<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended JUNE 30, 1998 or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-11278
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MINNTECH CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1229121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14605 - 28TH AVENUE NORTH
MINNEAPOLIS, MINNESOTA 55447
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 553-3300
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 22, 1998
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Common Stock, $0.05 par value 6,825,009 shares
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Minntech Corporation
Quarterly Report on Form 10-Q
June 30, 1998
Index
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Earnings 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
PAGE 2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINNTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30
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1998 1997
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<S> <C> <C>
Net Sales - product $ 18,319 $ 17,755
Contract Revenue 360 0
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NET SALES 18,679 17,755
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OPERATING COSTS AND EXPENSES
Cost of sales 10,180 10,542
Research and development 1,076 699
Selling, general and administrative 5,063 4,675
Amortization of intangible assets 197 211
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Total operating costs and expenses 16,516 16,127
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EARNINGS FROM OPERATIONS 2,163 1,628
Other income (expense), net 36 (11)
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EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST 2,199 1,617
Provision for income taxes 743 624
Minority interest (13) (40)
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NET EARNINGS $ 1,469 $ 1,033
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NET EARNINGS (LOSS) PER SHARE
Basic $ .22 $ .15
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Diluted $ .21 $ .15
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WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS
Basic 6,789 6,730
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-------- --------
Diluted 7,061 6,736
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</TABLE>
PAGE 3
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MINNTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, March 31,
1998 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,886 $ 6,805
Marketable securities 431 431
Accounts receivable, net 13,984 14,571
Inventories
Finished goods 5,056 5,733
Materials and work-in-process 5,991 5,463
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Total inventories 11,047 11,196
Prepaid expenses 2,449 1,623
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TOTAL CURRENT ASSETS 34,797 34,626
PROPERTY AND EQUIPMENT, AT COST
Land, buildings and improvements 9,627 9,533
Machinery and equipment 23,633 23,774
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33,260 33,307
Less accumulated depreciation (19,484) (19,116)
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Net property and equipment 13,776 14,191
OTHER ASSETS
Patent costs, net 770 780
Goodwill, net 782 888
Other 1,689 1,065
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TOTAL ASSETS $ 51,814 $ 51,550
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 216 $ 225
Accounts payable 3,073 3,893
Accrued expenses 3,125 4,428
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TOTAL CURRENT LIABILITIES 6,414 8,546
DEFERRED INCOME TAXES 454 454
DEFERRED COMPENSATION 749 783
MINORITY INTEREST (79) (66)
STOCKHOLDERS' EQUITY
Preferred stock, no par value - -
Common stock, $.05 par value 341 339
Additional paid-in capital 13,220 12,657
Accum. other comprehensive income (207) (319)
Retained earnings 30,922 29,156
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TOTAL STOCKHOLDERS' EQUITY 44,276 41,832
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 51,814 $ 51,550
-------- --------
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</TABLE>
PAGE 4
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MINNTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
June 30
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,469 $ 1,032
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 1,155 905
Provision for losses on accounts receivable 45 (52)
Foreign currency exchange loss (45) 146
Deferred income taxes 177 -
Minority interest (13) (40)
Other, net 203 (5)
Changes in assets and liabilities:
Accounts receivable 632 (923)
Inventories 189 1,631
Prepaid expenses (991) 91
Accounts payable (751) (917)
Accrued expenses (1,690) (78)
Income taxes payable 618 628
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Total adjustments (471) 1,386
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NET CASH PROVIDED BY OPERATING ACTIVITIES 998 2,418
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1421) (261)
Patent application costs (77) (67)
Other (5) (1)
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NET CASH USED IN INVESTING ACTIVITIES (1503) (329)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of note payable - (2,000)
Proceeds from exercise of stock options 566 285
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 566 (1,715)
Effects of exchange rate changes on foreign currency
cash balances 19 5
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NET INCREASE IN CASH AND CASH EQUIVALENTS 80 379
Cash and cash equivalents at beginning of period 6,805 3,222
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Cash and cash equivalents at end of period $ 6,885 $ 3,601
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</TABLE>
PAGE 5
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MINNTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DOLLARS IN THOUSANDS
NOTE 1 - FINANCIAL INFORMATION
The unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission; accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
These interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes in the
Company's Annual Report on Form 10-K for the year ended March 31, 1998 as filed
with the Securities and Exchange Commission.
