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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 01-14010
WATERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3668640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
34 MAPLE STREET
MILFORD, MASSACHUSETTS 01757
(Address, including zip code, of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 478-2000
Securities registered pursuant to Section Common Stock, par value $.01 per
12(b) of the Act: share New York Stock Exchange, Inc.
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
( )
State the aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 23, 1999: $3,028,097,556.
Indicate the number of shares outstanding of the registrant's common stock as of
March 23, 1999: 30,586,844.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Stockholders are incorporated by reference
in Parts I and II.
Portions of the proxy statement for the 1999 Annual Meeting of Stockholders are
incorporated by reference in Part III.
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WATERS CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10K
INDEX
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Index No. Page
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PART I
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1. Business ..................................................................... 3
2. Properties ................................................................... 9
3. Legal Proceedings ............................................................ 10
4. Submission of Matters to a Vote of Security Holders .......................... 11
Executive Officers ........................................................... 11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 12
6. Selected Financial Data ...................................................... 12
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................ 12
7a. Quantitative and Qualitative Disclosures About Market Risk ................... 13
8. Financial Statements and Supplementary Data .................................. 13
9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure ......................................................... 13
PART III
10. Directors and Executive Officers of the Registrant ........................... 13
11. Executive Compensation ....................................................... 13
12. Security Ownership of Certain Beneficial Owners and Management ............... 13
13. Certain Relationships and Related Transactions ............................... 13
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 14
Signatures ................................................................... 16
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PART I
ITEM 1: BUSINESS
GENERAL
Waters Corporation ("Waters" or the "Company") is a holding company
which owns only and all of the outstanding common stock of Waters Technologies
Corporation, the operating subsidiary. Waters Corporation was established to
acquire ("Acquisition") the predecessor Waters Chromatography Division
("Predecessor") of Millipore Corporation ("Millipore") on August 18, 1994.
Waters Corporation became a publicly traded company with its initial public
offering ("IPO") in November 1995. The Company has made two significant
acquisitions since its inception: TA Instruments, Inc. ("TAI") in May 1996 and
Micromass Limited ("Micromass") in September 1997.
BUSINESS SEGMENTS
The Company operates in the analytical instrument industry, with
manufacturing and distribution expertise in three complementary technologies:
HPLC instruments, columns and other consumables, and related service; thermal
analysis and rheology instruments; and mass spectrometry instruments that can be
integrated and used along with other analytical instruments, particularly HPLC.
The Company also operates in several geographic segments. See Footnote 15 to the
Financial Statements for detailed results by geographic segment and products and
service revenue found in the 1998 Annual Report which is incorporated herein by
reference.
BUSINESS
Waters, an analytical instrument manufacturer, is the world's largest
manufacturer and distributor of high performance liquid chromatography ("HPLC")
instruments, columns and other consumables, and related service. The Company has
the largest HPLC market share in the United States, Europe and non-Japan Asia
and has a leading position in Japan. HPLC, the largest product segment of the
analytical instrument market, is utilized in a broad range of industries to
detect, identify, monitor and measure the chemical, physical and biological
composition of materials, and to purify a full range of compounds. Through its
TAI subsidiary, Waters is also the world's leader in thermal analysis, a
prevalent and complementary technique used in the analysis of polymers. Also,
through its Micromass subsidiary, Waters is a market leader in mass
spectrometry, which can be integrated and used along with other analytical
instruments, especially HPLC.
Developed in the 1950's, HPLC today is the standard technique used to
identify and analyze the constituent components of a variety of chemicals and
materials. HPLC's unique performance capabilities enable it to separate and
identify 80% of all known chemicals and materials. As a result, HPLC is used to
analyze substances in a wide variety of industries for research and development
purposes, quality control and process engineering applications. Within the
pharmaceutical and life science industries, its most important end-use market,
HPLC is used extensively to identify new drugs, to develop manufacturing
methods, and to assure the potency and purity of new pharmaceuticals. HPLC is
used to identify food content for nutritional labeling in the food and beverages
industry and to test water and air purity within the environmental testing
industry. HPLC is also used in a variety of applications in other industries,
such as chemical and consumer products, as well as by universities and
government agencies. In many instances, Food and Drug Administration ("FDA") and
Environmental Protection Agency ("EPA") regulations, and those of their
international counterparts, mandate testing that requires HPLC instrumentation.
Waters manufactures over 100 HPLC instrument types. A complete HPLC
system consists of five basic components: the solvent delivery system, the
sample injector, the separation column, the detector and the data acquisition
unit. The solvent delivery system pumps the solvent through the HPLC system,
while the sample injector injects the sample into the solvent flow. The
separation column then separates the sample into its components for analysis by
the detector which measures the presence and amount of
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the constituents. The data acquisition unit then records and stores the
information from the detector. Consumable products primarily are columns packed
with separation media used in the HPLC testing process and are replaced at
regular intervals. The separation column contains one of several types of
packing, typically stationary phase packing made from silica. As the sample
flows through the column, it is separated into its constituent components.
The acquisition of TAI expanded the Company's product offerings to
include thermal analysis and rheology products. TAI develops, manufactures,
sells and services thermal analysis and rheology instruments which are used for
the physical characterization of polymers and related materials. Thermal
analysis measures the physical characteristics of materials as a function of
temperature. Changes in temperature affect several characteristics of materials
such as their physical state, weight, dimension and mechanical and electrical
properties, which may be measured by one or more thermal analysis techniques.
Consequently, thermal analysis techniques are widely used in the development,
production and characterization of materials in various industries such as
plastics, chemicals, automobiles, pharmaceuticals and electronics. Rheology
instruments complement thermal analyzers in characterizing materials. Rheology
characterizes the flow properties of materials and measures their viscosity,
elasticity and deformation under different types of loading. The information
obtained provides insight with regard to a material's behavior during
manufacture, transport, usage and storage.
The acquisition of Micromass expanded the Company's product offerings
in mass spectrometry instruments. Micromass is a world leader in the
development, manufacture, sale and support of organic, inorganic, stable isotope
and ICP mass spectrometers typically coupled with HPLC, chemical
electrophoresis, chemical electrophoresis chromatography, gas chromatography or
elemental analysis systems. Mass spectrometry is a powerful analytical technique
that is used to identify unknown compounds, to quantify known materials, and to
elucidate the structural and chemical properties of molecules by measuring the
masses of individual molecules that have been converted into ions. These
products supply a diverse market with a strong emphasis on the life science,
pharmaceutical, biomedical, clinical, environmental and geochemistry markets
worldwide. With the acquisition of Micromass, Waters became one of the leading
worldwide manufacturers of HPLC-MS systems, "hyphenated" analytical systems that
bring together HPLC and mass spectrometry detection. Design innovations in
HPLC-MS interfacing technology have drastically improved the operating
efficiencies of these systems, greatly simplifying their operation, driving down
their overall cost and making them much more affordable for the average
analytical laboratory. These laboratories previously relied on expert mass
spectrometrists to provide them the information they now get in minutes. The
largest market for HPLC-MS is the pharmaceutical market where new drug
development technologies are placing greater demands on laboratories to screen
and analyze new drug compounds.
Instruments comprise about two thirds of the Company's total revenue.
Consumable products and service comprise the remaining one third.
CUSTOMERS
Waters has a broad and diversified customer base that includes
pharmaceutical accounts, other industrial accounts, universities and government
agencies. The pharmaceutical segment represents the Company's largest sector and
includes multinational pharmaceutical companies, generic drug manufacturers and
biotechnology companies. The Company's other industrial customers include
chemical manufacturers, polymer manufacturers, food and beverage companies and
environmental testing laboratories. The Company also sells to various
universities and government agencies worldwide and Waters' technical support
staff work closely with these customers in developing and implementing
applications that meet their full range of analytical requirements.
The Company does not rely on any one customer or group of customers for
a material portion of its sales. During fiscal 1998, no customer accounted for
more than 2% of the Company's net sales.
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RESEARCH AND DEVELOPMENT
Waters maintains an active research and development program focused on
the development and commercialization of products which both complement and
update the existing product offering. The Company's research and development
expenditures for 1998, 1997 and 1996, were $34.4 million, $25.8 million, and
$20.9 million, respectively. Nearly all of the current HPLC products of the
Company have been developed at the main research and development center in
Milford, Massachusetts, with input and feedback from Waters' extensive field
organization. Nearly all of the current thermal analysis products have been
developed at the Company's research and development center in New Castle,
Delaware and the majority of the mass spectrometry products have been developed
at facilities in England. There are approximately 320 employees involved in the
Company's research and development efforts.
SALES AND SERVICE
Waters has the largest sales and service team focused exclusively on
HPLC in the industry. Across all technologies, using respective specialized
sales and service forces, the Company serves its customer base through over 944
field representatives in 75 sales offices throughout the world. Many field
representatives are former customers. The sales representatives have direct
responsibility for account relationships, while service representatives work in
the field to install instruments and minimize instrument downtime for customers.
Technical support representatives work directly with customers, helping them to
develop customized applications and procedures. Waters provides customers with
comprehensive product literature and also makes consumable products available
through a dedicated catalog.
MANUFACTURING
Waters provides high quality HPLC products by controlling each stage of
production of its instruments and columns. The Company assembles most of its
instruments at its facility in Milford, Massachusetts, where it performs
machining, wiring, assembly and testing. The Milford facility employs
manufacturing techniques that meet the strict ISO 9002 quality manufacturing
standards and FDA mandated Good Manufacturing Practices. The Company outsources
manufacturing of certain electronic components such as computers and screens to
outside vendors that can meet the Company's quality requirements.
The Company manufactures its HPLC columns at its facilities in Taunton,
Massachusetts and Wexford, Ireland, where it processes, sizes and treats silica
and polymer media that are packed into columns, solid phase extraction
cartridges and bulk shipping containers. These facilities meet the same ISO and
FDA standards met by the Milford, Massachusetts facility and are approved by the
FDA to produce Class 1 medical devices.
The Company manufactures its thermal analysis products at its New
Castle, Delaware facility and its rheology products at its Leatherhead, England
facility. Mass spectrometry products are manufactured at the Company's
Manchester, England facilities.
COMPETITION
The analytical instrument and systems market is highly competitive. The
Company encounters competition from several worldwide instrument manufacturers
in both domestic and foreign markets. Waters competes in its markets primarily
on the basis of instrument performance, reliability and service and, to a lesser
extent, price. Some competitors have instrument businesses that are much larger
than the Company's business, but are typically less focused on Waters' chosen
markets. Certain competitors have greater financial and other resources than the
Company.
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The market for consumable HPLC products, including separation columns,
is also highly competitive but is more fragmented than the analytical
instruments market. Waters encounters competition in the columns market from
chemical companies that produce column chemicals and small specialized companies
that pack and distribute columns. The Company believes that it is one of the few
suppliers that processes silica, packs columns, and distributes its own product.
Waters competes in this market on the basis of reproducibility, reputation and
performance, and, to a lesser extent, price.
