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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11278
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MINNTECH CORPORATION
(Exact name of registrant as specified in its charter)
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MINNESOTA 41-1229121
(State or other (I.R.S. Employer
jurisdiction Identification No.)
incorporation or
organization)
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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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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.05 PER SHARE
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of June 2, 1999, 6,838,742 shares of Common Stock, par value $.05 per
share, were outstanding, and the aggregate market value of the shares of Common
Stock (based upon the closing transaction price on such date as reported on the
NASDAQ National Market System) held by non-affiliates of the registrant was
approximately $94,887,545.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS INCORPORATED BY REFERENCE 10-K PART AND ITEM WHERE INCORPORATED
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1. Certain portions of the Definitive Proxy Statement Part III: Items 10, 11, 12 and 13
for the Annual Meeting of Shareholders of the
Registrant to be held August 25, 1999
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FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Forward Looking
Statements" in Item 7 and "Risk Factors" on pages 19 - 23 of this Annual Report
on Form 10-K, that could cause actual results to differ materially from those
projected. Because actual results may differ, readers are cautioned not to place
undue reliance on these forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Minntech Corporation (the "Company") was incorporated on January 30, 1974,
under the laws of Minnesota. The Company is engaged in the development,
manufacture, and marketing of medical supplies and devices, sterilants, and
filtration and separation products. The Company's products are used primarily in
kidney dialysis and in open-heart surgery. The trade name of Minntech Renal
Systems is used for products sold in the dialysis market and the trade name of
Minntech is used for products sold in the cardiosurgery market. The trade name
of Minntech Fibercor is used for filtration and separation products marketed to
the pharmaceutical, medical, semiconductor, and biotechnology industries. The
Company has core technologies in electronics, fibers, plastics, and chemical
solutions, all of which were internally developed.
INDUSTRY SEGMENTS
Through March 31, 1999, the Company has been primarily engaged in the
manufacture and marketing of medical devices and supplies. The Company also
markets filtration devices and disinfectants for filtration and separation
applications.
PRODUCTS
The Company has three interrelated product segments:
- Dialysis Products
- Cardiosurgery Products
- Developing Businesses (including filtration and separation and endoscope
reprocessing products)
DIALYSIS PRODUCTS
The Company manufactures supplies, concentrates, and electronic equipment
for hemodialysis treatment of patients with chronic kidney failure or end-stage
renal disease ("ESRD"). These dialysis products accounted for approximately 69.5
percent of the Company's product sales in fiscal 1999, 72.7 percent of product
sales in fiscal 1998, and 69.3 percent of product sales in fiscal 1997.
CONCENTRATES
The Company's main dialysis supply product is a line of acetate and
bicarbonate concentrates used by kidney centers to prepare dialysate, a chemical
solution used to draw waste products out of the blood during hemodialysis
treatments. According to the United States Renal Data Service, approximately
220,000 Americans suffering from ESRD underwent life-sustaining hemodialysis
treatments in 1997. These treatments are typically administered three times a
week and require approximately three gallons of dialysis concentrate each. The
Company believes it provides the industry's most complete line of these
concentrates in both liquid and powder form for use in virtually all types of
kidney dialysis machines.
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ELECTRONICS
The Company's major dialysis electronic products are the
Sonalarm-Registered Trademark- Foam Detector, a device that detects air emboli,
or bubbles, in blood during hemodialysis, and the Minipump-TM- Hemodialysis
Blood Pump, which circulates blood during hemodialysis. The
Sonalarm-Registered Trademark- and the Minipump-TM- are sold to end-users and in
component form to other manufacturers of blood processing equipment.
DIALYZER REPROCESSING
The Company's dialyzer reprocessing products include the
Renatron-Registered Trademark- II Automated Dialyzer Reprocessing System, the
Renalog-Registered Trademark- III Data Management System, and
Renalin-Registered Trademark- Cold Sterilant, a peracetic acid solution that
replaces formaldehyde, glutaraldehyde, and bleach in dialyzer reprocessing.
Actril-Registered Trademark- Cold Sterilant, a surface disinfectant, is also
part of the dialyzer reprocessing product line.
In response to government-mandated cost containment measures, in the late
1970s many United States dialysis centers began disinfecting and reusing
dialyzers (artificial kidneys) instead of discarding them after a single use (a
procedure now known as "dialyzer reuse"). Data released by the Centers for
Disease Control ("CDC") indicate that, as of 1996, 81 percent of all dialysis
centers in the United States reuse dialyzers. Between 1983 and 1996, the
percentage of these facilities using Renalin-Registered Trademark- for dialyzer
reprocessing grew from 5 to 54 percent. The other dialysis centers used
primarily formaldehyde or glutaraldehyde disinfectants to reprocess dialyzers.
The CDC also reported that 61 percent of centers practicing reuse used an
automated system to reprocess their dialyzers.
Unlike the United States market, dialyzer reuse is in the formative stages
in Europe. The Company has increased reprocessing product sales in Europe by
employing direct salespersons in major dialysis markets and promoting the
advantages of reuse. The Company estimates that approximately 73 percent of the
worldwide ESRD patients are outside of the United States.
The Renatron-Registered Trademark- reprocessing system, first introduced in
1982, provides an automated method of rinsing, cleaning, sterilizing, and
testing dialyzers for multiple use. The Renatron-Registered Trademark- II, the
most current version of the product introduced in 1990, includes a bar code
reader, computer, and a Renalog-Registered Trademark- III software system that
provides dialysis centers with automated record keeping and data analysis
capabilities. The Company believes its Renatron-Registered Trademark- system is
faster, easier to use, and more efficient than competitive automated systems.
The Company also believes that the Renatron-Registered Trademark- system is one
of the top selling automated dialyzer reprocessing systems in the world. At
March 31, 1999, the Company had an installed customer base of more than 4,000
Renatron-Registered Trademark- stations, and had supply agreements with dialysis
provider chains that account for approximately 40 percent of the hemodialysis
market.
Renalin-Registered Trademark- Cold Sterilant has been used in over 86
million dialyzer reprocessing treatments since the product was first introduced
in 1985. The product's proprietary peracetic acid-based formula effectively
cleans, disinfects, and sterilizes dialyzers without the hazardous fumes and
disposal problems related to older glutaraldehyde and formaldehyde reprocessing
solutions. The Company believes Renalin-Registered Trademark- is the leading
dialyzer reprocessing solution in the United States.
In May 1999, the Company introduced the RenaClear-TM- Dialyzer Cleaning
System, the first dedicated automated dialyzer cleaning system. The system
removes blood and organic debris from difficult-to-clean dialyzers before
reprocessing, a process known as "precleaning." Precleaning is common in
dialysis units because the practice can help extend the useful clinical life of
a dialyzer. When dialyzers are precleaned by hand, many dialysis facilities
remove the dialyzer header caps (the end caps of a dialyzer) to more effectively
rinse out heavy blood debris. However, opening the dialyzer in this fashion can
increase the risk of contamination of the dialyzer membrane. The RenaClear-TM-
system features a high-powered fluid injector that cleans dialyzer headers (the
two internal ends of a dialyzer) without requiring removal of the header caps.
The RenaClear-TM- Dialyzer Cleaning System is designed for use with peracetic
acid-based RenaClear-TM- Disinfectant. Both will be available for sale in fiscal
year 2000.
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OTHER
In March 1997, the Company discontinued the Primus-Registered Trademark-
dialyzer line (artificial kidney), taking a one-time restructuring charge to
write off all of the assets employed in the dialyzer business.
CARDIOSURGERY PRODUCTS
The Company manufactures three hollow fiber devices for use in
cardiosurgery--oxygenators, hemoconcentrators, and hemofilters. A fourth device,
a cardioplegia heat exchanger, has been submitted to the United States Food and
Drug Administration ("FDA") for review, and will be introduced to the European
market in fiscal 2000. The Company's cardiosurgery products accounted for
approximately 21.8 percent of total product sales in fiscal 1999, 19.9 percent
of product sales in fiscal 1998, and 25.7 percent of product sales in fiscal
1997.
OXYGENATORS
The Company has manufactured membrane oxygenators based on its proprietary
hollow fiber technology since 1987. To date, the Company's oxygenators have been
used in nearly 800,000 open-heart procedures worldwide.
An oxygenator is used by a perfusionist (a health care professional who
operates heart-lung bypass equipment) to replace the function of the lungs
during open-heart surgery. The patient's blood is circulated through the device,
which removes the carbon dioxide in the blood and exchanges it for oxygen. The
Company estimates that there are an estimated 900,000 open-heart procedures
performed annually worldwide.
The Biocor-Registered Trademark- 200 High Performance Oxygenator was
launched in the U.S. in April 1997. The product has been available in Europe
since November 1995. The Biocor-Registered Trademark- incorporates the Company's
proprietary weaving technology and offers improved performance over its
first-generation oxygenator. The compact design and reduced surface area of the
device results in a low priming volume--a feature that shortens set-up time for
the perfusionist and can reduce the need for donor blood. The
Biocor-Registered Trademark- also features a highly biocompatible plastic heat
exchanger. The Company believes that the consistent high performance
characteristics of the Biocor-Registered Trademark- make the product equal or
superior to competing oxygenators.
From 1987 to March 31, 1997, the Company manufactured its first generation
membrane oxygenator for exclusive worldwide distribution pursuant to an
agreement with C. R. Bard Inc. ("Bard"), under which Bard had exclusive
distribution rights through March 31, 1997, and nonexclusive rights thereafter.
Under its agreement with the Company, Bard was restricted from selling any other
oxygenator until January 1, 1997. In fiscal 1993, the largest purchase year of
the agreement, the first-generation oxygenator represented 35.3 percent total
Company sales. In fiscal 1997, the oxygenators represented 10.9 percent of total
sales. The Company did not receive significant orders from Bard in fiscal 1998
or 1999. Since March 31, 1997, this first generation oxygenator has been
available directly from the Company under the trade name Minntech-TM- 400.
HEMOCONCENTRATORS
In fiscal 1999, the Company received 510(k) market clearance from the FDA
for two new hemoconcentrators--the HPH-Registered Trademark- 700 HPH, an adult
hemoconcentrator (December 1998), and the HPH Mini-TM-, a hemoconcentrator
designed specifically for pediatric and neonatal patients (May 1998). With the
addition of these two new hemoconcentrators, the Company now offers a total of
five hemoconcentrator devices to meet the clinical volume requirements of
neonatal through large adult patients. Since 1985, the Company has manufactured
and marketed a complete line of hemoconcentrators. The Hemocor
HPH-Registered Trademark- hemoconcentrator line, the Company's current
third-generation product, succeeded the Hemocor Plus-Registered Trademark-
second-generation hemoconcentrator line in February 1994.
A hemoconcentrator is used by a perfusionist to concentrate red blood cells
and remove excess fluid from the bloodstream during open-heart surgery. Because
the entire blood volume of the patient passes
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through the hemoconcentrator device during an open-heart procedure, the
biocompatibility of the blood-contact components of the device is critical. The
entire line of Hemocor HPH-Registered Trademark- high performance
hemoconcentrator products contains the Company's proprietary polysulfone fiber.
The Hemocor HPH-Registered Trademark- line also features a unique "no-rinse"
design that allows it to be quickly and efficiently inserted into the bypass
circuit at any time during the open-heart procedure.
The Company estimates that hemoconcentration is currently used in up to 30
percent of the estimated 440,000 open-heart procedures performed annually in the
United States, and to a lesser extent internationally. Such procedures require
up to 132,000 hemoconcentrator devices each year worldwide. At March 31, 1999,
the Company believes it held a 70 percent share of the United States
hemoconcentrator market. The Company is currently exploring new clinical
applications for its hemoconcentrator products that it believes could increase
the total market size for the product.
HEMOFILTERS
In October 1997, the Company entered into a marketing and distribution
agreement with Baxter Healthcare Corporation (a subsidiary of Baxter
International, Inc.) to sell the Company's entire line of
Renaflo-Registered Trademark- II and Minifilter Plus-TM- hemofilter products in
all world markets except Japan and China.
The Renaflo-Registered Trademark- hemofilter, introduced in 1985, is a
device that performs hemofiltration--a slow, continuous blood filtration therapy
used to control fluid overload and acute renal failure in unstable, critically
ill patients that cannot tolerate the rapid filtration rates of conventional
hemodialysis. The hemofilter removes plasma water, waste products, and toxins
from the circulating blood of patients while conserving the cellular and protein
content of the blood. The Company's hemofilter line features no-rinse,
polysulfone fiber that requires minimal set up time for the healthcare
professional and is highly biocompatible for patient comfort. The hemofilter is
available in four different sizes to meet the clinical needs of neonates through
adults.
In April 1995, the Company completed the acquisition of the
hemoconcentrator, hemofilter, and dialysate filter product lines from Amicon
Ireland Ltd., an indirect subsidiary of W.R. Grace & Co. ("Amicon"). The Company
began manufacturing the hemoconcentrator and hemofilter products in its
Minneapolis facility in the first quarter of fiscal 1997.
OTHER
The EnGUARD-TM- PHX, a cardioplegia heat exchanger, was CE marked by the
Company in April 1999. The European market release of the product is scheduled
for fiscal 2000, and 510(k) submission for the product was made to the FDA on
April 2, 1999. The EnGUARD-TM- PHX precisely controls the temperature and
delivery of cardioplegia, a blood and/or chemical solution that arrests and
protects the heart during cardiopulmonary bypass procedures. The device is used
by a perfusionist as part of the cardiopulmonary bypass circuit. Like the
Biocor-Registered Trademark- oxygenator, the EnGUARD-TM- features the only
polymeric heat-exchanger currently available that is not susceptible to
electrostatic build-up, discharge, and associated fiber rupture.
In March 1997, in an effort to reduce expenses and focus resources on
profitable product areas, the Company discontinued the
Cathetron-Registered Trademark- system and CATHx-Registered Trademark-
sterilant. The Cathetron-Registered Trademark- system, along with its companion
cold sterilant CATHx-Registered Trademark-, was an automated system for cleaning
and sterilizing cardiovascular catheters for subsequent reuse. The Company
retains the patent rights to the technologies used in these products.