In the opinion of management, the condensed consolidated financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods.
NOTE 2 - RESTRUCTURING AND UNUSUAL ITEMS
During the first quarter ended June 30, 1998 $138 was charged to the
restructuring reserve for employee related costs. The restructuring reserve
balance as of June 30, 1998 totaled $498.
NOTE 3 - LINE OF CREDIT
At June 30, 1998, the Company had a line of credit with a commercial bank which
allows the Company to borrow up to $10 million on an unsecured basis at the
prime rate of interest (8.50% at June 30, 1998) or the indexed London Interbank
Offered Rate (LIBOR). As of June 30, 1998, the Company had no outstanding
borrowings under the line of credit. This line of credit expires August 31,
1998, and the Company plans to extend the bank line at that time.
NOTE 4 - NET EARNINGS PER SHARE
The Company had adopted SFAS No. 128 "Earnings Per Share" which became effective
for financial statements issued for periods ending after December 15, 1997.
Statements of Financial Accounting Standard No. 128 requires presentation of
basic and diluted earnings per share ("EPS") and restatement of EPS data for all
prior periods. Basic EPS includes no dilution and is computed by dividing net
income (loss) by the weighted average shares of common stock outstanding.
Diluted EPS is computed by dividing net income (loss) by the weighted average
shares of common stock and dilutive common stock equivalents outstanding. The
Company's dilutive common stock equivalents result from stock options and are
computed using the treasury stock method. The following table reconciles the
numerators and denominators of the basic and diluted EPS computations for the
three months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Income Before Effect of Dilutive Diluted
June 30, 1998 Extraordinary Item Stock Options Earnings Per Share
- ------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Income (Numerator) $1,469 $1,469
Shares (Denominator) 6,789 272 7,061
Per Share Amount $ .22 $ .21
June 30, 1997
- -------------
Income (Numerator) $1,033 $1,033
Shares (Denominator) 6,730 7 6,737
Per Share Amount $ .15 $ .15
</TABLE>
PAGE 6
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MINNTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
DOLLARS IN THOUSANDS
NOTE 4 - NET EARNINGS PER SHARE (CONT'D)
Outstanding stock options to purchase 140,600 shares of common stock as of June
30, 1998 were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares during the period.
NOTE 5 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" effective January 1, 1998. The statement
requires unrealized gains or losses on available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders equity, to be included in other comprehensive income.
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended June 30, 1998 1997
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<S> <C> <C>
Net Income $ 1,469 $ 1,033
Unrealized gains/losses or securities 0 3
Foreign currency translation adjustments 112 (61)
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Comprehensive Income $ 1,581 $ 975
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</TABLE>
PAGE 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues in the first quarter ended June 30, 1998 increased by 5.2%, to $18.7
million. Revenues included $.36 million related to achieving milestone events in
the Company's licensing and development agreement with Advanced Sterilization
Products (a division of Ethicon, Inc, a Johnson & Johnson Company).
Excluding the contract revenue, product sales increased 3.2% compared to the
first quarter of last fiscal year. Product sales growth is attributable to an
8.7% increase in reprocessing products combined with a 21.2% increase in
industrial filtration and separation products. The 3.8% decline in dialysis
supplies and devices sales in the quarter were due to lower sales of the
Company's discontinued dialyzer product line. Sales of other dialysis supply and
device products increased 9.8% compared to the same period last fiscal year.
Cardiosurgery product sales declined 1.4% compared to the prior year.
