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Previous: MERISEL INC /DE/, 10-Q, 1999-11-15 |
Next: CYTOGEN CORP, 10-Q, 1999-11-15 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| /x/ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| |
|
For the Quarterly period ended September 30, 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 |
MINNTECH CORPORATION
(Exact name of registrant as specified in its charter)
| Minnesota (State or other jurisdiction of incorporation or organization) |
41-1229121 (I.R.S. Employer Identification No.) |
14605 - 28th Avenue North
Minneapolis, Minnesota 55447
(Address of principal executive offices)
Registrant's telephone number, including area code: (6l2) 553-3300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Class |
|
Outstanding at October 22, 1999 |
|---|---|---|
| Common Stock, $0.05 par value | 6,913,806 shares |
Minntech Corporation
Quarterly Report on Form 10-Q
September 30, 1999
Index
| |
|
Page |
|---|---|---|
| Part I. Financial Information | ||
| Item 1. Financial Statements |
|
|
| Condensed Consolidated Statements of Earnings |
|
3 |
| Condensed Consolidated Balance Sheets |
|
4 |
| Condensed Consolidated Statements of Cash Flows |
|
5 |
| Notes to Condensed Consolidated Financial Statements |
|
6 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
10 |
| Part II. Other Information |
|
|
| Item 4. Submission of Matters to a Vote of Security Holders |
|
13 |
| Item 6. Exhibits and Reports on Form 8-K |
|
13 |
| Signatures |
|
15 |
| |
|
|
Page 2
Part I—Financial Information
Item 1. Financial Statements
Minntech Corporation
Condensed Consolidated Statements of Earnings
(Unaudited)
(In thousands, except per share amounts)
| |
Three Months Ended September 30 |
Six Months Ended September 30 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
1999 |
|
1998 |
|
1999 |
|
1998 |
|
||||
| Net sales—product | $ | 18,880 | $ | 17,944 | $ | 37,648 | $ | 36,263 | |||||
| Contract revenue | — | 60 | 60 | 420 | |||||||||
| Net sales | 18,880 | 18,004 | 37,708 | 36,683 | |||||||||
| Operating costs and expenses | |||||||||||||
| Cost of product sales | 10,733 | 9,814 | 21,416 | 19,994 | |||||||||
| Research and development | 1,128 | 896 | 2,358 | 1,972 | |||||||||
| Selling, general and administrative | 5,306 | 4,902 | 10,505 | 9,965 | |||||||||
| Amortization of intangible assets | 202 | 208 | 376 | 404 | |||||||||
| Total operating costs and expenses | 17,369 | 15,820 | 34,655 | 32,335 | |||||||||
| Earnings from operations | 1,511 | 2,184 | 3,053 | 4,348 | |||||||||
| Other income, net | 365 | (3 | ) | 592 | 33 | ||||||||
| Earnings before income taxes and Minority interest | 1,876 | 2,181 | 3,645 | 4,381 | |||||||||
| Provision for income taxes | 638 | 737 | 1,239 | 1,481 | |||||||||
| Minority interest | — | (3 | ) | — | (16 | ) | |||||||
| Net earnings | $ | 1,238 | $ | 1,447 | $ | 2,406 | $ | 2,916 | |||||
| Net earnings per share | |||||||||||||
| Basic | $ | .18 | $ | .21 | $ | .35 | $ | .43 | |||||
| Diluted | $ | .18 | $ | .21 | $ | .34 | $ | .42 | |||||
| Weighted-average common shares Outstanding | |||||||||||||
| Basic | 6,910 | 6,893 | 6,861 | 6,841 | |||||||||
| Diluted | 6,972 | 6,967 | 7,028 | 7,014 | |||||||||
The accompanying notes are an integral part of these financial statements.