DEVELOPING BUSINESS PRODUCTS
The Company's developing businesses include those product lines that account
for less than ten percent of total revenues, including the Company's filtration
and separation product line and endoscope reprocessing product line. Developing
business products accounted for 8.7 percent of the Company's
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product sales in fiscal 1999, 7.4 percent of product sales in fiscal 1998, and
5.0 percent of product sales in fiscal 1997.
FILTRATION AND SEPARATION PRODUCTS
The Company's filtration and separation division, Minntech Fibercor,
manufactures hollow fiber filters and disinfectants for high-purity water
systems in the pharmaceutical, medical, and biotechnology industries. The
Company's filtration and separation products are currently sold primarily in the
United States. However, the Company began the establishment of a European
distribution network in fiscal 1998 in order to capture a larger share of the
estimated $1.5 billion worldwide microfiltration market. The Company intends to
grow this portion of the business through selected acquisitions.
Filtration and separation product sales accounted for approximately 6
percent of the Company's total product sales in fiscal 1999.
FILTER PRODUCTS
The Company received 510(k) clearance from the FDA in March 1999 to market
FiberFlo-Registered Trademark- hollow fiber in-line capsule filters for medical
applications. The FiberFlo-Registered Trademark- Hollow Fiber Capsule Filter
line, which made its market debut in April 1998, is based on the same high
performance hollow fiber technology used in the Company's polysulfone
FiberFlo-Registered Trademark- HF cartridge filter product line. Capsule filters
are used in the cell and tissue engineering industry, bioprocessing,
pharmaceutical manufacturing, food and beverage processing, cosmetic
manufacturing, and electronics industries to filter spores, bacteria, and
pyrogens from aqueous solutions and gases. FiberFlo-Registered Trademark-
capsule filters are engineered for point-of-use applications that require very
fine filtration. To date, they are also the only solution filtration products on
the market to make endotoxin reduction claims. Their hollow fiber design
provides a surface area that is up to six times larger than traditional pleated
capsule filters on the market. The large surface area provides greater capacity
and longer filter life for the customer. FiberFlo-Registered Trademark- capsule
filters and cartridge filters are available in a variety of styles, sizes, and
configurations to meet a comprehensive range of customer needs and applications.
FiberFlo-Registered Trademark- cartridge filters are used in high-purity
industrial water systems to filter spores, bacteria, and pyrogens from water.
They are also used in medical device reprocessing to help health care facilities
meet reprocessing water quality guidelines outlined by the American Association
of Medical Instrumentation. The cartridge filters feature large surface area and
fine filtration advantages that are similar to the Company's capsule filter
line.
DISINFECTANTS
The Company's Minncare-Registered Trademark- Cold Sterilant is a liquid
sterilant product that is used to sanitize high-purity water treatment systems.
Minncare-Registered Trademark- is based on the Company's proprietary peracetic
acid sterilant technology, and is engineered to clean and disinfect reverse
osmosis (RO) membranes and associated water distribution systems. The Company
has private label agreements for both Minncare-Registered Trademark- and
Actril-Registered Trademark- sterilants with several manufacturers of filtration
and separation products.
OTHER
Minntech Fibercor offers a line of ancillary filtration products, including
cleaning solutions, disinfectant test strips, and filtration housings and
accessories.
ENDOSCOPE REPROCESSING
In February 1998, the Company entered into a distribution and marketing
agreement with Advanced Sterilization Products ("ASP"), a division of Ethicon (a
Johnson & Johnson company), to sell the Company's automated endoscope
reprocessor (formerly the AER-TM- Plus) and endoscope reprocessing
sterilant/disinfectant product (formerly Peract-Registered Trademark- 20). The
multi-year alliance calls for ASP to meet certain
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minimum purchase agreements of the endoscope reprocessor and
sterilant/disinfectant. Both products will continue to be manufactured at the
Company's production facility in Minneapolis, Minnesota. The Company also
entered into a multi-year joint development deal with ASP in April 1998 to
develop a next generation endoscope reprocessor and sterilant. See "Research and
Product Development" for more information.
The Company's endoscope reprocessing product line was originally purchased
from Bard Interventional Products, a division of C.R. Bard Inc., in September
1994. Through February 1998, the products were sold under the Company's trade
name of Unitrol-TM-.
An estimated 15 million gastrointestinal endoscopy procedures are performed
in the United States each year. Unlike disposable medical devices, which are
discarded after a patient procedure, the endoscopes used in these procedures may
be used on hundreds of patients a year before being retired from use. These
multi-channel scopes have numerous joints and crevices that can easily become
clogged with blood, tissue, or other biological material. The risk of
transmitting infection from patient to patient can be high if a thorough and
reliable disinfection procedure is not performed after each procedure. The
Company's automated endoscope reprocessor provides consistent high-level
endoscope disinfection. The self-contained system also helps safeguard
reprocessing staff by containing any disinfectant fumes.
The most widely-used sterilant used for endoscope reprocessing,
glutaraldehyde, emits fumes that can irritate the skin and respiratory system.
Published studies have reported severe physical reactions to glutaraldehyde
fumes, including skin irritation and inflammation, burning eyes, headaches, and
respiratory distress during medical device reprocessing procedures. The Company
believes its peracetic acid sterilant/ disinfectant has a competive advantage
over glutarldehyde in that it emits no noxious fumes and is biodegradable to
safeguard healthcare workers and the environment.
Endoscope reprocessing product sales accounted for approximately 3 percent
of the Company's total product sales in fiscal 1999.
MARKETS AND DISTRIBUTION
The Company sells its medical products in the United States primarily to
hospitals, clinics, and kidney treatment centers. The Company markets these
products in the United States through a direct sales force and through
distributors. At March 31, 1999, the Company employed a total of seven dialysis
sales representatives in the United States, three cardiosurgery sales
representatives, and three water filtration sales representatives. In addition,
a customer service staff and a technical services department support field
activity. The Company operates its own trucks to minimize shipping costs and to
expedite delivery of certain products from its Minneapolis, Minnesota
facilities. In fiscal 1999, the Company opened a second concentrate distribution
center in Camp Hill, Pennsylvania to more efficiently serve its customers in the
northeastern United States.
Minntech B.V., the Company's headquarters for its European operations in the
Netherlands, employed a total of 25 people in Europe at March 31, 1999. This
wholly-owned subsidiary has been the base for the Company's European dialysis
and cardiosurgery sales operations since 1995. In fiscal 1999, the Company began
to establish a European sales distribution network for filtration and separation
products. The Company's goal is to increase its revenues in Europe through
expanded direct sales activities. In May 1998, the Company formed its Minntech
International division to oversee operations of both Minntech B.V. and Minntech
Japan.
The Company's dialysis marketing programs are directed at nephrologists
(doctors who specialize in treating kidney disease), nurses, hospital and clinic
administrators, and others who influence purchasing decisions. Cardiosurgery
marketing programs are directed at perfusionists and cardiovascular surgeons,
and filtration and separation marketing programs are directed at distributors
and large original equipment manufacturers (OEM's).
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Pursuant to its marketing agreement with ASP, the Company does not directly
engage in endoscope reprocessing marketing activities. However, the Company does
support ASP's marketing programs by providing sales training, clinical
education, and technical assistance as needed. ASP's endoscope reprocessing
customer base includes gastroenterology nurses and physicians, infection control
and central sterile processing personnel, and hospital and clinic
administrators.
SOURCES AND AVAILABILITY OF MATERIALS
The Company has multiple sources of supplies for use in its manufacturing
operations with the exception of oxygenator fiber. Failure to obtain adequate
supplies of oxygenator fiber on a timely basis could have a material adverse
effect on the Company's results of operations. In addition, the Company
constructs many of its injection molds and also molds and extrudes many of its
component plastic parts.
PATENTS AND TRADEMARKS
The Company holds rights under 103 patents worldwide (including 45 U.S.
patents) covering its products or components thereof. At March 31, 1999, the
Company also had a total of 57 pending patent applications in the United States
and in foreign countries. The Company also holds rights under 243 trademark
registrations worldwide and had 69 trademark applications pending as of March
31, 1999.
The Company believes that patent protection is a significant factor in
maintaining its market position, but the rapid changes of technology in kidney
dialysis therapy, cardiosurgery, and the other areas in which the Company
competes may limit the value of the Company's existing patents.
While patents have a presumption of validity under the law, the issuance of
a patent is not conclusive as to its validity or the enforceable scope of its
claims. Accordingly, there can be no assurance that the Company's existing
patents will afford protection against competitors with similar inventions, nor
can there be any assurance that the Company's patents will not be infringed.
Competitors may also obtain patents that the Company would need to license or
design around. These factors also tend to limit the value of the Company's
existing patents. Consequently, in certain instances, the Company may consider
trade secret protection to be a more effective method of maintaining its
proprietary positions.
SEASONALITY OF THE BUSINESS
The Company's business is not seasonal.
WORKING CAPITAL AND BACKLOG
The Company's credit practices and related working capital needs are
comparable to those of other companies in the medical device and supplies
industry. The Company generally fills orders within 30 days of receipt. The
Company had approximately $416,000 of order backlogs as of March 31, 1999.
SIGNIFICANT CUSTOMERS
The Company's five largest customers accounted for approximately 33.4
percent of total sales in 1999, 24.9 percent in 1998, and 29.0 percent in 1997.
Total Renal Care Holdings, Inc., the Company's largest customer, accounted for
10.0 percent of total sales in 1999.
RENEGOTIATION OR TERMINATION OF GOVERNMENT CONTRACTS
No material portion of the Company's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
Government.
COMPETITION
DIALYSIS
The Company's dialysis and dialyzer reprocessing products are sold in a
highly competitive market, and the Company competes with many other firms. The
dialysis market is dominated by a few firms, including Baxter Healthcare
division of Baxter International Inc., Gambro (part of the Gambro Group, a
wholly-
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owned subsidiary of Incentive AB), and Fresenius Medical Care AG. These firms
have substantially greater financial and personnel resources than the Company
and most of them produce and sell a more comprehensive line of dialysis
equipment and supplies. The Company also faces competition from other
international companies and several smaller companies that carry a limited line
of products.
In fiscal 1999, two of the Company's competitors (Fresenius Medical Care AG
and HDC Medical, Inc.) introduced peracetic acid-based dialyzer reprocessing
germicides, expanding a market previously dominated by the Company's
Renalin-Registered Trademark- Cold Sterilant product. However,
Renalin-Registered Trademark- remains the only reprocessing chemical that has
been validated for use with the Renatron-Registered Trademark- dialyzer
reprocessing system and cleared for marketing as such under section 510(k) of
the Federal Food, Drug and Cosmetic Act. The Company has informed its
Renatron-Registered Trademark- customers that it is unable to guarantee the
integrity, reliability, and chemical interaction of alternative germicides with
the Renatron-Registered Trademark- system. The Company believes that this
validation, coupled with the Company's extensive dialyzer reprocessing
education, administration, and technical support services, are strong
competitive advantages for their product. However, the competitive price
pressures introduced by these new germicides may impact the Company's current
dialyzer reprocessing chemical market share.
There is a growing trend in the dialysis industry whereby manufacturers of
supplies are acquiring chains of dialysis treatment centers. These manufacturers
have a built-in customer base for their products. However, the Company currently
views its manufacturer-only status as a competitive market advantage. The
Company believes that many dialysis treatment providers do not want to purchase
hemodialysis supplies from manufacturers who also provide dialysis services and
are, in effect, their competitors.
CARDIOSURGERY
The Company's major competitors in the oxygenator market are Bard, Medtronic
Perfusion Systems, the Bentley Division of Baxter Healthcare Corporation, Sorin
Biomedical, Inc., Terumo Medical Corporation, and SARNS, Inc. (currently a
subsidiary of 3M Company; pending acquisition by Terumo Medical Corporation).
The major competitors in the hemoconcentrator market are Sorin Biomedical,
Terumo Medical Corporation, Baxter Healthcare Corporation, and Fresenius Medical
Care AG.
The cardiosurgery supply business has also experienced some consolidation
over the past several years. Since 1995, Baxter International, one of the
largest manufacturers of cardiosurgery devices, has purchased several large
contract groups that provide perfusion services to hospitals. This development
may have a future impact on sales of cardiosurgery products to the perfusionists
employed by this competitor, and the hospitals they contract with. In addition,
the development of new surgical technologies such as minimally-invasive
cardiosurgery that may not require current perfusion components such as
oxygenators or hemoconcentrators could impact future sales of these products.
DEVELOPING BUSINESSES--FILTRATION AND SEPARATION
Major competitors in the industry include Pall Corporation, Millipore
Corporation, Sartorius AG, Cuno, Inc., Whatman, Inc., and Osmonics, Inc. There
are a number of different mediums currently used in the manufacture of
microfilters that compete with the Company's polysulfone fibers (e.g., PTFE,
cellulose, polypropylene, nylon, PVDF).
MARKET CONDITIONS
The health care industry in the United States operates under
cost-containment pressures imposed by the federal government, employers, and
health insurance carriers. One major influence is the Medicare Prospective
Payment System, implemented in 1983, which provides for fixed payments to
hospitals for care of Medicare patients based on diagnosis rather than actual
hospital charges (the DRG system). In addition, the Company's end-user customers
for its dialysis and reprocessing products are subject to fixed payments per
treatment under separate Medicare regulations which have been in place for 25
years.
Health care providers, in general, have responded by shortening hospital
stays through quicker clinical diagnoses and by employing less invasive medical
procedures and more efficient therapies. In addition,
9
<PAGE>
hospitals and other health care providers have sought to lower their costs by
reducing their purchased supplies costs and by improving their utilization of
facilities and equipment. Dialysis centers, in particular, have also responded
by reprocessing and reusing dialyzers and by shortening treatment times.
