDA) enforcement policy strictly prohibits the marketing of approved medical devices for unapproved uses. Therefore, even if our products receive regulatory approval, regulators may significantly limit the indications for which our products may be marketed. In addition, the process of obtaining and maintaining required regulatory approvals can be lengthy and expensive, and the outcome of the process can be uncertain. Moreover, regulatory approvals may be withdrawn if we fail to comply with regulatory standards or if unforeseen problems arise following the initial marketing of a product. Additionally, we are required to adhere to Quality System Regulations promulgated by the FDA relating to product design, development, manufacturing, servicing, testing and documentation. Failure to comply with applicable Quality System Regulations or other regulatory requirements may result in fines, delays or suspensions of approvals, injunctions against further distribution of our products, seizures or recalls of products, operating restrictions, criminal prosecutions or other sanctions, in addition to adverse publicity. The adoption of new regulations or changes in existing regulations could prevent us from obtaining, or affect the timing of, future regulatory approvals and could adversely affect the marketing of our existing products. We cannot assure you that we will be able to obtain necessary regulatory approvals on a timely basis, if at all. Delays in our receipt of or failure to receive regulatory approvals, the loss of previously received approvals or our failure to comply with regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.
o Our manufacturing would be interrupted if we were unable to use our manufacturing facility. We manufacture most of our AngioJet System products at our manufacturing facility in Minneapolis, Minnesota. If this facility was to be destroyed, shut down or unable to be used for its intended purpose, or if the specialized manufacturing equipment we maintain at the office is damaged, we would not be able to manufacture the AngioJet System products until a replacement facility and equipment was found, and the replacement facility and process revalidated. The replacement of the manufacturing facility and equipment and the revalidation of the facilities could take several months before manufacturing operations could restart. The delay engendered by, and the potential cost incurred in, these steps would have a material adverse effect on our business, financial condition and results of operations.
o We are currently dependent upon a contract manufacturer for our AngioJet Ultra consoles and our failure to obtain supplies from this contractor could negatively impact our sales. Final development of our AngioJet Ultra Console was completed by a custom medical product design firm and that firm currently manufactures the consoles. Although we have obtained and own the specifications for the consoles, if we were required to replace the firm, we could experience several months delay in deliveries and other issues that could reduce our revenue and profitability. o We may not be able to enhance our products rapidly enough to keep pace with advances in the medical products industry. The medical products market is characterized by rapidly evolving technology. Our future success depends on our ability to keep pace with advancing technology from competitors and other innovators. Potential competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products, some of which may accomplish desired therapeutic effects through entirely different methods than the products we are developing. We believe our AngioJet System will face intense competition from a variety of treatments for the removal of blood clots, including clot-dissolving (thrombolytic) drug therapies, surgical intervention, balloon embolectomy, embolic protection devices, mechanical and laser thrombectomy devices, ultrasound ablators, and other thrombectomy devices based on waterjet systems that are currently being developed by other companies.
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o Larger companies in the medical products industry may be in a better position to compete for our customers. Many of the companies developing competing devices have substantially greater capital and substantially greater resources for and experience in research and development, regulatory matters, manufacturing and marketing than we have. These companies will be serious competitors for us and may succeed in developing products that are more effective and/or less costly than the AngioJet System. Furthermore, these companies may be more successful than we are in manufacturing and marketing their products. Our competitors or others may develop technologies, products or procedures that are more effective than any we are developing or that may render our technology and products obsolete or noncompetitive. The advent of new devices, procedures or new pharmaceutical agents could hinder our ability to compete effectively and could have a material adverse effect on our business, financial condition and results of operations.
o We may not be able to adequately secure our position through intellectual property protection. Our success depends and will continue to depend in part on our ability to maintain patent protection for our products and processes, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We attempt to protect our technology by filing patent applications for technology that we consider important to the development of our business, among other measures described below. Claims relating to medical technology patents involve complex legal and factual questions. Therefore, their outcomes are highly uncertain. We cannot assure you that our pending applications will result in patents being issued to us or that either our new patents or our existing patents will give us a competitive advantage. Moreover, our competitors may design around any patents issued to us, third parties may receive patent protection on their own waterjet devices, and others may hold or receive patents containing claims that may cover products developed by us. We require all our employees to execute non-disclosure and intellectual property assignment agreements when they are first employed. We cannot assure you, however, that these agreements and other safeguards will protect our proprietary information and know-how, or that they will provide us adequate remedies in the event of unauthorized use or disclosure of confidential information. We also cannot assure you that others will be unable to develop such information independently.
o The intellectual property litigation to which we might be required to resort to protect our products could be costly and unfavorable results could damage our business. The medical device industry has seen much litigation with respect to patent and other intellectual property rights. Litigation may be necessary for us to enforce our patents, to protect our trade secrets and know-how, to defend against claimed infringement of others' rights or to determine the ownership, scope or validity of the proprietary rights of Possis Medical, Inc. and others. However, litigation also could be extremely costly to us and could divert our resources and efforts away from our products and day-to-day business matters. If the litigation had an adverse outcome, it could subject us to substantial liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing, selling or using our products. Any of these results could have a material adverse effect on our business, financial condition and results of operations.
o Many of our sales are subject to reimbursement by third party agencies or private insurers of agencies and changes in eligibility or rates of reimbursement could adversely affect our business. Health care providers (such as hospitals and physicians) that purchase medical devices like the AngioJet System for the treatment of patients generally rely on third-party payors like Medicare, Medicaid and private insurance plans to reimburse all or part of the costs associated with the health care services they provide. In certain foreign markets, the pricing of and profits generated by health care products are subject to government control. In some states, Medicare and Medicaid payors reimburse hospitals for inpatient medical procedures at a pre-determined rate based on diagnosis-related groups. Currently, we do not believe that U.S. reimbursement rates are a material impediment to adoption of our therapy. If these rates do not include, and third-party payors do not otherwise provide, adequate reimbursement to health care providers for the cost of our products, our products will not gain wide market acceptance and our financial results will suffer. The market for our products also could be adversely affected by future legislation to reform the nation's health care system or by changes in industry practices regarding reimbursement. We cannot assure you that the reimbursement rates of third-party payors will allow us to price our products at levels sufficient to realize an appropriate return on our investment in product development.
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o We may not be able to retain all of our key personnel. We depend greatly on a limited number of key management and technical personnel. Moreover, because of the highly technical nature of our business, our ability to continue our technological developments and to market our products--and thereby develop a competitive edge in the marketplace--depends in large part on our ability to attract and retain qualified technical and key management personnel. Competition for qualified personnel is intense, and we cannot assure you that we will be able to attract and retain the individuals we need. The loss of key personnel, or our inability to hire or retain qualified personnel, could have a material adverse effect on our business, financial condition and results of operations.
o We may be subject to product liability claims, for which insurance coverage may be insufficient. The manufacture and sale of our products may subject us to product liability claims. The United States Supreme Court has held that, despite a company's compliance with FDA regulations, it may not be shielded from common-law negligent-design claims or manufacturing and labeling claims based on state laws. Product liability insurance is expensive and in the future may not be available on acceptable terms, if at all. We cannot assure you that the coverage limits of our product liability insurance policies will be adequate if a product liability claim is brought against us. A successful claim or series of claims against us that exceeds our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Moreover, whether or not successful, product liability litigation would likely divert the attention of our key personnel and could adversely affect our reputation and the marketability of our technology and products. Consequently, any product liability litigation could have a material adverse effect on our business, financial condition and results of operations.
o The protections we have adopted may cause takeover offers to be decided by the Board rather than our shareholders. Of the 100 million shares of capital stock authorized by our amended and restated articles of incorporation, 81 million shares are undesignated. Our Board of Directors may issue the undesignated shares on terms and with the rights, preferences and designations determined by the Board without shareholder action. In addition, we have adopted a shareholder rights plan that provides for the exercise of preferred share purchase rights when a person becomes the beneficial owner of 20% or more of our outstanding common stock (subject to certain exceptions). We also are subject to provisions of the Minnesota Business Corporation Act that limit the voting rights of shares acquired in specified types of acquisitions and that restrict specified types of business combinations. The existence or issuance of "blank check" stock, the existence of our shareholder rights plan and the effect of anti-takeover provisions under Minnesota law, individually or in the aggregate, may discourage potential takeover attempts and delay, deter or prevent a change in control. They also may make the removal of management more difficult, which could deprive our shareholders of opportunities to sell their shares at prices higher than prevailing market prices.