Page 3
Minntech Corporation
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
| |
|
September 30, 1999 |
|
March 31, 1999 |
|
||
|---|---|---|---|---|---|---|---|
| |
(Unaudited) |
|
|||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 8,922 | $ | 9,171 | |||
| Marketable securities | — | — | |||||
| Accounts receivable, net | 16,882 | 17,537 | |||||
| Inventories | |||||||
| Finished goods | 5,954 | 5,626 | |||||
| Materials and work-in-process | 7,574 | 6,611 | |||||
| Total inventories | 13,528 | 12,237 | |||||
| Prepaid expenses and other current assets | 2,566 | 2,330 | |||||
| Total current assets | 41,898 | 41,275 | |||||
| Property and equipment | |||||||
| Land, buildings and improvements | 10,544 | 10,507 | |||||
| Machinery and equipment | 27,363 | 25,464 | |||||
| 37,907 | 35,971 | ||||||
| Less accumulated depreciation | (22,391 | ) | (20,950 | ) | |||
| Net property and equipment | 15,516 | 15,021 | |||||
| Other assets | |||||||
| Patent costs, net | 666 | 524 | |||||
| Goodwill, net | 753 | 960 | |||||
| Other | 440 | 946 | |||||
| Total assets | $ | 59,273 | $ | 58,726 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|
||||||
| Current liabilities | |||||||
| Note payable | $ | — | $ | 252 | |||
| Accounts payable | 3,821 | 3,977 | |||||
| Income taxes payable | 475 | 543 | |||||
| Accrued expenses | 2,746 | 4,599 | |||||
| Total current liabilities | 7,042 | 9,371 | |||||
| Deferred income taxes | 82 | 82 | |||||
| Deferred compensation | 834 | 755 | |||||
| Total liabilities | 7,958 | 10,208 | |||||
| Commitments and Contingencies | — | — | |||||
| Stockholders' equity | |||||||
| Preferred stock, no par value; 5,000,000 shares authorized, none outstanding | — | — | |||||
| Common stock, $.05 par value; 20,000,000 shares authorized, 6,878,806 and 6,778,617 shares issued and outstanding, respectively | 344 | 339 | |||||
| Additional paid-in capital | 14,045 | 12,889 | |||||
| Accumulated other comprehensive (loss) | (422 | ) | (347 | ) | |||
| Retained earnings | 37,348 | 35,637 | |||||
| Total stockholders' equity | 51,315 | 48,518 | |||||
| Total liabilities and stockholders' equity | $ | 59,273 | $ | 58,726 | |||
The accompanying notes are an integral part of these financial statements.
Page 4
Minntech Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| |
Six Months Ended September 30 |
||||||
|---|---|---|---|---|---|---|---|
| |
|
1999 |
|
1998 |
|
||
| Cash flows from operating activities | |||||||
| Net earnings | $ | 2,406 | $ | 2,916 | |||
| Adjustments to reconcile net earnings to net cash (used in) | |||||||
| Provided by operating activities: | |||||||
| Depreciation and amortization | 2,080 | 2,038 | |||||
| Tax benefit from stock option exercises | 160 | — | |||||
| Foreign currency exchange loss | 93 | (39 | ) | ||||
| Deferred income taxes | — | — | |||||
| Minority interest | — | (16 | ) | ||||
| Gain on sale of land | (176 | ) | — | ||||
| Other, net | 19 | (19 | ) | ||||
| Changes in assets and liabilities: | |||||||
| Accounts receivable | 655 | (1,104 | ) | ||||
| Inventories | (1,291 | ) | (981 | ) | |||
| Prepaid expenses | (236 | ) | (686 | ) | |||
| Accounts payable | (156 | ) | (35 | ) | |||
| Accrued expenses | (1,666 | ) | (626 | ) | |||
| Income taxes payable | (68 | ) | 100 | ||||
| Total adjustments | (586 | ) | (1,368 | ) | |||
| Net cash provided by operating activities | 1,820 | 1,548 | |||||
| Cash flows from investing activities | |||||||
| Purchases of property and equipment | (2,204 | ) | (1,864 | ) | |||
| Patent application costs | (307 | ) | 55 | ||||
| Proceeds from sale of undeveloped land | 710 | — | |||||
| Other | (27 | ) | (37 | ) | |||
| Net cash used in investing activities | (1,828 | ) | (1,846 | ) | |||
| Cash flows from financing activities | |||||||
| Investments in subsidiaries | — | (436 | ) | ||||
| Payments on note payable | (252 | ) | (6 | ) | |||
| Proceeds from exercise of stock options | 1,507 | 566 | |||||
| Proceeds from employee stock purchase plan | 126 | — | |||||
| Repurchase of common stock | (759 | ) | (842 | ) | |||
| Payment of cash dividends | (695 | ) | (682 | ) | |||
| Net cash used in financing activities | (73 | ) | (1,400 | ) | |||
| Effects of exchange rate changes on foreign currency | |||||||
| Cash balances | (168 | ) | 138 | ||||
| Net decrease in cash and cash equivalents | (249 | ) | (1,560 | ) | |||
| Cash and cash equivalents at beginning of period | 9,171 | 6,805 | |||||
| Cash and cash equivalents at end of period | $ | 8,922 | $ | 5,245 | |||
The accompanying notes are an integral part of these financial statements.