Under the current cost containment environment, the competitive factors in
the medical markets served by the Company are such that cost reduction is a
prime consideration. While this may adversely affect some of the Company's
supply products, cost containment pressures may be a positive factor for certain
Company products, such as dialyzer reprocessing products and the
Renapak-Registered Trademark- Concentrate Manufacturing System.
RESEARCH AND PRODUCT DEVELOPMENT
The Company strives to design and develop technologically advanced products
that are customer driven, cost effective, and, in the case of its medical
products, improve the quality of patient care. The Company emphasizes product
development rather than basic research. The ability of the Company to compete
effectively depends upon its ability to anticipate changing market needs and
successfully develop products to meet those needs.
In April 1998, the Company entered into an agreement with ASP for the
development of a next-generation automatic endoscope reprocessing machine and
chemical sterilant. This multi-year joint development and licensing agreement
calls for a $1.5 million licensing fee to be paid to the Company upon the
completion of certain milestone events. The Company met all required milestones
on schedule in fiscal 1999. Under the agreement, the Company will have the
exclusive right to manufacture the reprocessing system and sterilant, and ASP
will have worldwide marketing rights for the products.
The Company's other current research and development efforts are directed
toward dialyzer reprocessing applications, hemodialysis concentrate
technologies, blood filtration and oxygenation technologies,
sterilant/disinfectant applications, and filtration and separation technologies.
As of March 31, 1999, 30 of the Company's employees were engaged in research
and development. In addition to its own research activities, the Company, from
time to time, obtains experimental and clinical research from outside
investigators, consultants, and institutions.
Over the past three years the Company has expended a total of $10.7 million
in research and development as follows: fiscal 1999--$4.4 million; fiscal
1998--$2.9 million; and fiscal 1997--$3.4 million. Such costs represented 5.8
percent, 4.1 percent, and 5.2 percent of revenues, respectively, in each period.
GOVERNMENT REGULATION
The medical products manufactured and marketed by the Company are subject to
the Federal Food, Drug and Cosmetic Act and the Medical Device Amendments of
1976 (collectively, the "FDCA"). These laws give the FDA extensive regulatory
authority over medical products developed, manufactured or marketed by the
Company in the United States. The FDCA requires the Company to register with the
FDA, provide updated device listings and submit a premarket notification to FDA
when (i) a device is being introduced into the market for the first time; (ii)
the manufacturer makes a significant change or modification to an already
marketed device that could affect safety or effectiveness; or (iii) there is a
major change or modification in the intended use of the device. The FDCA also
requires that the Company submit a premarket approval application for devices
that are life supporting or sustaining, or present a potential unreasonable risk
of injury or illness. In addition, the FDCA subjects the Company to Quality
System Regulations ("QSR") under which the FDA conducts periodic inspections to
verify compliance. Further, the QSRs impose certain requirements regarding
manufacturing procedures, distribution, advertising, labeling, and record
keeping. The FDA also has the power to order suspension of manufacturing or
marketing or to recall products that are not in compliance with law.
Before introducing its products into the market, the Company must comply
with the premarket approval and/or notification provisions of the FDCA. Data
regarding the product's safety and effectiveness must be submitted to the FDA.
In some instances, clinical studies may be necessary to obtain this data. In
some cases, before commencing clinical trials, the Company must apply for an
Investigational Device
10
<PAGE>
Exemption ("IDE"). Under an approved IDE, a device is exempt from certain FDA
provisions including misbranding, registration, listing, premarket approval,
records and reports and good manufacturing practices, thus enabling the
applicant company to test a device clinically. Before an IDE is granted,
sufficient nonclinical data must be submitted to demonstrate that the device is
safe and effective. Significant time and expense may be associated with the
collection of both clinical and nonclinical data, and there are no assurances,
that the necessary FDA premarket approvals or clearances will be granted.
In January 1995, the Company received ISO 9001 certification for its
Minneapolis, Minnesota facilities, and in April 1999, subsidiary Minntech B.V.
received ISO 9002 certification for its Herleen, The Netherlands facility. This
certification allows the Company to self-certify its products for sale
throughout the European community. In order to self-certify, the Company must
maintain certain records and files, which are reviewed by a "notified body"
organization on an annual basis. Many of the Company's products now display the
CE mark.
Certain products of the Company are also subject to registration with the
Environmental Protection Agency ("EPA"). The registration process generally
entails the collection and submission of data to support the products' label
claims. Considerable time and cost may be involved with the collection of data
to support these submissions, and there are no assurances that the necessary EPA
approvals will be granted for the Company's new products.
Compliance with federal, state, and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, do not have a material adverse effect upon the
capital expenditures, earnings, and competitive position of the Company.
EMPLOYEES
As of March 31, 1999, the Company employed 403 full-time and 8 part-time
employees, including 319 persons in manufacturing operations. An additional 44
people were contracted as temporary labor. None of these employees are covered
by a collective bargaining agreement, and the Company believes that its employee
relations are good.
GEOGRAPHIC AREA INFORMATION
The major foreign markets for the Company's products are Europe and the
Pacific Rim. Sales outside the United States for the fiscal years ended March
31, 1999, 1998 and 1997 were approximately $17.2 million, $14.6 million and
$12.2 million, respectively. Sales outside the United States accounted for
approximately 23 percent, 21 percent, and 19 percent of total sales,
respectively, in each period.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, and the year they became
executive officers are listed below:
<TABLE>
<CAPTION>
FIRST ELECTED
NAME POSITION WITH COMPANY AGE AS OFFICER
- ------------------------------------------ ------------------------------------------------- --- ---------------
<S> <C> <C> <C>
Thomas J. McGoldrick...................... President and Chief Executive Officer 58 1985
Daniel H. Schyma.......................... Vice President Sales and Marketing 57 1992
Richard P. Goldhaber...................... Vice President Research and Development 55 1993
Barbara A. Wrigley........................ Executive Vice President Corporate Development 48 1994
Robert W. Johnson......................... Vice President--Regulatory Affairs and Quality
Assurance 43 1994
Paul E. Helms............................. Senior Vice President Operations 53 1996
Jules L. Fisher........................... Vice President and Chief Financial Officer 45 1996
</TABLE>
11
<PAGE>
Mr. McGoldrick served as Vice President Corporate Development from March
1985 to June 1995, as Executive Vice President from June 1995 through March
1997, and as President and Chief Executive Officer and a director of the Company
from March 1997 to date.
Mr. Schyma served as Vice President Cardiopulmonary from January 1992 to
June 1994, as Vice President International from June 1994 through March 1997,
and as Vice President Sales and Marketing from March 1997 to date.
Ms. Wrigley served as Vice President, General Counsel and Secretary from
March 1994 to April 1999, and as Executive Vice President Corporate Development
from April 1999 to date.
Mr. Goldhaber has served as Vice President Research and Development from
November 1993 to date.
Mr. Johnson served as Director, Quality Assurance from August 1992 through
April 1994, as Vice President Quality Assurance from April 1994 to March 1997,
and as Vice President Regulatory Affairs and Quality Assurance from March 1997
to date.
Mr. Helms joined the Company in August 1996 as Senior Vice President
Operations, having previously been employed by Cabot Medical Corporation, a
medical device company, from 1988 to 1996, most recently as Vice President of
Operations (1991 to 1996).
Mr. Fisher joined the Company in November 1996 as Vice President and Chief
Financial Officer, having previously been employed by U.S. Surgical Corporation,
a medical device manufacturer, as Director, Operations Accounting from 1991 to
1996.
Executive officers are elected annually by the Board of Directors and serve
until their successors are duly elected and qualified.
ITEM 2. PROPERTIES
UNITED STATES
The Company owns two facilities located on adjacent sites, comprising a
total of 14 acres of land in Plymouth, a suburb of Minneapolis, Minnesota. One
facility is a 65,000 square-foot building, occupied by the Company since 1977,
which is used for manufacturing and warehousing operations. The second facility
is a 110,000 square-foot building, purchased in 1990, that houses the Company's
executive, administrative and sales staffs, and research operations. This
building is also used for manufacturing and warehousing.
In fiscal 1999, the Company leased two additional Minneapolis facilities to
support its dialysis business. The first is a 43,100 square-foot building
adjacent to the Company's Minneapolis headquarters. This building is used
primarily for warehouse operations, and houses some administrative staff. The
second facility is a 14,300 square-foot building used for concentrate and
sterilant warehousing only.
The Company also leases a 24,311 square foot building located in Camp Hill,
Pennsylvania. This facility is used as a warehouse and distribution hub for the
Company's dialysis concentrate business.
The Company owns a 2.3 acre parcel of land adjacent to the Company's
Minneapolis facilities. A second 5.5 acre parcel previously owned by the Company
was sold in early fiscal 2000.
EUROPE
The Company owns a 21,000 square-foot building on a 4.4 acre site in
Heerlen, The Netherlands. Occupancy commenced in April 1995. The facility serves
as the Company's European headquarters and is being used as a sales office and
warehouse. In fiscal 1998 the Company also began manufacturing activities at the
Heerlen location.
The Company believes its facilities are in good condition, being utilized
for their intended purposes, and have sufficient capacity to meet its reasonably
anticipated needs.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal proceedings
which it regards as likely to have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System
under the symbol "MNTX". The prices below are the high and low transaction
prices as reported in each quarter of the last two fiscal years.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
------------------------------------------
1999 1998
-------------------- --------------------
FISCAL QUARTER PRICES HIGH LOW HIGH LOW
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter..................................... $ 14.438 $ 11.875 $ 12.875 $ 9.000
Second Quarter.................................... $ 13.000 $ 9.000 $ 12.250 $ 10.250
Third Quarter..................................... $ 17.125 $ 9.000 $ 13.250 $ 11.000
Fourth Quarter.................................... $ 15.250 $ 10.375 $ 14.250 $ 11.938
</TABLE>
As of June 11, 1999, the Company had more than 400 shareholders of record.
The Company paid annual cash dividends of $0.10 per share on its Common
Stock in September 1998 and September 1997. The Board of Directors will consider
annually the payment of dividends. However, any future determination as to
payment of cash dividends will depend upon the financial condition and results
of operations of the Company and such other factors that are deemed relevant by
the Board of Directors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Net sales--product......................... $ 75,224 $ 69,381 $ 65,907 $ 64,769 $ 55,883 $ 47,488
Contract revenues.......................... 1,040 -- -- -- 300 300
--------- --------- --------- --------- --------- ---------
Total revenues............................. 76,264 69,381 65,907 64,769 56,183 47,788
Cost of product sales...................... 41,740 39,818 38,493 38,107 31,775 26,620
Research and development
expenses................................. 4,440 2,862 3,424 3,123 3,133 2,893
Selling, general and administrative
expenses................................. 20,249 19,154 17,404 15,320 11,940 10,053
Amortization of intangibles................ 848 752 856 763 358 198
Restructuring and other unusual
items.................................... -- -- 9,569 936 -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) from operations............ 8,987 6,795 (3,839) 6,520 8,977 8,024
Other income (expense), net................ 1,804 33 (499) 42 237 (44)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes........ 10,791 6,828 (4,338) 6,562 9,214 7,980
Provision (benefit) for income taxes....... 3,647 2,253 (700) 2,394 3,294 3,045
Minority interest.......................... (16) (110) (266) (140) -- --
--------- --------- --------- --------- --------- ---------
Net earnings (loss)........................ 7,160 $ 4,685 $ (3,372) $ 4,308 $ 5,920 $ 4,935
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Basic earnings (loss) per share............ $ 1.05 $ 0.69 ($ 0.50) $ 0.66 $ 0.95 $ 0.81
Basic weighted-average common shares....... 6,803 6,746 6,722 6,513 6,235 6,094
BALANCE SHEET DATA
Cash, cash equivalents and marketable
securities............................... $ 9,171 $ 7,236 $ 3,622 $ 5,219 $ 4,487 $ 7,699
Working capital............................ 31,904 26,080 20,104 22,128 18,106 17,875
Property and equipment, net................ 15,021 14,191 15,647 17,323 15,632 12,900
Total assets............................... 58,726 51,550 48,594 50,047 41,274 36,030
Long term debt............................. -- -- -- -- -- 1,906
Stockholders' equity....................... 48,518 41,833 37,435 41,210 35,052 28,704
Book value per common shares............... $ 7.13 $ 6.20 $ 5.61 $ 6.21 $ 5.49 $ 4.66
GENERAL DATA AND RATIOS
Dividends.................................. .10 .10 .10 .10 .10 .10
Current ratio.............................. 4.4 4.1 3.0 4.2 4.6 5.4
Gross margin on net product sales.......... 44.5% 42.6% 41.6% 41.2% 43.1% 43.9%
Net earnings (loss) as a % of revenues..... 9.5% 6.8% (5.1)% 6.7% 10.5% 10.3%
Return on average stockholders' equity..... 15.8% 11.8% (8.6)% 11.3% 18.6% 19.1%
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Revenues in fiscal year 1999 increased by $6.9 million, or 10 percent over
fiscal 1998 revenues. Fiscal 1999 product sales increased by $5.8 million or 8
percent due primarily to unit volume growth across our businesses. Revenues for
fiscal 1999 reflect $1.04 million for achieving milestone events in the
Company's licensing and development agreement with ASP.
Sales of dialysis products reached $52.3 million in fiscal 1999, an increase
of $1.9 million or 4 percent over fiscal 1998. Excluding discontinued products,
dialysis product sales grew 7 percent in fiscal 1999 as compared to fiscal 1998.
Sales of dialysis concentrate increased 9 percent and dialysis reprocessing
products grew 6 percent for the year. Sales from cardiosurgery products
increased $2.6 million or 19 percent from fiscal 1998, due primarily to a 40
percent increase in oxygenator sales. Developing business sales increased $1.4
million or 28 percent over the prior year. This increase is primarily
attributable to 40 percent growth in our filtration and separation products.
