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, 1997 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 41-1229121 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14605 - 28TH AVENUE NORTH MINNEAPOLIS, MINNESOTA 55447 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 553-3300 --------- 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 November 7, 1997 ----------------------------- ------------------------------- Common Stock, $0.05 par value 6,742,275 Minntech Corporation Quarterly Report on Form 10-Q September 30, 1997 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 7 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 8 Item 6. Exhibits and Reports on Form 8-K 9 SIGNATURES 10 Exhibit index 11 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 Six Months Ended September 30 September 30 1997 1996 1997 1996 -------- -------- -------- -------- NET SALES $ 16,355 $ 15,845 $ 34,110 $ 32,530 OPERATING COSTS AND EXPENSES Cost of sales 9,550 9,077 20,092 18,460 Research and development 631 829 1,330 1,654 Selling, general and administrative 4,532 4,306 9,207 8,407 Amortization of intangible assets 211 212 422 423 -------- -------- -------- -------- Total operating costs and expenses 14,924 14,424 31,051 28,944 -------- -------- -------- -------- EARNINGS FROM OPERATIONS 1,431 1,421 3,059 3,586 Other income (expense), net (29) (21) (40) (94) -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 1,402 1,400 3,019 3,492 Provision for income taxes 386 680 1,010 1,551 Minority interest (43) (61) (83) (131) -------- -------- -------- -------- NET EARNINGS $ 1,059 $ 781 $ 2,092 $ 2,072 -------- -------- -------- -------- -------- -------- -------- -------- NET EARNINGS PER SHARE $ .16 $ .12 $ .31 $ .30 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares 6,746 6,662 6,741 6,812 -------- -------- -------- -------- -------- -------- -------- -------- Page 3 MINNTECH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS September 30, March 31, 1997 1997 (Unaudited) --------- --------- CURRENT ASSETS Cash and cash equivalents $ 4,130 $ 3,222 Marketable securities 425 400 Accounts receivable, net 12,879 11,583 Inventories Finished goods 5,509 6,181 Materials and work-in-process 5,211 5,652 --------- --------- Total inventories 10,720 11,833 Prepaid expenses 1,807 2,945 --------- --------- TOTAL CURRENT ASSETS 29,961 29,983 PROPERTY AND EQUIPMENT, AT COST Land, buildings and improvements 9,583 9,647 Machinery and equipment 23,554 23,444 --------- --------- 33,137 33,091 Less accumulated depreciation (18,614) (17,444) --------- --------- 14,523 15,647 OTHER ASSETS Patent costs, net 707 711 Goodwill, net 1,109 1,327 Deferred income taxes 1,408 1,408 Other 924 925 --------- --------- TOTAL ASSETS $ 48,632 $ 50,001 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable $ 249 $ 3,241 Accounts payable 3,437 3,921 Accrued expenses 4,115 3,584 --------- --------- TOTAL CURRENT LIABILITIES 7,801 10,746 DEFERRED INCOME TAXES 1,553 1,553 DEFERRED COMPENSATION 236 224 MINORITY INTEREST (39) 44 STOCKHOLDERS' EQUITY Preferred stock, no par value - - Common stock, $.05 par value 337 334 Additional paid-in capital 12,424 12,143 Retained earnings 26,320 24,957 --------- --------- TOTAL STOCKHOLDERS' EQUITY 39,081 37,434 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 48,632 $ 50,001 --------- --------- --------- --------- Page 4 MINNTECH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended September 30 --------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 2,093 $ 2,072 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 1,782 1,968 Provision for losses on accounts receivable (108) 63 Foreign currency exchange loss 231 95 Minority interest (83) (131) Other, net 12 31 Changes in assets and liabilities: Accounts receivable (1,322) (183) Inventories 1,067 (5,381) Prepaid expenses 149 70 Accounts payable (486) (449) Accrued expenses 570 - Income taxes payable 998 187 -------- -------- Total adjustments 2,810 (3,730) -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,903 (1,658) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (386) (3,444) Proceeds from sale of marketable securities - 743 Patent application costs (192) (118) Acquisition of product line - - Other (8) 18 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (586) (2,801) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of note payable (3,000) - Proceeds from note payable - 