Page 5
Minntech Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1—Financial Information
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission; accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.
These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended March 31, 1999 as filed with the Securities and Exchange Commission.
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 shareholders' equity as previously reported.
In the opinion of management, the condensed consolidated financial statements reflect only normal and recurring adjustments necessary for a fair presentation of the interim periods.
NOTE 2—Restructuring and Unusual Items
During the second quarter ended September 30, 1999, $.07 million of employee related costs were paid, reducing the restructuring reserve balance. The restructuring reserve balance as of September 30, 1999 totaled $.16 million.
NOTE 3—Line of Credit
At September 30, 1999, the Company had a line of credit with a commercial bank which allowed the Company to borrow up to $10 million on an unsecured basis at the prime rate of interest (8.25% at September 30, 1999) or the indexed London Interbank Offered Rate (LIBOR). As of September 30, 1999, the Company had no outstanding borrowings under the line of credit.
NOTE 4—Net Earnings Per Share
The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and six month periods ended September 30, 1999 and 1998.
| (in thousands, except per share amounts) Three months ended 9/30/99 |
|
Income Before Extraordinary Item |
|
Effect of Dilutive Stock Options |
|
Diluted Earnings Per Share |
||
|---|---|---|---|---|---|---|---|---|
| Net earnings | $ | 1,238 | $ | 1,238 | ||||
| Weighted average common shares outstanding | 6,910 | 62 | 6,972 | |||||
| Per share amount | $ | .18 | $ | .18 | ||||
| Three months ended 9/30/98 |
|
|
|
|
|
|
||
| Net earnings | $ | 1,447 | $ | 1,447 | ||||
| Weighted average common shares outstanding | 6,893 | 74 | 6,967 | |||||
| Per share amount | $ | .21 | $ | .21 | ||||
Page 6
| (in thousands, except per share amounts) Six months ended 9/30/99 |
|
Income Before Extraordinary Item |
|
Effect of Dilutive Stock Options |
|
Diluted Earnings Per Share |
||
|---|---|---|---|---|---|---|---|---|
| Net earnings | $ | 2,406 | $ | 2,406 | ||||
| Weighted average common shares outstanding | 6,861 | 167 | 7,028 | |||||
| Per share amount | $ | .35 | $ | .34 | ||||
| Six months ended 9/30/98 |
|
|
|
|
|
|
||
| Net earnings | $ | 2,916 | $ | 2,916 | ||||
| Weighted average common shares outstanding | 6,841 | 173 | 7,014 | |||||
| Per share amount | $ | .43 | $ | .42 | ||||
Outstanding stock options to purchase 117,230 shares of common stock as of September 30, 1999 were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during the period.