Revenues in fiscal 1998 increased by $3.5 million, or 5.3 percent over
fiscal 1997 revenues due primarily to increased unit volumes in dialysis and
endoscope reprocessing products. Sales of dialysis products grew $4.8 million to
$50.4 million in fiscal 1998, a 10% increase over fiscal 1997. The dialysis
product increase is attributable to growth of 20 percent in dialysis processing
and 13 percent in dialysis concentrate, partially offset by decreases in
discontinued products. Cardiosurgery sales declined $3.2 million or 19 percent
in fiscal 1998, to $13.8 million. The decrease in cardiosurgery product sales
was due to the phase out of the first generation oxygenator supply contract with
Bard. Developing business product sales in fiscal 1998 increased $1.9 million or
56 percent over fiscal 1997. The increase is attributable to growth of 133
percent in endoscope reprocessing and 26 percent in filtration and separation.
Foreign exchange rate movements had a favorable year-to-year impact on
international sales of $.18 million in fiscal 1999. Foreign exchange rate
movements had an unfavorable impact on international sales of $1.8 million in
fiscal 1998 and $.6 million in fiscal 1997, respectively. Product sales have
grown at a compound annual rate of 5 percent over the last three years. The
following table is a summary of sales and percent of total Company sales by
product group over the last three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS) 1999 1998 1997
<CAPTION>
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Dialysis products................... $ 52,280 69.5% $ 50,425 72.7% $ 45,657 69.3%
Cardiosurgery products.............. 16,368 21.8% 13,802 19.9% 16,959 25.7%
Developing Business Products........ 6,576 8.7% 5,155 7.4% 3,293 5.0%
--------- --------- --------- --------- --------- ---------
Total Company Sales................. $ 75,224 100.0% $ 69,382 100.0% $ 65,909 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
DEFINITIONS FOR NET SALES BY PRODUCT GROUP
Product group segment reporting has been reclassified in 1999. Dialysis
product sales now include all concentrate, dialyzer reprocessing, and dialysis
supply and device revenues. The cardiosurgery product group remains the same.
Developing business product sales includes filtration and separation and
endoscope reprocessing revenues.
15
<PAGE>
INCOME/LOSS FROM OPERATIONS BY PRODUCT GROUP
Following is a summary of income/(loss) from operations before income taxes.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
(IN THOUSANDS OF DOLLARS) 1999 REVENUES 1998 REVENUES 1997 REVENUES
<CAPTION>
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Dialysis products............ $ 17,062 32.6% $ 16,015 31.8% $ 12,925 28.4%
Cardiosurgery products....... 3,039 18.6% 1,621 11.8% 4,583 27.0%
Other (Developing
Businesses)................ (153) -- (686) -- (1,262) --
Corporate & Unallocated...... (10,961) -- (10,154) -- (19,618) --
--------- --- --------- --- --------- ---
Total Company................ $ 8,987 11.8% $ 6,796 9.8% (3,372) --
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
GROSS MARGIN, OPERATING EXPENSES, AND NET EARNINGS
Following is a summary of gross margins on product sales, and key operating
expenses and net earnings as a percent of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------
<S> <C> <C> <C>
1999 1998 1997
-------------------------------
Gross margin on net product sales.................................... 44.5% 42.6% 41.6%
Research and development............................................. 5.8 4.1 5.2
Selling, general, and administrative................................. 26.6 27.6 26.4
Net (loss) earnings.................................................. 9.4 6.8 (5.1)
</TABLE>
Gross margin as a percent of product sales in fiscal 1999 increased to 44.5
percent from 42.6 percent in fiscal 1998. The improvement in fiscal 1999 gross
margin is primarily attributable to reductions in product costs. In fiscal 1998,
gross margin as a percentage of product sales was 42.6 percent compared to 41.6
percent in fiscal 1997. The improvement in gross margin in fiscal 1998 resulted
from a combination of favorable product mix and product cost reductions.
Research and development expenses in fiscal 1999 were $4.4 million, or 5.8
percent of revenues, compared to $2.9 million, or 4.1 percent of revenues, in
fiscal 1998, and $3.4 million, or 5.2 percent of sales, in fiscal 1997. The
increase in research and development spending for fiscal 1999 is primarily
related to the development of a second generation endoscope reprocessing machine
and sterilant. The Company intends to continue investing a substantial portion
of its revenue in new product development and expects that total research and
development expenses in fiscal 2000 will approximate 5.5 to 6.0 percent of
revenues.
Selling, general, and administrative expenses as a percentage of total
revenues were 26.6 percent in fiscal 1999, compared to 27.6 percent in fiscal
1998, and 26.4 percent in fiscal 1997. While selling, general, and
administrative expenses declined as a percentage of revenues in fiscal 1999, the
absolute dollars increased to support the higher sales level and expanded
dialysis reprocessing marketing programs. The higher spending in fiscal 1998 was
primarily to support the Biocor-Registered Trademark- 200 IHS Oxygenator launch.
RESTRUCTURING AND UNUSUAL ITEMS
In fiscal 1997, the Company recorded pre-tax charges for restructuring and
unusual items of $9.6 million. These charges related to the discontinuation of
two products and expenses associated with the departure of the Company's former
Chief Executive Officer. Accrued liabilities at March 31, 1999, and 1998 include
approximately $.4 million and $.6 million of employee-related restructuring
reserves, respectively.
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<PAGE>
OTHER INCOME
Fiscal 1999 other income reflects a $1.48 million gain related to the sale
of two U.S. patents. The technology covered in the patents sold was not utilized
in any of the Company's current products or future development plans.
INCOME TAXES
The income tax expense for fiscal 1999 was approximately $3.6 million, which
represents an effective tax rate of 33.8 percent, compared to income tax expense
of approximately $2.3 million or an effective tax rate of 33.0 percent in fiscal
1998. In fiscal 1997, the Company recorded an income tax benefit of $.7 million
or an effective tax rate of 16.1 percent.
The Company's tax provision in fiscal years 1999 and 1998 reflect a benefit
for utilization of net operating loss carry-forwards from its European
subsidiary. The fiscal 1997 tax provision does not recognize a benefit for these
operating losses. The Company expects the effective tax rate for fiscal 2000 to
range between 33.5 percent and 35.0 percent.
NET EARNINGS
The Company reported net earnings of $7.2 million, or $1.05 per share (basic
and diluted), compared to net earnings of $4.7 million, or $.69 per share (basic
and diluted) in fiscal 1998. The Company's fiscal 1999 net earnings represent a
53 percent increase over fiscal 1998. Fiscal 1999 net earnings reflect $.98
million for the sale of two U.S. patents. Excluding the patent sale, the
Company's 1999 fiscal year net earnings totaled $6.2 million, or $.91 per share
(basic and diluted), a 32 percent increase over fiscal 1998.
In fiscal 1997, the Company recorded a net loss of $(3.4) million, or $(.50)
per share (basic and diluted). The net loss in fiscal 1997 was due to
restructuring charges related primarily to the discontinuation of two products.
Prior to the restructuring charge in fiscal 1997, the Company recorded net
earnings of $3.0 million.
INFLATION
Management believes inflation has not had a material effect on the Company's
results of operations or on its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a strong balance sheet, as evidenced by
the following liquidity trends:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS) 1999 1998 1997
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Cash, cash equivalents and marketable securities............. $ 9,171 $ 7,236 $ 3,622
Working capital.............................................. 31,904 26,080 20,104
Stockholders' equity......................................... 48,518 41,833 37,435
Cash flow from operations.................................... 5,174 8,646 970
Cash dividends paid.......................................... 679 674 667
</TABLE>
The increase in cash, working capital, and stockholder's equity in fiscal
1999 is primarily attributable to the improvement in net earnings. The Company's
current ratio at March 31, 1999 was 4.4 compared to 4.1 at March 31, 1998. Cash
flow from operations in fiscal 1999 declined to $5.2 million from $8.7 million
in the prior year. The decrease in cash flow from operations is primarily
attributable to increases in accounts receivable and inventories to support the
increased sales level.
A total of $3.7 million was expended for plant improvements and equipment in
fiscal 1999, compared to $1.3 million and $5.2 million in fiscal 1998 and 1997,
respectively. The Company plans to invest between $3.5 million and $4.0 million
in capital equipment in fiscal 2000.
17
<PAGE>
During the past three years, proceeds from stock options exercised provided
a total of $2.0 million in equity capital as follows: fiscal 1999--$1.1 million;
fiscal 1998--$.4 million; and fiscal 1997--$.5 million. The Company announced a
stock repurchase program on August 21, 1998. Through March 31, 1999, the Company
expended $1.0 million to repurchase 101,200 shares of common stock.
In April 1998, the company signed a finite risk insurance policy to cover
potential future product liability and legal defense exposures. Payments of $1.0
million in April 1998 and $.7 million in April 1999 were made. Future payments
of $.7 million are planned through April 2001. In the event that these exposures
do not materialize, the Company will recover a portion of these premiums.
In May 1999, the Company signed a letter of intent with an oncologist to
acquire the rights to commercialize the physician's patented cancer therapy, as
well as the physician's clinic. The Company expects its cash balances, cash flow
from operations, and line of credit to be adequate to meet its obligations to
complete this acquisition, and other anticipated operating cash needs including
planned capital expenditures in its core business in fiscal 2000.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result of this
issue, computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. The Year 2000 issue could
result in system failures or miscalculations causing disruption of operations,
including, among other things, a temporary inability to process transactions
involving the recording of sales, manufacture of products, management of
inventory and distribution, preparation of invoices and collection of accounts
receivable.
The Company's management has established a program to address the Year 2000
issue in three phases as follows: (a) an assessment phase, (b) an analysis and
resolution strategy phase, and (c) a remediation and testing phase. The
compliance program focuses on the Company's information technology systems as
well as non-information technology systems (such systems contain embedded
technology in manufacturing, laboratory, or process control equipment containing
microprocessors or other similar circuitry).
The assessment phase, during which management attempted to identify all
hardware and software that affect the Company's operations, has been completed
with respect to the majority of the Company's operations. Based on the results
of the assessment phase, the Company has determined that its primary hardware
and operating system software is Year 2000 compliant. In addition, the Company's
internal financial and enterprise resource planning systems are compliant.
Management has determined that certain hardware and software will need to be
updated or replaced so that its information systems will properly recognize
dates after December 31, 1999.
The Company is currently in the remediation phase for most of its
information technology systems. For non-information technology, or embedded
technology systems, the Company is in the assessment, analysis and resolution
strategy phase. The Company anticipates that internal Year 2000 remediation
projects will be completed and tested by July 31, 1999.
In addition, the Company has reviewed and requested assurances on the status
of Year 2000 readiness of its critical suppliers. Many of these suppliers have
either declined to provide, or have limited their assurances on the status of
Year 2000 readiness. The Company will continue to monitor critical suppliers.
The Company is in the process of assessing the Year 2000 readiness of major
customers and their Year 2000 status is unclear. If a significant number of
suppliers and customers experience disruptions as a result of Year 2000 issues,
this could have a material adverse effect on the Company.
18
<PAGE>
The Company is currently developing contingency plans and scenarios, and
anticipates that such plans will be completed by September 30, 1999. Through
March 31, 1999, the Company has spent approximately $.7 million for Year 2000
remediation. Based on the status of assessments and re-mediation plans to date,
the Company estimates the total remaining cost of remediation at less than $.1
million. The Company believes it has ample resources to fund and complete
remediation and testing. However, estimates of Year 2000 costs are based on
numerous assumptions, and there can be no assurance that the estimates are
correct or that the actual costs will not be materially greater than
anticipated.
Based on its assessments and current knowledge, the Company believes it will
not, as a result of the Year 2000 issue, experience any material disruptions in
internal manufacturing processes, information processing or interfaces with
major customers, or with processing orders and billing. However, if certain
critical third-party providers, such as providers of electricity, water or
telephone service experience difficulties resulting in disruption of service to
the Company, a shutdown of the Company's operations at individual facilities
could occur for the duration of the disruption. The Company's management will
establish a contingency plan to provide for continuity of processing if the
Company's Year 2000 compliance efforts fail. Assuming no major disruption in
service from utility companies or other critical third-party providers, the
Company believes that Year 2000 compliance will not have a material effect on
the Company's results of operations or financial condition.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's United States-based export sales are
invoiced and paid in United States dollars. The transactions of the Company's
Netherlands-based subsidiary are invoiced and paid in several currencies,
including Dutch guilders, German marks and United States dollars. The Company
does not currently hedge its foreign currency transactions. Accordingly, the
Company is subject to risks associated with fluctuations in currency exchange
rates.
RISK FACTORS
Certain statements made in this Annual Report on Form 10-K, are
forward-looking statements that involve risks and uncertainties, and actual
results may differ. Factors that could cause actual results to differ include
those identified below.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The markets in which the
Company competes are highly competitive and are characterized by innovation and
technological change. The Company currently competes in each area of the
Company's business with a number of companies that have capital resources,
research and development staffs, facilities, experience in conducting clinical
trials and obtaining regulatory approvals, and experience in manufacturing and
marketing medical supplies and devices that are significantly greater than those
of the Company. In addition, there are several companies developing new
technologies that may reduce the demand for the Company's existing products,
such as minimally invasive techniques in open-heart surgery, which may not
require the use of oxygenators. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any that are being developed by the Company or that would
render the Company's products obsolete or noncompetitive. In addition, certain
of the Company's competitors may achieve patent protection, regulatory approval
or product commercialization that would limit the Company's ability to compete.
The Company's inability to compete successfully could have a material adverse
effect on its business, financial condition, and results of operations.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company relies heavily
on proprietary technology, which it protects primarily through licensing
arrangements, patents, trade secrets, and proprietary know-how. The Company
holds patents and has pending patent applications that cover certain aspects of
its technology. There can be no assurance that any pending or future patent
applications will be granted or that any current or future patents, regardless
of whether the Company is an owner or a licensee of such patent, will not be
challenged, rendered unenforceable, invalidated or circumvented or that the
rights granted thereunder or under its licensing agreements will provide a
competitive advantage to the
19
<PAGE>
Company. There can also be no assurance that the Company's trade secrets or
non-disclosure agreements will provide meaningful protection of the Company's
proprietary information. Furthermore, there can also be no assurance that others
will not independently develop similar technologies or duplicate any technology
developed by the Company or that the Company's technology will not infringe upon
patents or other rights owned by others. The Company's inability to maintain its
proprietary rights would have a material adverse effect on its business,
financial condition, and results of operations.
