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, manufacturing and marketing of medical supplies and devices, sterilants and water filtration products. The Company's products are used primarily in kidney dialysis and in open-heart surgery. The trade name of Renal Systems is used for products sold in the dialysis market, the trade name of Minntech is used for products sold in the cardiosurgery market, the trade name of Fibercor is used for marketing water filtration products, and the trade name of Unitrol is used for products sold in the endoscopy market. The Company has core technologies in electronics, fibers, plastics, and chemical solutions, all of which were internally developed.
INDUSTRY SEGMENTS Through March 31, 1997, the Company has been primarily engaged in a single industry segment--medical devices and supplies. The Company also markets filtration devices for industrial water purification applications.
PRODUCTS The Company has four interrelated product groups:
- Dialysis Supplies and Devices
- Reprocessing Products
- Cardiosurgery Products
- Water Filtration Products
DIALYSIS SUPPLIES AND DEVICES The Company's main dialysis supply product is a line of concentrates used by kidney centers to prepare dialysate (a salt solution) for hemodialysis treatments. The Company 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. The U.S. hemodialysis patient population consumes almost 35 million gallons of concentrates annually (estimate based on published information on patient populations). Sales of concentrate products accounted for more than 75 percent of all sales in this product group in each of the past three fiscal years.
The Company introduced its first dialyzer (artificial kidney) - the Renaflo-Registered Trademark- HDF 1350 dialyzer - in fiscal 1992. In fiscal 1993, the Company introduced the Primus-Registered Trademark- line of second generation dialyzers in Europe, and in August 1994, the Company received FDA market clearance to sell the Primus-Registered Trademark- dialyzer in the United States. Dialyzers are a commodity product that require considerable sales volume and low cost structure to be profitable. At the close of fiscal 1997, the Company's share of the highly competitive dialyzer market was less than one percent. As a result, in March 1997, the Company discontinued the Primus-Registered Trademark- dialyzer line, taking a one-time restructuring charge to write off all of the assets employed in the dialyzer business.
The Company's major dialysis electronic products are the Sonalarm-Registered Trademark- Foam Detector, a device that detects air 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.
These dialysis products accounted for approximately 32 percent of the Company's sales in fiscal 1997, 29 percent of product sales in fiscal 1996 and 33 percent of product sales in fiscal 1995.
REPROCESSING PRODUCTS Reprocessing products include the Renatron-Registered Trademark- Dialyzer Reprocessing System and associated supplies, including Renalin-Registered Trademark-, a cold sterilant solution that replaces formaldehyde, gluteraldehyde, and bleach in dialyzer reprocessing, and Actril-Registered Trademark- Cold Sterilant, a kidney machine disinfectant.
In response to government-mandated cost containment measures, many U.S. dialysis centers in the late 1970s began reusing dialyzers (artificial kidneys) instead of discarding them after a single use. In 1982, the Company introduced the Renatron-Registered Trademark-, a machine that provides an automated method of rinsing, cleaning, testing, and sterilizing dialyzers for multiple use. In 1985, dialysis centers began using Renalin-Registered Trademark- sterilant for manual reprocessing of dialyzers. In 1990, the Company began sales of the Renatron-Registered Trademark- II, a second generation system that includes a bar code reader, computer and Renalog-Registered Trademark- software for automated record keeping and analysis. Data released by the Centers for Disease Control ("CDC") indicate that, as of 1994, 81 percent of all U.S. hemodialysis patients were treated in centers that reuse dialyzers. The CDC also reported that 75 percent of all dialysis centers in the United States reuse dialyzers and 52 percent of these centers used Renalin-Registered Trademark- to sterilize their dialyzers. The other dialysis centers used primarily formaldehyde or glutaraldehyde disinfectants to reprocess dialyzers.
The Company believes its Renatron-Registered Trademark- system is faster and easier to use 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, 1997, the Company had an installed customer base of more than 3,000 Renatron-Registered Trademark- systems.
Unlike the United States market, dialyzer reuse is in the formative stages in Europe. The Company has increased its reprocessing product sales in Europe by employing direct salespersons in major dialysis markets and promoting the advantages of reuse.
In September 1994, the Company purchased an endoscope reprocessor product line from Bard Interventional Products, a division of C.R. Bard, Inc. ("Bard") for $934,000 in cash. Manufacturing of the products was assimilated into the Company's electronic device production facility in Minneapolis, Minnesota. The endoscope reprocessing machine provides high level disinfection for flexible endoscopes and is marketed to gastroenterology units of hospitals and ambulatory care units.
In fiscal 1997, Peract-TM- 20, a peracetic acid-based liquid cold sterilant/disinfectant for endoscope reprocessing, was introduced to the international marketplace. The product was submitted to FDA for 510(k) registration in February 1996, and the Company was still awaiting clearance as of March 31, 1997.