Note 5—Comprehensive Income
The components of comprehensive income are as follows (in thousands):
| |
Three months ended September 30, |
Six months ended September 30, |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
||||||||
| Net income | $ | 1,238 | $ | 1,447 | $ | 2,406 | $ | 2,916 | ||||
| Unrealized gains/losses or securities | — | 15 | — | 15 | ||||||||
| Foreign currency translation adjustments | 87 | 284 | (75 | ) | 396 | |||||||
| Comprehensive income | $ | 1,325 | $ | 1,746 | $ | 2,331 | $ | 3,327 | ||||
The accumulated other comprehensive loss balance as of September 30, 1999 of $422 is recorded net of $217 in income taxes.
Consolidated Statement of Stockholders' Equity (dollars in thousands)
| |
Common Stock |
|
|
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Accumulated other Comprehensive (loss) |
|
|
|||||||||||||||
| |
|
Shares Issued and Outstanding |
|
Amount |
|
Additional Paid-In Capital |
|
Retained Earnings |
|
Total |
|
|||||||
| Balances at March 31, 1999 | 6,778,617 | $ | 339 | $ | 12,889 | $ | (347 | ) | $ | 35,637 | $ | 48,518 | ||||||
| Net earnings | — | — | — | — | 2,406 | 2,406 | ||||||||||||
| Foreign currency translation adjustment (including taxes of $39) | — | — | — | (75 | ) | — | (75 | ) | ||||||||||
| Comprehensive income | — | — | — | — | — | 2,331 | ||||||||||||
| Exercise of stock options | 146,280 | 7 | 1,500 | — | — | 1,507 | ||||||||||||
| Repurchase of common stock | (68,100 | ) | (3 | ) | (756 | ) | — | — | (759 | ) | ||||||||
| Employee stock purchase plan | 22,009 | 1 | 252 | — | — | 253 | ||||||||||||
| Tax benefit from exercise of stock options | — | — | 160 | — | — | 160 | ||||||||||||
| Dividends paid of $.10 per share | — | — | — | — | (695 | ) | (695 | ) | ||||||||||
| Balances at September 30, 1999 | 6,878,806 | $ | 344 | $ | 14,045 | $ | (422 | ) | $ | 37,348 | $ | 51,315 | ||||||
Page 7
Note 6—Subsequent Event
On October 6, 1999, the Company finalized the sale of all assets and rights related to it's Biocor™ oxygenator and EnGUARD™ PHX cardioplegia systems components to Lifestream International LLC, a newly formed cardiopulmonary products company, in exchange for $7.2 million in cash and warrants. Under the terms of the agreement, Minntech will receive $2.3 million in cash at closing, and the balance of $4.9 million over the following two years. The Company anticipates this transaction will result in a small gain which is expected to be offset by related nonrecurring expenses.
Note 7—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 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 three month and six month periods ended September 30, 1999 and 1998.
Page 8
Business Segment Information
| |
Dialysis Products |
Cardiosurgery Products |
Other Developing Businesses |
Corporate & Unallocated(1) |
Total Company |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues |
|||||||||||||||
| Three months ended 9/30/99 | $ | 13,121 | $ | 3,736 | $ | 2,023 | $ | — | $ | 18,880 | |||||
| Three months ended 9/30/98 | 12,719 | 4,000 | 1,225 | 60 | 18,004 | ||||||||||
| Six months ended 9/30/99 | 26,938 | 7,408 | 3,302 | 60 | 37,708 | ||||||||||
| Six months ended 9/30/98 | $ | 25,569 | $ | 7,794 | $ | 2,900 | $ | 420 | $ | 36,683 | |||||
| Income (loss) from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended 9/30/99 | $ | 3,454 | $ | 828 | $ | 178 | $ | (2,949 | ) | $ | 1,511 | ||||
| Three months ended 9/30/98 | 4,649 | 638 | (420 | ) | (2,683 | ) | 2,184 | ||||||||
| Six months ended 9/30/99 | 7,522 | 1,287 | (140 | ) | (5,616 | ) | 3,053 | ||||||||
| Six months ended 9/30/98 | $ | 8,881 | $ | 1,179 | $ | (707 | ) | $ | (5,005 | ) | $ | 4,348 | |||
| Identifiable assets(2) |
|
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|
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| September 30, 1999 | $ | 20,420 | $ | 14,720 | $ | 2,724 | $ | 21,409 | $ | 59,273 | |||||
| March 31, 1999 | $ | 20,219 | $ | 13,543 | $ | 3,580 | $ | 21,384 | $ | 58,726 | |||||
Geographic Areas
Information in the table below is presented on the basis which the company uses it to manage the identifiable segments. International sales amounted to 21% and 17% of revenues for the three month periods ended September 30, 1999 and 1998, respectively. Substantially all of the Company's export sales are negotiated, invoiced and paid in U.S. dollars.