PATENTS, TRADEMARKS AND LICENSES
Waters owns a number of United States and foreign patents and has
patent applications pending in the United States and abroad. Certain technology
and software is licensed from third parties. Waters also owns a number of
trademarks. While the patents, licenses and trademarks are viewed as valuable
assets, the Company's patent position is not of material importance to its
operations.
EMPLOYEES
Waters employs approximately 2,800 employees. 57% of the Company's
employees are located in the United States. Labor relations are considered to be
excellent and no Waters employees have union affiliations.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from sites of past
spills, disposals or other releases of hazardous substances. The Company
believes that it currently conducts its operations, and in the past has operated
its business, in substantial compliance with applicable environmental laws. From
time to time, operations of the Company have resulted or may result in
noncompliance with or liability for cleanup pursuant to environmental laws. The
Company does not currently anticipate any material adverse effect on its
operations, financial condition or competitive position as a result of its
efforts to comply with environmental laws.
With respect to the Predecessor operations of the Company's HPLC
business, Millipore has been notified that the United States Environmental
Protection Agency has determined that a release or a threat of a release of
hazardous substances as defined by CERCLA has occurred at certain sites to which
chemical wastes generated by its manufacturing operations have been sent. In
each instance, Millipore was only one of a large number of corporations and
entities which received such notification, and anticipates that any ultimate
liability for remedial costs will be shared by others. In any instances
involving chemical wastes generated by the Predecessor, Millipore has entered
into partial settlements, paid its proportionate financial obligation and
received partial releases.
In connection with the Acquisition, Millipore agreed to retain
environmental liabilities resulting from pre-acquisition operations of the
Company's facilities. Notwithstanding this contractual agreement, under CERCLA
and similar environmental laws, the Company may remain primarily liable to
certain persons for environmental cleanup costs.
RISK FACTORS
COMPETITION AND THE ANALYTICAL INSTRUMENT MARKET
The analytical instrument market; in particular, the portion related to
the Company's HPLC, thermal analysis and mass spectrometry product lines; is
highly competitive, and the Company encounters competition from several
international instrument manufacturers and other companies in both domestic
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and foreign markets. Certain competitors are divisions of significantly larger
companies which have greater financial and other resources than the Company.
There can be no assurances that the Company's competitors will not introduce
more effective and less costly products than those of the Company, or that the
Company will be able to increase its sales and profitability from new product
introductions. Additionally, the market may, from time to time, experience low
sales growth. Approximately 60% of the Company's net sales in 1998 were to the
worldwide pharmaceutical industry, which may be periodically subject to
unfavorable market conditions and consolidations. Unfavorable industry
conditions could have a material adverse effect on the Company's results of
operations.
RISK OF DISRUPTION
The Company manufactures HPLC instruments at its facility in Milford,
Massachusetts, separation columns at its facilities in Taunton, Massachusetts
and Wexford, Ireland, thermal analysis products at its facility in New Castle,
Delaware, and mass spectrometry products at its facilities in Manchester,
England and Cheshire, England. Any prolonged disruption to the operations at
these facilities, whether due to labor difficulties, destruction of or damage to
either facility or other reasons, could have a material adverse effect on the
Company's results of operations and financial condition.
FOREIGN EXCHANGE RATES
Approximately 58% of Waters' 1998 net sales were outside of the United
States and were primarily denominated in foreign currencies. As a result, a
significant portion of the Company's sales and operations are subject to certain
risks, including adverse developments in the foreign political and economic
environment, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations and potentially adverse tax consequences.
Additionally, the U.S. dollar value of the Company's net sales varies
with currency exchange rate fluctuations. Significant increases in the value of
the U.S. dollar relative to certain foreign currencies could have a material
adverse effect on Waters' result of operations.
SUBSTANTIAL INDEBTEDNESS
The Company has substantial indebtedness. Subject to the terms and
conditions of the Bank Credit Agreement, Waters may incur additional
indebtedness from time to time to finance acquisitions or capital expenditures
or for other purposes. The level of the Company's indebtedness could have
important consequences to holders of the Common Stock, given that: (i) the
Company's ability to obtain additional debt financing in the future for working
capital, capital expenditures or acquisitions may be limited; and (ii) the
Company's level of indebtedness could limit its flexibility in reacting to
changes in the industry and economic conditions. Certain of the Company's
competitors currently operate on a less leveraged basis and, as a result, have
significantly greater financing flexibility than the Company.
The Bank Credit Agreement imposes operating and financial restrictions
on the Company. The Bank Credit Agreement contains covenants which limit
(subject to certain exceptions): (i) the incurrence of additional indebtedness;
(ii) the payment of dividends; (iii) transactions with affiliates; (iv) asset
sales, acquisitions, mergers and consolidations; (v) prepayments of other
indebtedness; (vi) the creation of liens and encumbrances; and (vii) other
matters customarily restricted in such agreements. In addition, substantially
all of the Company's assets, including the stock of its subsidiaries, are
pledged to secure indebtedness under the Bank Credit Agreement. There can be no
assurance that the Company's existing cash balances and cash flow from
operations together with borrowings under the Bank Credit Agreement will be
sufficient to meet all of its debt service requirements and to fund its capital
expenditure requirements for the foreseeable future.
FORWARD LOOKING STATEMENTS
Certain of the statements in this Form 10-K and the Annual Report are
forward-looking statements, including statements regarding, among other items,
(i) the impact of the Company's new
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products, (ii) the Company's growth strategies, including its intention to make
acquisitions and introduce new products, (iii) anticipated trends in the
Company's business and (iv) the Company's ability to continue to control costs
and maintain quality. These statements are subject to various risks and
uncertainties, many of which are outside the control of the Company, including
(i) changes in the HPLC, thermal analysis and mass spectrometry portions of the
analytical instrument marketplace as a result of economic or regulatory
influences, (ii) changes in the competitive marketplace, including new products
and pricing changes by the Company's competitors and (iii) the ability of the
Company to generate increased sales and profitability from new product
introductions. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this document and
the Annual Report will transpire.
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational
expertise. None of the key management employees has an employment contract with
the Company, and there can be no assurance that such individuals will remain
with the Company. If, for any reason, such key personnel do not continue to be
active in management, the Company's operations could be adversely affected.
YEAR 2000
Year 2000 ("Y2K") issues concern the ability of information systems to
properly recognize and process date-sensitive information beyond December 31,
1999.
The Company has been engaged in a concerted effort to ready its
business systems and products in anticipation of Y2K. A special internal project
team led by senior management was organized in 1997 in an attempt to ensure that
all material business systems, instrument products and applications software are
compliant by January 1, 2000. Currently, the companywide planning and inventory
phases have been completed. The assessment phase was substantially completed by
December 31, 1998, and included the examination of products, worldwide
operations, manufacturing systems, business computer systems, manufacturing,
warehousing and servicing equipment, network hardware and software, telephone
systems, desktop application software, mainframe operating systems, and
environmental operations. Currently, the Company believes that most of its
internal systems and related software are likely to be Y2K compliant. The
Company is continuing to examine its material software and systems for Y2K
compliance and take corrective action to minimize any significant detrimental
effects on operations.
The remediation and testing phases of the Company's systems are
scheduled to be completed by the middle of 1999. Based on the results of the
testing phase, a contingency plan will be completed. The Company has no plans to
engage in third party validation of its Y2K efforts. To date, approximately
$10.0 million has been spent over the past four years in connection with
bringing the Company's internal systems into compliance, primarily capital
expenditures for entirely new business and communications systems which replaced
predecessor systems. The remaining costs to fix Y2K problems are estimated at
less than $1.0 million, including capital expenditures to replace certain
predecessor capital items. These costs do not include any allocation for the
time devoted by regular employees of the Company to addressing Y2K problems, as
the Company does not separately track such time. The Company does not expect the
costs relating to the Y2K remediation phase to have a material effect on the
Company.
The Company has made public statements to customers regarding its state
of Year 2000 readiness for its products; however, the possibility of product
liability claims still exists. The Company also recognizes that Y2K disruptions
in customer operations could result in reduced sales and cash flow and increased
inventory or receivables. While these events are possible, the Company believes
that its customer base is broad enough to minimize the effects of a single
occurrence. To date, the Company has received communications from many of its
major customers which indicate an awareness of Y2K issues.
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The Company is in the process of obtaining certificates of compliance
from its major systems vendors. Additionally, the Company is in the process of
surveying its financial services, utilities, and communication providers, as
well as its critical suppliers to ensure that they are compliant. Despite these
efforts, however, interruption of supplier operations due to Y2K issues could
potentially affect Company operations. The Company uses multiple suppliers, and,
in some instances, maintains an inventory of parts and supplies, which may
reduce the risks of interruption, but cannot eliminate the potential for
disruption due to third party failure.
The Company currently has identified contingency alternatives for
certain elements of Year 2000 risk. The contingency plan is intended to be
completed during fiscal 1999. The plan will address customer problems as well as
temporary remedies in the event of failure of Company or third party systems.
The Company will continue to review its business interruption contingency plans
as it completes its testing and remediation phases during the year. However,
there can be no assurance that any contingency plans will prevent Y2K problems
from occurring.
While the Company believes its efforts will provide reasonable
assurance that material disruptions are not likely to occur due to internal
failure, the potential for interruption still exists. Specifically, the Company
and its subsidiaries could be materially adversely affected if utilities,
private businesses and governmental entities with which they do business or that
provide essential services are not Y2K compliant. The Company currently believes
that the greatest risk of disruption in its businesses exists in certain
international markets. Such interruptions could cause, among other things,
temporary plant closings, delays in the delivery of products, delays in the
receipt of supplies, invoice and collection errors, and inventory and supply
obsolescence. Recovery under existing insurance policies may be available
depending upon the circumstances of a Y2K related event.
The estimates and conclusions herein are based on management's best
estimates of future events. Risks that could cause results to differ from these
estimates and conclusions include the uncertainties involved in discovering and
correcting the potential Y2K sensitive problems which could have a serious
impact on specific facilities and the ability of suppliers and customers to
bring their systems into Y2K compliance.
EURO CURRENCY CONVERSION
Several countries of the European Union will adopt the euro as their
legal currency effective July 1, 2002. A transition period has been established
from January 1, 1999 to July 1, 2002 during which companies conducting business
in these countries may use the euro or their local currency. The Company has
considered the potential impact of the euro conversion on pricing competition,
its information technology systems, and currency risk and risk management.
Currently, the Company does not expect that the euro conversion will result in
any material increase in costs to the Company or have a material adverse effect
on its business or financial condition.
ITEM 2: PROPERTIES
Waters operates 17 United States facilities and 70 international
facilities. The Company believes its facilities are suitable and adequate for
its current production level and for reasonable growth over the next few years.
The Company's primary facilities are summarized in the table below.