LACK OF MARKET ACCEPTANCE. The Company's principal products are based upon
innovative medical concepts. The Company believes that market acceptance of
these products will depend, in part, on the Company's ability to convince the
medical community of the safety, efficacy, convenience, and cost effectiveness
of these products as compared to existing competitive products. Market
acceptance will further depend on the Company's ability to gain acceptance by
the medical community of the use of its products. There can be no assurance that
medical professionals will readily adopt new products or approaches,
particularly when certain competitors of the Company provide a more complete
product mix than that offered by the Company. The Company's inability to gain
market acceptance for its Biocor-Registered Trademark- 200 oxygenator and other
products would have a material adverse effect on the Company's business,
financial condition, and results of operations.
LITIGATION; POTENTIAL FOR ADVERSE OUTCOMES. The medical supply and device
market is characterized by frequent and substantial intellectual property
litigation. Intellectual property litigation is complex and expensive, and the
outcome of such litigation is difficult to predict. A finding against the
Company could have a material adverse effect on the Company's business,
financial condition, and results of operations.
GOVERNMENT REGULATION. In the United States, the FDA regulates the sale of
medical supplies and devices as well as manufacturing procedures, labeling, and
recordkeeping with respect to such products. The process of obtaining marketing
clearances and approvals from the FDA for new products can be time consuming and
expensive, and there is no assurance that such clearances or approvals will be
granted or that FDA review will not involve delays that would adversely affect
the Company's ability to commercialize its products. The FDA requires that a new
product secure either a 510(k) clearance or an approved PMA, depending upon its
classification, prior to marketing in the United States. The Company's products
are currently sold under a 510(k) clearance, which is available for products
demonstrated to be substantially equivalent to products that are already
commercially available. The 501(k) clearance process typically takes several
months and may require the submission of supporting laboratory or clinical data.
No assurance can be given that the Company will receive FDA marketing approval
for new products on a timely basis, or at all. Even if regulatory approvals to
market a product are obtained from the FDA, such approvals may entail
limitations on the indicated uses of the product. Product approvals by the FDA
can also be withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following initial approval. The FDA could
also limit or prevent the manufacture or distribution of the Company's products
and has the power to require the recall of such products. A product recall,
whether voluntary or mandated by the FDA, would have a material adverse effect
on the Company, particularly at the early stage of market introduction. FDA
regulations depend heavily on administrative interpretation, and there can be no
assurance that future interpretations made by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
The FDA, various state agencies, and foreign regulatory agencies inspect the
Company from time to time to determine whether the Company is in compliance with
various regulations relating to manufacturing practices, validation, testing,
quality control and product labeling. For example, the United States
Environmental Protection Agency regulates the chemical sterilants used in the
Company's water filtration product line. A determination that the Company is in
violation of such regulations could lead to imposition of civil penalties,
including fines, product recall orders or product seizures, and, in extreme
cases, criminal sanctions.
International regulatory bodies often establish varying regulations
governing products standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax
20
<PAGE>
requirements. As a result of the Company's sales in Europe, the Company was
required to be certified as ISO 9001 compliant and to receive CE mark
certification. Failure to maintain CE mark certification would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The Company's ability to sell its
products depends in part on the extent to which reimbursement for the cost of
such products and related treatments are available to patients under domestic
and foreign governmental health programs, private health insurance, managed care
organizations, workers' compensation insurers, and other similar programs. Over
the past decade, the cost of health care has risen significantly, and there have
been numerous proposals by legislators, regulators, and third-party health care
payors to curb these costs. In addition, certain health care providers are
moving towards a managed care system in which such providers contract to provide
comprehensive health care for a fixed cost per person. The Company is unable to
predict what changes will be made in the reimbursement methods utilized by
third-party health care payors. In addition, hospitals and other health care
providers have become increasingly price competitive and, in some instances,
have put pressure on medical suppliers to lower their prices. Any reductions in
coverage or price limitations by third-party payors could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
PRODUCT LIABILITY. The medical supply and device industry has been
historically litigious and the Company faces an inherent business risk of
financial exposure to product liability claims in the event that the use of its
products results in personal injury. Since the Company's principal products are
designed to be used in connection with medical procedures on the human body,
manufacturing errors or design defects could result in an unsafe condition,
injury or death to the patient, and could result in a recall of the Company's
products and substantial monetary damages. There can be no assurance that the
Company will not experience losses due to product liability claims in the
future. Although the Company currently maintains liability insurance, there can
be no assurance that the coverage limits of the Company's insurance policies
will be adequate. Such insurance is expensive, difficult to obtain, and may not
be available in the future on acceptable terms, or at all. Any claims against
the Company, regardless of their merit or eventual outcome, could have a
material adverse effect upon the Company's business financial condition, and
results of operations.
ACQUISITION OF CUSTOMERS BY COMPETITORS OF THE COMPANY. A significant
percentage of dialysis treatment centers nationwide are owned by competitors of
the Company. Accordingly, the Company may face difficulty in selling its
dialysis products to these centers. Additionally, a competitor has recently
acquired a number of companies that provide contract perfusion services to
hospitals. Although the Company believes that it is too early to assess the
long-term effects of these acquisitions on its business, the Company may face
difficulty in selling its cardiosurgery products to perfusionists employed by
these companies or to hospitals or clinics that contract with them. These
acquisitions (or other acquisitions by the Company's competitors) could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON DISTRIBUTOR SALES. Sales to distributors constitute a
significant portion of the Company's business both in the U.S. and foreign
markets. There can be no assurance that the Company will be able to maintain its
relationship with distributors, or, if these relationships terminate, that new
distributors will be found. The loss of a significant distributor could have a
material adverse effect on the Company's business, financial condition, and
results of operations if a new distributor (or other suitable sales
organization) could not be found on a timely basis.
INTERRUPTION IN SOURCES OF SUPPLY. The fiber used in the Company's
oxygenators is purchased from a single source. If this source of supply becomes
unavailable, then there can be no assurance that the Company would be able to
find an acceptable substitute supplier. In addition, high demand for
polycarbonate products by various industries has at times caused temporary
shortages of their supply. Any significant interruption in the supply of these
products could have a material adverse effect on the Company's business,
financial condition, and results of operations.
21
<PAGE>
ENVIRONMENTAL COMPLIANCE. In the ordinary course of its manufacturing
process, the Company uses various chemical solvents and other regulated
substances. Although the Company is not aware of any claim involving violation
of environmental or occupational health and safety laws or regulations, there
can be no assurance that such a claim may not arise in the future, which could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
CURRENCY RISK. Approximately 23 percent of the Company's business is
transacted in foreign markets. Long-term changes or short-term fluctuations in
currency exchange rates could have a material adverse effect on the Company's
business, financial condition, and results of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Company's five largest customers
in fiscal 1999 accounted for 33 percent of its total sales. The loss of one or
more of these customers could have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company's
oxygenator supply contract with Bard ended June 30, 1997. Although the Company
plans to supplant the lost revenues from Bard under this contract with sales of
its Biocor-Registered Trademark- 200 oxygenator, there can be no assurance that
these plans will be realized.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part on
its ability to attract and retain highly qualified scientific, technical,
management, and marketing personnel. Competition for such personnel is intense
and there can be no assurance that the Company will be able to attract and
retain the personnel necessary for the development and operation of its
business. The loss of the services of key personnel could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
POSSIBLE VOLATILITY OF SHARE PRICE. Market prices for securities of medical
technology companies are highly volatile and the trading price of the Company's
Common Stock could be subject to significant fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations by the Company or its competitors, government regulation, and other
events or factors, including the various risk actors discussed herein. In
addition, market prices of securities of medical technology companies have from
time to time experienced extreme price and volume fluctuations, which may be
unrelated to the operating performance of particular companies. These broad
market fluctuations may materially adversely affect the market price of the
Company's Common Stock.
ANTI-TAKEOVER CONSIDERATIONS. The Board of Directors of the Company has the
authority, without any action by the shareholders, to fix the rights and
preferences of any shares of the Company's Preferred Stock to be issued from
time to time. In addition, as a Minnesota corporation, the Company is subject to
certain anti-takeover provisions of the Minnesota Business Corporation Act (the
"MBCA"). The authority of the Board with regard to the Preferred Stock and the
provisions of the MBCA could have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the then prevailing market price of the
Common Stock, and may adversely effect the market price of, and the voting and
other rights of the holders of, Common Stock.
VOLATILITY OF GLOBAL MARKETS. The Company and its subsidiary operate in a
global market. Global operations are subject to risks, including political and
economic instability, general economic conditions, imposition of government
controls, fluctuations of exchange rates, the need to comply with a wide variety
of foreign and United States export laws, trade restrictions and the greater
difficulty of administering business overseas. Although substantially all of the
Company's direct international sales are denominated in United States dollars,
both direct sales by the Company and sales through its affiliated international
distributors may be affected by these factors and thus may adversely affect the
operations and financial results of the Company.
YEAR 2000 ISSUES. Certain of the Company's information systems and products
may require updating to continue to function properly beyond 1999. The Company
believes that adequate resources have been allocated for this purpose and does
not expect to incur significant expenditures to address this issue. However,
there can be no assurance that the Company will identify all Year 2000
compliance issues in its
22
<PAGE>
information systems and products in advance of their occurrence or that the
Company will be able to remedy successfully any problems that are discovered.
The expenses of the Company's efforts to address such problems, or the expenses
or liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
financial condition, and results of operations, In addition, the revenue stream
and financial stability of existing customers may be adversely impacted by Year
2000 compliance problems, which could cause fluctuations in the Company's
revenue and operating results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Reports of Independent Certified Public
Accountants are contained on pages 25 through 41 of this report.
QUARTERLY FINANCIAL DATA
Quarterly financial data has not been submitted because the Company has less
than 800 shareholders of record.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item with respect to directors will be
included under the heading "Election of Directors" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held August 25,
1999, and is incorporated herein by reference.
The information required under this item with respect to directors,
executive officers and any persons who are beneficial owners of more than ten
percent of any class of equity securities of the Company will be included under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on August 25, 1999, and is incorporated herein by reference.
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, information as
to executive officers of the Company is set forth in Part I of this Form 10-K
under the caption "Executive Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item will be included under the heading
"Executive Compensation and Other Information" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held August 25, 1999, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item will be included under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held August 25, 1999, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF REPORT
1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this Form 10-K:
(i) Consolidated Balance Sheets for the years ended March 31, 1999 and
1998
(ii) Consolidated Statements of Earnings for the three years ended March
31, 1999, 1998 and 1997
(iii) Consolidated Statements of Stockholders' Equity for the three years
ended March 31, 1999, 1998, and 1997
(iv) Consolidated Statements of Cash Flows for the three years ended
March 31, 1999, 1998 and 1997
(v) Notes to Consolidated Financial Statements
(vi) Report of Independent Accountants
2. Schedules filed as part of this Form 10-K: none
All schedules are omitted because they are not applicable to the Company or
because the information required is included in the consolidated financial
statements and notes thereto.
3. Exhibits included herein:
<TABLE>
<S> <C>
3(a) Restated Articles of Incorporation, as amended
3(b) Restated By-Laws(1)
3(c) Amendment to By-Laws in November 1998(2)
4 Form of Specimen Common Stock Certificate(3)
10(a) 1989 Stock Plan, as amended(4)*
10(b) Amendment to 1989 Stock Plan Effective February 25, 1998(5)*
10(c) Form of Employment Agreement dated September 1, 1996 with certain officers of the
Company(4)*
10(d) Separation and Consulting Agreement with Dr. Louis C. Cosentino dated April 1,
1997(4)*
10(e) 1990 Employee Stock Purchase Plan, as amended June 1, 1993(3)
10(f) Supplemental Executive Retirement Plan effective April 1, 1996(6)*
10(g) Amendment to Supplemental Executive Retirement Plan effective April 1, 1998(5)*
10(h) Director Emeritus Consulting Plan(7), as amended(8)*
10(i) Amended 1998 Stock Option Plan(2)
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None
- ------------------------------
* Management contract, compensatory plan or arrangement filed pursuant to Rule
601(b)(1)(iii)(A) of Regulation S-K under the Securities Exchange Act of
1934.
(1) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-11278.
(2) Incorporated by reference to the specified exhibit filed as part of the
Company's Registration Statement on Form S-8, Registration No. 333-70545.
(3) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1993, File
No. 0-11278.
(4) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year-ended March 31, 1997, File
No. 0-11278.
(5) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1998, File
No. 0-11278
(6) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1995, File
No. 0-11278.
(7) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
File No. 0-11278.
(8) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 0-11278.