4,000 Proceeds from exercise of stock options 285 486 Payment of cash dividends (674) (667) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES (3,389) 3,819 -------- -------- Effects of exchange rate changes on foreign currency cash balances (21) (12) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 907 (652) Cash and cash equivalents at beginning of period 3,222 4,064 -------- -------- Cash and cash equivalents at end of period $ 4,129 $ 3,412 -------- -------- -------- -------- 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, 1997, as filed with the Securities and Exchange Commission. In the opinion of management, the condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods. NOTE 2 - RESTRUCTURING AND UNUSUAL ITEMS During the first quarter ended June 30, 1997, and second quarter ended September 30, 1997, there were no significant changes in the restructuring charges recorded March 31, 1997. NOTE 3 - LINE OF CREDIT At June 30, 1997, the Company had $1,000,000 of outstanding borrowings under a line of credit with a commercial bank. The entire balance was repaid in early July. The line of credit expired August 31, 1997, and the Company is currently negotiating with several commercial banks to obtain more favorable terms. The Company does not anticipate any problems in establishing a new line of credit. NOTE 4 - NET EARNINGS PER SHARE The calculations of net earnings per common and common equivalent shares are presented in the following table. All amounts are in thousands except per share amounts. Three Months Ended Six Months Ended September 30 September 30 ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Net earnings $ 1,059 $ 781 $ 2,092 $ 2,072 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares outstanding 6,746 6,662 6,741 6,657 Weighted average common equivalent shares for stock options - - - 155 -------- -------- -------- -------- Weighted average common and common equivalent shares 6,746 6,662 6,741 6,812 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings per share $ .16 $ .12 $ .31 $ .30 -------- -------- -------- -------- -------- -------- -------- -------- Page 6 NOTE 4 - NET EARNINGS PER SHARE CONT. In March 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("FAS No. 128"). FAS No. 128 applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997. Under FAS No. 128 the presentation of primary earnings per share is replaced with a presentation of basic earnings per share. FAS No. 128 requires dual presentation of basic and diluted earnings per share for entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. Management believes the adoption of FAS No. 128 will not have a material effect on the financial statements. NOTE 5 - CASH DIVIDEND On August 27, 1997, the Company's Board of Directors declared an annual cash dividend of $.10 per share on the Company's common stock. The dividend was paid on September 26, 1997, to stockholders of record as of September 12, 1997. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales in the second quarter ended September 30, 1997, increased by $510,000, or 3.2%, to $16,355,000. Cardiosurgery sales declined 25.1% and continue to be impacted by the conclusion of the purchase agreement with C.R. Bard for the Company's first generation oxygenator. In the second quarter of fiscal 1997, oxygenator sales to C.R. Bard represented 13.3% of Company sales. Excluding the oxygenator sales from both years, revenues of our other products increased by 15.7% compared to the second quarter of fiscal 1997. The sales growth in other product lines is primarily attributable to a 16.8% increase in reprocessing products combined with an 8.7% increase in dialysis supplies and devices. Sales for the six months ended September 30, 1997, increased by $1,580,000, or 4.9%, to $34,110,000 from $32,530,000 in the prior year. The increase results from 26.6% growth in reprocessing products combined with a 10.8% increase in dialysis supplies and devices; partially offset by a 27.6% decline in cardiosurgery sales. Excluding the oxygenator, sales of other product lines increased by 17.6% over the first half of last fiscal year. Net sales by product group are summarized on the following table: Three Months Ended Six Months Ended September 30 September 30 ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Dialysis supplies and devices $ 5,299 $ 4,873 $ 10,682 $ 9,643 Reprocessing products 7,156 6,127 15,088 11,921 