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PRIMARY FACILITY LOCATIONS
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LOCATION FUNCTION (1) OWNED/LEASED SQUARE FEET (000'S)
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Etten-Leur, Netherlands D Leased 26
Franklin, MA D Leased 30
Milford, MA M, R, S Owned 408
Taunton, MA M Owned 32
Singapore S Leased 5
Tokyo, Japan R, S Leased 12
Wexford, Ireland M Leased 20
New Castle, DE M, R, S, D Leased 53
Leatherhead, England M, R, S, D Leased 10
Manchester, England M, R, S, D Leased 54
Cheshire, England M, R, S Leased 28
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(1) M = Manufacturing; R = Research; S = Sales; D = Distribution
Waters operates and maintains 13 field offices in the United States and
62 field offices abroad in addition to sales offices in the primary facilities
listed above. The Company's primary field office locations are listed below.
FIELD OFFICE LOCATIONS (2)
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UNITED STATES INTERNATIONAL
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<S> <C> <C> <C>
Tustin, CA Australia India Switzerland
Wood Dale, IL Austria Italy Taiwan
Fairfax, VA Belgium Japan United Kingdom
Cary, NC Brazil Mexico
Morristown, NJ Canada Netherlands
Houston, TX Czech Republic Norway
Pleasanton, CA Denmark People's Republic of China
Ann Arbor, MI Finland Poland
Capitola, CA France Puerto Rico
Rolling Meadows, IL Germany Russia
Beverly, MA Hong Kong Spain
Spring, TX Hungary Sweden
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(2) Waters operates more than one office within certain states and foreign
countries.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are involved in
various litigation matters arising in the ordinary course of its business. None
of the matters in which the Company or its subsidiaries are currently involved,
either individually or in the aggregate, is material to the Company or its
subsidiaries.
The Company, through its subsidiary TAI, asserted a claim against The
Perkin-Elmer Corporation ("PE") alleging patent infringement of three patents
owned by TAI ("the TAI patents"). PE counterclaimed for infringement of a patent
owned by PE ("the PE patent"). PE withdrew its claim for infringement preserving
its right to appeal rulings interpreting the claims of the PE patent. The U.S.
District Court for the District of Delaware granted judgment as a matter of law
in favor of TAI and
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enjoined PE from infringing the TAI patents. PE has indicated its intention to
appeal. The Company believes it has meritorious arguments and should prevail,
although the outcome is not certain. The Company believes that any outcome will
not be material to the Company.
The Company has filed suit against Hewlett-Packard Company and
Hewlett-Packard GmbH ("HP"), seeking a declaration that certain products sold
under the mark Alliance do not constitute an infringement of one or more patents
owned by HP or its foreign subsidiaries ("the HP patents"). Similar actions
seeking revocation or nullification of foreign HP patents have been filed in
Europe. The Company believes it has meritorious arguments and should prevail,
although the outcome is not certain. The Company believes that any outcome of
the proceedings will not be material to the Company.
Cohesive Technologies, Inc. ("Cohesive") has filed an infringement
action against the Company alleging that one product, in a large product line,
infringes an issued Cohesive patent. The Company has denied infringement. The
Company believes it has meritorious arguments and should prevail, although the
outcome is not certain. The Company believes that any outcome of the proceedings
will not be material to the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS
Douglas A. Berthiaume, 50, has served as Chairman of the Board of
Directors of the Company since February 1996 and has served as President, Chief
Executive Officer and a Director of the Company since August 1994. From 1990 to
1994, Mr. Berthiaume served as President of the Waters Chromatography Division
of Millipore. Mr. Berthiaume is a Director of Genzyme Corporation.
Arthur G. Caputo, 47, has been Senior Vice President, Sales and
Marketing of the Company since August 1994. He joined the Predecessor in October
1977 and has held a number of positions in sales within the Predecessor and
Millipore. Prior to his current position, he was Senior Vice President and
General Manager of Millipore's North American Business Operations responsible
for establishing the Millipore North American Sales Subsidiary and also served
as the General Manager of Waters' North American field sales, support and
marketing functions.
Thomas W. Feller, 58, has been Senior Vice President, Operations of
the Company since August 1994. He joined Millipore in 1977 and moved to the
Predecessor as Vice President of Operations in 1980. Mr. Feller returned to
Millipore Operations in 1985 before becoming Senior Vice President of
Manufacturing Operations for the Predecessor in January 1991. Prior to
joining Millipore, Mr. Feller held various production and manufacturing
positions at Johnson and Johnson, Jensen Speaker and Baxter Travenol.
John R. Nelson, 55, has been Senior Vice President, Research and
Development of the Company since August 1994. He joined the Predecessor in
August 1976 and has held a variety of positions in marketing as well as
research and development, including Vice President Waters Research
Development and Engineering, Senior Vice President Worldwide Marketing
Operations and Senior Vice President of Product Development. Mr. Nelson is
also responsible for the Company's TA Instruments, Inc. and Micromass Limited
operations.
Philip S. Taymor, 43, has been Senior Vice President, Finance and
Administration, Chief Financial Officer, Treasurer and Assistant Secretary of
the Company since August 1994. He joined
11
<PAGE>
Millipore in May 1981 and held several positions in the Millipore organization,
including Corporate Controller, Director of Finance of Millipore's Membrane
Division and Manager of Corporate Accounting. Mr. Taymor joined the Predecessor
in early 1992. His current responsibilities include business and financial
planning, accounting and financial reporting, treasury operations, legal, tax
and information systems. Mr. Taymor joined Millipore from Grant Thornton &
Company, Certified Public Accountants.
Brian K. Mazar, 41, has been Vice President, Human Resources of the
Company since August 1994. He joined the Predecessor in 1991 as Director of
Human Resources with responsibility for worldwide human resources functions.
From 1986 to 1991, Mr. Mazar was Director of Human Resources of GeneTrak
Systems. Prior thereto, Mr. Mazar worked at Exxon Corporation and Corning
Glass Works.
Devette W. Russo, 46, has been Vice President, Chromatography
Consumables Division of the Company, since 1990. She joined the Predecessor in
1975 as a Marketing Communications Account Manager, and has held a variety of
positions within the Predecessor and Millipore in marketing before assuming
her current responsibilities as Vice President, Chromatography Consumables
Division. Prior positions include Director of Corporate Communications for
Millipore and Vice President of Marketing for the Chemistry Division. Ms.
Russo held various marketing and application support roles before joining the
Millipore organization.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is registered under the Securities Exchange
Act of 1934 and is listed on the New York Stock Exchange under the symbol WAT.
As of March 23, 1999, the Company had approximately 279 common stockholders of
record. The Company has not declared or paid any dividends on its Common Stock
in the past two years and does not plan to pay dividends in the foreseeable
future.
The quarterly range of high and low sales prices for the Common Stock
as reported by the New York Stock Exchange is as follows:
<TABLE>
<CAPTION>
PRICE RANGE
-----------
FOR THE QUARTER ENDED HIGH LOW
--------------------- ---- ---
<S> <C> <C>
March 31, 1997 31 3/8 26
June 30, 1997 37 3/4 23 1/8
September 30, 1997 45 1/4 31 7/16
December 31, 1997 48 7/16 36
March 31, 1998 52 36 1/2
June 30, 1998 62 14/16 49 5/16
September 30, 1998 68 5/16 52 6/16
December 31, 1998 87 1/2 53 2/16
</TABLE>
ITEM 6: SELECTED FINANCIAL DATA
Reference is made to information contained in the section entitled
"Selected Financial Data" on page 42 of the 1998 Annual Report, which
information is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the information on pages 19 to 23 of the 1998
Annual Report, which information is incorporated herein by reference.
12
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information on page 23 of the 1998 Annual
Report, which information is incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's consolidated financial statements
and notes thereto on pages 25 to 40 of the 1998 Annual Report together with the
"Report of Independent Accountants" dated January 22, 1999 on page 24 and
"Quarterly Results" on page 41, which information is incorporated herein by
reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Information concerning the Registrant's directors is set forth in
the Proxy Statement under the headings "Election of Directors" and "Directors
Meetings and Compensation." Such information is incorporated herein by
reference.
b. Information required by Item 405 of Regulation S-K is set forth in
the Proxy Statement under the heading "Director and Officer and Ten Percent
Stockholder Securities Reports." Such information is incorporated herein by
reference.
ITEM 11: EXECUTIVE COMPENSATION
Information concerning compensation of the Registrant's executive
officers is set forth in the Proxy Statement under the heading "Management
Compensation." Such information is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners." Such information is incorporated herein
by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Relationships and
Related Transactions." Such information is incorporated herein by reference.
13
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements: Reference is made to the Company's consolidated
financial statements and notes thereto on pages 25 to 40 of the 1998
Annual Report, which information is incorporated herein by reference.
(2) Financial Statement Schedules:
WATERS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at End
Period Additions Deductions of Period
-------------------------------------------------------------
Allowance for Doubtful
Accounts:
<S> <C> <C> <C> <C>
1998 $ 2,785 $ 617 $ (436) $ 2,966
1997 $ 1,712 $ 1,471 $ (398) $ 2,785
1996 $ 1,513 $ 779 $ (580) $ 1,712
</TABLE>
(3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
2.1 Agreement for the Sale and Purchase of Micromass Limited
dated as of September 12, 1997, between Micromass
Limited, Schroder UK Buy-Out Fund III Trust I and
Others, Waters Corporation and Waters Technologies
Corporation. (Incorporated by reference to the
Registrant's Report on Form 8-K, filed on October 8,
1997 and amended on December 5, 1997.)
3.1 Second Amended and Restated Certificate of Incorporation
of Waters Corporation, as amended to date. (1)
3.2 Amended and Restated Bylaws of Waters Corporation, as
amended to date. (1)
10.1 Credit Agreement, dated as of November 22, 1995, among
Waters Corporation, Waters Technologies Corporation,
Bankers Trust Company and other Lenders party thereto. (2)
10.2 First Amendment to Credit Agreement, dated as of March
6, 1996 among Waters Corporation, Waters Technologies
Corporation, Bankers Trust Company and other Lenders
party thereto. (2)
10.3 Waters Corporation Amended and Restated 1996 Long-Term
Performance Incentive Plan. Incorporated by reference to
Exhibit A of the Proxy Statement for the 1996 Annual
Meeting of Stockholders ("1996 Proxy Statement").
10.31 May 1998 Amendment to the Waters Corporation Amended and
Restated 1996 Long-Term Performance Incentive Plan.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
10.32 November 1998 Amendment to the Waters Corporation
Amended and Restated 1996 Long-Term Performance
Incentive Plan.
10.4 Waters Corporation 1996 Employee Stock Purchase Plan.
Incorporated by reference to Exhibit B of the 1996 Proxy
Statement.
10.5 Waters Corporation 1996 Non-Employee Director Deferred
Compensation Plan. Incorporated by reference to Exhibit
C of the 1996 Proxy Statement.
10.6 Waters Corporation Amended and Restated 1996
Non-Employee Directors Stock Option Plan. Incorporated
by reference to Exhibit D of the 1996 Proxy Statement.
10.7 Agreement and Plan of Merger among Waters Corporation,
TA Merger Sub, Inc. and TA Instruments, Inc. dated as of
March 28, 1996. Incorporated by reference to the
Registrant's Report on Form 8-K dated March 29, 1996.
10.8 Offer to Purchase and Consent Solicitation Statement,
dated March 7, 1996, of Waters Technologies Corporation.
