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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange
- ------ Act of 1934
For the quarterly period ended December 31, 1997
-----------------
- ------- Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
-------------------- ---------------------
Commission File No. 0-18785
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OXBORO MEDICAL INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1391803
- -------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13828 Lincoln Street NE, Ham Lake, Minnesota 55304
- -------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612) 755-9516
--------------------------------
No Change
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
2,658,942 shares of Common Stock at January 31, 1998
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TABLE OF CONTENTS
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at 3
December 31, 1997 (unaudited) and September 30, 1997
Condensed Consolidated Statements of Earnings for
Three Months Ended December 31, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for
Three Months Ended December 31, 1997 and 1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
(unaudited)
Item 2. Management's Discussion and Analysis 7
Part II. Other Information
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
2
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I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,486 $ 124,815
Trade receivables, less allowance for doubtful accounts
of $23,304 and $28,276, respectively 700,564 719,547
Inventories 1,820,971 1,659,838
Deferred income taxes 188,000 188,000
Other current assets 161,592 250,329
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TOTAL CURRENT ASSETS 2,880,613 2,942,529
PROPERTY AND EQUIPMENT:
Land 57,211 57,211
Building 897,589 891,919
Furniture and equipment 1,255,874 1,243,080
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2,210,674 2,192,210
Less accumulated depreciation (891,211) (841,582)
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1,319,463 1,350,628
OTHER ASSETS
Cash surrender value - life insurance 213,351 203,770
Inventories 910,000 910,000
Other 168,694 171,250
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TOTAL ASSETS $5,492,121 $5,578,177
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----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 43,313 $ 131,313
Current maturities of long-term obligation 6,411 6,411
Accounts payable 198,643 231,704
Accrued salaries, wages, payroll taxes 232,973 245,126
Income taxes payable 53,755 32,602
Other accrued expenses 134,029 195,139
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TOTAL CURRENT LIABILITIES 669,124 842,295
LONG-TERM OBLIGATION, less current maturities 385,258 386,754
DEFERRED INCOME TAXES 115,000 115,000
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value 22,586 22,586
Additional paid-in capital 1,313,057 1,313,057
Retained earnings 3,080,902 2,992,291
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4,416,545 4,327,934
Less: Receivable from ESOP (93,806) (93,806)
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TOTAL SHAREHOLDERS' EQUITY 4,322,739 4,234,128
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,492,121 $5,578,177
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</TABLE>
See accompanying notes to financial statements.
3
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
-------------------------
1997 1996
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<S> <C> <C>
Net sales $ 1,177,746 $ 1,139,632
Cost of goods sold 411,281 320,396
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Gross margin 766,465 819,236
Selling, general and administrative expenses 649,728 773,412
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Operating earnings 116,737 45,824
Interest expense (10,584) (11,238)
Interest and other income 4,611 10,162
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Earnings before income taxes 110,764 44,748
Income taxes 22,153 10,382
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Net earnings $ 88,611 $ 34,366
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Net earnings per common and common equivalent share:
Basic $.04 $.01
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Diluted $.04 $.01
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Weighted average common and common equivalent
shares outstanding:
Basic 2,258,578 2,672,278
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Diluted 2,275,459 2,673,091
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
----------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 88,611 $ 34,366
Net earnings
Adjustments to reconcile net earnings to net cash used in
Operating activities:
Depreciation and amortization 49,629 45,271
Increase in cash value of life insurance (9,581) (19,736)
Change in operating assets and current liabilities:
Receivables 18,983 (985)
Inventories (161,133) (175,071)
Other current assets 88,737 5,323
Accounts payable (33,061) 133,704
Accrued expenses (73,263) (154,252)
Income taxes payable 21,153 11,669
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NET CASH USED IN OPERATING ACTIVITIES (9,925) (119,711)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction of (additions to) other assets 2,556 (65,157)
Purchase of property and equipment (18,464) (66,963)
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NET CASH USED IN INVESTING ACTIVITIES (15,908) (132,120)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under (payments on) note payable to bank (88,000) 252,000
Payments on long-term obligation (1,496) (1,606)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (89,496) 250,394
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (115,329) (1,437)
CASH AND CASH EQUIVALENTS, at beginning of period 124,815 13,323
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CASH AND CASH EQUIVALENTS, at end of period $ 9,486 $ 11,886
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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OXBORO MEDICAL INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation
of results for such periods. The results of operations for any
interim period are not necessarily indicative of results for the full
year. These financial statements should be read in conjunction with
the financial statements and notes thereto contained in the Company's
Report on Form 10-KSB for the fiscal year ended September 30, 1997.