The Company began sales of the Cathetron-Registered Trademark- Reprocessing System in Europe in April 1994. The Cathetron-Registered Trademark- system, along with its companion cold sterilant CATHx-Registered Trademark-, is an automated system for cleaning and sterilizing cardiovascular catheters for subsequent reuse. The product was never introduced in the United States marketplace. 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. Assets related to the Cathetron-Registered Trademark- business were written off as part of the Company's restructuring charge.
Reprocessing products accounted for approximately 38 percent of product sales in fiscal 1997, 34 percent of sales in 1996 and 32 percent of product sales in fiscal 1995.
CARDIOSURGERY PRODUCTS The primary products in this group at March 31, 1997, consisted of three hollow fiber devices.
OXYGENATORS Since 1987, the Company has manufactured membrane oxygenators based on its proprietary hollow fiber technology. An oxygenator is used by a perfusionist (a technician who operates heart-lung bypass equipment) to replace the function of the lungs during open-heart surgery. To date, the Company's oxygenators have been used in over 600,000 open-heart procedures worldwide. The Company's first generation oxygenator was sold exclusively
through Bard. from 1987 through March 31, 1997. Since March 31, 1997, this first generation oxygenator has been available from the Company under the trade name Minntech-TM- 400. In 1995, the Company introduced a second generation oxygenator - - the Biocor-TM- 200 High Performance Oxygenator.
From 1987 to 1997, the Company manufactured its first generation oxygenator for exclusive worldwide distribution pursuant to an agreement with Bard. Bard agreed to purchase certain minimum quantities of the oxygenator through December 31, 1995. These minimum quantities had an annual sales value to the Company of approximately $10 million, and Bard's annual purchases through March 31, 1995 exceeded such minimums. In April 1995, Bard and the Company entered into a new agreement for the sale of the oxygenator whereby Bard agreed to purchase certain minimum quantities of the oxygenator through March 31, 1997. The agreement also allowed Bard to continue purchasing the oxygenator through June 30, 1997, without any minimum purchase obligation. Bard had exclusive distribution rights through March 31, 1997 and nonexclusive rights thereafter, and was restricted from selling any other oxygenator until January 1, 1997. Bard's minimum purchase obligation under the agreement for the period April 1, 1995 to March 31, 1997, had a sales value to the Company of approximately $20 million. The Company does not anticipate significant orders from Bard in the first quarter of fiscal 1998. See "Significant Customers."
The Biocor-TM- 200 was introduced in Europe in November 1995, and on March 7, 1997, the Company received FDA 510(k) clearance for the U.S. market for the Biocor-TM-. The product 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 reduces set-up time for the perfusionist and can reduce the need for donor blood. The Biocor-TM- 200 also provides a high gas transfer rate with minimal pressure drop. The Company believes that the consistent high performance characteristics of the device are equal or superior to competing products.
HEMOCONCENTRATORS Since 1985, the Company has manufactured and sold hemoconcentrators, a filtration device that removes excess body fluids during open-heart surgery. In 1988, the Company introduced a second generation product, the Hemocor Plus-Registered Trademark- hemoconcentrator, a rinse-free device that allows for faster set-up during surgery. In February 1994, the Company received FDA market clearance for a third generation product, the Hemocor HPH-Registered Trademark- line, which contains a higher performance hollow fiber membrane. The Company estimates that hemoconcentration is currently used in 25 to 30 percent of all open-heart procedures in the United States and to a lesser extent internationally, and that such procedures require up to 140,000 hemoconcentrator devices annually worldwide. At March 31, 1997, the Company believes it holds more than a 70 percent share of the United States hemoconcentrator market.
HEMOFILTERS The Renaflo-Registered Trademark- Hemofilter, introduced in fiscal 1985, is a device that performs continuous arteriovenous hemofiltration (CAVH), an intensive care therapy that treats acute renal failure and fluid overload in critically ill patients. CAVH is an alternative to conventional dialysis for these patients.
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 purchase price was approximately $1.4 million, paid in cash. The Company also signed a six-month supply agreement with Amicon whereby Amicon manufactured products for the Company to be sold in Europe. The Company began manufacturing the hemoconcentrator and hemofilter products in its Minneapolis facility in the first quarter of fiscal 1997.
Cardiosurgery products accounted for approximately 26 percent of the Company's product sales in fiscal 1997, 34 percent of product sales in fiscal 1996, and 33 percent of product sales in fiscal 1995.
WATER FILTRATION PRODUCTS There are two major products in this group: Fiberflo-Registered Trademark- Microfilter and Minncare-Registered Trademark- Disinfectant. The Fiberflo-Registered Trademark- Microfilter is a hollow fiber filter that has "point of use" applications in industrial water purification. These filters are being used for finer filtration in the pharmaceutical, medical device, and biotechnology industries. Minncare-Registered Trademark- Disinfectant is used to disinfect water treatment systems. Through March 31, 1997, water filtration product sales accounted for 3.6 percent of the Company's product sales in fiscal 1997, 2.5 percent of product sales in fiscal 1996, and 2.2 percent of product sales in fiscal 1995.