Incorporated by reference to the Registrant's Report on
Form 8-K dated March 11, 1996.
10.9 WCD Investors, Inc. Amended and Restated 1994 Stock
Option Plan, as amended (including Form of Amended and
Restated Stock Option Agreement). (2)
10.10 Waters Corporation Retirement Plan. (2)
10.11 Registration Rights Agreement made as of August 18,
1994, by and among WCD Investors, Inc., AEA Investors,
Inc., certain investment funds controlled by Bain
Capital, Inc. and other stockholders of Waters
Corporation. (2)
10.12 Form of Indemnification Agreement, dated as of August
18, 1994, between WCD Investors, Inc. and its directors
and executive officers. (2)
10.13 Form of Management Subscription Agreement, dated as of
August 18, 1994, between WCD Investors, Inc. and certain
members of management. (2)
13.1 1998 Annual Report to Stockholders.
21.1 Subsidiaries of Waters Corporation. (1)
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule.
</TABLE>
--------------
(1) Incorporated by reference to the Registrant's Report on Form 10-K
dated March 29, 1996.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-3810).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three month period ended
December 31, 1998.
(c) See (3) above.
(d) Not Applicable.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999 Waters Corporation
/s/ Philip S. Taymor
----------------------------------------------
Philip S. Taymor
Senior Vice President, Finance
and Administration and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on March 31, 1999.
Chairman of the Board of Directors, Chief Executive
/s/Douglas A. Berthiaume Officer, and President (principal executive officer)
- ------------------------
Douglas A. Berthiaume
Senior Vice President, Finance and
Administration, and Chief Financial Officer
(principal financial officer and principal
/s/ Philip S. Taymor accounting officer)
- ------------------------
Philip S. Taymor
/s/ Joshua Bekenstein Director
- ------------------------
Joshua Bekenstein
/s/ Michael J. Berendt Director
- ------------------------
Michael J. Berendt, PhD
/s/ Philip Caldwell Director
- ------------------------
Philip Caldwell
/s/ Edward Conard Director
- ------------------------
Edward Conard
/s/ Laurie H. Glimcher Director
- ------------------------
Dr. Laurie H. Glimcher
/s/ William J. Miller Director
- ------------------------
William J. Miller
/s/ Thomas P. Salice Director
- ------------------------
Thomas P. Salice
16
<PAGE>
AMENDMENT
TO THE
WATERS CORPORATION
AMENDED AND RESTATED
1996 LONG-TERM PERFORMANCE INCENTIVE PLAN
The Waters Corporation Amended and Restated 1996 Long-Term Performance
Incentive Plan ("Plan") is hereby amended effective May 12, 1998, as follows:
1. Section 4 of the Plan is amended by deleting the reference to
"1,000,000 Common Shares" in paragraph (b) thereof and substituting "3,000,000
Common Shares" therefor.
AMENDMENT executed as of the 12th day of May, 1998.
WATERS CORPORATION
By: /s/ Doug Berthiaume
------------------------
<PAGE>
AMENDMENT
TO THE
WATERS CORPORATION
AMENDED AND RESTATED
1996 LONG-TERM PERFORMANCE INCENTIVE PLAN
The Waters Corporation Amended and Restated 1996 Long-Term Performance
Incentive Plan ("Plan") is hereby amended effective November 9, 1998 as
follows:
1. Section 7 of the Plan is amended by adding the following at the end
of paragraph (b) thereof.
Except as may be recommended by the Committee and approved by the Board,
no Award of Restricted Stock shall have a Restricted Period of less than 3
years.
2. Section 10 of the Plan is amended by adding the following at the
end thereof:
Notwithstanding the foregoing, no outstanding Award of Restricted Stock
under the Plan may be amended to shorten the Restricted Period without the
approval of the Board. No Award of Options may be amended to allow the
exchange or repricing of such Options without the approval of the
stockholders of the Company.
3. Section 17 of the Plan is deleted in its entirety and the following
new Section 17 is substituted therefor:
17. Plan Amendment or Suspension. The Plan may be amended or suspended
in whole or in part at any time from time to time by the Board; provided,
however, that (i) no material amendment which is to the benefit of management
or the Board shall be effective unless and until the same is approved by
stockholders of the Company or (ii) no amendment shall be effective unless
and until the same is approved by the stockholders of the Company where the
failure to obtain such approval would adversely affect the compliance of the
Plan with Rule 16b-3 under the Exchange Act and with other applicable law. No
amendment of the Plan shall adversely affect in a material manner any right
of any participant with respect to any Award theretofore granted without such
participant's written consent, except as permitted under Paragraph 10.
AMENDMENT executed on this 9th day of November, 1998.
WATERS CORPORATION
/s/ Douglas Berthiaume
-----------------------------------
<PAGE>
(Front Cover)
WATERS 1998 ANNUAL REPORT
A CLOSE LOOK AT THE NEXT GENERATION OF TOOLS FOR ANALYTICAL CHEMISTRY
(COVER IMAGE: CLOSE-UP OF A SAMPLE CAROUSEL HOLDING SAMPLE VIALS.)
(Inside Front Cover: Corporate Description)
Waters Corporation (NYSE: WAT) is the world's leading supplier of high
performance liquid chromatography (HPLC) instrumentation and consumables, as
well as thermal analysis and mass spectrometry (MS) products. Around the
world, Waters-Registered Trademark- products are used by pharmaceutical,
biotechnology, industrial, university and government research & development,
quality assurance and environmental testing laboratories. For these
customers, we provide technology that gives scientists fundamental data on
chemical mixtures and materials. Then, by turning these analytical data into
useful information, we help scientists understand the complexities of
chemistry and life itself.
<PAGE>
FINANCIAL HIGHLIGHTS
ADJUSTED FINANCIAL RESULTS (A):
<TABLE>
<CAPTION>
($ in thousands, except per share data) 1998 1997 Increase
<S> <C> <C> <C>
For the year:
Net sales $ 618,813 $ 465,470 33%
Operating income $ 136,325 $ 92,687 47%
Percentage of sales 22.0% 19.9%
Income from operations before income taxes $ 118,047 $ 78,967 50%
Net income available to common stockholders $ 89,936 $ 62,270 44%
Net income per basic common share $ 3.01 $ 2.14 41%
Net income per diluted common share $ 2.78 $ 1.94 43%
Return on average assets 15.9% 13.6%
Return on average equity 84.7% 65.0%
At year end:
Total assets $ 577,701 $ 552,059
Stockholders' equity $ 150,119 $ 62,297
Employees 2,758 2,640
(A) Adjusted financial results for 1998 and 1997 reflect reported results of
operations excluding nonrecurring charges related to the September 1997
acquisition of Micromass Limited ($16,500 for revaluation of acquired
inventory in 1998; $16,500 for revaluation of acquired inventory and
$55,000 for expensed in-process research and development in 1997).
Excluded amounts had no related tax effects. Net income per basic common
share amounts for 1998 and 1997 were computed based upon weighted average
shares of common stock outstanding of 29,930 and 29,127, respectively. Net
income per diluted common share amounts for 1998 and 1997 were computed
based upon weighted average shares of common stock and equivalents
outstanding of 32,321 and 32,168, respectively.
</TABLE>
1
<PAGE>
[Photograph]
(PHOTOGRAPH OF DOUGLAS A. BERTHIAUME, CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE
OFFICER)
Letter to Shareholders
1998 was another extremely successful year for Waters. First and foremost, it
marked the consolidation of Micromass Limited, acquired in late 1997, and its
full range of mass spectrometry technologies with Waters. We had anticipated
favorable synergies from the combination, but the ultimate impact far
exceeded original expectations. Over 200 LC-MS systems, incorporating the
Waters Alliance-Registered Trademark- LC System and Micromass-TM-mass
spectrometers, were sold by the traditional Waters sales force, significantly
exceeding budget. At the same time the Micromass organization, now focused on
their remaining portfolio of high value research systems, also exceeded sales
budgets for every major product line. Micromass' revolutionary Q-Tof-TM-
system continued to be the instrument of choice in fast growing proteomic
laboratories while sales of the Quattro-TM-LC triple quadrupole instrument
grew by over 20%, principally in pharmaceutical drug metabolism applications.
As the year progressed, bench-top time-of-flight instruments also showed very
strong growth, particularly in life science applications.
Our core HPLC and thermal analysis business also performed
exceptionally well in 1998, growing at double-digit rates.
This combined strength in our business operations was reflected in the
Company's financial performance. Sales grew to $619 million, up 33% from 1997.
Earnings per share, excluding nonrecurring items, grew by 43% to $2.78 per
share. Operations generated over $110 million of cash in 1998, and debt was
reduced by $90 million. At current rates of cash generation and if there were no
alternative uses of cash, the Company could be net debt-free in little more than
two years.
With this strong business performance, we have sustained a high and
productive level of investment in the development of strategic products and
technologies aimed at assuring our future growth. In 1999, we will introduce
several new systems that, in the premarketing stage, already have stimulated
significant customer interest. The first, our Alliance HT System, extends the
Alliance brand into high throughput sample processing applications, principally
in drug discovery and early-stage drug development. Engineered for LC-MS at very
high
2
<PAGE>
throughput rates, this new automated system is designed to reduce the
sample-to-sample cycle time during the analysis and purification of newly
synthesized compounds. Our new CapLC-TM-System will open up avenues of research
to scientists working with very small biological samples by dramatically
improving sensitivity and maximizing the information derived from each sample.
In addition, Micromass will also introduce several new technologies in
1999 including a very promising inlet design for the LCT time-of-flight
instrument. Called MUX-TM-technology, this design promises to deliver a
four-fold productivity improvement in high throughput laboratories. A new
Quattro Ultima-TM-triple quadrupole will bring industry leading performance to
important drug metabolism applications.
We also anticipate the launch of a major new line of chromatography
columns during 1999. These will be based on a proprietary platform technology
for creating particles based on silica-polymer hybridization, yielding new
levels of chromatographic performance.
A constant flow of new products which answers the critical
analytical needs of our customers and improves the productivity of their
operations is the key to continuing our successful performance. Clearly, 1999
promises to be a year of exceptional new product introductions.
Although I find our 1999 new product line-up exciting, we have already
seen in the first days of January particularly strong interest from scientists
for our existing product platforms. In January 1999, we received the single
largest order in our history. The Japan National Police Agency placed an
order for over $8 million of Alliance LC-MS Systems for their country-wide
forensic laboratories.
Nihon Waters is to be congratulated for winning this large order
against strong local and international competition and for setting the stage to
achieve substantial growth in the difficult Japanese economy. Sales growth in
Japan in 1999 can only add to the momentum we continue to see in other areas of
the world.
Finally, I would like to express my thanks to our customers and
employees who together, once again, have helped Waters to produce record results
and industry leading performance.