Sales by product group are summarized on the following table:
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
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<S> <C> <C> <C> <C>
Dialysis supplies and devices $ 5,181 28.3% $ 5,383 30.3%
Reprocessing products 8,624 47.1% 7,932 44.7%
Cardiosurgery products 3,794 20.7% 3,846 21.7%
Industrial filtration & separation 720 3.9% 594 3.3%
------- ----- ------- -----
Total product sales $18,319 100.0% $17,755 100.0%
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</TABLE>
Gross margin on net product sales as a percentage of sales in the quarter ended
June 30, 1998 increased to 44.4% from 40.6% in the same quarter last fiscal
year. The increase in gross margin this quarter is attributable to favorable
product mix combined with product cost reductions.
Research and development expenses in the first quarter ended June 30, 1998 were
$1.1 million or 5.8% of revenues, compared to $.7 million or 3.9% of revenues,
in the first quarter of fiscal 1998. The increase in research and development
spending in the quarter is primarily related to the Company's licensing and
development agreement with Advanced Sterilization Products for a second
generation endoscope reprocessing machine and sterilant. The Company expects
that research and development spending in fiscal year 1999 will approximate 5.0
to 5.5 percent of revenues.
Selling, general and administrative expenses in the quarter ended June 30, 1998
were $5.1 million or 27.1% of revenues, compared to $4.7 million or 26.3% of
revenues, in the first quarter one year ago. Selling, general and administrative
expenses increased due to spending to support the Biocor TM Oxygenator launch
combined with additional dialyzer reprocessing marketing programs.
The Company's effective income tax rate was 33.8% for the quarter ended June 30,
1998 compared to an effective rate of 38.6% in the first quarter of the prior
fiscal year. The Company's tax provision in the quarter ended June 30, 1998
reflects a greater benefit for net operating loss carryforwards in the European
subsidiary than in the same period last fiscal year, which lowers the Company's
effective tax rate.
The Company reported net earnings of $1.5 million for the quarter ended June 30,
1998, or 7.9% of revenue, compared to net earnings $1.0 million, or 5.8% of
revenues, in the first quarter one year ago. The increase in net earnings for
the quarter is primarily attributable to improved gross margins on product
sales.
PAGE 8
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LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $1.0 million of cash and cash equivalents for the
quarter ended June 30, 1998. At June 30, 1998, the Company had $7.3 million of
cash, cash equivalents, and marketable securities.
Working capital at June 30, 1998 was $28.4 million compared to $26.1 million at
March 31, 1998. The current ratio at June 30, 1998 was 5.4, compared to 4.1 at
March 31, 1998. The Company invested $1.4 million in capital equipment in the
three month ended June 30, 1998 and plans to invest between $3.5 million and
$4.0 million during fiscal year 1999.
In April 1998, the Company signed a finite risk insurance policy to cover
potential future product liability and legal defense exposures. A payment of
$1.0 million was made in April 1998 and future payments of $1.4 million will be
made through April 2001. In the event that these exposures do not
materialize, the Company will recover a portion of these payments.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
June 30, 1998.
PAGE 9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Minntech Corporation
Date: August 10, 1998
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/s/ Jules L. Fisher
----------------------------
Jules L. Fisher
Chief Financial Officer
(Duly authorized officer)
(Principal financial offer)
PAGE 10
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF EARNINGS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,886
<SECURITIES> 431
<RECEIVABLES> 13,984
<ALLOWANCES> 0
<INVENTORY> 11,047
<CURRENT-ASSETS> 34,797
<PP&E> 33,260
<DEPRECIATION> 19,484
<TOTAL-ASSETS> 51,814
<CURRENT-LIABILITIES> 6,414
<BONDS> 0
0
0
<COMMON> 341
<OTHER-SE> 43,935
<TOTAL-LIABILITY-AND-EQUITY> 51,814
<SALES> 18,319
<TOTAL-REVENUES> 18,679
<CGS> 10,180
<TOTAL-COSTS> 16,516
<OTHER-EXPENSES> 36
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,199
<INCOME-TAX> 743
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,469
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
</TABLE>