o We depend on single-source suppliers. We depend on single-source suppliers for some of the raw materials used in the manufacture of our products. If we cannot obtain key raw materials from our suppliers, we cannot assure you that the materials will be available from other suppliers, that other suppliers will agree to supply the materials to us, or that our use of the other suppliers would be approved by the FDA. Although we believe our supply of raw materials currently is adequate for the needs of our business, we cannot assure you that new sources of supply will be available when needed. Any interruption in our supply of raw materials could have a material adverse effect on our ability to manufacture our products until a new source of supply is located and, therefore, could have a material adverse effect on our business, financial condition and results of operations.
o Investments in third-party device companies and/or products may not provide the anticipated returns. An element of our strategic plan is to evaluate and act on opportunities to acquire products, technologies and/or companies that provide an attractive enhancement to our current product portfolio and future growth. As part of this strategy, in December 2006, we invested $2.5 million in Rafael Medical, Inc., to secure a 15% ownership position and an option to purchase the company outright. If this or other similar investments become impaired, the resultant losses could have a material adverse effect on our business, financial condition and results of operations.
Item 1B.
Item 1B. Unresolved Staff Comments
None
Item 2.
Item 2. Properties:
We lease approximately 51,000 square feet of office and manufacturing space (including approximately 6,500 square feet of controlled environment manufacturing space) at 9055 Evergreen Boulevard NW, Minneapolis, Minnesota 55433-8003. We lease approximately 25,000 square feet of additional office and warehouse space at 9130 and 9144 Springbrook Drive, Minneapolis, Minnesota 55433-8003. We lease approximately 800 square feet of office space at 1513 Johnson Ferry Road, Marietta, Georgia 30062. See Note 7 of Notes to Financial Statements in Part II, Item 8, in this Form 10-K.
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We believe these properties to be in good condition and are adequate to meet our current levels of production, research and development and necessary corporate business activities. Included in the existing lease for the 9055 Evergreen Boulevard NW property is the option to purchase the facility, extend the lease term in two five-year increments, of which we are one and one-half years into the first of the two five year extension options, and/or add on to the current location as the need arises.
Item 3.
Item 3. Legal Proceedings:
We were served with a shareholder lawsuit filed with the Minnesota Federal District Court on June 3, 2005, alleging that Possis Medical, Inc. and named individual officers violated federal securities laws. The Complaint seeks class action status and unspecified damages. The suit was dismissed with prejudice by order of the Court on February 1, 2007. Plaintiffs have filed an appeal from the Court's order and the appeal is still pending. We continue to believe that the allegations of the lawsuit are without merit and are contesting the appeal of the trial court's decision. While we do not believe that the amount of any potential liability associated with these matters can be accurately estimated at this time, we believe we have adequate insurance coverage to cover any potential damages and expenses. However, an unfavorable resolution of these matters could have a material adverse effect on our results of operations, financial condition or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders:
None
Executive Officers of the Registrant:
Robert G. Dutcher joined our medical subsidiary in 1985 as its General Manager and became its President. He served as our Executive Vice President from June 1992 until October 1993. He has served as President and Chief Executive Officer since October 1993. Mr. Dutcher was elected Chairman of the Board in December 2001.
Jules L. Fisher joined us as Chief Financial Officer, Vice President of Finance in May 2005. Prior to that time, Mr. Fisher served as a consultant with Certes Financial Pros since November 2004 and was Corporate Controller of American Medical Systems from February to September 2004. Mr. Fisher was the Chief Financial Officer of Medical CV, Inc. from December 2001 to February 2004. From 1996 until December 2001, Mr. Fisher served as Vice President and Chief Financial Officer at Minntech Corporation.
Irving R. Colacci joined us in 1988 as Secretary and Corporate Counsel. Since 1993, he has served as General Counsel and Vice President, Legal Affairs and Human Resources; in August 2005 he was designated as Chief Governance Officer.
James D. Gustafson has served as a Vice President since January 1, 1994, and has been responsible for our Quality Assurance and Regulatory/Clinical Affairs since June 1993. In August 2001, Mr. Gustafson assumed responsibility research, development, and engineering functions, and in August 2005 assumed responsibility for all clinical evaluation activities, and was designated Chief Quality Officer.
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Shawn F. McCarrey became our Director of U.S. Sales in December 1998 and became Vice President of U.S. Sales in April 2001, Vice President of Worldwide Sales in February 2003 and Executive Vice President of Worldwide Sales and Marketing in 2005. Prior to December 1988, Mr. McCarrey served in a variety of sales positions with USCI, a subsidiary of C.R. Bard, Inc., from January 1982 until 1998.
Robert J. Scott joined our medical subsidiary in 1985 and has served as Vice President of Manufacturing since 1993 and Information Technology since July 30, 2001. In August 2005 he was designated as Chief Security Officer.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:
We had 1,240 common shareholders of record on September 17, 2007. Our common stock is traded on the Nasdaq Stock Market under the symbol POSS. High and low closing sale prices for each quarter of fiscal years ended July 31, 2007 and 2006 are presented below:
2007 2006 ------------------------------ ---------------------------- High Low High Low ------------------------------ ---------------------------- QUARTER: First $11.20 $ 8.45 $13.39 $9.90 Second 13.48 10.12 12.97 9.40 Third 13.91 11.58 10.26 8.90 Fourth 13.40 10.41 9.85 7.77
We have not paid cash dividends on our common stock since 1983. We do not currently anticipate paying cash dividends in the foreseeable future.
Share Repurchase Program
In December 2006, our Board of Directors authorized the repurchase of an additional $15,000,000 of common stock from time to time in open market transactions. The December 2006 authorization will expire in December 2008. We repurchased 376,490 shares during the year ended July 31, 2007. We believe that the share repurchase program is an effective tool to reduce the dilution associated with our stock based incentive compensation plans.
During the three months ended July 31, 2007, we repurchased an aggregate of 226,752 shares of our common stock pursuant to the repurchase program. The following table details those purchases on a monthly basis:
PERFORMANCE GRAPH
Set forth below is a graph showing the five-year cumulative returns through July 31, 2007, of our common stock as compared with the NASDAQ Composite, NASDAQ Medical Equipment Russell 2000 Index ,and a peer group, index comprised of seven companies in the medical device industry with similar cardiovascular markets. In fiscal 2006 the graph compared our common stock with the Russell 2000 Index and the peer group. In Fiscal 2008 the graph will compare our common stock only with the NASDAQ Composite index and NASDAQ Medical Equipment index. The Russell 2000 Index and the Peer Group will no longer be included on the graph. We decided to discontinue use of the Russell 2000 Index in future periods because our common stock is no longer included in the Russell 2000 index. We decided to discontinue use of the peer group because of changes in the individual companies that comprise the peer group, which currently includes Arthrocare Corp.; Cardiac Science, Inc.; Datascope Corp.; Kensey Nash Corp.; Merit Medical Systems, Inc.; Novoste Corp.; Spectranetics Corp. The graph assumes an investment of $100.00 in our common stock in each of the indexes on July 31, 2002, and the reinvestment of all dividends.
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[Please see Supplemental PDF for Graph]
Cumulative Total Return ---------------------------------------------------- 7/02 7/03 7/04 7/05 7/06 7/07 ------- -------- ------- -------- --------- -------- POSSIS MEDICAL, INC. 100.00 172.62 290.06 118.66 84.79 112.78 RUSSELL 2000 100.00 123.11 144.11 179.82 187.45 210.17 NASDAQ Composite 100.00 128.66 142.78 164.72 161.10 197.04 NASDAQ Medical Equipment 100.00 129.09 164.64 194.71 186.52 241.51 PEER GROUP 100.00 141.06 166.40 192.16 206.25 215.21 - -------------------
(1) Arthrocare Corp.; Cardiac Science, Inc.; Datascope Corp.; Kensey Nash Corp.; Merit Medical Systems, Inc.; Novoste Corp.; Spectranetics Corp.