Sincerely,
Douglas A. Berthiaume
Chairman, President and Chief Executive Officer
3
<PAGE>
NEW TOOLS FOR A NEW ERA
These are exciting times for the world's scientists. Today they are
being called upon to push the boundaries of human knowledge farther and
faster than ever before. To discover everything from life-saving or extending
medicines to new, lighter, stronger materials for manufactured goods. To find
ways to reduce pollution with more efficient production methods. Companies,
governments and societies in general are counting on these gifted
professionals to make an increasingly vital contribution to their fiscal and
physical well being. And Waters is doing everything we can to ensure they
succeed.
This is why, more than ever before, these scientists and the
organizations they work for are looking to Waters Corporation for a new, more
powerful generation of tools. Today, as we celebrate our 41st year in
business, our instrumentation, software, consumables and customer support are
at work in more places doing more things. And while we have a long history of
providing tools to scientists--we basically invented the category of high
performance liquid chromatography (HPLC) 25 years ago--today we are
especially proud to simultaneously launch many exciting, new products.
The following pages will tell you about some of these. But first it may
be helpful to revisit the technology we provide and to whom we provide it.
Quite simply, Waters technologies--HPLC, mass spectrometry (MS) and thermal
analysis--supply information on the chemical composition, molecular
structure, and physical properties of natural and synthetic substances. Our
products help scientists break things down and examine them at their most
fundamental molecular level. This information allows scientific
professionals--chemists, biochemists and materials scientists--to make better
decisions. Our products are at work on a daily basis in many industries,
including the pharmaceutical, food, beverage, plastics, agri-chemical and
industrial sectors, as well as in government agencies, universities and
research institutes.
4
<PAGE>
(photo/caption)
(IMAGE:COMPUTER-ENHANCED ILLUSTRATION OF A HIGH INTENSITY LIGHT BEAM EMITTED
FROM FIBER OPTIC BUNDLE STRIKING DIFFRACTION GRATING AND REFLECTING THROUGH
SLIT ONTO AN ARRAY OF PHOTODIODES)
THE WATERS CapLC SYSTEM IS THE FIRST RESEARCH INSTRUMENT DESIGNED FOR
PROTEIN RESEARCHERS AND DRUG DISCOVERY CHEMISTS WORKING WITH VERY SMALL AMOUNTS
OF SAMPLES. WHEN INTERFACED TO A RESEARCH GRADE MICROMASS SPECTROMETER, IT HAS
THE DISTINCTION OF BEING ONE OF THE WORLD'S MOST SENSITIVE ANALYTICAL
INSTRUMENTS. USING OUR PATENTED, THIRD-GENERATION OPTICAL FIBER TECHNOLOGY, WE
HAVE PROVEN WE CAN EXTEND THE SENSITIVITY OF THE LC/MS BY 50X. A CRITICAL TOOL
IN THE PROCESS OF DISEASE TARGETING AND IDENTIFYING, THIS NEW TECHNOLOGY ALLOWS
SCIENTISTS TO ISOLATE THE CAUSES OF DISEASE EASIER AND FASTER THAN EVER BEFORE.
5
<PAGE>
(photo/caption)
(IMAGE: CLOSEUP PHOTOGRAPH OF A STAINLESS STEEL TAKE-UP NEEDLE POSITIONED OVER
A 384-WELL MICROTITRE PLATE CONTAINING SAMPLES TO BE ANALYZED)
OUR ALLIANCE HT SYSTEM PROVIDES EXTREMELY HIGH THROUGHPUT COMPOUND ANALYSIS AND
PURIFICATION TO AID IN DRUG DISCOVERY AND DEVELOPMENT. THIS PRODUCT HAS NEW
AUTOMATION FEATURES, INCLUDING A NEW SAMPLE INJECTOR, ADDED SAMPLE CAPACITY, AND
NEW SOFTWARE THAT CAN CUT THE TIME TO GENERATE RESULTS IN HALF. THE SYSTEM HAS
BEEN SPECIFICALLY OPTIMIZED FOR USE WITH AN MS DETECTOR. THIS ALLOWS SCIENTISTS
TO TEST MORE DRUG CANDIDATES AND DEVELOP EFFECTIVE DRUGS FASTER.
6
<PAGE>
A PROVEN, UNPARALLELED APPROACH TO PRODUCT DEVELOPMENT
For the past five years, our approach to complex technologies has been
simple. It is our goal to be the best of breed in all of the areas in which
we choose to participate. That means we are well prepared to
invest--significantly and successfully--in research and development.
A good example is our Alliance HPLC systems. Launched three years
ago, and the product of our most intensive research and development effort to
date, these instruments have taken HPLC to a new level, and have become the
engine driving much of our growth. Today, we are preparing new versions of
the Alliance system, including our Alliance HT (for high throughput), to take
this technology to new customers. Other examples of major research projects
that are now successful products include our Millennium(32)-Registered
Trademark- software, the first 32-bit data management system for
chromatography, and the first designed especially to work with
Microsoft-Registered Trademark- Windows NT-Registered Trademark-. Our new
entry into the field of capillary-scale LC, Waters CapLC-TM-System, promises
to yield scientists more information on smaller quantities of precious
samples than was ever achievable before. And in the consumables area, new
additions to our growing Oasis-Registered Trademark- product line, including
Oasis HLB extraction plates, have increased our ability to satisfy critical
needs in the area of high throughput sample preparation for drug and
metabolite analysis. Our new SymmetryShield-TM- columns use a patented
separation chemistry to deliver a new standard in speed, sensitivity and
test-to-test reproducibility.
7
<PAGE>
AN EXPANDED PRODUCT LINE, AN EXPANDING MARKET SHARE
Recently, we added the powerful family of Micromass mass spectrometry
products to our portfolio of solutions, and we also acquired TA Instruments.
Both of these product lines represent best of breed technologies--and they
are solutions that appeal to a large, rapidly growing customer base.
These and other acquisitions have helped Waters greatly broaden the
field upon which we play. Today, in addition to the leading HPLC systems,
software and consumables, we are also selling or developing products in other
sectors. Our fast-growing Micromass line of products in particular leads the
industry in performance, and has been very successful in key pharmaceutical
applications, including proteomics and pharmacokinetics applications.
In thermal analysis, we continue to gain market share. Thermal analysis
can be found wherever engineered materials are fabricated from plastics. From
the most mundane plastic product to specialized, multi-layered, advanced
composites, our thermal analysis products are at work in the design and
fabrication of automotive, packaging, construction and home electronics
products.
In addition to providing the best products, one way to expand market
share is by offering superior customer service. Launched two years ago, our
Waters Connections-SM-program has clearly differentiated Waters from our
competition. At a time when some of our competitors are downsizing their
infrastructure and spending for customer service and support, we continue to
invest in programs aimed at giving our customers more value. Thus, our
customers are enjoying unprecedented reliability and uptime.
In 1999, we are rolling out a line of premium replacement parts and
components under the PerformancePLUS-TM-brand. These parts are made of the
highest quality materials, and are designed to extend the life of replacement
parts and improve the serviceability of our instrument systems.
8
<PAGE>
(photo/caption)
(IMAGE:CLOSE-UP PHOTOGRAPH OF THE HEAD ASSEMBLY OF TA INSTRUMENTS'
MICRO-THERMAL ANALYZER)
OUR uTA-TM-2990 MICRO-THERMAL ANALYZER IS ONE OF THE MOST POWERFUL NEW
TECHNOLOGIES FOR MATERIALS ANALYSIS. THIS UNIQUE TECHNOLOGY, WHICH WON
THREE INDUSTRY INNOVATION AWARDS IN 1998 ALONE, HELPS MATERIALS
SCIENTISTS UNDERSTAND THE SURFACE STRUCTURE AND PROPERTIES OF ADVANCED
MATERIALS AS DIVERSE AS SPACE SHUTTLE TILES, PHARMACEUTICAL TABLETS AND
HEART VALVE REPLACEMENTS. THIS TECHNOLOGY COMBINES THERMAL ANALYSIS
WITH AN EXTREMELY HIGH-POWERED MICROSCOPE TO REVEAL HIDDEN ANOMALIES IN
ADVANCED MATERIALS.
9
<PAGE>
(photo caption)
(IMAGE: COMPUTER-ENHANCED PHOTOGRAPH OF THE LOG-IN SCREEN FOR WATERS
MILLENNIUM(32) CHROMATOGRAPHY SOFTWARE SUPERIMPOSED OVER THE BACK OF A
COMPACT DISK)
OUR Y2K-COMPLIANT MILLENIUM(32) SOFTWARE PROVIDES SCIENTISTS WITH WAYS TO
MANAGE THE HUGE VOLUMES OF DATA THEY GENERATE. IT HELPS THEM TO TRACK AND
COMPARE RESULTS AND ADHERE TO INTERNATIONAL AND REGULATORY GUIDELINES FOR
DOCUMENTING HUNDREDS OF MILLIONS OF INDIVIDUAL ANALYSES EACH YEAR.
10
<PAGE>
THE TRENDS THAT SHAPE OUR SUCCESS
In addition to research and development, a key factor in determining
what products we develop is our knowledge of and dedication to understand
market dynamics and customer requirements. All the products we mention in
this report have been developed to meet specific customer needs. Today, there
are several trends affecting our customers that we believe will have a
positive effect on the sales of existing products and on those that we plan
to launch. One of the most important is the current state of the
pharmaceutical market. Never before have there been so many promising new
drugs in the product pipeline. When Waters products are used in the discovery
and development of these drugs, chances are high that these companies will
continue to use us when they produce these drugs.
What's more, since time to market is critical, companies are looking for
tools that allow them to work faster. Our products, with their higher
performance, improved automation, and greater sensitivity, do that.
In the polymer and chemical industries, our customers are looking for
new uses for old materials and experimenting with new ones. That calls for
instruments that work harder. Instruments like the Waters Alliance GPC 2000
System and TA Instruments' thermal analyzers. Here again, Waters products
provide performance characteristics unavailable in competitive products.
Our customers are also experiencing increasing pressure from regulatory
agencies. New Waters products will help them deal with the challenges that
regulations impose, such as security, meticulous record keeping and
traceability.
11
<PAGE>
LOOKING TO THE FUTURE
This new generation of analytical instruments and consumables gives us
cause for optimism about the present and future of our business. However, we
also want to share some insight into a number of other exciting products in
our pipeline, and some still in the planning stages.
We expect our Micromass Quattro Ultima to redefine the capabilities of
instruments used for quantitative pharmacokinetics. Instruments of this type
are the de facto standard for drug regulatory authorities. Introduced at the
1999 Pittsburgh Conference on Analytical Chemistry and Applied Spectroscopy
in March, the Quattro Ultima promises to push back the frontiers of
sensitivity to new levels.
The newest revision of Millennium(32) software will begin shipping later
in 1999, and will have even more powerful features than the existing version.
The networking segment of our software business grew significantly in 1998.
We expect this to continue, thanks to these new capabilities and our
partnerships with over one dozen applications developers who are creating
programs our customers can use for more complex data analysis.
Our Alliance GPC 2000 System will begin shipping in 1999. This
specialized instrument--an extension of our Alliance system concept--will
help chemists confidently distinguish very subtle differences in apparently
identical polymers and medical plastics across a broad range of operating
temperatures.