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 direct sales forces and through independent stocking distributors. At March 31, 1997, the Company employed a total of seven dialysis sales representatives in the United States, two cardiosurgery sales representatives, two water filtration sales representatives, and one endoscope reprocessor sales representative. In addition, a customer service staff and a technical services department support field activity. The Company also operates its own trucks to expedite delivery of certain products and minimize shipping costs.
Starting in 1991, the Company began establishing direct sales operations in Europe to enhance marketing of its products. The Company's goal is to increase its revenues in Europe through expanded direct sales activities. The Company's headquarters for its European operations in the Netherlands employed a total of 15 people in Europe at March 31, 1997.
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 (technicians who operate heart-lung bypass equipment) and cardiovascular surgeons. Endoscope reprocessing marketing programs are directed at gastroenterology nurses and physicians, infection control and central sterile processing personnel, and hospital and clinic administrators. Water filtration marketing programs are directed at distributors and large OEMs. The Company supports its field organization and network of distributors through advertising, distribution of sales materials, publication of articles in medical journals, and attendance at medical conferences.
SOURCES AND AVAILABILITY OF MATERIALS The majority of the materials and components that the Company uses in its manufacturing operations are readily obtainable from multiple sources worldwide. 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 151 patents worldwide (including 42 U.S. patents) covering its products or components thereof. At March 31, 1997, the Company also had a total of 100 pending patent applications in the United States and in foreign countries. The Company also holds rights under 191 trademark registrations worldwide and has 86 applications pending.
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 also may 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. No material order backlogs existed at March 31, 1997.
SIGNIFICANT CUSTOMERS The Company's five largest customers in fiscal 1997 accounted for approximately 29 percent of total sales. Sales of oxygenators to Bard accounted for approximately 10 percent of product sales in fiscal year 1997, and 20 percent or more of product sales in fiscal 1996 and 1995. Bard agreed to purchase certain minimum quantities of the
oxygenator under a contract that began in fiscal 1988 and was scheduled to terminate December 31, 1995. In April 1995, a new agreement was reached extending the term to June 30, 1997. The Company does not anticipate significant orders from Bard in the first quarter of fiscal 1998 (See "Products--Cardiosurgery Products--Oxygenators").
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 AND MARKET CONDITIONS The Company's dialysis and 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 International Inc., Gambro (a division of CGH Medical), 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.
The Company's new Biocor-TM- oxygenator and hemoconcentrators are sold by its own direct sales force and by a network of independent medical distributors. Bard was the exclusive distributor of the Company's first generation membrane oxygenator through March 31, 1997, and has nonexclusive distribution rights through June 30, 1997 (See "Products-Cardiosurgery Products-Oxygenators"). The first generation oxygenator, now known as the Minntech-TM- 400, has also been available directly from the Company since March 31, 1997. Besides Bard, the Company's major competitors in the oxygenator market are Medtronic, Inc., Cobe Laboratories Inc. (a division of CGH Medical), Baxter International, Inc., Terumo Corporation and Avecor Cardiovascular, Inc. The major competitors in the hemoconcentrator market are CGH Medical and Baxter International, Inc.
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 more than 20 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, 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 other supplies 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. Although cost containment 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 and endoscope reprocessing products, hemoconcentrators, and the Renapak-Registered Trademark- Concentrate Manufacturing System.
There is a growing trend in the dialysis industry whereby manufacturers of supplies are acquiring chains of dialysis treatment centers. These manufacturers, in effect, have a built-in customer base for their products. However, the Company 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.
RESEARCH AND PRODUCT DEVELOPMENT The Company strives to design and develop technologically advanced products that are 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.
As of March 31, 1997, 20 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 $9,680,000 in research and development as follows: fiscal 1997 - $3,424,000; fiscal 1996 - $3,123,000; and fiscal 1995 - $3,133,000. Such costs represented 5.2 percent , 4.8 percent and 5.6 percent of revenues, respectively, in each such period.
The Company's current research and development efforts are directed toward reprocessing applications, blood filtration and oxygenation technologies, cold sterilant/ disinfection applications, and water filtration.
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 U.S. Food and Drug Administration ("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 the Good Manufacturing Practice (GMP) regulations under which the FDA conducts periodic inspections to verify compliance. Further, the GMP's 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 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.
During 1992 and 1993, the time between submission to the FDA and final clearance for marketing increased substantially; however, review times by the FDA are beginning to decrease. Notwithstanding, there are no assurances that this trend will continue, and the Company is still experiencing delays in receiving product clearances.
In January 1995, the Company received ISO 9001 certification for its Minneapolis, Minnesota facilities. 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, 1997, the Company employed 364 full-time and 13 part-time employees, including 227 persons in manufacturing operations. None of the employees is 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 Western Europe and the Far East. Sales outside the United States for the years ended March 31, 1997, 1996 and 1995 were approximately $12,187,000, $10,462,000 and $7,261,000, respectively. Sales outside the United States accounted for approximately 18 percent, 16 percent and 13 percent of total sales, respectively, in each such period.
EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages, and the year they became executive officers are listed below:
Executive officers are elected annually by the Board of Directors and serve until their successors are duly elected and qualified.
Mr. McGoldrick served as Vice President Corporate Development from March 1985 to June 1995 and as Executive Vice President from June 1995 through March 1997.
Mr. Schyma served as Vice President Cardiopulmonary from January, 1992 to June 1994 and as Vice President International from June 1994 through March 1997.
Ms. Wrigley served as Intellectual Property Counsel from September 1991 to August 1993, as General Counsel from August 1993 to March 1994 and as Vice President and General Counsel from March, 1994 to date.
Mr. Goldhaber joined the Company in November 1993, having previously been employed by Baxter Healthcare Corporation from 1965 to 1993 in various manufacturing and engineering capacities, including Vice President, New Product Development for Baxter's European operations.
Mr. Johnson joined the Company in August 1992, having previously been employed from 1991 to 1992 as Director of Quality Assurance and Regulatory Affairs at Aortech Inc., a manufacturer of artificial heart valves. From 1989 to 1991, Mr. Johnson was Director of Operations at Specialty Engineering Corporation, a custom metal fabricator for the computer and medical device industries.
Mr. Helms joined the company in August 1996, having previously been employed by Cabot Medical Corporation from 1988 to 1991 as Vice President of Manufacturing, and from 1991 to 1996 as Vice President of Operations.
Mr. Fisher joined the Company in November 1996, having previously been employed by U.S. Surgical Corporation as Director, Operations Accounting, from 1991 to 1996. From 1987 to 1991, Mr. Fisher served in various financial positions for the Pharmaceutical Group of Bristol-Myers Squibb Company.
ITEM 2.
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.
The Company also owns two parcels of undeveloped land adjacent to these facilities comprising a total of 7.8 acres.
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, warehouse and manufacturing facility.
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.
ITEM 3.
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.
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, 1997.
PART II
ITEM 5.
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.
YEARS ENDED MARCH 31 1997 1996 -------------------------------------- Fiscal Quarter Prices High Low High Low --------------------------------------------------------------- First Quarter $ 21.500 $ 10.000 $ 15.50 $ 11.50 Second Quarter $ 15.000 $ 9.500 $ 19.25 $ 13.75 Third Quarter $ 13.750 $ 10.375 $ 23.63 $ 16.00 Fourth Quarter $ 12.125 $ 9.625 $ 22.50 $ 17.00
As of June 20, 1997, the Company had approximately 500 shareholders of record.
The Company paid annual cash dividends of $0.10 per share on its Common Stock in September 1995 and September 1996. 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS REVENUES Revenues in fiscal year 1997 increased by $1,138,000, or 1.8 percent over fiscal 1996 revenues due primarily to increased unit sales of reprocessing products and dialysis supplies and devices. Sales of dialysis reprocessing products increased by 17 percent for the current fiscal year with endoscope and catheter reprocessing showing declines. Dialysis supply and device (excluding dialyzer) sales increased 9 percent for the current fiscal year.
Revenues from cardiosurgery products during fiscal 1997 declined 24 percent from the prior fiscal year reflecting the gradual phase out under the oxygenator contract. Sales of oxygenators to Bard accounted for 10 percent of total company revenues in fiscal year 1997 compared to 20 percent in fiscal year 1996. The Company's supply contract with Bard expires June 30, 1997, and management does not anticipate material sales to Bard in fiscal year 1998. Management expects that sales of the Company's new oxygenator will largely offset the decline in product sales from the Bard contract. On March 7, 1997, the new Biocor-TM- 200 High Performance Oxygenator received FDA clearance to market, and the Company began selling it in the U.S. shortly thereafter. Sales of this product commenced in Europe in November 1995.
Total revenues in fiscal year 1996 increased by $8,587,000, or 15 percent over fiscal year 1995 revenues due primarily to increased unit sales of dialyzer reprocessing and endoscope reprocessing products and increased sales of cardiosurgery products. Sales of cardiosurgery products for the fiscal year 1996 grew 22 percent due to increased unit sales of hemoconcentrators and hemofilters which more than offset a small decline in oxygenator sales. Product lines acquired in the first quarter of the 1996 fiscal year contributed to the growth of cardiosurgery product sales. Product price increases in fiscal year 1996 did not have a significant impact on revenues.
Changes in foreign currency exchange rates did not have a significant impact on the Company's revenues in fiscal years 1997, 1996, and 1995.
Product sales have grown at a compound annual rate of 12 percent over the past three years. The following table indicates sales and percent of total sales by product group for each of the last three fiscal years:
GROSS MARGINS Gross profit from product sales in fiscal 1997 was $27,414,000, or 41.6 percent of net product sales, compared to $26,661,000, or 41.2 percent, in fiscal 1996 and $24,108,000, or 43.1 percent, in fiscal 1995. The increase in gross margin in fiscal 1997 resulted primarily from increased sales of higher margin reprocessing products. The decrease in gross margin in fiscal 1996 was due primarily to lower margins on certain hollow fiber products. High dialyzer manufacturing costs depressed gross margins in each of fiscal years 1997, 1996, and 1995.