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Item 6.
Item 6. Selected Financial Data:
SELECTED FINANCIAL DATA POSSIS MEDICAL, INC. YEARS ENDED JULY 31,
On August 1, 2005, (beginning of fiscal 2006) we adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment (SFAS 123R), which resulted October 12, 2007
share) for fiscal 2007 and $3,462,000 of pre-tax expense, or ($2,962,000 after tax, or $0.17 per diluted share) for fiscal 2006. Stock-based compensation for fiscal 2005, 2004 and 2003 was $0. See Note 4 to the Financial Statements.
The specific purposes of the non-GAAP financial measures for income per common share "before income taxes" relates to the utilization of net operating loss carryover for tax purposes in fiscal year 2003. Breaking this out separately is intended to disclose to the investor the significance of the net operating loss utilization to earnings per share.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation:
General
We develop, manufacture, and market medical devices for mechanical thrombectomy in native coronary arteries and coronary bypass grafts, leg arteries and in kidney dialysis access grafts and native fistulas. Our primary product, the AngioJet Rheolytic Thrombectomy System (AngioJet System) uses miniaturized waterjet technology, which enables interventional cardiologists, interventional radiologists, vascular surgeons, and other specialists to remove blood clots throughout the body.
The proprietary first generation AngioJet System consists of the 3000 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. For our new AngioJet Ultra System we combine the disposable catheters with a pump that we sell as integrated disposable thrombectomy sets. We launched the new AngioJet Ultra Thrombectomy System in January 2007. The AngioJet Ultra System consists of the next-generation Ultra Console (capital equipment) with a combined single disposable Thrombectomy set (catheter and pump) that delivers pressurized saline. Disposable catheter sets are specifically designed to treat particular clinical indications. The new Ultra System features a simple and fast setup process, the flexibility to use a broad range of catheters, a sleeker design, lighter weight, and handling improvements that make it significantly easier to maneuver than the first generation drive unit. AngioJet coronary catheters are Class III medical devices marketed in the U.S. under an approved PMA. The AngioJet AV-Access and peripheral arterial catheters are Class II devices that are marketed in the U.S. under cleared 510(k) submissions.
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We expect 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. For fiscal 2008, we also expect significant contribution to sales from our new AngioJet Ultra System consoles.
Critical Accounting Policies
Our financial statements include accounts of Possis Medical, Inc. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, we have made our best estimates and applied our best judgment of certain amounts included in the financial statements, giving due consideration to materiality. Our 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.
Revenue Recognition
Revenues associated with AngioJet drive units and the consoles that are maintained at customer locations are recognized, and title and risk of loss on those drive units is transferred to the customer when we receive a valid purchase order from the customer. Revenue is not recognized for AngioJet drive units and consoles that are maintained at customer locations as evaluation drive units or consoles. We do not lease AngioJet drive units and consoles. Revenues associated with products other than drive units or consoles that are shipped to customers from our 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 and console extended warranties is amortized on a straight-line basis over the life of the warranty period that is generally twelve months.
Allowance for Returns
Trade receivables 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 of returns. The estimate is based upon our historical product return experience, customer complaint rates, information received from our customers and other assumptions that we believe are reasonable under the circumstances. We review, on a quarterly basis, the actual returns for the previous quarter and evaluate the adequacy of the allowance for future returns. Although we believe the amount of the allowance for returns is appropriate, actual returns incurred could differ from our original estimate, requiring adjustments to the allowance that effect the results during the period of adjustment.
Allowance for Doubtful Accounts
Substantially all of our trade receivables are due from health care facilities located in the United States. We provide for an allowance for uncollectible or "doubtful" accounts based upon the age of our outstanding receivables and the payment history and creditworthiness of each customer. We evaluate the adequacy of the allowance for doubtful accounts on a quarterly basis. Although we believe the amount of the allowance for doubtful accounts is appropriate, nonpayment of accounts could differ from our original estimate, requiring adjustments to the allowance.
Inventories
We value inventories at the lower of cost or market. In order to determine the market value of inventory, on a quarterly basis, we assess the inventory quantities on hand to estimate future usage and sales and, if necessary, set up an obsolescence reserve for inventory deemed excess or obsolete to estimate market value. Although we believe the amount of the reserve for inventory obsolescence is appropriate, the amount of our inventory that becomes obsolete may differ from our original estimate, requiring adjustments to the reserve.
Deferred Tax Asset Valuation Allowance
We record deferred tax assets primarily from federal and state net operating loss carryovers and from research and development tax credit carryovers and to the extent the utilization of those loss carryovers and credits is doubtful, we record an allowance against the deferred tax assets. Generally, during periods of sustained profitability no allowance is recorded unless there is a specific credit that cannot be applied before it expires, or a loss in a jurisdiction that cannot be applied in other jurisdictions. We became profitable starting in fiscal 2001 and have remained profitable since. In fiscal 2007, we increased the valuation allowance against our deferred tax asset to $1,504,000 because of research and development tax credits that may exceed the limits imposed by Federal and State tax jurisdictions on use of credits and that may therefore not be realizable in future years.
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Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123(R)), effective for a company's first fiscal year beginning after June 15, 2005, SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires all share-based compensation, including grants of stock options, to be recognized in the statements of earnings. On August 1, 2005 we adopted SFAS No. 123(R), and elected the modified prospective transition method. This method permits us to apply the new requirements on a prospective basis. Our net income for fiscal 2007 and 2006, reflected stock-based compensation expense of $3,289,000 ($2,528,000 after tax, or $0.14 per diluted share) and $3,462,000 ($2,962,000 after tax, or $0.17 per diluted share). Our fiscal 2005 net income does not reflect stock-based compensation expense on stock options. Fiscal 2005 stock-based compensation expense on stock options under SFAS 123(R) would have been $5,292,000 ($3,169,000 after tax, or $0.16 per diluted share)
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Results of Operations
Fiscal Years Ended July 31, 2007, 2006 and 2005
Operating Expenses
The following table compares dollars (in thousands) and percentage changes in the Statements of Income between 2007 and 2006 and between 2006 and 2005.
On August 1, 2005, (beginning of fiscal 2006) we adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment (SFAS 123(R), which resulted in $3,289,000 of pre-tax expense, or ($2,528,000 after tax, or $0.14 per diluted share) for fiscal 2007 and $3,462,000 of pre-tax expense, or ($2,962,000 after tax, or $0.17 per diluted share) for fiscal 2006. Stock-based compensation prior to implementation of SFAS 123(R) in fiscal 2006 was reflected as a financial statement footnote disclosure. See Note 4 to the Financial Statements.
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Revenue
Total product sales for 2007 increased $4,775,000, or 8 percent, to $66,655,000, compared to $61,879,000 in fiscal 2006. Total product sales for fiscal 2006 decreased $3,174,000 or 5 percent to $61,879,000, compared to $65,053,000 in fiscal 2005.
The revenue increase during fiscal 2007 relates to the introduction of the AngioJet(R) Ultra Thrombectomy System and increased peripheral (medium length catheters) sales partially offset by a reduction in coronary (long length catheters) and AV sales (short length catheters). In addition, the increase was partially due to the introduction of the SafeSeal Hemostasis Patch and Fetch Aspiration Catheter. Fiscal 2007 revenue was negatively impacted some what due to a trade-in program designed to facilitate customer conversion to the new Ultra System Console from the first generation drive unit Customers who upgrade to an Ultra System Console within one year of the first generation drive unit purchase are eligible for this trade-in program and receive a credit towards the purchase of an Ultra Console.
Fiscal 2006 revenue decreased primarily due to the negative impact from the results of the AiMI post-marketing study impacting our coronary, or long catheter sales. Fiscal 2006 revenue was also affected by higher than normal sales force turnover.
Our fiscal 2007 allowance for sales returns increased due to the introduction of the AngioJet Ultra Thrombectomy System. First generation disposable catheters and pumps can not be used with the new Ultra System. Conversely, Ultra System disposable thrombectomy sets are not usable with the first generation AngioJet System. Customers who either purchased the Ultra Console or received an Ultra Console under an evaluation program could return their first generation catheters and pump sets for credit. As a result, our allowance for sales returns increased to 2.5 percent of gross revenue in fiscal 2007, compared to 1.1 percent in fiscal 2006, and 1.0 percent in fiscal 2005. In fiscal 2007 the majority of the returns were incurred in the last half of the fiscal year after the Ultra System was launched..