These products, and many others to follow, will continue the Waters
tradition of providing superior technology to the scientists of the world.
Allowing them to provide all of us with a superior quality of life.
12
<PAGE>
(photo/caption)
(IMAGE:CLOSE-UP PHOTOGRAPH OF AN IONIZED VAPOR STREAM PRODUCED BY
THE ELECTROSPRAY INTERFACE FOR WATERS ZMD MASS SPECTROMETER)
TOGETHER, THE OASIS-Registered Trademark-HLB EXTRACTION PLATES, THE ALLIANCE
HT SYSTEM, AND THE MICROMASS QUATTRO MS/MS FORM AN EXCELLENT TOOL FOR
CLINICAL TRIALS THAT CALL FOR HIGH THROUGHPUT SAMPLE ANALYSIS. DURING THE
THREE PHASES OF CLINICAL TRIALS THOUSANDS OF BLOOD AND URINE SAMPLES ARE
ANALYZED FOR LEVELS OF THERAPEUTIC DRUGS AND THEIR METABOLITES. THE RESULTS
GIVE RESEARCHERS CRITICAL INFORMATION IN THE DRUG DEVELOPMENT PROCESS
YIELDING GUIDANCE IN TERMS OF SAFE AND EFFECTIVE DOSAGE LEVELS.
13
<PAGE>
COMPANY OFFICERS
[Photographs]
5 Photographs of company officers. Captions beside four read:
THOMAS W. FELLER
Senior Vice President
Operations
DEVETTE W. RUSSO
Vice President,
Chromatography
Consumables Division
JOHN R. NELSON
Senior Vice President
Research, Development,
and Engineering
DOUGLAS A. BERTHIAUME
Chairman, President, and
Chief Executive Officer
14
<PAGE>
[Photographs]
3 Photographs of company officers. Captions beside them read:
ARTHUR G. CAPUTO
Senior Vice President
Worldwide Sales and Marketing
PHILIP S. TAYMOR
Senior Vice President
and Chief Financial Officer
BRIAN K. MAZAR
Vice President, Human Resources
and Investor Relations
15
<PAGE>
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16
<PAGE>
FINANCIAL TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 19
REPORT OF INDEPENDENT ACCOUNTANTS.......................................... 24
CONSOLIDATED FINANCIAL STATEMENTS.......................................... 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. 29
QUARTERLY RESULTS.......................................................... 41
SELECTED FINANCIAL DATA.................................................... 42
17
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18
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Waters Corporation ("Waters" or the "Company"), an analytical instrument
manufacturer, is the world's largest manufacturer and distributor of high
performance liquid chromatography ("HPLC") instruments, columns and other
consumables, and related service. The Company has the largest HPLC market share
in the United States, Europe and non-Japan Asia and has a leading position in
Japan. HPLC, the largest product segment of the analytical instrument market, is
utilized in a broad range of industries to detect, identify, monitor and measure
the chemical, physical and biological composition of materials, and to purify a
full range of compounds. Through its TA Instruments, Inc. ("TAI") subsidiary,
the Company is also the world's leader in thermal analysis, a prevalent and
complementary technique used in the analysis of polymers. Also, through its
Micromass Limited ("Micromass") subsidiary, the Company is a market leader in
mass spectrometry, which can be integrated and used along with other analytical
instruments, especially HPLC.
Sales grew by 33% in 1998 and by 19% in 1997. Sales growth accelerated as a
result of increased customer demand for new products and the effect of
acquisitions. Operating income for the year ended December 31, 1998 was $136.3
million, a 47% increase over the $92.7 million generated in 1997, excluding
nonrecurring charges in both years related to the purchase of Micromass.
Excluded 1998 nonrecurring charges totalled $16.5 million for revaluation of
acquired inventory. Excluded 1997 nonrecurring charges totalled $71.5 million;
$16.5 million for revaluation of acquired inventory and $55.0 million for
expensed in-process research and development. Earnings per diluted common share
were $2.78 in 1998, a 43% increase over the $1.94 in 1997 excluding nonrecurring
charges.
During 1998, approximately 58% of the Company's combined net sales were
derived from operations outside the United States. The Company believes that the
geographic diversity of its sales reduces its dependence on any particular
region. The U.S. dollar value of these revenues varies with currency exchange
fluctuations, and such fluctuations can affect the Company's results from period
to period.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales for 1998 were $618.8 million, compared to $465.5 million
for the year ended December 31, 1997, an increase of 33%. Excluding the adverse
effects of a stronger U.S. dollar, net sales increased by 35% in 1998. The
Company's core HPLC and thermal analysis products grew by 12%, while the impact
of the Micromass acquisition resulted in the remaining 23% points of growth.
HPLC growth was generally broad-based across all geographies except the Pacific
Rim, and particularly strong in the U.S. and Europe offsetting declines in the
Pacific Rim. Japan had moderate sales growth for the year. Pharmaceutical
customer demand was especially strong across all geographies. Sales of the
Company's mass spectrometry products grew strongly as well with increased use of
mass spectrometry as an analytical tool within the pharmaceutical industry,
especially in conjunction with HPLC.
GROSS PROFIT. Gross profit for 1998 was $369.8 million, compared to $275.7
million for 1997, an increase of $94.1 million or 34%. Excluding the two $16.5
million nonrecurring charges for revaluation of acquired inventory related to
purchase accounting for the Micromass acquisition in 1997 and 1998, gross profit
increased by 32% in 1998. Gross profit as a percentage of sales excluding the
inventory revaluation charge decreased to 62.4% in 1998 from 62.8% in 1997,
reflecting the inclusion of Micromass results after its September 1997
acquisition. (Micromass mass spectrometry gross margins are lower than Waters
HPLC historical gross margins, but its operating expenses are commensurately
lower, and its overall operating margins are comparable to those of Waters.)
Excluding the impact of Micromass results, gross profit as a percentage of sales
increased in 1998, primarily as a result of increased efficiencies in the
Company's manufacturing operations and lower raw material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 were $206.2 million, compared to $167.3 million
for 1997. As a percentage of net sales, selling, general and administrative
expenses decreased to 33.3% for 1998 from 35.9% for 1997 as a result of higher
sales volume and expense controls. The $38.9 million or 23% increase in total
expenditures primarily resulted from including the expenses of Micromass.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were $34.4
million for 1998 compared to $25.8 million for 1997, an $8.6 million or 33%
increase from prior year levels. Current year spending increased due to the
inclusion of acquired company expenses. The Company continued to invest
significantly in the development of new and improved HPLC, thermal analysis,
rheology and mass spectrometry products.
GOODWILL AND PURCHASED TECHNOLOGY AMORTIZATION. Goodwill and purchased
technology amortization for 1998 was $9.4 million, compared to $6.5 million for
1997, an increase of $2.9 million or 45%. This increase primarily was related to
the acquisition of Micromass.
19
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
OPERATING INCOME. Operating income for 1998 was $119.8 million, an increase of
$98.6 million from the prior year. Operating income in 1998 included $16.5
million of nonrecurring acquisition related charges while 1997 included $71.5
million of similar charges. Excluding the revaluation of acquired inventory
charges in 1998 and 1997 and the expensed in-process research and development
charge in 1997, all in connection with the Micromass acquisition, operating
income was $136.3 million for the year ended December 31, 1998 and represented a
$43.6 million or 47% increase over 1997. As in the prior year, Waters continued
to improve operating income levels in 1998 on the strength of sales growth,
volume leverage, continued focus on cost reduction in all operating areas and
the accretive impact of acquisitions.
INTEREST EXPENSE, NET. Net interest expense increased by $4.6 million, or 34%,
from $13.7 million in 1997 to $18.3 million in 1998. The current year increase
reflected higher average 1998 debt levels as a result of borrowings which
financed the late 1997 acquisition of Micromass, reduced by 1998 repayments from
the Company's cash flow.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate, excluding
nonrecurring, nondeductible charges related to the revaluation of acquired
inventory in 1998 and revaluation of acquired inventory and expensed in-process
research and development in 1997, was 23% in 1998 and 20% in 1997.
INCOME (LOSS) FROM OPERATIONS. Income from operations for 1998 was $74.4
million, compared to an $(8.3) million loss from operations for 1997. Excluding
nonrecurring acquisition related charges in 1998 and 1997, the Company generated
$90.9 million of income in 1998 compared to $63.2 million in 1997. The
improvement over the prior year was a result of sales growth, continued focus on
cost reductions in all operating areas and the accretive impact of the Micromass
acquisition.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for 1997 were $465.5 million, compared to $391.1 million
for the year ended December 31, 1996, an increase of 19%. Excluding the adverse
effects of a stronger U.S. dollar, net sales increased by 24% in 1997. The
Company's core HPLC products grew by 10%, while the impact of acquired companies
resulted in the remaining 14% points of growth. HPLC growth was generally
broad-based across geographies and end-user markets, but particularly strong in
the U.S. and Europe. Pharmaceutical customer demand was strong across all
geographies. The Company's thermal analysis product sales grew strongly as well.
GROSS PROFIT. Gross profit for 1997 was $275.7 million, compared to $239.8
million for 1996, an increase of $35.9 million or 15%. Excluding nonrecurring
charges for revaluation of acquired inventory related to purchase accounting for
acquisitions ($16.5 million related to Micromass in 1997 and $6.1 million
related to TAI in 1996), gross profit increased by 19% in 1997. Gross profit as
a percentage of sales excluding revaluation charges decreased to 62.8% in 1997
from 62.9% in 1996, reflecting the inclusion of Micromass results after its
September 1997 acquisition. (Micromass mass spectrometry gross margins are lower
than Waters HPLC historical gross margins, but its operating expenses are
commensurately lower, and its overall operating margins are comparable to those
of Waters.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1997 were $167.3 million, compared to $148.5 million
for 1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 35.9% for 1997 from 38.0% for 1996, reflecting continued
emphasis on expense controls. The $18.8 million or 13% increase in total
expenditures was primarily the result of including the expenses of acquired
companies.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were $25.8
million for 1997 compared to $20.9 million for 1996, a $4.9 million or 23%
increase from prior year levels. Current year spending increased with the
addition of acquired company spending. The Company continued to invest
significantly in the development of new and improved HPLC detection, consumable
and data products, thermal analysis and rheology products, and newly acquired
mass spectrometry products.
GOODWILL AND PURCHASED TECHNOLOGY AMORTIZATION. Goodwill and purchased
technology amortization for 1997 was $6.5 million, an increase of $1.3 million
from the prior year. This increase was primarily related to the acquisition of
Micromass and the inclusion of a full year of goodwill amortization from the
1996 TAI acquisition.
20
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
EXPENSED IN-PROCESS RESEARCH AND DEVELOPMENT. In 1997, the Company expensed
$55.0 million of the purchase price for Micromass related to acquired in-process
research and development, which had not reached technological feasibility and
had no alternative future use.