RESEARCH AND DEVELOPMENT Research and development expenses in fiscal 1997 were $3,424,000 or 5.2 percent of revenues, compared to $3,123,000, or 4.8 percent of revenues, in fiscal 1996 and $3,133,000 or 5.6 percent of revenues in fiscal 1995. The Company intends to continue investing a substantial portion of its revenues in new product development. The Company expects that total research and development expenses in fiscal 1998 will approximate 5 1/2 - 6 percent of revenues.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general, and administrative expenses as a percentage of total revenues were 26.4 percent in fiscal 1997 compared to 23.7 percent in fiscal 1996 and 21.3 percent in fiscal 1995. The higher costs in fiscal years 1997 and
1996 were due primarily to increases in sales staffs and expanded marketing efforts in Europe and Japan (in 1996). Additionally, expenses in the United States have increased due to the changing marketing requirements in the Company's cardiosurgery business.
RESTRUCTURING AND UNUSUAL ITEMS The Company recorded pre-tax charges for restructuring and unusual items of $9,569,000 in the fourth quarter of fiscal 1997. These charges reflect the discontinuation of the Primus-Registered Trademark- dialyzer and Cathetron-TM- catheter reprocessing system combined with expenses associated with the departure of the Company's founder, Dr. Louis C. Cosentino, as Chairman, Chief Executive Officer, and President. Management determined that the dialyzer product line does not fit within the long-term strategy of the Company due to the competitive nature of the business and high sales volumes required to be profitable. Key aspects of the dialyzer related charges are fixed asset, inventory, and intellectual property write-downs to estimated net realizable values.
INCOME TAXES The tax provision for fiscal 1997 reflects a benefit of $700,249, an effective tax rate of 16.1 percent. The Company's effective income tax rate in fiscal 1996 and 1995 were 36.5 percent and 35.8 percent, respectively. The company benifited from deductible losses related to investments in foreign subsidiaries in fiscal years 1996 and 1995. The fiscal 1997 effective rate is low primarily because no tax benifit was recorded for operating losses at foreign subsidiaries. The Company's effective income tax rate may vary in fiscal 1998, depending upon the operating results of its foreign subsidiaries.
NET EARNINGS The Company recorded a net loss in fiscal 1997 of $(3,372,000), or $(0.51) per share, compared to earnings of $4,308,000, or $0.62 per share, in fiscal 1996 and $5,920,000,or $0.90 per share, in fiscal 1995. The net loss in fiscal 1997 was due restructuring charges related primarily to the discontinuation of the Primus-Registered Trademark- dialyzer line. Prior to the restructuring charge, the Company had net income of $2,922,000, or $0.44 per share, in fiscal 1997.
The decrease in earnings and net margin in fiscal 1996 was due to higher operating expenses, lower gross margin, and fiber production scale-up losses of $936,000 incurred in the second quarter. The increase in earnings in fiscal 1995 was due to higher sales revenues.
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:
MARCH 31 1997 1996 1995 ---------------------------------------------------------------------- Cash, cash equivalents and $3,622,412 $5,218,727 $4,487,345 marketable securities Working capital 19,236,773 22,128,080 18,105,889 Long-term debt Stockholders Equity 37,434,056 41,210,272 35,052,404 Cash flow from operations 970,450 5,311,968 5,614,677 Cash dividends paid 667,471 652,542 623,250
The decrease in cash, working capital, and cash flow from operations in fiscal 1997 is primarily attributable to operating the Primus-Registered Trademark- dialyzer product line at a loss during the year. The Company's current ratio at March 31, 1997 was 2.8 compared to 4.2 at March 31, 1996. The Company borrowed $4,000,000 against its $10,000,000 bank line of credit in September 1996. As of March 31, 1997, the outstanding balance was reduced to $3,000,000 and to $1,000,000 on June 19, 1997. The bank line of credit allows the Company to borrow on an unsecured basis at either the prime rate of interest (8.25 percent as of March 31, 1997) or at an indexed London Interbank Offered Rate (LIBOR).
The Company expended a total of $5,208,000 for plant improvements and equipment in fiscal 1997, compared to $4,333,000 in fiscal 1996 and $3,573,000 in fiscal 1995. The Company plans to invest approximately $3,800,000
in capital equipment in fiscal 1998. During the first quarter of fiscal 1996, the Company acquired a group of hollow fiber product lines for $1,402,000 in cash. The assets acquired included inventory, equipment, and goodwill.
During the past three years, proceeds from stock options exercised provided a total of $3,375,259 in equity capital as follows: fiscal 1997--$486,794; fiscal 1996--$1,979,059; and fiscal 1995--$909,406.
The Company believes that its strong financial condition at March 31, 1997, along with anticipated cash flows from operations, will be sufficient to meet its working capital and capital equipment needs in fiscal 1998.