We sold 82 AngioJet System first-generation drive units and 113 Ultra System consoles worldwide in fiscal 2007, 156 drive units in fiscal 2006 and 215 drive units in fiscal 2005. The Ultra consoles were first introduced for sale in January 2007. As of July 31, 2007, we had a total of 2,144 AngioJet System drive units and Ultra System consoles in the field world wide, compared to 1,822 and 1,645 at the end of the fiscal 2006 and 2005, respectively.
During fiscal 2007, we sold a total of approximately 47,300 catheters and pump sets world wide versus approximately 47,000 in fiscal 2006 and 49,300 in fiscal 2005. This represents a 1 percent increase in fiscal 2007 and an 5 percent decrease in fiscal 2006 in unit catheter sales from the previous years.
We employ a variety of flexible drive unit and console sale programs, including outright sale and various evaluation programs. The purchasing cycle for the AngioJet System drive unit and Ultra consoles varies depending on the customer's budget cycle and is normally approximately six months from the beginning of the marketing cycle. We have signed contracts with seven hospital purchasing groups to increase market penetration. These hospital purchasing groups evaluate and screen new medical technologies, and negotiate pre-determined discounts on behalf of their members, and. By working with these hospital purchasing groups, we are placed on their recommended vendor list, and in some instances receive marketing support from the purchasing group supported by a marketing fee that we pay. These discounts and marketing fees have been offset by the increase in our sales to the member hospitals of the purchasing group. There has been no material negative effect on our 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.
International sales of the AngioJet System were $2,073,000 in fiscal 2007, $2,021,000 in fiscal 2006 and $1,938,000 in fiscal 2005. The modest increase in sales is primarily due to the introduction of the Fetch manual aspiration catheter and SpiroFlex catheter sales in the European market. The AngioJet Ultra Thrombectomy System is currently not being sold internationally.
Cost of Medical Products/Gross Profit Margin
Cost of medical products increased $3,226,000 to $20,340,000 in fiscal 2007 compared to fiscal 2006. The increase was primarily due to an increase in product unit sales including AngioJet sales, Fetch and SafeSeal, combined with slightly higher product costs on the new Ultra System product line.
Gross profit increased $1,550,000 to $46,315,000 or 69.5 percent of product sales in fiscal 2007 from $44,765,000 or 72.3 percent of product sales in fiscal 2006. The increase in gross profit was primarily due to the increase in sales volume offset by a shift in overall sales mix to lower-margin Ultra System Consoles from higher margin disposables, combined with slightly higher product costs on the new Ultra System line.
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Cost of medical products increased $147,000 to $17,114,000 in fiscal 2006 compared to fiscal 2005. The increase was primarily due to higher production overhead on lower production unit volumes combined with an increase in compensation charges under SFAS 123(R) of $418,000, offset by the reduction in AngioJet unit sales.
Gross profit decreased by $3,321,000 to $44,765,000 or 72.3 percent in fiscal 2006 from $48,086,000, or 73.9 percent of product sales in fiscal 2005. The decrease in the gross profit margin in fiscal 2006 and 2005 was primarily due to lower revenue unit volume.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased $5,258,000 to $38,248,000, or 57.4 percent of product sales, in fiscal 2007 from $32,990,000 or 53.3 percent of product sales in fiscal 2006. The primary factors for the expense increase for fiscal 2007 were sales force additions, commissions, and a new sales compensation plan which contributed $4,306,000 or 82 percent of the overall increase. Additional increases in fiscal 2007 included sales samples, convention, and travel expense.
Selling, general and administrative expense increased $4,365,000 to $32,990,000, or 53.3 percent of product sales, in fiscal 2006 from $28,625,000 or 44.0 percent of product sales in fiscal 2005. The expense increase for fiscal 2006 was attributable primarily to SFAS 123(R) stock-based compensation charges which contributed $2,279,000 or over half of the overall increase. We also had increased expenditures in fiscal 2006, however, in marketing, clinical study, and in the proportionate amount of salary, incentives and benefits for field sales personnel resulting from turnover.
We currently have a U.S. sales force of approximately 87 employees and expect that will be sufficient to grow sales and service our current customer base for the AngioJet System through fiscal 2008. We expect selling, general and administrative costs to decline as a percent of revenue starting in the second half of fiscal 2008.
Research and Development Expenses
Research and development expenses decreased $1,650,000 to $9,258,000, or 13.9 percent of product sales, in fiscal 2007 compared to $10,907,000 or 17.6 percent of product sales in fiscal 2006. The decrease was primarily due to the completion of the new AngioJet Ultra System Console and associated project to combine the pump and catheter disposables.
Research and development expenses increased $405,000 to $10,907,000, or 17.6 percent of product sales, in fiscal 2006 compared to $10,502,000 or 16.1 percent of product sales in fiscal 2005. The increase was primarily due to SFAS 123(R) impact of $765,000. Excluding the impact of SFAS 123(R), overall research and development expenses would have decreased by $360,000.
We believe that research and development expenses for AngioJet System applications and related products in fiscal 2008 will approximate 12 percent to 13 percent of product sales. Research and development expense levels are dependent upon the continuing development of its current products and investment in the development of new AngioJet System thrombectomy applications and related products.
Interest Income
Interest income increased $300,000 to $2,113,000 in fiscal 2007 compared to $1,813,000 in fiscal 2006. Fiscal 2006 interest income increased $539,000 in fiscal 2006 from $1,274,000 in fiscal 2005. The increases are due to the investing of excess cash and cash equivalents in a portfolio of marketable securities and to the interest rate levels. Fiscal 2008 interest income levels will be dependent on the amount of excess cash and cash equivalents invested and the interest rates.
Loss On Sale of Securities
Loss on sales of securities was $13,000 in fiscal 2007, $148,000 in fiscal 2006, and $114,000 in 2005. The losses were due to interest rate increases that reduced the fair market value of the investments in marketable securities. Future gains and losses on the sale of securities will be primarily dependent on interest rate fluctuations.
Provision for Income Taxes
We recorded a provision for income taxes of $853,000, or approximately 94 percent of income before income taxes, for fiscal 2007. We recorded a provision for income taxes of $1,723,000 and $3,964,000, or approximately 68 percent, and 39 percent of income before income taxes, for fiscal years 2006 and 2005, respectively.
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For fiscal 2007, our effective tax rate was 94 percent on a GAAP basis and 38 percent as adjusted to exclude the impact of SFAS 123 (R). The increase in the GAAP effective tax rate in the current year is primarily attributable to the treatment of incentive stock options (or ISO's) under SFAS 123 (R) and the level of income before income taxes. Unless there is a disqualifying disposition, we are not entitled to a deduction upon exercise of an ISO and although SFAS 123(R) now requires us to recognize expense over the vesting period, there is no offsetting tax benefit. In contrast, we are entitled to a deduction, and tax benefit, upon exercise of non-qualified stock options. Approximately 33 percent of stock-based compensation expense is related to ISO's in fiscal 2007 so the impact on our GAAP effective tax rate is significant.
For fiscal 2006, our effective tax rate was 68 percent on a GAAP basis and 37 percent as adjusted to exclude the impact of SFAS 123 (R). The increase in the GAAP effective tax rate in the current year is attributable to the treatment of incentive stock options (or ISO's) under SFAS 123 (R) as described above. Approximately 63 percent of stock-based compensation expense for fiscal 2006 was related ISO's so the impact on our GAAP effective tax rate was significant.
During fiscal 2005, we determined that the scope of our operations caused us to have nexus in states in which we had not previously filed corporate state income tax returns. We filed the appropriate corporate state income tax returns in these states, including returns for prior years, to obtain the appropriate net operating loss carry-forwards. We expensed an additional $165,000 of corporate state income tax expense relating to the filing of these state corporate income tax returns during fiscal 2005.