OPERATING INCOME. Operating income for 1997 was $21.2 million, a decrease of
$24.6 million from the prior year. This decrease reflected $71.5 million of
non-recurring charges related to the Micromass acquisition in 1997 ($16.5
million for revaluation of acquired inventory and $55.0 million for expensed
in-process research and development), compared to $25.4 million of nonrecurring
charges related to the TAI acquisition in 1996 ($6.1 million for revaluation of
acquired inventory and $19.3 million for expensed in-process research and
development). Excluding revaluation of acquired inventory and expensed
in-process research and development charges in both 1997 and 1996, operating
income was $92.7 million for the year ended December 31, 1997 and represented a
$21.5 million or 30% increase over 1996. Waters improved operating income levels
in 1997 on the strength of sales growth, volume leverage, continued focus on
cost reduction in all operating areas and the accretive impact of acquisitions.
INTEREST EXPENSE, NET. Net interest expense decreased by $1.0 million, or 7%,
from $14.7 million in 1996 to $13.7 million in 1997. The decrease reflected
reduced debt levels for the first nine months of 1997 and more favorable
interest rates under the Bank Credit Agreement, partially offset by the impact
of increased debt levels in the fourth quarter of 1997 due to the Micromass
acquisition.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate, excluding
nonrecurring, nondeductible charges related to the revaluation of acquired
inventory and expensed in-process research and development, was 20% in 1997
compared to 19.9% in 1996.
(LOSS) INCOME FROM OPERATIONS. The loss from operations for 1997 was $(8.3)
million, compared to income of $19.9 million for 1996. Excluding nonrecurring
acquisition related charges in both years, the Company generated $63.2 million
of income in 1997 compared to $45.3 million in 1996. The improvement over the
prior year was a result of sales growth, continued focus on cost reductions in
all operating areas and the accretive impact of acquisitions.
YEAR 2000
Year 2000 ("Y2K") issues concern the ability of information systems to properly
recognize and process date-sensitive information beyond December 31, 1999.
The Company has been engaged in a concerted effort to ready its business
systems and products in anticipation of Y2K. A special internal project team
led by senior management was organized in 1997 in an attempt to ensure that
all material business systems, instrument products and applications software
are compliant by January 1, 2000. Currently, the companywide planning and
inventory phases have been completed. The assessment phase was substantially
completed by December 31, 1998, and included the examination of products,
worldwide operations, manufacturing systems, business computer systems,
manufacturing, warehousing and servicing equipment, network hardware and
software, telephone systems, desktop application software, mainframe
operating systems, and environmental operations. Currently, the Company
believes that most of its internal systems and related software are likely to
be Y2K compliant. The Company is continuing to examine its material software
and systems for Y2K compliance and take corrective action to minimize any
significant detrimental effects on operations.
The remediation and testing phases of the Company's systems are scheduled
to be completed by the middle of 1999. Based on the results of the testing
phase, a contingency plan will be completed. The Company has no plans to engage
in third party validation of its Y2K efforts. To date, approximately $10.0
million has been spent over the past four years in connection with bringing the
Company's internal systems into compliance, primarily capital expenditures for
entirely new business and communications systems which replaced predecessor
systems. The remaining costs to fix Y2K problems are estimated at less than $1.0
million, including capital expenditures to replace certain predecessor capital
items. These costs do not include any allocation for the time devoted by regular
employees of the Company to addressing Y2K problems, as the Company does not
separately track such time. The Company does not expect the costs relating to
the Y2K remediation phase to have a material effect on the Company.
The Company has made public statements to customers regarding its state of
Year 2000 readiness for its products; however, the possibility of product
liability claims still exists. The Company also recognizes that Y2K disruptions
in customer operations could result in reduced sales and cash flow and increased
inventory or receivables. While these events are possible, the Company believes
that its customer base is broad enough to minimize the effects of a single
occurrence. To date, the Company has received communications from many of its
major customers which indicate an awareness of Y2K issues.
The Company is in the process of obtaining certificates of compliance from
its major systems vendors. Additionally, the Company is in the process of
surveying its financial services, utilities, and communication providers, as
well as its critical suppliers to ensure that they are compliant. Despite these
efforts, however, interruption of supplier operations due to Y2K issues could
potentially affect Company operations. The Company uses multiple suppliers, and,
in some instances, maintains an inventory of parts and supplies, which may
reduce the risks of interruption, but cannot eliminate the potential for
disruption due to third party failure.
21
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WATERS CORPORATION AND SUBSIDIARIES
The Company currently has identified contingency alternatives for certain
elements of Year 2000 risk. The contingency plan is intended to be completed
during fiscal 1999. The plan will address customer problems as well as temporary
remedies in the event of failure of Company or third party systems. The Company
will continue to review its business interruption contingency plans as it
completes its testing and remediation phases during the year. However, there can
be no assurance that any contingency plans will prevent Y2K problems from
occurring.
While the Company believes its efforts will provide reasonable assurance
that material disruptions are not likely to occur due to internal failure, the
potential for interruption still exists. Specifically, the Company and its
subsidiaries could be materially adversely affected if utilities, private
businesses and governmental entities with which they do business or that provide
essential services are not Y2K compliant. The Company currently believes that
the greatest risk of disruption in its businesses exists in certain
international markets. Such interruptions could cause, among other things,
temporary plant closings, delays in the delivery of products, delays in the
receipt of supplies, invoice and collection errors, and inventory and supply
obsolescence. Recovery under existing insurance policies may be available
depending upon the circumstances of a Y2K related event.
The estimates and conclusions herein are based on management's best
estimates of future events. Risks that could cause results to differ from these
estimates and conclusions include the uncertainties involved in discovering and
correcting the potential Y2K sensitive problems which could have a serious
impact on specific facilities and the ability of suppliers and customers to
bring their systems into Y2K compliance.
EURO CURRENCY CONVERSION
Several countries of the European Union will adopt the euro as their legal
currency effective July 1, 2002. A transition period has been established from
January 1, 1999 to July 1, 2002 during which companies conducting business in
these countries may use the euro or their local currency. The Company has
considered the potential impact of the euro conversion on pricing competition,
its information technology systems, and currency risk and risk management.
Currently, the Company does not expect that the euro conversion will result in
any material increase in costs to the Company or have a material adverse effect
on its business or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, net cash provided by the Company's operating activities was $110.2
million, primarily as a result of net income for the period after adding back
nonrecurring non-cash charges and depreciation and amortization. Primary uses of
this cash flow during the year were $90.2 million of net bank debt repayment and
$20.6 million of property, plant and equipment and software capitalization
investment.
In September 1997, the Company amended its Bank Credit Agreement increasing
maximum availability to $450 million. This increase was used to finance the
acquisition of Micromass. The Company believes that existing cash balances and
current cash flow from operating activities together with borrowings available
under the Bank Credit Agreement will be sufficient to fund working capital,
capital spending and debt service requirements of the Company in the foreseeable
future.
As a publicly held company, the Company has not paid any dividends and does
not plan to pay any dividends in the foreseeable future.
ENVIRONMENTAL MATTERS
The Company's facilities are subject to federal, state and local environmental
requirements, including those relating to discharges to air, water and land, the
handling and disposal of solid and hazardous waste and the cleanup of properties
affected by hazardous substances. The Company does not currently anticipate any
material adverse effect on its operations or financial condition as a result of
its efforts to comply with, or its liabilities under, such requirements. The
Company does not currently anticipate any material capital expenditures for
environmental control facilities. Some risk of environmental liability is
inherent in the Company's business, however, and there can be no assurance that
material environmental costs will not arise in the future. In particular, the
Company might incur capital and other costs to comply with increasingly
stringent environmental laws and enforcement policies. Although it is difficult
to predict future environmental costs, the Company does not anticipate any
material adverse effect on its operations, financial condition or competitive
position as a result of future costs of environmental compliance. In connection
with the acquisition of the predecessor HPLC business of Millipore Corporation
("Millipore") in August 1994, Millipore retained environmental liabilities
resulting from pre-acquisition operations of the Company's facilities.
RECENT ACCOUNTING STANDARDS CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Earlier application is permitted.
The statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. While management has not
determined the impact of this new standard, it is not expected to be material to
the Company.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use and provides guidance for determining whether computer software is for
internal use. Specifically, guidance is provided as to when such costs incurred
should be expensed or capitalized. The Company has adopted SOP 98-1 in the
accompanying financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits, which
is effective for periods beginning after December 15, 1997, but excludes interim
periods during 1998. The statement standardizes employer disclosure requirements
about pension and other postretirement benefit plans by requiring additional
information on changes in the benefit obligations and fair values of plan assets
and eliminating certain disclosures that are no longer useful. It does not
change the measurement or recognition of those plans. The Company has adopted
SFAS 132 in the accompanying financial statements.
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WATERS CORPORATION AND SUBSIDIARIES
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective for periods beginning after December 15, 1997. The statement
establishes standards for reporting information about operating segments in
annual financial statements of public business enterprises and in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company has adopted SFAS 131 in the accompanying financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income, which is effective for periods beginning after
December 15, 1997. The statement establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. The statement
requires that all components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company has adopted SFAS 130 in the accompanying financial
statements.
FORWARD-LOOKING INFORMATION
Safe Harbor Statement Under Private Securities Litigation Reform Act of 1996
Certain statements contained herein are forward looking. Many factors could
cause actual results to differ from these statements, including, but not limited
to, obsolescence resulting from the introduction of technologically advanced
products by other companies, pressure on prices from competitors with
significantly greater financial resources, regulatory obstacles to new product
introductions, reduction in capital spending of pharmaceutical customers, and
market risk described below. Please refer also to the Company's Form 10-K for
additional risk factors.
Market Risk
The Company is exposed to financial risk in several areas including changes in
foreign exchange rates and interest rates. The Company attempts to minimize its
exposures by using certain financial instruments, for purposes other than
trading, in accordance with the Company's overall risk management guidelines.
Further information regarding the Company's accounting policies for financial
instruments and disclosures of financial instruments can be found in Notes 2 and
6 to the Company's consolidated financial statements.
Foreign Exchange
The Company has operations in various countries and currencies all over the
world. As a result, the Company's financial position, results of operations and
cash flows can be affected by fluctuations in foreign currency exchange rates.
The Company uses debt swap agreements to mitigate partially such effects.
In 1998, the Company amended debt swap agreements entered in May 1997 which
hedged the U.S. dollar value of the Company's investment in the net assets of
certain foreign subsidiaries. These agreements effectively swapped higher
floating rate LIBOR borrowings for lower fixed rate borrowings in their
respective local currencies. The effect of these debt swap agreements lowers
overall annual interest cost by approximately $2.4 million over the lives of the
swap agreements at interest rates in effect in the respective contracts on
December 31, 1998. The Company could incur higher or lower principal payments
over the term of the swap agreements. At currency exchange rates in effect on
December 31, 1998, the fair market value of those instruments was $177.0
thousand. Details of these swap agreements are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Geography Notional Amount Composite Interest Rate Expiration Dates
(In thousands)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan $32,307 1.19% July 1999 to January 2001
Europe 26,800 2.02% January 2000
Canada 6,400 4.05% January 2000
--------
Total $65,507
--------
--------
</TABLE>
Assuming a hypothetical adverse change of 10% in year-end exchange rates (a
weakening of the U.S. dollar), the fair value of those instruments would
decrease by $6.6 million.