2. INVENTORIES
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Inventories consist of:
Raw materials $ 1,479,296 $ 1,385,987
Finished goods 1,251,675 1,183,851
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$ 2,730,971 $ 2,569,838
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</TABLE>
The above amounts include portions of inventories classified as long
term.
3. SHAREHOLDERS' EQUITY
Changes in shareholders' equity during the three months ended December
31, 1997 were as follows:
<TABLE>
<S> <C>
Shareholders' equity at September 30, 1997 $ 4,234,128
Net earnings 88,611
-----------
Shareholders' equity at December 31, 1997 $ 4,322,739
-----------
-----------
</TABLE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid $10,584 and $11,238 in interest during the three
months ended December 31, 1997 and 1996, respectively, and received
cash of $489 and $2,911 as interest payments during the three months
ended December 31, 1997 and 1996, respectively.
5. NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128"). As
required by SFAS 128, all current and prior year earnings per share
data have been restated to conform to the provisions of SFAS 128.
6
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The Company's basic net earnings per share amounts have been computed
by dividing net earnings by the weighted average number of outstanding
common shares. The Company's diluted net earnings per share is
computed by dividing net earnings by the weighted average number of
outstanding common shares and common share equivalents relating to
stock options, when dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had working capital of $2,211,489 as
compared to $2,100,234 at September 30, 1997 and long-term debt of $385,258.
As of December 31, 1997, the Company had $9,486 in cash as compared to
$124,815 at September 30, 1997.
During the quarter ended December 31, 1997, the Company used $9,925 in net
cash in operating activities, including an increase of $161,133 in
inventories and a decrease of $33,061 in accounts payable.
The Company used $15,908 in investing activities during the quarter ended
December 31, 1997, primarily for equipment and tooling and intangibles
related to Oxboro Outdoors ("Outdoors") products.
The Company has obtained a line of credit of $1,500,000 subject to certain
terms and conditions related to the Company's financial performance. As of
December 31, 1997, the Company's outstanding balance on this line of credit
was $43,313, reduced from $131,313 at September 30, 1997. The Company
believes that additional funds, if needed, would be available in amounts
sufficient for the Company's fiscal 1998 operations. However, depending upon
the outcome of the opposing proxy solicitation noted below, including costs
incurred by the Company in connection therewith or changes in current
management, there may not be sufficient funds for fiscal 1998 operations or
the availability of funds may be impaired.
RESULTS OF OPERATIONS
Net sales for the three-month period ended December 31, 1997 were $1,177,746
as compared to $1,139,632 for the corresponding period in the previous fiscal
year. This represents an increase of approximately 3%.
Net sales of medical and surgical products were $1,061,323, an increase of
2%, or $22,106, over the corresponding period in fiscal 1996. The largest
dollar increase and the largest percentage increase in sales ($30,825, or
51%) came from international sales. Direct sales to hospitals and dealers
were up very slightly, and sales to packaging companies decreased ($29,298),
effected mainly by a one-time sale of approximately $24,000 in last year's
first quarter. Competitiveness continues in the Company's medical product
markets.
Outdoors sales for the three months ended December 31, 1997 were $116,423 as
compared to $100,415 for the corresponding period in the previous fiscal
year, an increase of approximately 16%. In fiscal 1996 Outdoors entered into
a license agreement with NFL-TM- Properties, Inc., that gives Outdoors the
right to manufacture and sell fishing tackle printed with logos, names and
7
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various indicia of all 30 National Football League-TM- teams. Currently,
these logos, names and various indicia are utilized on four types of fishing
tackle and on earrings and key chains manufactured using fishing tackle
components. Recently, Outdoors reached agreement with Major League Baseball
for a similar license to use Major League Baseball logos, team names and
various indicia in the production and sale of fishing tackle. Shipments of
such products are expected to commence during the second or third quarter of
fiscal 1998. For first quarter 1998, shipment of products produced under
license from NFL Properties accounted for approximately 83% of sales of
Outdoors products as compared to 84% of sales for the corresponding period in
fiscal 1997.
Gross margin for the first quarter of fiscal 1998 and 1997 was 65% and 72%,
respectively. The 7% decrease in gross margin for first quarter 1998 results
from expenses related to compliance activities for ISO 9000, European CE Mark
certification, various regulatory matters and the impact from the reduction
of medical products production levels during the quarter. Gross margin for
the three-month period ended December 31, 1997 for medical and surgical
products decreased by 7% from 31% to 24%. Gross margin for the same period
for Outdoors declined by 1% from 28% to 27%.
During the first quarter of fiscal 1998, selling, general and administrative
(SG&A) expenses decreased by 16%, or $123,684, and decreased from 68% to 55%
as a percentage of sales, as compared to the first quarter of fiscal 1997.