We increased our deferred tax asset by an additional $78,000 in fiscal 2007, $56,000 in fiscal 2006, and $466,000 in fiscal 2005, as a result of the tax benefit from exercise of stock options and an associated disqualifying disposition that are recorded directly in the Statement of Changes in Shareholders' Equity. In fiscal 2006, we performed a study of our research and development tax credit for the fiscal years 1995 through 2005. This analysis resulted in a net increase in the our net research and development tax credits that can be carried forward of $594,000. The valuation allowance against the deferred tax asset was increased by $91,000 in fiscal 2007 to $1,504,000. Of this allowance, $1,296,000 relates to research and development tax credits that may not be realizable. An additional $153,000 valuation allowance relates to the capital loss carryover.
Net Income We recorded net income of $56,000, or $0.00 per diluted share, in fiscal 2007, compared to net income of $809,000, or $0.05 per diluted share, in fiscal 2006 and net income of $6,155,000, or $0.34 per diluted share, in fiscal 2005. SFAS No.123(R) was adopted on August 1, 2006. Our net income for fiscal 2005 does not reflect the impact of adopting SFAS No.123(R). The impact on the fiscal 2005 net income if SFAS No.123(R) was included is stock-based compensation expense, net of tax, of $2,986,000 or $0.16 per diluted share.
Liquidity and Capital Resources
Our cash, cash equivalents, and marketable securities totaled approximately $42,872,000 at July 31, 2007 compared to $48,116,000 at July 31, 2006. The primary factors in the decrease were the repurchase of our common stock for $4,413,000, investment in Rafael Medical of $2,613,000 and capital expenditures of $1,744,000 which was partially offset by the cash provided by operations of $2,586,000.
During fiscal 2007, we generated $2,586,000 of cash from operating activities, which resulted primarily from $56,000 net income, depreciation of $2,889,000, a decrease in deferred tax assets of $389,000, non-cash stock-based compensation expense of $4,050,000, and an increase in accounts payable and accrued liabilities of $1,335,000. These cash sources were partially offset by increases in accounts receivables of $291,000, inventories of $4,310,000, and in prepaid expenses and other assets of $1,548,000. The stock-based compensation includes the expensing of stock options under SFAS 123 (R). The increase in trade accounts payable and accrued liabilities was due to the timing of the payments, including an increase in accrued compensation which was paid subsequent to year-end. Trade receivables increased in fiscal 2007 due to the increase in product sales. Inventory increased due to the introduction of new products in fiscal 2007, primarily the AngioJet Ultra System. The increase in prepaid expenses is primarily due to increase in deposits with inventory vendors.
We generated $389,000 of cash from investing activities in fiscal 2007. This includes the net proceeds from marketable securities of $4,727,000, offset partially by the investment in Rafael Medical of $2,613,000 and the purchase of $1,744,000 of property and equipment.
We used $3,817,000 of cash in financing activities in fiscal 2007, to repurchase of 376,500 shares of our common stock for $4,413,000, offset partially by $596,000 of cash received in connection with the exercise of stock options.
During fiscal 2006, we generated $8,470,000 of cash from operating activities, which resulted primarily from $809,000 net income, depreciation of $2,564,000, a decrease in deferred tax assets of $1,220,000, stock-based compensation expense of $3,554,000, and an increase in accounts payable and accrued liabilities of $1,674,000. These cash sources were partially offset by increases in inventories of $662,000, and in prepaid expenses and other assets of $802,000. The stock-based compensation includes the expensing of stock options under SFAS 123 (R). The increase in trade accounts payable and accrued liabilities was due to the timing of the payments, including an increase in accrued compensation which was paid subsequent to year-end. Inventory increased due to the introduction of new products in fiscal 2006. The increase in prepaid expenses is primarily due to increase in deposits with inventory vendors.
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We used $7,938,000 in investing activities in fiscal 2006. This includes the net purchase of marketable securities of $5,776,000 and the purchase of $2,164,000 of property and equipment.
We used $2,283,000 of cash in financing activities in fiscal 2006, which resulted from the repurchase of 312,500 shares of our common stock for $3,163,000, offset partially by the cash received in connection with the exercise of stock options for $919,000.
During fiscal 2005, we generated $11,919,000 of cash from operating activities, which resulted primarily from $6,155,000 net income, depreciation of $2,341,000, a decrease in deferred tax assets of $3,374,000, and a decrease in accounts receivable of $1,957,000. These sources of cash from operations were partially offset by cash used to fund an increase in inventories of $1,021,000, an increase in prepaid expenses and other assets of $424,000, and a decrease in accounts payable and accrued liabilities of $840,000. The $1,957,000 decrease in receivables was due to decrease in revenue in fiscal 2005 as compared to fiscal 2004. Inventory increased as we built additional units to meet the anticipated increase in demand of the AngioJet System that was not realized because of the negative impact of the AiMI post-marketing study results. The decrease in trade accounts payable and accrued liabilities was due to the timing of the payments.
We used $1,368,000 of cash in investing activities during fiscal 2005. This includes proceeds from the sale of marketable securities of $279,000 and the purchase of $1,661,000 of property and equipment.
We used $13,706,000 of cash in financing activities in fiscal 2005, which resulted from the repurchase of 1,133,100 shares of our common stock for $14,961,000, offset partially by the cash received in connection with the exercise of stock options for $1,256,000.
Cash from operating activities in fiscal 2007, 2006, and 2005 reflect depreciation for company-owned drive units at customer locations, as well as property and equipment. In addition, the decrease in the deferred tax asset in fiscal years 2007, 2006, and 2005 was due to the utilization of the net operating loss carry-forwards to offset current taxes payable.
Except with respect to lease obligations, purchase obligations and our commitment to provide $1,500,000 of financing to Rafael Medical, we do not have any substantial commitments for capital expenditures. The following table sets forth contractual obligations at July 31, 2007:
o Operating Lease Obligations - See Note 8 to the Financial Statements. o Purchase Obligations - These are open committed purchase orders for inventory and operational expenses. o Rafael Medical Obligations - See Note 5 to the Financial Statements. o Other Long-Term Liabilities - See Note 2 to the Financial Statements.
With over $42 million of cash and marketable securities, we believe our cash on hand and funds from operations will be sufficient to cover both our short-term and long-term operating requirements.
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Off-Balance Sheet Arrangements
We do not have any material off-balance-sheet financial arrangements.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk:
We primarily invest our 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. Loss on sales of securities was $13,000 in fiscal 2007, $148,000 in fiscal 2006 and $114,000 in 2005. The losses were due to 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.
Our foreign product sales are in U.S. Dollars ("USD") except for product sales in Germany, which are in euro's. The German product sales were minimal during fiscal 2007. We have 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 July 31, 2007.
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Item 8.
Item 8. Financial Statements and Supplementary Data:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Possis Medical, Inc.:
We have audited the accompanying balance sheets of Possis Medical, Inc. (the "Company") as of July 31, 2007 and 2006, and the related statements of income and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended July 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Possis Medical, Inc. at July 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 4 to the financial statements, the Company changed its method of accounting for shared-based payments in 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of July 31, 2007, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 12, 2007, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
Minneapolis, MN October 12, 2007
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POSSIS MEDICAL, INC. BALANCE SHEETS
See notes to financial statements.
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POSSIS MEDICAL, INC. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED JULY 31
See notes to financial statements.
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POSSIS MEDICAL, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31
See notes to financial statements.
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POSSIS MEDICAL, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Possis Medical, Inc. (the "Company") is a developer, manufacturer and marketer of medical devices, operating in one business segment. The Company was incorporated in 1956 and has operated several businesses over the last 50 years. In 1990, the Company decided to focus on medical products and in 1993 changed its name to Possis Medical, Inc. The Company's primary product , the AngioJet Rheolytic Thrombectomy System, received U.S. marketing approval for use in arterio-venous (AV) access hemodialysis grafts and native fistulas in December 1996, for use in native coronary arteries and coronary bypass grafts in March 1999, and for use in leg arteries in April 2000.
The Company's thrombectomy products utilize new technology, and the production processes and equipment used to manufacture them are unique and have been designed and constructed by Company employees. In addition, the medical device industry is subject to the laws and oversight of the United States Food and Drug Administration as well as non-U.S. regulatory bodies in countries where the Company does business.
Use of Estimates 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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents.