Geographic Area Information
| |
United States |
International |
Other(1) |
Eliminations |
Total |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues |
|||||||||||||||
| Three months ended 9/30/99 | $ | 17,533 | $ | 4,651 | $ | 0 | $ | (3,304 | ) | $ | 18,880 | ||||
| Three months ended 9/30/98 | 17,437 | 3,497 | 60 | (2,990 | ) | 18,004 | |||||||||
| Six months ended 9/30/99 | 33,762 | 10,092 | 60 | (6,206 | ) | 37,708 | |||||||||
| Six months ended 9/30/98 | $ | 33,444 | $ | 8,472 | $ | 420 | $ | (5,653 | ) | 36,683 | |||||
| Property, Plant & Equipment, net |
|
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| September 30, 1999 | $ | 12,596 | $ | 2,920 | — | — | $ | 15,516 | |||||||
| March 31, 1999 | $ | 12,149 | $ | 2,872 | — | — | $ | 15,021 | |||||||
Significant Customers
During the three month periods ended September 30 1999 and 1998 there were no significant customers that accounted for 10% or more of the Company's total revenues.
Page 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Revenues in the second quarter ended September 30, 1999 increased by 4.9 percent to $18.9 million. Excluding contract revenue, product sales increased 5.2 percent compared to the second quarter of last fiscal year. Sales of dialysis products increased 3.2 percent over the same period a year ago due primarily to a 29.4 percent increase in dialysis concentrate sales, partially offset by a 13.8 percent decline in dialyzer reprocessing product sales. The Cardiosurgery product sales decrease of 6.6 percent is attributable to a decline in oxygenator sales. Developing business product sales increased 65.1 percent for the second quarter due to an 81 percent increase in filtration and separation product sales combined with a 38.2 percent increase in endoscope reprocessing products.
Revenues for the six-month period ending September 30, 1999 increased by 2.8 percent to $37.7 million. Fiscal 2000 year-to-date product sales increased by 3.8 percent or $1.4 million. Dialysis product sales are up 5.4 percent over the same period one year ago, due primarily to a 34.7 percent increase in dialysis concentrate sales partially offset by a 10.6 percent decline in dialyzer reprocessing product sales. The Cardiosurgery product sales decrease of 5.0 percent for the six-month period is primarily attributable to lower oxygenator product sales. Developing business product sales are up 13.9 percent over the same period in the prior year, due to a 67 percent increase in filtration and separation product sales, partially offset by a 42.4 percent decline in endoscope reprocessing.
Product sales by group are summarized on the following table:
| |
Three Months Ended September 30 |
Six Months Ended September 30 |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands of dollars) |
||||||||||||
| 1999 |
1998 |
1999 |
1998 |
|||||||||
| Dialysis products | $ | 13,121 | $ | 12,719 | $ | 26,938 | $ | 25,569 | ||||
| Cardiosurgery products | 3,736 | 4,000 | 7,408 | 7,794 | ||||||||
| Developing Business Products | 2,023 | 1,225 | 3,302 | 2,900 | ||||||||
| Total Company Sales | $ | 18,880 | $ | 17,944 | $ | 37,648 | $ | 36,263 | ||||
Gross margin as a percentage of product sales decreased to 43.2 percent from 45.3 percent in the same quarter of last fiscal year. For the six-month period ended September 30, 1999 gross margins on product sales were 43.1 percent compared to 44.9 percent in the prior year. The decline in gross margins for both the three and six-month periods is attributable to unfavorable product mix combined with lower average selling prices in dialyzer reprocessing products. The unfavorable product mix is attributable to increased dialysis concentrate sales.