24
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................................. $ 9,171 $ 6,805
Marketable securities...................................................................... -- 431
Accounts receivable, less allowance for doubtful accounts of $590 and $339, respectively... 17,537 14,571
Inventories................................................................................ 12,237 11,196
Deferred taxes............................................................................. 840 991
Prepaid expenses and other current assets.................................................. 1,490 632
--------- ---------
TOTAL CURRENT ASSETS..................................................................... 41,275 34,626
--------- ---------
PROPERTY AND EQUIPMENT, AT COST
Land, buildings and improvements........................................................... 10,507 9,533
Machinery and equipment.................................................................... 21,507 19,911
Office and sales equipment................................................................. 3,957 3,863
--------- ---------
Total property and equipment............................................................... 35,971 33,307
Less accumulated depreciation.............................................................. (20,950) (19,116)
--------- ---------
NET PROPERTY AND EQUIPMENT............................................................... 15,021 14,191
OTHER ASSETS
Patent costs, net.......................................................................... 524 780
Goodwill, net.............................................................................. 960 888
Other...................................................................................... 946 1,065
--------- ---------
TOTAL ASSETS................................................................................. $ 58,726 $ 51,550
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Term loan.................................................................................. $ 252 $ 225
Accounts payable........................................................................... 3,977 3,893
Accrued salaries and wages................................................................. 756 796
Accrued profit sharing..................................................................... 650 796
Accrued bonuses............................................................................ 1,126 716
Other accrued expenses..................................................................... 2,067 1,811
Income taxes payable....................................................................... 543 309
--------- ---------
TOTAL CURRENT LIABILITIES................................................................ 9,371 8,546
--------- ---------
DEFERRED INCOME TAXES........................................................................ 82 454
DEFERRED COMPENSATION........................................................................ 755 783
MINORITY INTEREST............................................................................ -- (66)
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock--$.05 par value; 5,000,000 shares authorized, none outstanding
Common Stock--$.05 par value; 20,000,000 shares authorized, 6,778,617 and 6,771,736 shares
issued and outstanding, respectively..................................................... 339 339
Additional paid-in-capital................................................................. 12,889 12,657
Retained earnings.......................................................................... 35,637 29,156
Accumulated other comprehensive income..................................................... (347) (319)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY............................................................... 48,518 41,833
COMMITMENTS AND CONTINGENCIES................................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................... $ 58,726 $ 51,550
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Net sales--products............................................................ $ 75,224 $ 69,381 $ 65,907
Contract revenue............................................................... 1,040 -- --
--------- --------- ---------
Total revenues............................................................... 76,264 69,381 65,907
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of product sales.......................................................... 41,740 39,818 38,493
Research and development....................................................... 4,440 2,862 3,424
Selling, general and administrative............................................ 20,249 19,154 17,404
Amortization of intangible assets.............................................. 848 752 856
Restructuring and other unusual items.......................................... -- -- 9,569
--------- --------- ---------
Total operating costs and expenses........................................... 67,277 62,586 69,746
--------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS.................................................. 8,987 6,795 (3,839)
--------- --------- ---------
OTHER INCOME (EXPENSES)
Interest expense............................................................... (112) (16) (174)
Interest income and other, net................................................. 1,916 49 (325)
--------- --------- ---------
1,804 33 (499)
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST........................ 10,791 6,828 (4,338)
Provision (benefit) for income taxes........................................... 3,647 2,253 (700)
Minority interest.............................................................. (16) (110) (266)
--------- --------- ---------
NET EARNINGS (LOSS).............................................................. $ 7,160 $ 4,685 $ (3,372)
--------- --------- ---------
--------- --------- ---------
NET EARNINGS (LOSS) PER SHARE
Basic.......................................................................... $ 1.05 $ 0.69 $ (0.50)
Diluted........................................................................ $ 1.05 $ 0.69 $ (0.50)
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------- ACCUMULATED
SHARES ADDITIONAL OTHER
ISSUED AND PAID-IN COMPREHENSIVE RETAINED
OUTSTANDING AMOUNT CAPITAL INCOME EARNINGS TOTAL
----------- ----------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES MARCH 31, 1996........................... 6,635,134 $ 332 $ 11,646 $ 48 $ 29,184 $ 41,210
Net Loss.......................................... -- -- -- (3,372) (3,372)
Unrealized holding gain on securities (including
taxes of $(10))................................. -- -- -- 52 -- 52
Foreign currency translation adjustment (including
taxes of $(55))................................. -- -- -- (287) -- (287)
----------- ----- ----------- ------ --------- ---------
Comprehensive Income.............................. -- -- -- -- -- (3,607)
----------- ----- ----------- ------ --------- ---------
Exercise of stock options......................... 40,579 2 485 -- -- 487
Tax benefit from exercise of stock options........ -- -- 12 -- -- 12
Dividends paid of $.10 per share.................. -- -- -- -- (667) (667)
----------- ----- ----------- ------ --------- ---------
BALANCES MARCH 31, 1997........................... 6,675,713 $ 334 $ 12,143 (187) $ 25,145 $ 37,435
Net earnings...................................... -- -- -- -- 4,685 4,685
Unrealized holding gain on securities (including
taxes of $4).................................... -- -- -- 8 -- 8
Foreign currency translation adjustment (including
taxes of $69)................................... -- -- -- (140) -- (140)
----------- ----- ----------- ------ --------- ---------
Comprehensive Income.............................. -- -- -- -- -- 4,553
----------- ----- ----------- ------ --------- ---------
Exercise of stock options, net of 8,876 shares
surrendered in payment.......................... 96,023 5 449 -- -- 454
Tax benefit from exercise of stock options........ -- -- 65 -- -- 65
Dividends paid of $.10 per share.................. -- -- -- -- (674) (674)
----------- ----- ----------- ------ --------- ---------
BALANCES MARCH 31, 1998........................... 6,771,736 $ 339 $ 12,657 (319) 29,156 $ 41,833
Net earnings...................................... 7,160 7,160
Unrealized holding gain on securities (including
taxes of $7).................................... -- -- -- 14 -- 14
Foreign currency translation adjustment (including
taxes of $21)................................... -- -- -- (42) -- (42)
----------- ----- ----------- ------ --------- ---------
Comprehensive Income.............................. -- -- -- -- -- 7,132
----------- ----- ----------- ------ --------- ---------
Exercise of stock options......................... 6,881 -- 64 -- -- 64
Tax benefit from exercise of stock options........ -- -- 168 -- -- 168
Dividends paid of $.10 per share.................. -- -- -- -- (679) (679)
----------- ----- ----------- ------ --------- ---------
BALANCES MARCH 31, 1999........................... 6,778,617 $ 339 $ 12,889 $ (347) $ 35,637 $ 48,518
----------- ----- ----------- ------ --------- ---------
----------- ----- ----------- ------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)................................................................ $ 7,160 $ 4,685 $ (3,372)
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities
Restructuring charges.......................................................... -- -- 7,781
Depreciation and amortization.................................................. 3,625 3,528 4,634
Tax benefit from stock option exercises........................................ 169 65 12
Foreign currency exchange (gain) loss.......................................... (46) 110 562
Deferred income taxes.......................................................... (220) 760 (2,000)
Minority interest.............................................................. (16) (110) (267)
Gain on sale of patents........................................................ (1,481) -- --
Changes in assets and liabilities:
Accounts receivable.......................................................... (2,966) (3,116) (723)
Inventories.................................................................. (1,041) 614 (3,587)
Prepaid expenses............................................................. (858) 897 (75)
Accounts payable............................................................. 84 (28) (1,154)
Accrued expenses............................................................. 420 1,402 95
Income Taxes Payable......................................................... 233 309 (815)
Other........................................................................ 111 (470) (121)
--------- --------- ---------
Total adjustments.......................................................... (1,986) 3,961 4,342
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... 5,174 8,646 970
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.............................................. (3,692) (1,335) (5,208)
Patent application costs......................................................... (237) (366) (308)
Proceeds from sale of marketable securities...................................... 445 -- 743
Proceeds from sale of patents.................................................... 1,600 -- --
Other............................................................................ 95 -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............................................. (1,789) (1,701) (4,773)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable....................................................... 27 -- 4,241
Payment of note payable.......................................................... -- (3,000) (1,000)
Proceeds from exercise of stock options.......................................... 1,075 454 487
Purchase of minority interest.................................................... (436) -- --
Stock repurchase................................................................. (1,011) -- --
Payment of cash dividends........................................................ (679) (674) (667)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ (1,024) (3,220) 3,061
Effects of exchange rate changes on foreign currency cash balances................. 5 (142) (100)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 2,366 3,583 (842)
Cash and cash equivalents at beginning of year..................................... 6,805 3,222 4,064
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................... $ 9,171 $ 6,805 $ 3,222
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................................................. $ 4 $ 44 $ 174
Cash paid for income taxes......................................................... $ 3,409 $ 423 $ 2,151
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Minntech Corporation is a leader in developing, manufacturing and marketing
medical devices, sterilants and water filtration products. The Company's
products are used in kidney dialysis, open-heart surgery, endoscopy, and in the
preparation of pure water for medical, industrial and laboratory use.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
REVENUE RECOGNITION
Sales are recognized at the time products are shipped. Provisions for sales
allowances and returned products are estimated and recorded at the time of sale.
The Company allows customers to return products for credit upon written
authorization from the Company.
Contract revenues derived from development and marketing agreements are
recorded as earned based on the performance requirements of the contract.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consisted of:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash....................................................................... $ 1,663 $ 1,820
Money market mutual funds.................................................. 7,508 4,985
--------- ---------
Total Cash and Equivalents................................................. $ 9,171 $ 6,805
--------- ---------
--------- ---------
</TABLE>
A substantial portion of the Company's cash balances are held in one
financial institution.
Money market mutual funds are stated at fair value, which approximates cost
at March 31, 1999 and 1998.
MARKETABLE SECURITIES The Company accounts for marketable securities in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Marketable securities consisted of investments in bond funds. At March 31,
1998 the adjusted cost of the funds exceeded fair market value. The unrealized
gains/losses net of income taxes is reported as a
29
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
component of other comprehensive income. These securities were disposed of prior
to the end of fiscal 1999.
Marketable securities consisted of:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1998
-------------
<S> <C>
Adjusted cost.................................................................... $ 443
Unrealized holding loss.......................................................... (12)
-----
Fair market value................................................................ $ 431
-----
-----
</TABLE>
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
by the first-in, first-out method.
Inventories consisted of:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Finished goods.......................................................... $ 5,626 $ 5,733
Materials and work-in process........................................... 6,611 5,463
--------- ---------
Total inventory......................................................... $ 12,237 $ 11,196
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis over their
estimated service lives. Accelerated and straight-line methods are used for
income tax reporting purposes.
<TABLE>
<CAPTION>
ESTIMATED LIVES IN
YEARS
----------------------
<S> <C>
Buildings............................................................. 31.5
Building Improvements................................................. 5-20
Machinery & Equipment................................................. 3-10
Transportation Equipment.............................................. 3-5
Office Equipment...................................................... 3-10
</TABLE>
PATENT COSTS
Patent application costs consist principally of legal and filing fees and
are capitalized and amortized over five years.
GOODWILL
Goodwill represents the cost in excess of the fair value of net assets
acquired and is amortized using the straight-line method over five to ten years.
The Company periodically evaluates the existence of
30
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill impairment on the basis of whether the goodwill is fully recoverable
from projected, undiscounted net cash flows of the related business unit.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
FOREIGN CURRENCY TRANSLATION
Foreign assets and liabilities are translated to U.S. dollars at year-end
exchange rates. Revenues and expenses are translated at rates that approximate
those prevailing at the time of transactions. The resulting translation
adjustments are reported as a component of other comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement, which must be adopted by the Company for
transactions entered into beginning April 1, 2001, establishes new standards for
recognition and measurement of derivatives and hedging activities. The Company
will implement this statement as required; however, implementation of this
disclosure standard will not effect the Company's results of operations, cash
flows, or financial position as the Company currently does not actively transact
in financial instruments that would be subject to the accounting under this
statement.
RECLASSIFICATIONS
Certain reclassifications have been made to make the prior year financial
statements comparable with the current year's presentation. The reclassification
had no effect on earnings or shareholder's equity as previously reported.
NOTE 2--RESTRUCTURING AND UNUSUAL ITEMS
In the fourth quarter of fiscal 1997, the Company adopted a restructuring
plan designed to reduce its cost structure and improve its competitive position
primarily through the discontinuation of two unprofitable product lines--the
Primus-Registered Trademark- dialyzer and Cathetron-Registered Trademark-
catheter reprocessing system. In addition, the charge provided for costs
associated with the departure of the Company's former Chief Executive Officer.
The restructuring charge consisted of asset write downs of $7,856 and employee
costs of $1,713 totaling $9,569 before taxes and $6,294 after taxes. The
following table details the restructuring reserve as recorded in the balance
sheet and current year activity. The remaining reserve at March 31, 1999 relates
to employee costs.
31
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--RESTRUCTURING AND UNUSUAL ITEMS (CONTINUED)
THE RESTRUCTURING RESERVE CONSISTED OF THE FOLLOWING:
<TABLE>
<S> <C>
Reserve balance at March 31, 1997................................... $ 1,097
Fiscal 1998 payments................................................ (461)
---------
Reserve balance at March 31, 1998................................... $ 636
Fiscal 1999 payments................................................ (281)
---------
Reserve balance at March 31, 1999................................... $ 355
---------
---------
</TABLE>
NOTE 3--LINE OF CREDIT
At March 31, 1999, the Company had a line of credit with a commercial bank
which allowed the Company to borrow up to $10,000 on an unsecured basis at the
prime rate of interest (7.75 percent at March 31, 1999) or the indexed London
Interbank Offered Rate (LIBOR). At March 31, 1999, the Company had no
outstanding borrowings under the line of credit. This line of credit expires
August 31, 2000.
NOTE 4--SEGMENT DATA AND SIGNIFICANT CUSTOMERS
Effective for fiscal year end 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) 131, "Disclosure about Segments of an
Enterprise and Related Information". SFAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The objective is to provide
information about the different types of business activities in which the
Company engages, and the different economic environments in which it operates to
help users of financial statements.
The Company's businesses are organized, managed, and internally reported as
three segments. These segments, which are based upon products, services and
industry, are Dialysis Products, Cardiosurgery Products and Other (Developing
Businesses). Management of these segments includes responsibility for different
product lines and services on a geographic basis, including accountability for
revenues as well as sales and marketing costs.