Marketable Securities During fiscal 2007 and 2006, the Company primarily invested its excess cash and cash equivalents in a professionally managed portfolio of marketable securities. All Company securities in this portfolio as of July 31, 2007 and 2006 are classified as available-for-sale and consist primarily of U.S. government securities and corporate/municipal bonds. These investments are reported at fair value with a net unrealized gain (loss) for the years ended July 31, 2007, 2006 and 2005, of approximately $269,000, ($89,000) and ($104,000), respectively, net of tax effect, which is included in other comprehensive income (loss). The cost of securities sold is based on the specific identification method. No impairment losses were recorded during fiscal years 2007, 2006, and 2005.
Information regarding the Company's available-for-sale marketable securities as of July 31, 2007 and 2006 is as follows:
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The following information recaps marketable securities for the years ended July 31, 2007 and 2006:
July 31, 2007 -----------------------------------------------------------
Inventories
Inventories are stated at the lower of cost (on the first-in, first-out basis) or market. Inventory balances at July 31 were as follows:
2007 2006 ------------ ------------ Finished goods $4,206,290 $2,021,448 Work-in-process 2,544,172 1,381,157 Raw materials 2,601,426 2,513,345 ------------ ------------ $9,351,888 $5,915,950 ============ ============
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 at July 31 were as follows:
Impairment of Long-Lived Assets
Management of the Company periodically reviews the carrying value of property and equipment owned by the Company by comparing the carrying value of these assets with their related expected future net cash flows. Should the sum of the related expected future net cash flows be less than the carrying value, management will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. No impairment losses were recorded during fiscal 2007, 2006 and 2005.
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Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss or tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the variances between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance to reflect the possibility that some portion or all of the deferred tax assets may not be realized.
Derivative Instruments and Hedging Activities
All contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company's policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales.
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 we receive 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. We do not lease AngioJet drive units. Revenues associated with products that are shipped to customers from our 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 that is generally twelve months.
Shipping and Handling
The Company recognizes all amounts billed to customers in a sales transaction related to shipping and handling as product sales. The Company records costs related to shipping and handling in cost of medical products.
Fair Value of Financial Instruments
The carrying value of all financial instruments approximates fair value due to the short-term nature of the instruments.
Net Income Per Common Share
Net income per common share for fiscal 2007, 2006 and 2005 is computed by dividing net income by the weighted average number of common shares outstanding. Options representing 1,652,538, 1,787,072, and 1,328,814, shares of common stock at July 31, 2007, 2006 and 2005, respectively, have been excluded from the computations because their effect would have been antidilutive.
Fair Value Measurements
In March 2006, the FASB issued FASB No. 157, "Fair Value Measurements". This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Adoption is not expected to have a material impact on the Company's earnings, financial position or cash flows.
Accounting for Uncertainty in Income Taxes
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In June 2006, The FASB issued FASB Interpretation No. 48. "Accounting for Uncertainty in Income Taxes", an Interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with this Interpretation is a two-step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The Company is in the process of evaluating the impact of adopting this interpretation.
Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued FASB No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans". This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Adoption is not expected to have a material impact on our earnings, financial position or cash flows.
The Fair Value Option for Financial Assets and Liabilities
In February 2007, the FASB issued FASB No. 159, "The Fair Value Option for Financial Assets and Liabilities". This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Adoption is not expected to have a material impact on our earnings, financial position or cash flows.
2. EXECUTIVE BENEFIT PLAN
Effective February 1, 2004, the Company entered into a Supplemental Executive Retirement Deferred Compensation Agreement (SERP) with the Company's Chief Executive Officer (CEO). The Agreement requires the Company to establish an account on behalf of the CEO and to fund it yearly until the CEO reaches 65 years of age or early retirement, whichever comes first. The estimated yearly funding amount is approximately $203,000 for seven years. The target benefit is an annual benefit, for a ten-year period, equal to one-half of the CEO's base compensation at the time benefits become payable under the SERP.
In fiscal 2005, the Company established a Nonqualified Profit Sharing Plan (the "Plan") for executive officers. The Plan requires annual awards based upon target goals and contribution levels established by the Board of Directors. The Plan requires the Company to establish an account on behalf of each participant and to credit the participant account yearly. The estimated yearly funding amount for the 2007, 2006 and 2005 Plan Year is $63,000, $51,000, and $50,000, respectively. The target benefit is an annual benefit, for a ten-year period, equal to one-tenth of the participant's account at the time benefits become payable under the Plan. The fiscal 2007 benefit was funded subsequent to year end.
Total compensation expense resulting from the SERP and Plan for fiscal 2007, 2006 and 2005 is approximately $378,000, $296,000, and $344,000, respectively, which is included in selling, general and administrative expenses. As of July 31, 2007 and 2006, the assets of $1,081,000 and $723,000 and liabilities of $1,202,000 and $824,000 relating to the SERP and Plan are included in the balance sheet under the captions Other Assets and Other Liabilities.
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3. INCOME TAXES
At July 31, 2007, the Company had net operating loss carry-forwards of approximately $9,118,000 for federal tax purposes, which expire in 2020 through 2025, and $6,390,000 for Minnesota tax purposes, which expire in 2013 through 2016.
In addition, at July 31, 2007, the Company has approximately $3,999,000 in federal and state tax credits, all of which are research and development tax credits, which expire from 2008 through 2027, and an approximately $938,000 alternative minimum tax credit, which does not expire. The Company established a valuation allowance for $1,296,000 against these research and development tax credits as a portion of them may not be realizable in future years. In fiscal 2007, an additional $33,000 valuation allowance relates to the capital loss carryover, an additional $76,000 valuation allowance was established that relates to state research and development tax credits and reduced by $18,000 that relates to state net operating loss carryforwards.
The components of the income tax expense as of July 31, 2007, 2006 and 2005 are as follows:
Deferred tax assets and liabilities as of July 31, 2007 and 2006 are described in the table below.
2007 2006 --------------- --------------- Current Assets (liabilities): Allowance for doubtful accounts and returns $ 488,000 $ 228,000 Inventory 740,000 479,000 Deferred Revenue 478,000 429,000 Employee compensation and benefits 287,000 183,000 Other 17,000 12,000 --------------- --------------- Net $ 2,010,000 $ 1,331,000 =============== =============== Long-term assets (liabilities): Net operating loss carry-forwards $ 3,513,000 $ 5,855,000 Amortization of patents 1,125,000 975,000 Tax credits 4,943,000 4,643,000 Compensation 1,679,000 779,000 Depreciation (429,000) (411,000) Unrealized loss on investments 38,000 208,000 Capital loss carry-forward 153,000 120,000 --------------- --------------- 11,022,000 12,169,000 Valuation allowance (1,504,000) (1,413,000) --------------- --------------- Net $ 9,518,000 $ 10,756,000 =============== ===============
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The effective income tax rate differed from the U.S. federal statutory rate for each of the three years ended July 31, 2007, 2006 and 2005 as follows:
Deferred tax benefit of $78,000. $56,000, and $466,000 in fiscal 2007, 2006 and 2005, respectively, relate to disqualifying dispositions of incentive stock options, which were recorded directly in equity.
4.SHAREHOLDERS' EQUITY
Stock Based Compensation
We have stock-based compensation plans under which we issue stock options, non-vested share awards and discounted purchase rights under an employee stock purchase (Section 423) plan (ESPP). Employee and director stock options issued prior to July 31, 2005 have a ten-year term. Employee stock options issued subsequent to July 31, 2005 have a five-year term. Outstanding stock options issued to employees generally vest over a four-year period however, on occasion the Company has issued options that vest based upon achieving corporate objectives or stock price performance. Outstanding stock options issued to directors vest over the following periods, based on the basis for issuance: a) six months - stock options in lieu of compensation for services rendered as directors, b) four years - annual grants of stock options and c) stock price performance with a seven-year cliff period - service award options. Directors receive an annual non-vested share award that vests upon continued employment (time based) of one year. Our ESPP permits employees to purchase stock at 85% of the market price of our common stock at the end of the quarterly purchase period.