Research and development expenses in the second quarter ended September 30, 1999 were $1.1 million or 6.0 percent of revenues compared to $.9 million or 5.0 percent of revenues in the second quarter of fiscal 1999. For the six-months ended September 30, 1999, expenses totaled $2.4 million or 6.3 percent of revenues compared to $2.0 million, or 5.4 percent of revenues for the same period one year ago. The increase in research and development spending for the three and six month periods is primarily related to the development of a second-generation endoscope reprocessing system combined with increased spending for dialyzer reprocessing programs. The Company expects that research and development expenses in fiscal 2000 will approximate 5.5 to 6.0 percent of revenues.
Selling, general and administrative expenses for the quarter ended September 30, 1999 were $5.3 million or 28.1 percent of revenues compared to $4.9 million or 27.2 percent of revenues in the second quarter one year ago. For the six month period ended September 30, 1999 selling, general and administrative expenses totaled $10.5 million, or 27.9 percent of revenues compared to $10.0 million, or 27.2 percent of revenues for the same period last year. The selling, general and administrative expense increase in fiscal 2000 for the three and six month periods is primarily attributable to acquisition-related spending combined with
Page 10
expanded international marketing efforts. The acquisition spending is tied to the Company's efforts to license a patented cancer therapy and purchase a related apheresis clinic. In early October, the Company announced that it had canceled plans to move forward with this acquisition. The selling, general and administrative expenses associated with this transaction totaled $.2 million in the three-month period and $.3 million for the six-month period ended September 30, 1999.
Other income of $.365 million for the second quarter ended September 30, 1999 reflects the impact of favorable foreign exchange combined with increased interest income. Other income of $.6 million for the six-month period ended September 30, 1999 also includes a $.174 million gain on the sale of undeveloped land recognized in the first quarter of fiscal 2000.
The Company's effective income tax rates for both the second quarter and six-months ended September 30, 1999 were 34.0 percent compared to an effective rate of 33.8 percent for the same periods one year ago. The Company expects the effective tax rate for fiscal 2000 to range between 33.8 and 34.3 percent.
The Company reported net earnings of $1.238 million for the second quarter ended September 30, 1999 or 6.6 percent of revenue compared to net earnings of $1.448 million, or 8.0 percent of revenue, in the second quarter one year ago. For the six-month period ended September 30, 1999 net earnings were $2.406 million, or 6.4 percent of revenue, compared to net earnings of $2.916 million, or 7.9 percent of revenue for the same period last year. The decline in net earnings for the second quarter ended September 30, 1999 is primarily attributable to lower gross margins. For the six-month period ended September 30, 1999 net earnings were unfavorably impacted by a decrease in contract revenue combined with lower gross margins due to unfavorable product mix. Fiscal 2000 net earnings also reflect $.137 million for the second quarter and $.24 million for the six month period ended September 30, 1999 for expenses associated with the cancer therapy acquisition which was canceled in early October 1999.
Liquidity and Capital Resources
Operating activities provided $1.82 million of cash and cash equivalents for the six-month period ended September 30, 1999. At September 30, 1999 the Company had $8.9 million of cash and cash equivalents.
The Company invested $2.5 million in capital equipment and patents in the six-month period ended September 30, 1999 and plans to invest between $3.5 million and $4.5 million during fiscal 2000.
On August 21, 1998 the Company announced a stock repurchase program. Through November 8, 1999 the Company expended $2.4 million to repurchase 227,100 shares of Common Stock. During the second quarter of fiscal 2000 the Company repurchased 65,100 shares of common stock for $.7 million.