Research and development is managed at the corporate level. Resource
decisions and performance assessment is managed by corporate officers. Research
and development expenses are monitored by project and allocated to their
respective segments. Corporate Administration costs are not allocated to
32
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--SEGMENT DATA AND SIGNIFICANT CUSTOMERS (CONTINUED)
reportable segments. Therefore, management does not represent that these
segments, if operated independently, would report the operating income and other
financial information shown below. The table below presents information about
reportable segments for the years ended March 31, 1999, 1998 and 1997:
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
OTHER CORPORATE
DIALYSIS CARDIOSURGERY (DEVELOPING & TOTAL
PRODUCTS PRODUCTS BUSINESSES) UNALLOCATED(1) COMPANY
--------- ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
1999......................................... $ 52,279 $ 16,369 $ 6,576 $ 1,040 $ 76,264
1998......................................... 50,424 13,802 5,155 -- 69,381
1997......................................... 45,656 16,959 3,292 -- 65,907
INCOME (LOSS) FROM OPERATIONS
1999......................................... $ 17,062 $ 3,039 $ (153) $ (10,961) $ 8,987
1998......................................... 16,015 1,621 (686) (10,154) 6,796
1997......................................... 12,925 4,583 (1,262) (19,618)(2) (3,372)
IDENTIFIABLE ASSETS(3)
1999......................................... $ 20,219 $ 13,543 $ 3,580 $ 21,384 $ 58,726
1998......................................... 17,891 12,917 3,031 17,711 51,550
1997......................................... 16,069 13,849 2,657 16,019 48,594
</TABLE>
- ------------------------
(1) Loss from operations consists of unallocated corporate administrative
expenses and amortization of intangibles.
(2) Includes a $9,569 restructuring charge.
(3) Identifiable segment assets include accounts receivable, property plant and
equipment, and inventories. Additional assets included in Corporate
Administration primarily include cash and marketable securities, capitalized
patent costs, deferred income taxes, goodwill, land and certain prepaid
expenses.
33
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--SEGMENT DATA AND SIGNIFICANT CUSTOMERS (CONTINUED)
GEOGRAPHIC AREAS
Information in the table below is presented on the basis which the company
uses it to manage the identifiable segments. Export sales amounted to 23%, 21%
and 19% of revenues for 1999, 1998 and 1997, respectively. Substantially all of
the Company's export sales are negotiated, invoiced and paid in U.S. dollars.
GEOGRAPHIC AREA INFORMATION
<TABLE>
<CAPTION>
UNITED
STATES INTERNATIONAL OTHER ELIMINATIONS TOTAL
------------ ------------ --------- --------- -------
<S> <C> <C> <C> <C> <C>
REVENUES
1999........................ $ 67,192 $ 20,575 $ 1,040(1) $(12,543) $76,264
1998........................ 62,791 16,848 -- (10,258) 69,381
1997........................ 57,991 12,244 -- (4,328) 65,907
PROPERTY, PLANT & EQUIPMENT,
NET
1999........................ $ 12,149 $ 2,872 -- -- $15,021
1998........................ 12,744 1,546 -- -- 14,290
1997........................ 14,051 1,538 -- -- 15,589
</TABLE>
- ------------------------
(1) Contract revenue received during fiscal 1999.
SIGNIFICANT CUSTOMERS
The following table summarizes sales to the Company's customers exceeding
10% of total revenues as follows:
<TABLE>
<CAPTION>
SIGNIFICANT PERCENTAGE
CUSTOMER REVENUES OF REVENUES
--------------- ----------- ---------------
<S> <C> <C> <C>
Year ended
March 31, 1999.......................................... A $ 7,578 10%
B -- --
Year ended
March 31, 1998.......................................... A -- --
B -- --
Year ended
March 31, 1997.......................................... A -- --
B $ 6,869 10%
</TABLE>
Customer A is included in the Dialysis Products segment. Sales to customer B
were made under a contract that expired June 30, 1997, the revenues are included
in the Cardiosurgery Products segment. The Company's historical credit losses
have not been significant.
34
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, FEDERAL STATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1999
Currently payable............................................. $ 3,195 $ 672 $ 3,867
Deferred...................................................... (202) (18) (220)
--------- --------- ---------
Total....................................................... $ 2,993 $ 654 $ 3,647
--------- --------- ---------
--------- --------- ---------
1998
Currently payable............................................. $ 1,414 $ 79 $ 1,493
Deferred...................................................... 686 74 760
--------- --------- ---------
Total....................................................... $ 2,100 $ 153 $ 2,253
--------- --------- ---------
--------- --------- ---------
1997
Currently payable............................................. $ 1,237 $ 63 $ 1,300
Deferred...................................................... (1,823) (177) (2,000)
--------- --------- ---------
Total....................................................... $ (586) $ (114) $ (700)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision (benefit) for income taxes differs from the statutory U.S.
federal tax rate of 34 percent applied to earnings (loss) before income taxes as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory Federal income tax rates.................. $ 3,669 $ 2,322 $ (1,475)
Foreign subsidiary (income)/loss.................................................... (415) (564) 849
State income taxes, net of federal benefit.......................................... 195 78 (76)
Exempt income attributable to foreign sales......................................... (17) -- (53)
Other, net.......................................................................... 215 417 55
--------- --------- ---------
Total provision (benefit)........................................................... $ 3,647 $ 2,253 $ (700)
--------- --------- ---------
--------- --------- ---------
</TABLE>
35
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--INCOME TAXES (CONTINUED)
The tax effects of cumulative temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax asset
Foreign subsidiary net operating losses................................. $ 1,152 $ 578
Deferred compensation and severance..................................... 219 425
Fixed asset reserve..................................................... 708 708
Allowance for doubtful accounts......................................... 110 55
Inventories............................................................. 394 478
Unrealized holding losses on investments................................ -- 108
Accruals................................................................ 398 153
Amortization of goodwill................................................ 370 278
Prepaid Insurance....................................................... 175 --
Other, net.............................................................. 39 26
--------- ---------
Gross deferred tax asset................................................ 3,565 2,809
Valuation Allowance..................................................... (1,152) (578)
--------- ---------
Net deferred tax asset.................................................. $ 2,413 $ 2,231
--------- ---------
--------- ---------
Deferred tax liability
Plant and equipment depreciation........................................ $ 1,656 $ 1,694
--------- ---------
--------- ---------
</TABLE>
The Company recorded valuation allowances related to foreign subsidiaries
net operating losses which are not recognized until their ultimate realization
is considered to be more likely than not.
NOTE 6--COMMITMENTS
OPERATING LEASES
Total rental expense for operating leases for fiscal years 1999, 1998 and
1997 was approximately $422, $473, and $804, respectively. Operating leases are
for warehouse space and office equipment.
Future minimum lease payments for operating leases, net of cancellation
clauses, consist of the following at March 31, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
2000................................................................................. $ 661
2001................................................................................. 532
2002................................................................................. 311
2003................................................................................. 101
---------
$ 1,605
---------
---------
</TABLE>
36
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--COMMITMENTS (CONTINUED)
SEVERANCE AGREEMENTS
The Company has employment agreements with all officers that provide three
years of severance pay benefits if there is a change in control of the Company.
Under the agreements, these officers receive 100 percent of such severance
benefits if they are involuntarily terminated and 50 percent of such severance
benefits if they voluntarily terminate. The maximum contingent liability under
these agreements at March 31, 1999, was approximately $4,370.
NOTE 7--STOCK OPTIONS
At March 31, 1999, the Company has reserved 3,203,125 shares of Common Stock
for issuance under its 1989 and 1998 Stock Plans. The Plans provide for
incentive stock options and other options to be granted to directors, officers,
key employees, and consultants at an exercise price not less than fair market
value of the Common Stock at the date of grant. The options generally vest over
a four year period and expire after ten years.
Option transactions under these plans during the three years ended March 31,
1999, are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF OPTIONS OPTION PRICE
----------- -------------
<S> <C> <C>
Outstanding at March 31, 1996..................................... 1,624,415 $ 13.97
Granted......................................................... 1,209,783 10.54
Exercised....................................................... (23,124) 12.55
Cancelled....................................................... (1,013,724) 14.33
----------- ------
Outstanding at March 31, 1997..................................... 1,797,350 10.67
Granted......................................................... 417,530 12.36
Exercised....................................................... (94,180) 4.76
Cancelled....................................................... (54,060) 10.50
----------- ------
Outstanding at March 31, 1998..................................... 2,066,640 11.27
Granted......................................................... 255,936 12.71
Exercised....................................................... (88,833) 10.07
Cancelled....................................................... (29,568) 14.37
----------- ------
Outstanding at March 31, 1999..................................... 2,204,175 $ 11.46
----------- ------
----------- ------
</TABLE>
In January 1997, 824,883 options granted in fiscal years 1992 through 1997
with exercise prices ranging from $10.75 to $20.50 were repriced to $10.625 per
share, the market price at the time of repricing. The repricing is reflected in
the above roll forward as a grant cancellation and a new grant issuance.
37
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--STOCK OPTIONS (CONTINUED)
The following table summarizes stock options outstanding and exercisable at
March 31, 1999.
<TABLE>
<CAPTION>
OUTSTANDING
- ----------------------------------------------------------------------------
WEIGHTED- WEIGHTED- EXERCISABLE
AVERAGE AVERAGE -----------------------------
CONTRACTUAL EXERCISE WEIGHTED-AVERAGE
EXERCISE PRICE RANGE OPTIONS LIFE REMAINING PRICE OPTIONS EXERCISE PRICE
- ---------------------------- ---------- ------------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$4.31-$5.89................. 25,948 1.1 $ 5.26 25,948 $ 5.26
$9.50-$10.83................ 1,355,194 5.7 10.54 1,113,939 10.57
$11.13-$13.88............... 714,236 8.8 12.51 316,960 12.50
$15.00-20.50................ 108,797 4.9 17.46 108,797 17.46
---------- -- ------ ---------- ------
2,204,175 6.6 $ 11.46 1,565,644 $ 11.35
---------- -- ------ ---------- ------
---------- -- ------ ---------- ------
</TABLE>
The estimated weighted-average grant-date fair value of stock options
granted during fiscal years 1999, 1998, and 1997 were $5.70, 5.69, and 5.06 per
option, respectively. The Company applies Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for its stock option and
purchase plans. Had the Company's stock option plans and its stock purchase
plans compensation costs been determined based on the fair value at the option
grant dates for awards consistent with the accounting provision of FAS 123
"Accounting for Stock Based Compensation," the Company's net income (loss) and
earnings (loss) per share for fiscal years 1999, 1998 and 1997 would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C> <C>
Net Income (Loss)............................. As reported 7,160 4,685 $ (3,372)
Pro-Forma 4,105 2,942 $ (5,310)
Basic Earnings (Loss) per share............... As reported $ 1.05 $ .69 $ (.50)
Pro-Forma $ .61 $ .44 $ (.79)
Diluted Earnings (Loss) per share............. As reported $ 1.05 $ .69 $ (.50)
Pro-Forma $ .60 $ .43 $ (.79)
</TABLE>
The fair value of options granted under the Company's fixed stock option
plans during fiscal 1999, 1998 and 1997 was estimated on the dates of grant
using the Black-Scholes options-pricing model. The assumptions for fiscal 1999,
1998, and 1997 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Risk free interest rates......................... 5.4-6.2% 5.6-6.5% 6.0-6.6%
Expected life.................................... 6.6 years 6.6 years 5.1 years
Expected volatility.............................. 38% 40% 50%
Expected dividends............................... .75% .8% 1%
</TABLE>
Pro forma compensation cost related to shares purchased under the Employee
Stock Purchase Plan, discussed below, is measured based on the discount from
market value. The effects of applying FAS 123 in this pro forma disclosure are
not indicative of future pro forma effects. FAS 123 does not apply to awards
prior to fiscal 1996, and additional awards in future years are anticipated.
38
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--STOCK OPTIONS (CONTINUED)
The Company adopted an employee stock purchase plan on June 1, 1990. Under
the plan, 562,500 shares of Common Stock were reserved for issuance to eligible
employees. The plan allows employees to designate up to 10 percent of their base
salaries for purchase of common stock at 85 percent of fair market value.
At March 31, 1999, the Company held a total of $253 in payroll withholdings
for the purchase of stock under the plan.
A total of 128,785 shares have been issued under the plan since inception:
19,248 shares in 1998; 10,719 shares in 1997; and 17,455 shares in 1996.
NOTE 8--PROFIT SHARING AND RETIREMENT SAVINGS
The Company has a 401(k) retirement savings and profit sharing plan under
which eligible employees may contribute up to 10 percent of their salaries. The
Company matches 10 percent of employee contributions to a maximum of 6/10ths of
1 percent of compensation. The Company also makes annual profit sharing
contributions to the plan at the discretion of the Board of Directors. The
Company's contributions were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1999 1998 1997
--------- --------- -----
<S> <C> <C> <C>
Matching 401 (k) contributions......................................... $ 63 $ 58 $ 50
Profit sharing contributions........................................... 624 649 --
--------- --------- ---
Total Company contributions............................................ $ 687 $ 707 $ 50
--------- --------- ---
--------- --------- ---
</TABLE>
NOTE 9--PREFERRED STOCK
The Company's Board of Directors is authorized to issue five million shares
of no par value Preferred Stock in one or more series. The Board can determine
voting, conversion, dividend and redemption rights, and other preferences of
each series. No shares have been issued under this authorization.
NOTE 10--FOREIGN OPERATIONS
Amounts attributable to foreign operations, primarily in Europe, included in
the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales of foreign consolidated subsidiaries.......................... $ 13,507 $ 12,668
Earnings from operations of foreign subsidiaries........................ 291 1,551
</TABLE>
NOTE 11--NET EARNINGS PER SHARE
The Company has adopted SFAS No. 128 "Earnings Per Share" which became
effective for financial statements issued for periods ending after December 15,
1997. SFAS 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
39
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--NET EARNINGS PER SHARE (CONTINUED)
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 years ended March 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
BASIC EARNINGS
(LOSS) PER EFFECT OF DILUTIVE DILUTED EARNINGS
1999 SHARE STOCK OPTIONS (LOSS) PER SHARE
- ----------------------------------------- --------------- --------------------- ----------------
<S> <C> <C> <C>
Net income............................... $ 7,160 $ 7,160
Weighted-average shares.................. 6,803 47 6,850
Per share amount......................... $ 1.05 $ 1.05
1998
- -----------------------------------------
Net income............................... $ 4,685 $ 4,685
Weighted-average shares.................. 6,743 90 6,833
Per share amount......................... $ .69 $ .69
1997
- -----------------------------------------
Net loss................................. $ (3,372) $ (3,372)
Weighted-average shares.................. 6,722 -- 6,722
Per share amount......................... ($ .50) ($ .50)
</TABLE>
Outstanding stock options to purchase 140 shares, 195 shares, and 84 shares
of Common Stock as of March 31, 1999, 1998, and 1997 respectively, 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 Stock
during the period.