FOREIGN CURRENCY TRANSACTIONS Substantially all of the Company's U.S.-based export sales are invoiced and paid in U.S. dollars. The transactions of the Company's Netherlands-based subsidiary are invoiced and paid in several currencies, including Dutch guilders, German marks and U.S. 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 which 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 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 recently introduced Biocor-TM- 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 United States Food and Drug Administration (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 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.
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 20 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 1997 accounted for 29 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 recently introduced Biocor TM 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Reports of Independent Certified Public Accountants are contained on pages 20 through 30 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Grant Thornton LLP, the Company's independent accountants since 1974, was dismissed on January 30, 1995, and Price Waterhouse LLP was appointed as the Company's new independent accountants. Grant Thornton's report on the financial statements for the year ended March 31, 1994, was unqualified. Price Waterhouse's report on the financial statements for the years ended March 31, 1995 and 1996 were unqualified. There have been no disagreements with Grant Thornton LLP or Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. There have occurred no "reportable events" as defined in Item 304(a) of Regulation S-K. The decision to change accountants was recommended by the Audit Committee of the Company's Board of Directors and approved by the Board of Directors.
PART III
ITEM 10.
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 27, 1997, 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.
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 27, 1997, and is incorporated herein by reference.
ITEM 12.
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 27, 1997, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14.
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, 1997 and 1996 (ii) Consolidated Statements of Earnings three years ended March 31, 1997, 1996 and 1995 (iii) Consolidated Statements of Stockholder's Equity three years ended March 31, 1997, 1996, and 1995 (iv) Consolidated Statements of Cash Flows three years ended March 31, 1997, 1996 and 1995 (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: 3(a) Articles of Incorporation, as amended (1) 3(b) Amendment of By-Laws in March 1986 (2) 3(c) Restated By-Laws(2) 4 Form of Specimen Common Stock Certificate(3) 10(a) 1989 Stock Plan, as amended 10(b) Form of Employment Agreement dated September 1, 1996 with certain officers of the Company 10(c) Separation and Consulting Agreement with Dr. Louis C. Cosentino dated April 1, 1997 10(d) 1990 Employee Stock Purchase Plan, as amended June 1, 1993 (3) 10(e) Supplemental Executive Retirement Plan effective April 1, 1996(4) 10(f) Director Emeritus Consulting Plan (5), as amended (6) 23 Consent of Price Waterhouse LLP 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K None
________________________________ (1) 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, 1988, File No. 0-11278. (2) Incorporated by reference to the specified exhibit filed as part of the Company's report on Form 8-K on March 12, 1986, File No. 0-11278. (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, 1995, File No. 0-11278. (5) 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. (6) 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.
MINNTECH CORPORATION CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
MINNTECH CORPORATION CONSOLIDATED STATEMENT OF EARNINGS
The accompanying notes are an integral part of these statements.
MINNTECH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
MINNTECH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
MINNTECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, its majority-owned subsidiary 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. 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:
FY ENDED MARCH 31 1997 1996 ----------------------------- ------------ ------------- Cash $ 1,676,471 $ 2,117,793 Money market mutual funds 1,545,941 1,946,598 ------------ ------------ $ 3,222,412 $ 4,064,391 ------------ ------------ ------------ ------------
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, 1997 and 1996.
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, 1997 and 1996, the adjusted cost of the funds exceed fair market value. The unrealized holding losses, net of income taxes, are reported as a reduction in stockholders' equity.
Marketable securities consisted of: ------------------------------------------------------------ FY ENDED MARCH 31 1997 1996 ------------------------------------------------------------ Adjusted cost $ 442,974 $ 1,269,019 Unrealized holding loss $ (42,974) $ (114,683) ---------- ------------ Fair market value $ 400,000 $ 1,154,336 ---------- ------------ ---------- ------------
INVENTORIES Inventories are valued at the lower of cost or market, with cost determined by the first-in, first-out method.
Inventories consisted of:
------------------------------------------------------------ FY ENDED MARCH 31 1997 1996 ------------------------------------------------------------ Finished Goods $ 6,181,128 $ 4,768,680 Materials and work-in process $ 5,652,288 $ 6,666,655 ------------ ------------ $ 11,833,416 $ 11,435,335 ------------ ------------ ------------ ------------
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.
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 seven years. The Company periodically evaluates the existence of 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 the average exchange rates in effect for the year. Unrealized translation adjustments are reported as a component of stockholders' equity.
ADOPTION OF FAS 123 Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," requires companies to measure employee stock compensation plans based on the fair value method of accounting. However, the Statement allows the alternative of continued use of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro forma disclosure of net income and earnings per share determined as if the fair-value based method had been applied in measuring compensation cost. The Company adopted the new standard in fiscal 1996 and elected the continued use of APB Opinion No. 25.
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 founder as Chairman, Chief Executive Officer and President. The restructuring charge totaled $9,569,000 before taxes and $6,294,000 after taxes.