Prior to August 1, 2005, we applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for these plans. No stock-based compensation expense was recognized in our statements of income prior to fiscal 2006 for stock option awards, as the exercise price was equal to the market price of our stock on the date of grant. In addition, we did not recognize any stock-based compensation expense for our ESPP as it is intended to be a plan that qualifies under Section 423 of the Internal Revenue Code of 1986, as amended.
On August 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123(R)), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for fiscal 2007 and 2006, includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of July 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation; and (b) compensation expense for all stock-based awards granted subsequent to July 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). We recognized compensation expense for stock options and non-vested share awards, that are either market-based or time-based, on a straight-line basis over the requisite service period of the award. Total stock-based compensation expense for stock options issued to employees included in our statement of income for fiscal 2007 and 2006, was $3,289,000 (2,528,000, net of tax) and $3,462,000 ($2,962,000, net of tax), respectively. In accordance with the modified prospective transition method of SFAS No. 123(R), financial results for prior periods have not been restated. We included additional stock-based compensation of $172,000 and $138,000 resulting from discounted stock options issued to directors for fiscal 2007 and 2006, and $589,000 and $36,000 resulting from amortization of restricted stock issued to employees and directors in fiscal 2007 and 2006. Fiscal 2006 stock compensation was reduced by $82,000 relating to cancelled restricted stock.
The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation for fiscal 2005 under FAS 123 prior to revision.
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As Reported Net income, as reported $ 6,155,418
Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax (3,169,000) Net income, pro forma $ 2,986,418
Net income per common share Basic-as reported $ 0.35 Basic-pro forma $ 0.17
Diluted-as reported $ 0.34 Diluted-pro forma $ 0.16
Prior to the adoption of SFAS No. 123(R), we reported all tax benefits resulting from the exercise of stock options as operating cash flows in our statements of cash flows. In accordance with SFAS No. 123(R), for fiscal 2007 and 2006, we revised our statement of cash flows presentation to report the excess tax benefits from the exercise of stock options as financing cash flows. For fiscal 2007 and 2006, $78,000 and $39,000, respectively, of excess tax benefits were reported as financing cash flows rather than operating cash flows.
We estimated the fair values using the Black-Scholes option-pricing model prior to August 1, 2005 and using the Actuarial Binomial option-pricing model subsequent to July 31, 2005, modified for dividends and using the following assumptions:
2007 2006 2005 ---- ---- ---- Dividend yield None None None Expected volatility 54-57% 38-60% 54-68% Risk-free interest rate 4.7-5.1% 3.7-5.1% 4.1-4.5% Expected life of option 49-50 mo. 46-102 mo. 63-84 mo. Fair value of options on grant date $1,795,000 $2,579,000 $7,635,000 ========== ========== ==========
Forfeitures are estimated based on historical experience.
o Risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of our stock options. o In 2007 and 2006 we used an independent valuation advisor to assist us in computing expected stock price volatility. In fiscal 2005, we used historical market price data. o We estimate the expected life of stock options based upon historical experience
Common Stock Repurchased
The Company's Board of Directors authorized share repurchase program of $15,000,000 in February 2005 and $15,000,000 in December 2006. As of July 31, 2007, the share repurchase authorization remaining is $10,587,000.
During fiscal 2005, in open market transactions, the Company repurchased 1,133,100 shares of its common stock, at an average price of approximately $13.20 per share. During fiscal 2006, in open market transactions, the Company repurchased 312,491 shares of its common stock at an average price of approximately $10.12 per share. During fiscal 2007, in open market transactions, the company repurchased 376,490 shares of its common stock at an average price of approximately $11.72 per share.
Since the inception of its repurchase programs, the Company has repurchased 2,312,381 shares of its common stock at an average price of approximately $13.64 per share.
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Stock Options
In December 1999, the Company established the 1999 Stock Compensation Plan (the 1999 Plan), which replaced the 1992 Stock Compensation Plan (the 1992 Plan). Although the 1992 Plan remains in effect for options outstanding, no new options may be granted under this plan.
The 1999 Plan authorizes awards of the following type of equity-based compensation: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock, annual grants of stock options to directors, stock options to directors in lieu of compensation for services rendered as directors, and other stock-based awards valued in whole or in part by reference to stock of the Company. No incentive stock options may be granted on or after December 16, 2009, nor shall such options remain valid beyond ten years following the date of grant.
The total number of shares of stock reserved and available for distribution under the 1999 Plan originally was 2,000,000 shares, all of which may be issued as incentive stock options. The total number of shares of stock reserved and available for distribution under the 1999 Plan has been increased annually since August 1, 2000 by 2 percent of the number of shares of the Company's common stock outstanding on July 31 of the prior fiscal year.
At July 31, 2007, there were 3,324,666 shares reserved for outstanding options under all plans and 370,764 shares were available for granting of options under the 1999 Plan.
In fiscal 2007, 2006 and 2005, the Company granted 25,464, 27,494, and 18,807 compensatory options, respectively, to its outside directors in lieu of cash payments for directors fees. These options vest six months after date of grant and expire not more than ten years from date of grant. The expense associated with compensatory options to outside directors was approximately $172,000, $138,000, and $123,000 for the years ended July 31, 2007, 2006 and 2005, respectively.
A summary of changes in outstanding options for each of the three years ended July 31 follows:
Stock option weighted-average exercise prices during fiscal 2007, 2006 and 2005 are summarized below:
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The following table summarizes information concerning options outstanding and exercisable options as of July 31, 2007:
Non-Vested Share Awards
The fair value of non-vested market-based and time-based share awards is determined based on generally accepted valuation techniques and the closing market price of our stock on the date of grant. A summary of the status of our market-based and time-based share awards for each of the three years ended July 31 follows:
2007 2006 2005 ------------- ------------- -------------- Outstanding at beginning of year 3,594 2,754 1,884 Granted 66,564 21,947 2,754 Vested (46,300) (14,818) (1,884) Forfeited/canceled (20,684) (6,289) -- ------------- ------------- -------------- Outstanding at end of year 3,174 3,594 2,754 ============= ============= ==============
Share awards fair value during fiscal 2007, 2006 and 2005 are summarized below:
2007 2006 2005 ------------ ------------ -------------- Outstanding at beginning of year $ 8.36 $ 11.70 $ 28.60 Granted 8.89 12.15 13.08 Vested 9.03 12.47 13.08 Forfeited/canceled 8.66 13.03 -- Outstanding at end of year $ 11.12 $ 8.36 $ 11.70 ============ ============ =============
The aggregate intrinsic value of options outstanding and exercisable as of July 31, 2007, (the amount by which the market price of the stock on July 31, 2007, exceeded the exercise price of the stock on the date of grant) was $6,850,000 and $5,744,000, respectively.
In August 2006, the Company issued 63,390 shares of restricted stock to management and executives of the Company as part of the fiscal 2006 management incentive program. The restricted stock vested when our stock price closed at $11.26 or greater for twenty consecutive trading days, which occurred on December 22, 2006. The $548,957 fair market value of the restricted stock was expensed in fiscal 2007 as compensation expense. We cancelled 20,684 shares of restricted stock due to management and executives electing to receive fewer shares in lieu of paying withholding taxes.
In fiscal 2007, the Company granted 3,174 shares of restricted stock to the Board of Directors under the terms of the 1999 Plan, which vest in twelve months. The fair market value of the restricted shares was approximately $35,000 as of July 31, 2007. In case of termination of a member of the Board of Directors, unvested shares are forfeited.
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In August, 2005, the Company issued 18,353 shares of restricted stock to executives of the Company as part of the fiscal 2005 management incentive program. The restricted stock vested when our stock price closed at $13.00 or greater, which occurred on August 31, 2005. The $230,600 fair market value of the restricted stock was expensed in fiscal 2005 as compensation expense. We cancelled 6,289 shares of restricted stock due to executives electing to receive fewer shares in lieu of paying withholding taxes.
In fiscal 2006, the Company granted 3,594 shares of restricted stock to the Board of Directors under the terms of the 1999 Plan, which vest in twelve months. The fair market value of the restricted shares was approximately $30,000 as of July 31, 2006. In case of termination of a member of the Board of Directors, unvested shares are forfeited.