(The rest of this page left intentionally blank.)
40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Minntech Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Minntech
Corporation and its subsidiaries at March 31, 1999 and 1998 and the results of
their operations and their cash flows for the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
May 14, 1999
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
MINNTECH CORPORATION
(Registrant)
By: /s/ THOMAS J. MCGOLDRICK
-----------------------------------------
Thomas J. McGoldrick
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: June 25, 1999
</TABLE>
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 dates indicated
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ THOMAS J. MCGOLDRICK Officer and Director
- ------------------------------ (Principal Executive
Thomas J. McGoldrick Officer)
/s/ JULES L. FISHER Chief Financial Officer
- ------------------------------ (Principal Accounting
Jules L. Fisher and Financial Officer)
/s/ FRED L. SHAPIRO, M.D.
- ------------------------------ Director
Fred L. Shapiro, M.D.
/s/ WILLIAM HOPE
- ------------------------------ Director
William Hope
- ------------------------------ Director
George Heenan
/s/ AMOS HEILICHER
- ------------------------------ Director
Amos Heilicher
/s/ NORMAN DANN
- ------------------------------ Director
Norman Dann
/s/ DONALD H. SOUKUP
- ------------------------------ Director
Donald H. Soukup
/s/ MALCOLM MCDONALD
- ------------------------------ Director
Malcolm McDonald
</TABLE>
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT FORM OF FILING
- --------------- -------------------------------------------------------------------------- -------------------------
<C> <S> <C>
3(a) Restated Articles of Incorporation, as amended............................ Electronic Submission
3(b) Restated By-Laws(1).......................................................
3(c) Amendment to By-Laws in November 1998(2)..................................
4 Form of Specimen Common Stock Certificate(3)..............................
10(a) 1989 Stock Plan, as amended(4)*...........................................
10(b) Amendment to 1989 Stock Plan Effective February 25, 1998(5)*..............
10(c) Form of Employment Agreement dated September 1, 1996 with certain officers
of the Company(4)*.......................................................
10(d) Separation and Consulting Agreement with Dr. Louis C. Cosentino dated
April 1, 1997(4)*........................................................
10(e) 1990 Employee Stock Purchase Plan, as amended June 1, 1993(3).............
10(f) Supplemental Executive Retirement Plan effective April 1, 1996(6)*........
10(g) Amendment to Supplemental Executive Retirement Plan effective April 1,
1998(5)*.................................................................
10(h) Director Emeritus Consulting Plan(7), as amended(8)*......................
10(i) Amended 1998 Stock Option Plan(2).........................................
21 Subsidiaries of the Registrant............................................ Electronic Submission
23 Consent of PricewaterhouseCoopers LLP..................................... Electronic Submission
27 Financial Data Schedule................................................... Electronic Submission
</TABLE>
- ------------------------
* Management contract, compensatory plan or arrangement filed pursuant to Rule
601(b)(1)(iii)(A) of Regulation S-K under the Securities Exchange Act of
1934.
(1) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-11278.
(2) Incorporated by reference to the specified exhibit filed as part of the
Company's Registration Statement on Form S-8, Registration No. 333-70545.
(3) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1993, File
No. 0-11278.
(4) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year-ended March 31, 1997, File
No. 0-11278.
(5) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1998, File
No. 0-11278
(6) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1995, File
No. 0-11278.
(7) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
File No. 0-11278.
(8) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 0-11278.
<PAGE>
Exhibit 3(a)
RESTATED ARTICLES OF INCORPORATION, AS AMENDED
OF
MINNTECH CORPORATION
ARTICLE I.
The name of this corporation shall be Minntech Corporation.
ARTICLE II.
The purpose and powers of this corporation shall be:
(a) General business purposes.
(b) To engage in the design, production, manufacture, distribution and
sale of medical devices of all types.
(c) To take, lease, purchase or otherwise acquire, and to own, use, hold,
sell, convey, exchange, lease, mortgage, work, improve, develop, divide, and
otherwise handle, deal in, and dispose of real estate, real property and any
interest or right therein.
(d) To purchase or otherwise acquire, own, mortgage, pledge, sell, assign
and transfer, or otherwise dispose of, to invest, trade, deal in and deal with
goods, wares and merchandise and personal property of every class and
description; to acquire and pay for in cash, stocks or bonds of this
corporation, or otherwise, the good will, rights, assets and property, and to
undertake or assume the whole or any part of the obligations or liabilities of
any person, firm, association or corporation; to acquire, hold, use, sell,
assign, lease, grant licenses in respect of, mortgage or otherwise dispose of
letters patent of the United States or any foreign country, patent rights,
licenses and privileges, inventions, improvements and processes, copyrights,
trademarks and trade names, relating to or useful in connection with any
business of this corporation.
(e) To purchase, hold, sell and transfer the shares of its own capital
stock, provided it shall not use its funds or property for the purchase of its
own shares of capital stock when such would cause any impairment of its capital,
and provided further that shares of its own capital stock belonging to it shall
not be voted upon directly or indirectly.
(f) To have one or more offices, within or without the State of Minnesota,
to carry on all or any of its operations and business and, without restriction
or limit as to amount, to purchase or otherwise acquire, hold, own, mortgage,
sell, convey or otherwise dispose of real property of every class and
description in any of the states, districts, territories or colonies of the
United States, and in any and all foreign countries, subject to the laws of such
state, district, territory, colony or country; and, in general, to exercise and
have such other powers
<PAGE>
and purposes as may be reasonably incidental to or necessary for the exercise of
any of the powers hereinabove specified.
(g) To do each and all of the things aforesaid for itself, or as agent,
broker, factor, consignee, associate, joint venturer, or partner of or with
other persons, firms, partnerships, general or limited, associations, or
corporations; and to do the same as fully and to the same extent as natural
persons might or could do, including the formation or entering into joint
ventures or general or limited partnerships or associations to do any of the
things aforesaid and becoming and acting as a joint venturer, general or limited
partner, or associate or member therein.
(h) To serve as, act in the capacity of, and perform all duties and
responsibilities impliedly and explicitly required of a general partner in
general partnerships and as general partner of limited partnerships.
(i) The objects and purposes specified in the foregoing paragraphs shall,
except where otherwise expressed, be in nowise limited or restricted by
reference to, or inference from the terms of any other clause in these Articles
of Incorporation, but the objects and purposes specified in each of the
foregoing clauses of this article shall be regarded as independent objects and
purposes and shall be in addition to any other powers of corporations having
general business purposes under the Minnesota Business Corporation Act.
ARTICLE III.
The location and post office address of its registered office within the
State of Minnesota shall be 14605 28th Avenue North, Minneapolis, Minnesota
55447.
ARTICLE IV.
The time for commencement of this corporation shall be the date on which
these articles of incorporation are filed in the Office of the Secretary of
State of Minnesota, and its duration shall be perpetual.
ARTICLE V.
(1) The total number of shares which the Company shall have authority to
issue is twenty-five million (25,000,000) divided into twenty million
(20,000,000) shares of common stock with the par value of five cents ($.05) and
five million (5,000,000) shares of preferred stock with no par value.
(2) No holder of stock of this corporation shall be entitled to any
cumulative voting rights.
2
<PAGE>
(3) The capital stock of the corporation shall be issued in the manner, at
such times, in such amounts and for such consideration, in money or property or
both, as the Board of Directors may, from time to time, determine.
(4) No holder of stock of this corporation shall have any preferential,
pre-emptive or other rights of subscription to any shares of any class of stock
of this corporation allotted or sold or to be allotted or sold and now or
hereafter authorized, or to any obligations or securities convertible into any
class of stock of this corporation nor any right of subscription to any part
thereof.
(5) In addition to, and not by way of limitation of, the powers granted to
the Board of Directors by the statutes of the State of Minnesota, the Board of
Directors shall have the authority to fix any designation, class, series, voting
power, preference, right, qualification, limitation, restriction, dividend,
sinking or purchase fund rights, time and price of redemption, time and price of
liquidation, and conversion right with respect to any stock of this corporation.
The Board of Directors shall further have the authority to issue shares of a
class or series to holders of another class or series to effectuate share
dividends, splits, or conversion of its outstanding shares.
(6) The corporation may grant rights to convert any of its securities into
shares of stock of any class or classes, or options to purchase or subscribe for
shares of any class or classes, and may issue share purchase or subscription
warrants or other evidence of such option rights, setting forth the terms,
provisions and conditions thereof, including the price or prices at which such
shares may be purchased or subscribed for, and such options may be transferable
or nontransferable and separable or inseparable from other shares or securities
of the corporation. The Board of Directors is authorized to fix the terms,
provisions and conditions of such rights or options, including the conversion
basis or bases and the option price or prices at which shares may be purchased
or subscribed for, and to authorize the issuance thereof.
ARTICLE VI.
The amount of stated capital with which this corporation shall begin
business shall be the sum of One Thousand Dollars ($1,000.00).
ARTICLE VII.
The management of the corporation shall be vested in a Board of Directors
consisting of not more than 11 nor less than 3 directors, the exact number of
directors to be determined from time to time, after the 1983 Annual Meeting of
Stockholders, by the Board of Directors by the affirmative vote of a majority of
the entire Board. The directors shall be divided into three classes, designated
Class I, Class II, Class III. Each class shall consist as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. At the 1983 Annual Meeting of Stockholders, a Board of
Directors consisting of seven directors shall be elected consisting of two
Class I directors who shall be elected for a
3
<PAGE>
one-year term, two Class II directors who shall be elected for a two-year term,
and three Class III directors who shall be elected for a three-year term. At
each succeeding Annual Meeting of Stockholders beginning in 1984, successors to
the class of directors whose term expires at that annual meeting shall be
elected for a three-year term. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, and any
additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
director shorten the term of any incumbent director. A director shall hold
office until the Annual Meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification, or removal for cause.
Stockholders may remove a director from office only for cause. Any vacancy
occurring on the Board of Directors, including any vacancy resulting from an
increase in the number of directors, may be filled by a majority of the Board of
Directors then in office, although less than a quorum, or by the sole remaining
director. Any director elected to fill a vacancy not resulting from an increase
in the number of directors shall have the same remaining term as that of his
predecessor.
The vote required for any amendment to, or repeal of, all or any portion of
this Article VII shall be the affirmative vote of the holders of at least
two-thirds of the voting power of the outstanding shares of the corporation;
provided, however, that if the then current or preexisting Board of Directors of
this corporation shall by resolution adopted at a meeting of the Board of
Directors have unanimously approved the amendment or repeal proposal and have
determined to unanimously recommend it for approval by the holders of shares
entitled to vote on the matter, then the vote required shall be the affirmative
vote of the holders of at least a majority of the voting power of the
outstanding shares.
ARTICLE VIII.
The corporation shall indemnify its officers, directors, employees and
agents to the full extent permitted by the laws of the State of Minnesota, as
now in effect or as the same may be hereafter amended.
ARTICLE IX.
When stockholder approval is required by applicable state law for any of
the following transactions, the vote required for such approval shall be the
affirmative vote of the holders of at least two-thirds of the outstanding shares
then entitled to vote:
(1) Any plan of merger;
(2) Any plan of exchange;
4
<PAGE>
(3) Any sale, lease, transfer or other disposition of all or substantially
all of this corporation's property and assets, including its goodwill, not in
the usual course of its business;
(4) Any dissolution of this corporation; or
(5) Any amendment to, or repeal of all or any portion of this Article IX;
provided, however, that if the then current or preexisting Board of Directors of
this corporation shall by resolutions adopted at a meeting of the Board of
Directors have by the vote of two-thirds of the entire Board of Directors
approved one of the enumerated matters (other than dissolution of this
corporation or an amendment of this Article IX to alter the two-thirds
dissolution vote) and shall have so determined to recommend it for approval by
the holders of shares entitled to vote on the matter, then the vote required
shall be the affirmative vote of the holders of at least a majority of the
voting power of the outstanding shares.
ARTICLE X.
No director of this Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota
Statutes; (iv) for any transaction from which the director derived any improper
personal benefit; or (v) for any act or omission occurring prior to the date
when this provision becomes effective.
The provisions of this Article shall not be deemed to limit or preclude
indemnification of a director by the Corporation for any liability of a director
which has not been eliminated by the provisions of this Article.
If the Minnesota Statutes hereafter are amended to authorize the further
eliminate or limitation of the liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the amended Minnesota Statutes.
5
<PAGE>
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage
Name Jurisdiction Ownership
- ----------------------------- ----------------------- -----------------
<S> <C> <C>
Minntech B.V. The Netherlands 100%
Minntech Japan Corporation Japan 100%
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 2-99511 effective July 18, 1985; File No. 33-32070
effective December 5, 1989; File No. 33-34621 effective May 20, 1990; File No.
33-35368 effective July 1, 1990; File No. 33-35990 effective July 24, 1990; File
No. 33-45351 effective January 28, 1992; File No. 333-70545 effective January
13, 1999) of Minntech Corporation of our report dated May 14, 1999 appearing on
page 41 of this form 10-K.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,171
<SECURITIES> 0
<RECEIVABLES> 18,127
<ALLOWANCES> 590
<INVENTORY> 12,237
<CURRENT-ASSETS> 41,275
<PP&E> 35,971
<DEPRECIATION> (20,950)
<TOTAL-ASSETS> 58,726
<CURRENT-LIABILITIES> 9,371
<BONDS> 0
0
0
<COMMON> 339
<OTHER-SE> 48,179
<TOTAL-LIABILITY-AND-EQUITY> 58,726
<SALES> 75,224
<TOTAL-REVENUES> 76,264
<CGS> 41,740
<TOTAL-COSTS> 67,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (112)
<INCOME-PRETAX> 10,807
<INCOME-TAX> 3,647
<INCOME-CONTINUING> 7,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,160
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.05
</TABLE>