The Primus-Registered Trademark- dialyzer related charges totaled $7,282,000 and consist of write-downs of inventory, $4,191,000; fixed assets, $2,930,000; and intellectual property, $161,000. Charges related to the Cathetron-Registered Trademark- catheter reprocessing system total, $574,000; and relate to a provision for anticipated sales returns and write-down of inventory. Included in the charge is $1,229,000 to provide for severance and anticipated future pension costs related to the departure of the Company's founder as Chairman, Chief Executive Officer, and President. The balance of the
charge, $484,000; relates primarily to severance and other costs to downsize the organization. The majority of the restructuring charges were non-cash in nature.
NOTE 3--LINE OF CREDIT
At March 31, 1997, the Company had a line of credit with a commercial bank which allows the Company to borrow up to $10,000,000 on an unsecured basis at the prime rate of interest (8.25 percent at March 31, 1997) or the indexed London Interbank Offered Rate (LIBOR). At March 31, 1997, the Company had $3,000,000 of outstanding borrowings under the line of credit. This line of credit expires August 31, 1997, and the Company plans to extend the bank line at that time.
NOTE 4--SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to one unaffiliated customer accounted for approximately 10 percent, 23 percent, and 25 percent of sales in fiscal years 1997, 1996 and 1995, respectively. The Company has a corresponding concentration of accounts receivable due from this customer. Sales to this customer are made under a contract which is scheduled to expire June 30, 1997.
Consolidated sales outside the United States, principally to customers in Western Europe and the Far East, amounted to $12,187,000, $10,462,000 and $7,261,000 in fiscal years 1997, 1996 and 1995, respectively.
NOTE 5--INCOME TAXES
The provision for income taxes consisted of the following:
FY ENDED MARCH 31 FEDERAL STATE TOTAL ---------------------------- ------------ ---------- ------------ Currently Payable $ 1,237,156 $ 62,934 $ 1,300,090 Deferred (1,822,733) (177,606) (2,000,339) ------------ ---------- ------------ $ (585,577) $ (114,672) $ (700,249) ------------ ---------- ------------ ------------ ---------- ------------ Currently Payable $ 2,375,600 $ 162,000 $ 2,537,600 Deferred (146,100) 2,500 (143,600) ------------ ---------- ------------ $ 2,229,500 $ 164,500 $ 2,394,000 ------------ ---------- ------------ ------------ ---------- ------------ Currently Payable $ 3,016,300 $ 245,900 $ 3,262,200 Deferred 25,800 6,000 31,800 ------------ ---------- ------------ $ 3,042,100 $ 251,900 $ 3,294,000 ------------ ---------- ------------ ------------ ---------- ------------
The provision for income taxes differs from the statutory U.S. federal tax rate of 34 percent applied to earnings before income taxes as follows:
FY ENDED MARCH 31 1997 1996 1995 ---------------------------- ------------ ---------- ------------
Income tax expense at statutory federal income tax rates $(1,475,100) $ 2,254,700 $ 3,132,700 Foreign subsidiary losses 848,800 671,600 261,800 State income taxes, net of federal benefit (75,700) 108,500 166,300 Exempt income attributable to foreign sales (53,400) (51,000) (59,200) Loss on investment in foreign subsidiary - (593,800) (189,700) Other, net 55,151 4,000 (17,900) ------------ ---------- ------------ $ (700,249) $ 2,394,000 $ 3,294,000 ------------ ---------- ------------ ------------ ---------- ------------
The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
FY ENDED MARCH 31 1997 1996 ----------------------------------------- ------------ ------------ Deferred tax asset Foreign subsidiary net operating losses $ 1,100,000 $ 1,525,000 Deferred compensation and severance 569,500 - Fixed asset reserve 707,500 - Allowance for doubtful accounts 54,800 50,700 Inventories 1,044,900 230,900 Unrealized holding losses on investments 130,800 40,900 Accrued vacation pay 107,500 152,500 Amortization of goodwill 189,000 100,700 Other, net 46,000 179,000 ------------ ------------ Gross deferred tax asset 3,950,000 2,279,700 Valuation allowance (1,100,000) (1,525,000) ------------ ------------ Net deferred tax asset 2,850,000 754,700 ------------ ------------ ------------ ------------ Deferred tax liability Plant and equipment depreciation $ 1,553,208 $ 1,412,000 ------------ ------------ ------------ ------------
The Company recorded valuation allowances related to foreign subsidiary net operating losses which are not recognized until their ultimate realization is considered to be more likely than not. The current portion of the deferred tax asset is included in the prepaid expenses and other current assets component of the balance sheet.
Cash payments for income taxes were approximately $2,151,000, $2,345,000, and $3,452,000 in fiscal years 1997, 1996 and 1995, respectively.
NOTE 6--COMMITMENTS
OPERATING LEASES Total rental expense for operating leases for fiscal years 1997, 1996 and 1995 was approximately $804,000, $905,000, and $808,000, respectively.
Future minimum lease payments for operating leases, net of cancellation clauses, consist of the following at March 31, 1997:
FISCAL YEAR AMOUNT --------------------------------------- ------------ 1998 $ 486,752 1999 397,893 2000 140,255 2001 12,650 ----------- $ 1,037,550 ----------- -----------
SEVERANCE AGREEMENTS The Company revised employment agreements with all officers that provide 3 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, 1997 was approximately $3,600,000.