In fiscal 2005, the Company granted 2,754 shares of restricted stock to the Board of Directors under the terms of the 1999 Plan, which vest in twelve months. The fair market value of the restricted shares was approximately $32,000 as of July 31, 2005. In case of termination of a member of the Board of Directors, unvested shares are forfeited.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan, effective January 1, 1991, enables eligible employees, through payroll deduction, to purchase the Company's common stock at the end of each calendar quarter. For fiscal 2007 and 2006, the purchase price is 85 percent of the fair market value of the stock on the last day of the calendar quarter. The Company issued 30,099 shares in fiscal 2007, 61,665 shares in fiscal 2006, and 37,580 shares in fiscal 2005 under this Plan. Prior to amendment in fiscal 2006, the plan enabled eligible employees to purchase shares at the lower of 85 percent of the fair market value of the stock on the first or last day of the calendar year.
5. INVESTMENT IN RAFAEL MEDICAL
We invested in Rafael Medical Technologies, Inc. (Rafael), a company developing an inferior vena cava (IVC) filter named SafeFlo(R). In December 2006, we invested $2.5 million in a series of preferred stock of Rafael that represents a 15 percent ownership interest and also executed a stock purchase agreement that provides us a right for a period of three-year to purchase the remaining capital stock of Rafael that is or may become outstanding. We have committed to provide up to an additional $1.5 million as requested by Rafael in secured debt financing if necessary during this three year period at Rafael's election, none of which is outstanding at July 31, 2007. The preferred stock purchase agreement provides us with a number of rights as an investor. The total investment on the balance sheet of $2,613,000 reflects $113,000 of transaction related costs that were capitalized. As of July 31, 2007, management has determined that there is no impairment in the value of its investment in Rafael which is accounted for under the cost method.
6. 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. A summary of changes in the Company's product warranty liability of each of the three years ended July 31 follows:
7. 401 k PLAN
The Company has an employee savings and profit sharing plan for all qualified employees who have completed six months of service. Company contributions are made at the discretion of the Board of Directors subject to the maximum amount allowed under the Internal Revenue Code. Contributions for the years ended July 31, 2007, 2006 and 2005 were $445,000, $372,000, and $358,000, respectively.
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8. COMMITMENTS AND CONTINGENCIES
The Company's operations are conducted from a leased facility under an operating lease that expires in fiscal 2011. The lease can be canceled by either party with notice and payment of a termination fee.
The Company is also leasing administrative, shipping and warehouse facilities under an operating lease that expires in fiscal 2009 and is leasing a sales office under an operating lease that expires in 2008.
Total rental expense charged to operations was approximately $441,000, $426,000, and $406,000, for the years ended July 31, 2007, 2006, and 2005, respectively.
Future minimum payments under the non-cancelable operating leases at July 31, 2007 are:
Year Ending July Amount ------------------ ----------------- 2008 $438,000 2009 394,000 2010 273,000 2011 185,000 ---------- Total minimum lease payments $1,290,000 ==========
We were served with a shareholder lawsuit filed with the Minnesota Federal District Court on June 3, 2005, alleging that Possis Medical, Inc. and named individual officers violated federal securities laws. The Complaint seeks class action status and unspecified damages. The suit was dismissed with prejudice by order of the Court on February 1, 2007. Plaintiffs have filed an appeal from the Court's order and the appeal is still pending. We continue to believe that the allegations of the lawsuit are without merit and are contesting the lawsuit vigorously. While we do not believe that the amount of any potential liability associated with these matters can be accurately estimated at this time, we believe we have adequate insurance coverage to cover any potential damages and expenses. However, an unfavorable resolution of these matters could have a material adverse effect on our results of operations, financial condition or cash flows.
9. 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 and vascular 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 for each of the three years ended July 31, 2007, 2006 and 2005 are as follows:
2007 2006 2005 ------------- -------------- ---------------- United States $ 64,581,303 $ 59,858,452 $ 63,115,776 Outside the United States 2,073,289 2,020,926 1,937,553 ------------- -------------- ---------------- Total revenues $ 66,654,592 $ 61,879,378 $ 65,053,329 ============= ============== ================
In fiscal 2007, 2006, and 2005 there were no individual customers with sales exceeding 10 percent of total revenues.
10. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) Fiscal Year Ended July 31,
Fiscal Year Ended July 31, 2007 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Product sales $ 15,603,881 $ 15,806,085 $ 16,239,689 $ 19,004,937 Gross profit 11,195,687 11,068,685 11,046,343 13,004,081 Net income (loss) (233,649) 173,700 44,069 71,680
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Net income (loss) per common share Basic $ (.01) $ .01 $ .00 $ .00 Diluted $ (.01) $ .01 $ .00 $ .00
Net income (loss) per common share Basic $.02 $.02 $ .02 $.03 Diluted $.01 $.02 $(.02) $.03
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
During fiscal 2007 and 2006, there were no changes in or disagreements with the Company's independent registered public accounting firm on accounting procedures or accounting and financial disclosures.
Item 9A.
Item 9A. 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.
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Internal control over financial reporting - -----------------------------------------
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
- - Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
- - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
- - Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Possis Medical Inc.'s internal control over financial reporting as of July 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -- Integrated Framework. Based on management's assessment and those criteria, it believes that, as of July 31, 2007, Possis Medical, Inc. maintained effective internal control over financial reporting.
Possis Medical, Inc.'s independent registered public accounting firm has audited management's assessment of the effectiveness of Possis Medical, Inc.'s internal control over financial reporting as of
July 31, 2007, as stated in the Report of Independent Registered Public Accounting Firm, [appearing under Item 9A], which expresses unqualified opinions on management's assessment and on the effectiveness of Possis Medical, Inc.'s internal controls over financial reporting as of July 31, 2007.
/s/ Robert G. Dutcher --------------------------------------- Robert G. Dutcher Chief Executive Officer
October 12, 2007
/s/ Jules L. Fisher --------------------------------------- Jules L. Fisher Chief Financial Officer October 12, 2007
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Possis Medical, Inc.:
We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Possis Medical, Inc. (the "Company") maintained effective internal control over financial reporting as July 31, 2007, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of July 31, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2007, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements and financial statement schedule as of and for the year ended July 31, 2007, of the Company and our report dated October 12, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Minneapolis, MN October 12, 2007
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Item 9B.
Item 9B. Other Information
None. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant:
Information under the heading "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference. The information regarding executive officers is included in Part I of this report under the caption "Executive Officers of the Registrant."
Item 11.
Item 11. Executive Compensation:
Information regarding compensation of directors and officers for the fiscal year ended July 31, 2007 is in the Proxy Statement under the heading "Election of Directors" and "Executive Compensation" and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters:
The security ownership of certain beneficial owners and management is contained in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference.
Information regarding securities authorized for issuance under equity compensation plans is contained in the Proxy Statement under the heading "Securities Authorized for Issuance Under Equity Compensation Plans" and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions:
Information regarding related party transactions is contained under the heading "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services:
Information under the heading "Audit Committee Report and Payment of Fees to Accountants" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules:
(a) 1. Financial Statements
The following financial statements of the Company, accompanied by a Report of Independent Registered Public Accounting Firm, are contained in Part II, Item 8:
Balance Sheets, July 31, 2007 and 2006 Statements of Income and Comprehensive Income for each of the three years in the period ended July 31, 2007 Statements of Cash Flows for each of the three years in the period ended July 31, 2007 Statements of Changes in Shareholders' Equity for each of the three years in the period ended July 31, 2007 Notes to Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are submitted herewith:
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SCHEDULE II - Valuation Accounts for each of the three years in the period ended July 31, 2007 Other schedules are omitted because they are not required or are not applicable or because the required information is included in the financial statements listed above.
3. 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 on the following pages.
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* Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POSSIS MEDICAL, INC.
Dated: October 12, 2007 by: /s/ Jules L. Fisher ------------------------------ Jules L. Fisher Chief Financial Officer and Vice President of Finance
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
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SCHEDULE II
POSSIS MEDICAL, INC.
VALUATION ACCOUNTS YEARS ENDED JULY 31, 2007, 2006 AND 2005
Valuation allowance on deferred tax asset:
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POSSIS MEDICAL, INC. FORM 10-K - ITEM 15(a)3
EXHIBIT INDEX
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