Cardiosurgery products 3,223 4,305 7,069 9,762 Water filtration products 677 540 1,271 1,204 -------- -------- -------- -------- $ 16,355 $ 15,845 $ 34,110 $ 32,530 -------- -------- -------- -------- -------- -------- -------- -------- Page 7 RESULTS OF OPERATIONS CONT. Gross profit for the second quarter ended September 30, 1997, was $6,805,000 or 41.6% of net sales, compared to $6,768,000 or 42.7% of net sales for the quarter one year ago. For the six months ended September 30, 1997, gross profit was $14,018,000, or 41.1% of net sales, compared to $14,070,000, or 43.3% of net sales for the same period one year ago. The decrease in gross margins is due primarily to the decline in unit sales of oxygenators. Research and development expenses for the second quarter totaled $631,000 or 3.9% of sales, compared to $829,000 or 5.2% of sales in the quarter one year ago. For the six months ended September 30, 1997, expenses totaled $1,330,000, or 3.9% of sales, compared to $1,654,000 or 5.1% of sales for the same period one year ago. The Company expects that total research and development expenses for the fiscal year ending March 31, 1998, will approximate 4.5% of sales. Selling, general and administrative expenses for the second quarter ended September 30, 1997, were $4,532,000 or 27.8% of sales, compared to $4,306,000 or 27.3% of sales in the second quarter one year ago. For the six months ended September 30, 1997, selling, general and administrative expenses totaled $9,207,000 or 27.0% of sales, compared to $8,407,000 or 25.8% of sales for the same period one year ago. Selling, general and administrative expenses have increased due to spending to support the Biocor-Registered Trademark- 200 launch. The Company's effective income tax rates for the second quarter and six months ended September 30, 1997, were 27.5% and 33.4%, respectively, compared to 48.6% and 44.4% for the same periods one year ago. The tax provision for the quarter and six months year to date reflect a benefit for operating loss carryforwards in our European subsidiary which lowers the Company's effective tax rate. The Company reported net earnings of $1,059,000, 6.5% of sales for the quarter ended September 30, 1997, compared to earnings $781,000, or 4.9% of sales in the second quarter one year ago. For the six months ended September 30, 1997, earnings were $2,092,000 or 6.1% of sales, compared to earnings of $2,072,000 or 6.4% of sales for the same period one year ago. The increase in net earnings for the quarter and six months are primary attributable to the lower effective tax rates. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided $2,485,000 and $4,903,000 of cash and cash equivalents for the quarter and six months ended September 30, 1997, respectively. At September 30, 1997, the Company had $4,555,000 of cash, cash equivalents and marketable securities, an increase of $933,000 from March 31, 1997. Working capital on September 30, 1997, was $22,160,000 compared to $19,237,000 as of March 31, 1997. The Company's current ratio at September 30, 1997, was 3.8:1 compared to 2.8:1 at March 31, 1997. Improvements in cash flow during the first six months enabled the Company to pay off $2,000,000 of the outstanding balance on our domestic bank line of credit in the quarter ended June 30, 1997, and the remaining $1,000,000 balance in the quarter ended September 30, 1997. The Company invested $386,000 in capital equipment during the six months ended September 30,1997, and expects to invest approximately $3,000,000 during fiscal 1998. Page 8 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on August 27, 1997. The stockholders took the following actions: (i) the stockholders elected three directors to serve for terms ending in 2000 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: The names of the remaining directors whose term of office as a director continued after the Annual Meeting are Fred Shapiro, M.D., Donald H. Soukup, Louis C. Cosentino, and Norman Dann. Votes For Withheld --------- --------- George Heenan 4,841,252 1,117,994 Amos Heilicher 4,835,142 1,124,104 Thomas J. McGoldrick 4,844,894 1,114,352 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1997. 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: NOVEMBER 12, 1997 /s/ Jules L. Fisher ------------------------ Jules L. Fisher Vice President and Chief Financial Officer (Duly authorized officer) (Principal financial officer) Page 9