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MINNTECH CORP
10-Q, 2000-08-14
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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 July 1, 2000 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)

14605 - 28th Avenue North
Minneapolis, Minnesota 55447
(Address of principal executive offices)

Registrant's telephone number, including area code: (612) 553-3300

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    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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Minntech Corporation

Quarterly Report on Form 10-Q

July 1, 2000

Index

					Page
Part I.  Financial Information
	Item 1.		Financial Statements
			Condensed Consolidated Statements of Operations		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
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

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Part I—Financial Information

Item 1.  Financial Statements

Minntech Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

				Thirteen weeks ended July 1, 2000			Three months ended June 30, 1999
Net sales—product				$	17,033		$	18,768
Contract revenue					—			60
Net sales					17,033			18,828
Operating costs and expenses
	Cost of product sales				10,992			10,683
	Research and development				1,014			1,231
	Selling, general and administrative				5,051			5,199
	Amortization of intangible assets				59			173
		Total operating costs and expenses			17,116			17,286
Earnings (loss) from operations					(83	)		1,542
Other income, net					52			227
Earnings (loss) before income taxes					(31	)		1,769
Provision (benefit) for income taxes					(10	)		601
Net earnings (loss)				$	(21	)	$	1,168
Net earnings per share
		Basic		$	.00		$	.17
		Diluted		$	.00		$	.17
Weighted average common shares Outstanding
		Basic			6,682			6,815
		Diluted			6,682			7,032

The accompanying notes are an integral part of these financial statements.

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Minntech Corporation

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share amounts)

					July 1, 2000			March 31, 2000
					(Unaudited)
ASSETS
Current assets
	Cash and cash equivalents				$	9,635		$	10,687
	Accounts receivable, less allowance for doubtful accounts of $438 and $422, respectfully					15,308			14,800
	Inventories
		Finished goods				5,762			5,095
		Raw materials				4,462			4,422
		Work-in-process				2,820			3,146
			Total inventories			13,044			12,663
	Prepaid expenses and other current assets					3,707			2,952
		Total current assets				41,694			41,102
Property and equipment
	Land, buildings and improvements					10,425			10,340
	Machinery and equipment					27,609			26,639
						38,034			36,979
	Less accumulated depreciation					(22,365	)		(21,620	)
		Net property and equipment				15,669			15,359
Other assets
	Patent costs, net					456			544
	Goodwill, net					513			541
	Other					3,548			4,047
Total assets					$	61,880		$	61,593
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accounts payable				$	5,447		$	4,593
	Income taxes payable					—			319
	Accrued compensation					1,216			1,509
	Other accrued expenses					2,114			1,998
		Total current liabilities				8,777			8,419
Deferred compensation						887			866
Total liabilities						9,664			9,285
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, 6,678,016 and 6,686,714 shares issued and outstanding, respectively					334			334
	Additional paid-in capital					12,084			12,181
	Accumulated other comprehensive income					(1,068	)		(1,094	)
	Retained earnings					40,866			40,887
Total stockholders' equity						52,216			52,308
Total liabilities and stockholders' equity					$	61,880		$	61,593

The accompanying notes are an integral part of these financial statements.

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Minntech Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

					Thirteen weeks ended July 1, 2000			Three months ended June 30, 1999
Cash flows from operating activities
	Net earnings (loss)				$	(21	)	$	1,168
	Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
		Depreciation and amortization				802			1,058
		Tax benefit from stock option exercises				—			115
		Foreign currency exchange loss/(gain)				(132	)		11
		Gain on sale of land				—			(176	)
		Other, net				116			5
		Changes in operating assets and liabilities:
			Accounts receivable			(1	)		(543	)
			Inventories			(380	)		(121	)
			Prepaid expenses			(748	)		(289	)
			Accounts payable			976			(412	)
			Accrued expenses			(260	)		(2,219	)
			Income taxes payable			(372	)		(610	)
			Total adjustments			1			(3,181	)
Net cash used in operating activities						(20	)		(2,013	)
Cash flows from investing activities
	Purchases of property and equipment					(945	)		(1,101	)
	Patent application costs					(42	)		(240	)
	Proceeds from sale of undeveloped land					—			709
	Other					8			(20	)
Net cash used in investing activities						(979	)		(652	)
Cash flows from financing activities
	Payments on note payable					—			(5	)
	Proceeds from exercise of stock options					—			1,040
	Proceeds from employee stock purchase plan					97			64
	Repurchase of common stock					(194	)		(35	)
Net cash provided by (used in) financing activities						(97	)		1,064
Effects of exchange rate changes on foreign currency cash balances						44			(173	)
Net decrease in cash and cash equivalents						(1,052	)		(1,774	)
Cash and cash equivalents at beginning of period						10,687			9,171
Cash and cash equivalents at end of period					$	9,635		$	7,397

The accompanying notes are an integral part of these financial statements.