SG&A expenses decreased for Medical by approximately $86,000, or 16%,
resulting from decreases in outside services, operating supplies, postage,
shipping supplies, telephone costs, repair and maintenance charges, product
samples, and conventions, mainly due to expense reduction efforts by the
Company. In addition, the decrease resulted from decreased net freight
expense, estimated bonus expense for the chief executive officer for fiscal
year 1998, and reductions in gross wages due to the termination of a previous
officer of the Company offset by the addition of personnel for new positions
within the Company and by the impact of annual salary increases. These
decreases were partly offset by increased royalties, directors' fees, legal
and accounting fees, and regulatory compliance functions.
SG&A expenses decreased for Outdoors by approximately $38,000, or 17%,
compared to the corresponding period in the previous fiscal year. The
decreases were due mainly to a reduction in advertising expense, research and
development, repair and maintenance, medical reimbursement, auto expense,
consulting fees, legal fees, and bad debt expense. These decreases were
offset by increases in gross wages due to annual salary increases, printing
costs, convention expense, commissions paid to independent representatives
and depreciation.
Earnings before income taxes for first quarter of fiscal 1998 was $110,764 as
compared to $44,748 in first quarter of fiscal 1997, an increase of 148%.
The increase is mainly due to the decrease in SG&A expenses offset by the
decrease in gross margins for medical and surgical products.
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 - "Earnings per Share" ("SFAS 128"). As required by SFAS
128, all current and prior year earnings per share data have been restated to
conform to the provisions of SFAS 128.
8
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On January 22, 1998, the Company received notice that two shareholders had
nominated themselves for positions on the Company's Board of Directors. During
the second quarter of fiscal year 1998, the Company expects to incur substantial
expenses to respond to this proxy solicitation opposing the Board's nominees for
election at the 1998 Annual Meeting. Although these expenses cannot be
precisely estimated at this time, the Company expects they will likely result in
a net loss for the second quarter of fiscal 1998. Management believes it is in
the Company's best interest to oppose the nominees proposed by the two dissident
shareholders.
FORWARD LOOKING STATEMENTS
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. There are certain important factors that could cause results to
differ materially from those anticipated by some of the statements made
herein. Among the factors that could cause actual results to differ
materially are the following: acceptance of new products, pricing strategies
of competitors, general conditions in the industries served by the Company's
products, changes in management of the Company and overall economic
conditions, including inflation and consumer buying patterns.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 14, 1997, Up North Communications, Ltd. ("Up North") commenced an
action against the Company and Outdoors, in Minnesota District Court, Anoka
County, seeking payment of approximately $64,000, plus interest, for goods
and services provided to Outdoors. Outdoors asserted a counterclaim against
Up North alleging breach of contract, breach of warranty and
misrepresentation, seeking damages in excess of $50,000, for Up North's
failure to comply with the contract by supplying defective goods and services
and misrepresenting its abilities and experience. Up North also asserted a
claim for defamation, claiming damages in excess of $50,000 for damage to
reputation.
The dispute arose from problems occurring in the printing of lures and
packaging materials for Outdoors products. Outdoors claims that the film and
the backer cards supplied by Up North were defective and not suitable for
their intended use and that Outdoors was forced to find alternative sources
of supply.
A jury trial held in late October and early November 1997, resulted in a jury
verdict in favor of the Company and Outdoors for between $19,000 and $26,700,
depending on the court's interpretation of the legal effect of one of the
jury's answers to the special verdict. The court had dismissed Up North's
defamation claim prior to submission to the jury.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December
31, 1997.
10
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SIGNATURE
Pursuant to the requirements of the Exchange Act, the Registrant caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
OXBORO MEDICAL INTERNATIONAL,
INC.
Dated: February 12, 1998 By /s/ Larry A. Rasmusson
-------------------------------
Larry A. Rasmusson
Its Chief Executive and Chief Financial
and Accounting Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,486
<SECURITIES> 0
<RECEIVABLES> 723,868
<ALLOWANCES> 23,304
<INVENTORY> 2,730,971
<CURRENT-ASSETS> 2,880,613
<PP&E> 2,210,674
<DEPRECIATION> 891,211
<TOTAL-ASSETS> 5,492,121
<CURRENT-LIABILITIES> 669,121
<BONDS> 0
0
0
<COMMON> 22,586
<OTHER-SE> 4,300,153
<TOTAL-LIABILITY-AND-EQUITY> 5,492,121
<SALES> 1,177,746
<TOTAL-REVENUES> 1,177,746
<CGS> 411,281
<TOTAL-COSTS> 411,281
<OTHER-EXPENSES> 649,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,584
<INCOME-PRETAX> 110,764
<INCOME-TAX> 22,153
<INCOME-CONTINUING> 88,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,611
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