Working capital at September 30, 1999 was $34.9 million, compared to $31.9 million at March 31, 1999. The current ratio at September 30, 1999 was 5.9, compared to 4.4 at March 31, 1999.
In May 1999, the Company signed a letter of intent to acquire rights to commercialize a patented cancer therapy and purchase a related apheresis clinic. In early October 1999, the Company announced that it canceled plans to complete this transaction.
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.
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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. 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.
The Company is nearly complete with the remediation phase for its information technology systems and non-information technology, or embedded technology systems. The Company will continue to implement plans and conduct additional follow-up testing through December 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 closely 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.
The Company has developed contingency plans and scenarios. Through September 30, 1999, the Company has spent approximately $.7 million for Year 2000 remediation. Based on follow-up assessments and remediation efforts to date, the Company estimates the total remaining cost of remediation and testing 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.
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Part II—Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 1999 Annual Meeting of Stockholders held on August 25, 1999, the stockholders approved the following:
(a) The stockholders elected two directors to serve for terms ending in 2002 and until their successors are elected. The stockholders present in person or by proxy cast the following numbers of votes in connection with the election of directors, resulting in the election of all of the nominees:
| Director |
|
Votes For |
|
Withheld |
|---|---|---|---|---|
| Fred L. Shapiro, M.D. | 5,763,471 | 59,110 | ||
| Donald H. Soukup | 5,763,471 | 59,110 |
The names of the remaining directors whose term of office as director continued after the Annual Meeting are Norman Dann, William Hope, George Heenan, Amos Heilicher, Malcolm W. McDonald and Thomas McGoldrick.
(b) The stockholders ratified the appointment of PricewaterhouseCoopers LLP as the independent auditors of the Company for the fiscal year ending March 31, 2000 with 5,788,647 votes for, 17,584 votes against, and 16,350 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
| Exhibit No. |
|
Exhibit |
|
Form of Filing |
|---|---|---|---|---|
| 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(a | ) | Form of Specimen Common Stock Certificate(3) | ||
| 4(b | ) | Rights Agreement, dated as of July 1, 1999, between the Company and Norwest Bank Minnesota, National Association(4) | ||
| 10(a | ) | 1989 Stock Plan, as amended(5)* | ||
| 10(b | ) | Amendment to 1989 Stock Plan Effective February 25, 1998(6)* | ||
| 10(c | ) | Form of Employment Agreement dated September 1, 1996 with certain officers of the Company(5)* | ||
| 10(d | ) | Separation and Consulting Agreement with Dr. Louis C. Cosentino dated April 1, 1997(5)* | ||
| 10(e | ) | 1990 Employee Stock Purchase Plan, as amended June 1, 1993(3) | ||
| 10(f | ) | Supplemental Executive Retirement Plan effective April 1, 1996(7)* | ||
| 10(g | ) | Amendment to Supplemental Executive Retirement Plan effective April 1, 1998(6)* | ||
| 10(h | ) | Director Emeritus Consulting Plan(8), as amended(9)* | ||
| 10(i | ) | Amended 1998 Stock Option Plan(2) |
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| Exhibit No. |
|
Exhibit |
|
Form of Filing |
|---|---|---|---|---|
| 21 | Subsidiaries of the Registrant | |||
| 23 | Consent of PricewaterhouseCoopers LLP | |||
| 27 | Financial Data Schedule | Electronic Submission |
b) Reports on Form 8-K
Current Report on Form 8-K, filed on July 13, 1999, relating to press release regarding execution of letter of intent of proposed acquisition.
Current Report on Form 8-K, filed on May 25, 1999, relating to the adoption of the rights agreement.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MINNTECH CORPORATION | ||||||
| Date: |
|
November 10, 1999 |
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|
/s/ JULES L. FISHER |
||
Jules L. Fisher Chief Financial Officer (Duly authorized officer) (Principal financial officer) |
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