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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 in the United States have been condensed or omitted.

    These unaudited 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, 2000 as filed with the Securities and Exchange Commission.

    The Company has adopted a universal calendar for financial reporting beginning in the first quarter of fiscal 2001. First quarter results will include the thirteen weeks ended July 1, 2000. A fiscal year will include either 52 or 53 weeks in total. This change in reporting will not be materially different from prior years.

    In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods.

NOTE 2—Line of Credit

    At July 1, 2000, 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 (9.5% at July 1, 2000) or the indexed London Interbank Offered Rate (LIBOR). As of July 1, 2000, the Company had no outstanding borrowings under the line of credit. This credit line expires on August 31, 2000.

NOTE 3—Net Earnings Per Share

    The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations for the thirteen weeks ended July 1, 2000 and the three months ended June 30, 1999.

			Basic Earnings Per Share			Effect of Dilutive Stock Options		Diluted Earnings Per Share
			(in thousands, except per share amounts)
Thirteen weeks ended July 1, 2000
Net loss			$	(21	)			$	(21	)
Weighted average common shares outstanding				6,682		—			6,682
	Per share amount		$	.00				$	.00
Three months ended June 30, 1999
Net earnings			$	1,168				$	1,168
Weighted average common shares outstanding				6,815		217			7,032
	Per share amount		$	.17				$	.17

    Outstanding stock options to purchase 588,049 and 43,788 shares of common stock as of July 1, 2000 and June 30, 1999, respectfully, were not included in the computation of diluted earnings per

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share because the options' exercise prices were greater than the average market price of the common shares during the period.

NOTE 4—Comprehensive Income

    The components of comprehensive income are as follows:

NOTE 5—Stockholders' Equity

Consolidated Statement of Stockholders' Equity
(dollars in thousands)

			Common Stock
			Shares issued and outstanding		Amount			Additional paid-in capital			Accumulated other comprehensive income			Retained earnings			Total
Balances at March 31, 2000			6,686,714		$	334		$	12,181		$	(1,094	)	$	40,887		$	52,308
Net loss															(21	)		(21	)
Foreign currency translation adjustment (including taxes of $14)												26						26
Repurchase of common stock			(24,100	)		(1	)		(194	)								(195	)
Employee stock purchase plan			15,402			1			97									98
Balances at July 1, 2000			6,678,016		$	334		$	12,084		$	(1,068	)	$	40,866		$	52,216

NOTE 6—Segment Data and Significant Customers

    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.

    The dialysis product segment includes supplies, concentrates and electronic equipment for hemodialysis treatment of patients with chronic kidney failure or end-stage renal disease. Included in the cardiosurgery products segment are oxygenators, hemoconcentrators, and hemofilters which are

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used during open-heart surgery. Developing business products include filtration and separation products and endoscope reprocessing supplies.

    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 first quarter (thirteen weeks ended July 1, 2000) of fiscal 2001, and the first quarter (three months ended June 30, 1999) of fiscal 2000.

Business Segment Information

		Dialysis Products			Cardiosurgery Products			Other Developing Businesses			Corporate & Unallocated(1)			Total Company
Revenues
First quarter 2001		$	13,260		$	2,029		$	1,744		$	0		$	17,033
First quarter 2000		$	13,816		$	3,673		$	1,279		$	60		$	18,828
Earnings (loss) from Operations
First quarter 2001		$	2,595		$	237		$	(98	)	$	(2,817	)	$	(83	)
First quarter 2000		$	4,068		$	459		$	(318	)	$	(2,667	)	$	1,542
Identifiable assets(2)
First quarter 2001		$	22,141		$	13,656		$	2,479		$	23,604		$	61,880
First quarter 2000		$	21,010		$	14,200		$	2,910		$	19,556		$	57,676

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(1)

Loss from operations consists of unallocated corporate administrative expenses and amortization of intangibles.

(2)

Identifiable segment assets include accounts receivable; property plant and equipment; inventories; and long term notes receivable. Additional assets included in Corporate Administration primarily include cash and short term investments, capitalized patent costs, deferred income taxes, goodwill, land and certain prepaid expenses.