NOTE 7--STOCK OPTIONS At March 31, 1997, the Company had 1,865,020 shares of common stock reserved under its 1982 Incentive Stock Option Plan and 1989 Stock Plan. 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.
Option transactions under these plans during the three years ended March 31, 1997 are summarized as follows: WEIGHTED NUMBER AVERAGE OF SHARES OPTION PRICE Outstanding at March 31, 1994 1,565,522 $ 9.87 Granted 96,150 14.45 Exercised (231,421) 4.89 Cancelled (121,035) 12.60 ----------- ----------- Outstanding at March 31, 1995 1,309,216 10.84 Granted 677,010 17.29 Exercised (273,058) 8.94 Cancelled (88,753) 13.27 ----------- ----------- 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 ----------- ----------- ----------- -----------
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 January 1997 repricing is reflected in the above roll forward as a grant cancellation and a new grant issuance.
Options to purchase 1,099,769 shares were exercisable at March 31, 1997.
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.
A total of 98,818 shares have been issued under the plan since inception as follows: NUMBER MAY 31 OF SHARES ------------------------------------------- ---------- 1996 17,455 1995 17,873 1994 15,045 1993 15,552 1992 14,787 1991 18,106
At March 31, 1997, the Company held a total of $127,403 in payroll withholdings for the purchase of stock under the plan.
The estimated weighted average grant-date fair value of stock options granted during 1997 was $5.06 per option and $6.72 per option for 1996. 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 1997 and 1996 would have been adjusted to the pro forma amounts indicated below:
FY ENDED MARCH 31 1997 1996 ------------------------------------------------------------------------- Net Income (Loss) As reported ($3,371,663) $4,308,239 Pro-Forma ($5,309,816) $3,811,895 Net Income (Loss) per share As reported ($ .51) $ .62 Pro-Forma ($ .80) $ .55
The following table summarizes stock options outstanding and exercisable at March 31, 1997.
The fair value of options granted under the Company's fixed stock option plans during fiscal 1997 and 1996 was estimated on the dates of grant using the Black-Scholes options-pricing model. The assumptions for fiscal 1997 and 1996 were as follows:
FY ENDED MARCH 31 1997 1996 ------------------------------------------------------------------------- Risk free interest rates 6.0 - 6.6% 5.4 - 6.9% Expected life 5.1 years 5.1 years Expected volatility 50% 36% Expected dividends 1% 1%
Pro forma compensation cost related to shares purchased under the Employee Stock Purchase Plan 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 granted prior to fiscal 1996 nor to awards anticipated in future years with exception to the fiscal 1997 pricing.
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 are as follows:
FY ENDED MARCH 31 1997 1996 1995 ------------------------------------------------------------------------ Matching 401 (k) contributions $ 49,867 $ 42,800 $ 38,800 Profit sharing contributions - - 363,600 --------- --------- --------- $ 49,867 $ 42,800 $ 402,400 --------- --------- --------- --------- --------- ---------
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:
FY ENDED MARCH 31 1997 1996 ---------------------------------------------------------------------- Net sales of consolidated subsidiaries $7,518,042 $6,439,973 Operating losses of consolidated foreign subsidiaries ($1,921,588) ($1,582,564) Total assets of consolidated foreign subsidiaries $7,130,937 $7,307,790
NOTE 11--Net Earnings per Share
Net earnings per share are computed based on the weighted average number of common shares and common equivalent shares outstanding. Common share equivalents include potentially dilutive stock options using the "modified treasury stock" method. Shares used in the computations are as follows:
FY ENDED MARCH 31 1997 1996 1995 ------------------------------------------ --------- --------- --------- Weighted average common shares outstanding 6,667,755 6,517,123 6,274,270 Weighted average common equivalent shares for stock options (951) 406,695 339,121 --------- --------- --------- 6,666,804 6,923,818 6,613,391 --------- --------- --------- --------- --------- ---------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of 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, 1997 and 1996 and the results of their operations and their cash flows for the three years in the period ended March 31, 1997 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota May 23, 1997
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.
MINNTECH CORPORATION (Registrant)
By ---------------------------------------- Thomas J. McGoldrick PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: June 26, 1997
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
SIGNATURE TITLE DATE - -------------------------------------------------------------------------------
President, Chief Executive Officer and - ----------------------------- Director (Principal Executive Officer) Thomas J. McGoldrick
Chief Financial Officer (Principal - ----------------------------- Accounting and Financial Officer) Jules L. Fisher
- ----------------------------- Director Fred L. Shapiro, M.D.
- ----------------------------- Director Louis C. Cosentino, Ph.D.
- ----------------------------- Director George Heenan
- ----------------------------- Director Amos Heilicher
- ----------------------------- Director Norman Dann
- ----------------------------- Director Donald H. Soukup
EXHIBITS