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 18.4% and 25.0% of revenues for the first quarter of fiscal 2001, and the first quarter of fiscal 2000, respectively. Substantially all of the Company's export sales are negotiated, invoiced and paid in U.S. dollars.

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Geographic Area Information

		United States			International			Other			Eliminations			Total
Revenues
First quarter 2001		$	15,728		$	3,541		$	0		$	(2,236	)	$	17,033
First quarter 2000		$	16,229		$	5,441		$	60	(1)	$	(2,902	)	$	18,828
Property, Plant & Equipment, net
First quarter 2001		$	13,164		$	2,505			—			—		$	15,669
First quarter 2000		$	12,405		$	2,832			—			—		$	15,237

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(1)

Contract revenue received during fiscal 2000.

NOTE 7—New Accounting Pronouncement

    In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"("SAB 101") which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. The Company is in the process of analyzing the requirements of SAB 101, as amended, and is required to comply no later than the fourth quarter of fiscal year 2001. The Company has not yet determined the impact of SAB 101 on its consolidated financial statements but does not expect the adoption of SAB 101 to have a material impact on the results of operations.

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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations

Results of Operations

    Revenues in the first quarter of fiscal 2001 decreased 9.5 percent to $17.0 million, compared to $18.8 million in the first quarter of fiscal 2000. Dialysis product sales decreased 4.0 percent to $13.1 million in the first quarter of fiscal 2001, due primarily to a decline in dialyzer reprocessing sales. Sales of cardiosurgery products declined by $1.6 million or 44.8 percent from the first quarter in the prior year as a result of divesting the Company's oxygenator product line, combined with lower hemoconcentrator sales. The developing business product sales increase of 36.4 percent in the quarter is due to 18.4 percent growth in filtration and separation products combined with an increase in endoscope reprocessing products. Foreign exchange rate movements had an unfavorable year-to-year impact of $.3 million on international product sales in the quarter.

    Product sales by group are summarized on the following table:

			Thirteen weeks ended July 1, 2000			% of total sales		Three months ended June 30, 1999			% of total sales
			(in thousands of dollars)
Dialysis products			$	13,260		77.9	%	$	13,816		73.6	%
Cardiosurgery products				2,029		11.9	%		3,673		19.6	%
Other Developing Business products				1,744		10.2	%		1,279		6.8	%
Total Company			$	17,033		100.0	%	$	18,768		100.0	%

    Following is a summary of earnings (loss) from operations before income taxes by business segment:

			Thirteen weeks ended July 1, 2000			% of segment revenues		Three months ended June 30, 1999			% of segment revenues
			(in thousands of dollars)
Dialysis products			$	2,595		19.6	%	$	4,068		29.4	%
Cardiosurgery products				237		11.7	%		459		12.5	%
Other Developing Businesses				(98	)	—			(318	)	—
Corporate & Unallocated				(2,817	)	—			(2,667	)	—
Total Company			$	(83	)	—		$	1,542		8.2	%

    Gross margin on net product sales as a percentage of sales in the period ended July 1, 2000 decreased to 35.5 percent from 43.1 percent in the comparable period last year. The decrease in gross margins this quarter is attributable to start-up costs for two major distribution centers, higher overhead costs resulting from lower sales volumes, higher fuel costs, and lower selling prices in the Company's hemoconcentrator and dialyzer reprocessing sterilant product lines. The hemoconcentrator average selling prices decline is attributable to distributing the product under an OEM structure this year as compared to the same period in the prior year when the Company was a direct marketer of this product.

    Research and development expenses in the period ended July 1, 2000 were $1.0 million or 6.0 percent of revenues compared to $1.2 million or 6.5 percent of revenues in the prior year. The Company expects that research and development spending in fiscal 2001 will range between 5.3 and 6.0 percent of revenues.

    Selling, general and administrative expenses for the quarter ended July 1, 2000 were $5.1 million or 29.7 percent of revenues, compared to $5.2 million or 27.6 percent of revenues, in the comparable

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period last year. The decrease in absolute dollars in fiscal 2001 is attributable to reduced sales and marketing spending in cardiosurgery products, partially offset by severance costs tied to management changes in the current period combined with sales force expansion costs.

    Other income in the prior year reflects a $.176 million gain related to the sale of a parcel of undeveloped land.

    The Company's effective tax rate was 32.3 percent for the quarter ended July 1, 2000 compared to an effective tax rate of 34.0 percent in the quarter one year ago. The Company expects the effective tax rate to range between 32.0 and 33.5 percent for fiscal 2001.

    The Company reported a net loss of $21,000 for the quarter ended July 1, 2000, compared to net earnings of $1.17 million in the first quarter one year ago. The decrease in net earnings is attributable to lower product sales, start-up costs for two new dialysis distribution centers, higher fuel costs, lower average selling prices in two key product lines, severance costs, and dialysis sales force expansion expenses.

Liquidity and Capital Resources

    Operating activities used $20,000 of cash and cash equivalents for the first quarter ended July 1, 2000. In addition, the Company invested $1.0 million in capital equipment and patents in the first quarter. At July 1, 2000 the Company held $9.6 million in cash and cash equivalents.

    The Company initiated a stock repurchase program in August 1998 and has spent $3.85 million to repurchase a total of 388,100 shares to date under the program. During the first quarter of fiscal 2001 the Company expended $.193 million to repurchase 24,100 shares.

    Working capital at July 1, 2000 was $32.9 million as compared to $32.7 million as of March 31, 2000. The current ratio at July 1, 2000 was 4.8, compared to 4.9 at March 31, 2000.

    In April 1998, the Company signed a finite risk insurance policy to cover potential future product liability and legal defense exposures. Premium payments of $1.7 million were made in fiscal 1999 and 2000. In the event that these exposures do not materialize, the Company will recover a portion of these premiums. The Company is currently evaluating its exposures covered under this policy and the need to maintain coverage which could result in return of a portion of premiums paid.

    In May 2000, the Company signed a letter of intent to acquire Di-Chem Concentrate, Inc., an OEM manufacturer of hemodialysis concentrates. The Company expects its cash balances, cash flow from operation, 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 2001.

Year 2000 issues

    The Company's computer systems and equipment successfully transitioned to the year 2000 with no significant issues. The Company continues to keep the year 2000 project management in place to monitor latent problems that could surface at key dates or events in the future. The Company does not anticipate any significant problems related to these events. However, there can be no assurances that failure to address the year 2000 issues by significant business partners will not have a material adverse effect on the Company.

Euro Conversion

    Effective January 1, 1999, the European Economic and Monetary Union created a single Eurocurrency (the euro) for its member countries. A transition period is in effect that began January 1, 1999, and goes through December 31, 2001, during which time transactions will be executed in both the

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euro and the member country currencies. Effective January 1, 2002, euro bank notes will be introduced and on July 1, 2002, the euro will be the sole legal tender of the European Economic and Monetary Union countries.

    In general, the adoption of a single currency for the participating countries is expected to result in greater transparency of pricing, making Europe a more competitive environment for businesses. However, conversion to the euro is expected to affect many financial systems and business applications.

    The Company will switch all European business to the euro as the functional currency as of April 1, 2001. The Company's current European price list is maintained in euros. This conversion should require only minimal information system modifications. It is not anticipated at this time, that the euro will have a material impact on our fundamental risk management philosophy. Any costs incurred associated with the adoption of the euro will be expensed as incurred, and are not anticipated to be material to the Company's results of operations, financial condition, or liquidity.

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Part II—Other Information

Item 4.  Submission of Matters to a Vote of Security Holders

    None.

Item 6.  Exhibits and reports on Form 8K

a)

Exhibits

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*

Management contract, compensatory plan or arrangement.

(1)

Incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, File No. 0-11278.

(2)

Incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-11278.

(3)

Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No. 333-70545.

(4)

Incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, File No. 0-11278.

(5)

Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed on July 12, 1999, File No. 0-11278.

(6)

Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year-ended March 31, 1997, File No. 0-11278.

(7)

Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended March 31, 1998, File No. 0-11278

(8)

Incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-11278.

(9)

Intentionally not used.

(10)

Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, File No. 0-11278.

(11)

Incorporated by reference to Exhibit 12(g) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, File No. 0-11278.

(12)

Incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended March 31, 1998, File No. 0-11278.

(13)

Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-11278.

(14)

Incorporated by reference to Exhibit 10(b) filed as part of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-11278.

(15)

Incorporated by reference to Exhibit 10 to the Company's Registration Statement on Form S-8, Registration No. 333-70545.

(16)

Incorporated by reference to Exhibit 10(L) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, File No. 0-11278.

(17)

Incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, File No. 0-11278.

(18)

Incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, File No. 0-11278.

(b)

Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the first quarter of fiscal 2001.

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Signatures

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MINNTECH CORPORATION
Date: August 14, 2000
	/s/ JULES L. FISHER    Jules L. Fisher Chief Financial Officer (Duly authorized officer) (Principal financial officer)

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Part I—Financial Information
Item 1. Financial Statements
Signatures

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