Interest Rates
The Company is exposed to risk of interest rate fluctuations in connection with
its Bank Credit Agreement. As a result, the Company attempts to minimize its
interest rate exposures by using certain financial instruments described below
for purposes other than trading.
At December 31, 1998, the Company maintained an interest rate swap
agreement with Bankers Trust Company expiring December 31, 2001. The Company
swapped $135 million in 1998 ($151 million in 1999, $143 million in 2000 and $93
million in 2001) in notional amount of floating rate LIBOR borrowings for an
equivalent notional amount of borrowings at a fixed interest rate of 6.3%. At
December 31, 1998 and 1997, the fair value of this agreement was an unrealized
loss of $4.4 million and $1.6 million, respectively. At December 31, 1998, a one
percentage point decrease in the LIBOR rate would decrease the fair market value
by approximately $3.4 million.
The Company's debt swap agreements also fix the interest rate on its Bank
Credit Agreement. At December 31, 1998, a one percentage point decrease in the
LIBOR rate would decrease the fair market value by approximately $23.0 thousand.
23
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WATERS CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Waters Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Waters
Corporation and Subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Boston, Massachusetts PricewaterhouseCoopers LLP
January 22, 1999
24
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (In thousands, except per share data) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,497 $ 3,113
Accounts receivable, less allowances for doubtful accounts of $2,966
and $2,785 at December 31, 1998 and 1997, respectively 136,806 111,022
Inventories 80,281 87,375
Other current assets 29,040 14,989
----------- ------------
Total current assets 251,624 216,499
Property, plant and equipment, net 89,029 88,668
Other assets 59,554 66,714
Goodwill, less accumulated amortization of $12,281 and $7,543 at December 31,
1998 and 1997, respectively 177,494 180,178
----------- ------------
Total assets $ 577,701 $ 552,059
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 4,259 $ 7,394
Accounts payable 36,510 33,061
Deferred revenue and customer advances 29,706 25,289
Accrued retirement plan contributions 5,934 3,426
Accrued income taxes 16,112 9,400
Accrued other taxes 4,225 4,597
Other current liabilities 88,827 87,489
----------- ------------
Total current liabilities 185,573 170,656
Long term debt 218,250 305,340
Redeemable preferred stock 9,058 8,096
Other liabilities 14,701 5,670
----------- ------------
Total liabilities 427,582 489,762
Stockholders' equity:
Common stock, par value $0.01 per share 50,000 shares authorized, 30,297 and
29,583 shares issued and outstanding at December 31,
1998 and 1997, respectively 303 296
Additional paid-in capital 174,717 161,476
Deferred stock option compensation (386) (606)
Accumulated deficit (21,697) (96,096)
Accumulated other comprehensive (loss) (2,818) (2,773)
---------- ------------
Total stockholders' equity 150,119 62,297
---------- ------------
Total liabilities and stockholders' equity $ 577,701 $ 552,059
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 618,813 $ 465,470 $ 391,113
Cost of sales 232,497 173,275 145,254
Revaluation of acquired inventory 16,500 16,500 6,100
--------- --------- -----------
Gross profit 369,816 275,695 239,759
Selling, general and administrative expenses 206,211 167,290 148,513
Research and development expenses 34,433 25,750 20,898
Goodwill and purchased technology amortization 9,347 6,468 5,219
Expensed in-process research and development -- 55,000 19,300
--------- --------- -----------
Operating income 119,825 21,187 45,829
Interest expense, net 18,278 13,720 14,740
--------- --------- -----------
Income from operations before income taxes 101,547 7,467 31,089
Provision for income taxes 27,148 15,755 11,230
--------- --------- -----------
Income (loss) before extraordinary item 74,399 (8,288) 19,859
Extraordinary (loss) on early retirement of debt -- -- (22,264)
--------- --------- -----------
Net income (loss) 74,399 (8,288) (2,405)
Less: Accretion of and 6% dividend on preferred stock 963 942 921
--------- --------- -----------
Net income (loss) available to common stockholders $ 73,436 $ (9,230) $ (3,326)
--------- --------- -----------
--------- --------- -----------
Income (loss) per basic common share:
Income (loss) per common share before extraordinary item $ 2.45 $ (.32) $ .66
Extraordinary (loss) per common share -- -- (.78)
--------- --------- -----------
Net income (loss) per common share $ 2.45 $ (.32) $ (.12)
--------- --------- -----------
--------- --------- -----------
Weighted average number of basic common shares 29,930 29,127 28,841
--------- --------- -----------
--------- --------- -----------
Income (loss) per diluted common share:
Income (loss) per common share before extraordinary item $ 2.27 $ (.32) $ .60
Extraordinary (loss) per common share -- -- (.71)
--------- --------- -----------
Net income (loss) per common share $ 2.27 $ (.32) $ (.11)
--------- --------- -----------
--------- --------- -----------
Weighted average number of diluted common shares and equivalents 32,321 29,127 31,628
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 74,399 $ (8,288) $ (2,405)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income taxes (10,366) (5,891) (4,200)
Depreciation and amortization 27,248 20,010 16,709
Amortization of debt issuance costs 1,240 1,085 1,055
Compensatory stock option expense 220 220 250
Tax benefit related to stock option plans 7,623 2,976 --
Expensed in-process research and development -- 55,000 19,300
Revaluation of acquired inventory 16,500 16,500 6,100
Extraordinary loss on early retirement of debt -- -- 22,264
Change in operating assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (21,978) (8,127) (8,981)
(Increase) in inventories (8,230) (2,270) (670)
Increase in accounts payable and other current liabilities 14,034 11,399 4,992
Increase in deferred revenue and customer advances 4,284 5,375 2,541
Other, net 5,196 8,377 (1,238)
---------- ---------- ----------
Net cash provided by operating activities 110,170 96,366 55,717
Cash flows from investing activities:
Additions to property, plant and equipment (15,040) (18,216) (10,064)
Software capitalization and other intangibles (5,576) (5,177) (3,758)
Business acquisitions, net of cash acquired (3,157) (160,985) (83,349)
Loans to officers 187 (136) (425)
Other, net -- -- 4,497
---------- ---------- ----------
Net cash (used in) investing activities (23,586) (184,514) (93,099)
Cash flows from financing activities:
Net (repayment) borrowings of bank debt (90,225) 87,452 126,902
Retirement of Senior Subordinated Notes -- -- (91,219)
Proceeds from stock plans 6,588 2,491 1,322
Other, net -- 1,113 (2,282)
---------- ---------- ----------
Net cash (used in) provided by financing activities (83,637) 91,056 34,723
Effect of exchange rate changes on cash and cash equivalents (563) (434) 65
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 2,384 2,474 (2,594)
Cash and cash equivalents at beginning of period 3,113 639 3,233
---------- ---------- ----------
Cash and cash equivalents at end of period $ 5,497 $ 3,113 $ 639
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information:
Income taxes paid $ 14,993 $ 10,022 $ 3,401
Interest paid $ 19,601 $ 12,754 $ 15,941
Supplemental noncash transactions:
Issuance of common stock for acquisition $ -- $ 11,241 $ --
Issuance of notes for acquisition $ -- $ 9,975 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Deferred Other Statement of
Common Paid-in Stock Option Accumulated Comprehensive Comprehensive
(In thousands) Stock Capital Compensation (Deficit) (Loss) Income Total Income
- -------------------------------------------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $ 288 $ 145,318 $ (1,076) $ (85,403) $ (1,009) $58,118
Comprehensive (loss), net of tax:
Net (loss) -- -- -- (2,405) -- (2,405) $ (2,405)
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- 1,013 1,013 1,013
Minimum pension liability adjustment -- -- -- -- 404 404 404
---------- ---------
Other comprehensive income -- -- -- -- 1,417 -- 1,417
---------
Comprehensive (loss) -- -- -- -- -- -- $ (988)
---------
---------
Accretion of preferred stock -- (321) -- -- -- (321)
Dividend payable on preferred stock -- (600) -- -- -- (600)
Compensatory stock option expense -- -- 250 -- -- 250
Stock options exercised 1 1,320 -- -- -- 1,321
---------- --------- ---------- ---------- ---------- --------
Balance December 31, 1996 289 145,717 (826) (87,808) 408 57,780
Comprehensive (loss), net of tax:
Net (loss) -- -- -- (8,288) -- (8,288) $ (8,288)
Other comprehensive (loss):
Foreign currency translation adjustments -- -- -- -- (3,181) (3,181) (3,181)
---------- ---------
Other comprehensive (loss) -- -- -- -- (3,181) -- (3,181)
---------
Comprehensive (loss) -- -- -- -- -- -- $ (11,469)
---------
---------
Accretion of preferred stock -- (342) -- -- -- (342)
Dividend payable on preferred stock -- (600) -- -- -- (600)
Issuance of common stock for acquisition 3 11,238 -- -- -- 11,241
Issuance of common stock for Employee Stock
Purchase Plan 1 317 -- -- -- 318
Compensatory stock option expense -- -- 220 -- -- 220
Stock options exercised 3 2,170 -- -- -- 2,173
Tax benefit related to stock option plans -- 2,976 -- -- -- 2,976
---------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1997 296 161,476 (606) (96,096) (2,773) 62,297
Comprehensive income, net of tax:
Net income -- -- -- 74,399 -- 74,399 $ 74,399
Other comprehensive (loss):
Foreign currency translation adjustments -- -- -- -- (45) (45) (45)
---------- --------
Other comprehensive (loss) -- -- -- -- (45) -- (45)
--------
Comprehensive income -- -- -- -- -- -- $ 74,354
--------
--------
Accretion of preferred stock -- (363) -- -- -- (363)
Dividend payable on preferred stock -- (600) -- -- -- (600)
Issuance of common stock for Employee Stock
Purchase Plan 1 865 -- -- -- 866
Compensatory stock option expense -- -- 220 -- -- 220
Stock options exercised 6 5,716 -- -- -- 5,722
Tax benefit related to stock option plans -- 7,623 -- -- -- 7,623
---------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1998 $ 303 $ 174,717 $ (386) $ (21,697) $ (2,818) $ 150,119
---------- --------- ---------- ---------- ---------- ---------
---------- --------- ---------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1 DESCRIPTION OF BUSINESS, ORGANIZATION AND
BASIS OF PRESENTATION
Waters Corporation ("Waters" or the "Company"), an analytical instrument
manufacturer, is the world's largest manufacturer and distributor of high
performance liquid chromatography ("HPLC") instruments, chromatography columns
and other consumables, and related service. HPLC, the largest product segment of
the analytical instrument market, is utilized in a broad range of industries to
detect, identify, monitor and measure the chemical, physical and biological
composition of materials, and to purify a full range of compounds. Through its
TA Instruments, Inc. ("TAI") subsidiary, the Company is also the world's leader
in thermal analysis, a prevalent and complementary technique used in the
analysis of polymers. Through its Micromass Limited ("Micromass") subsidiary,
the Company is also a market leader in the development, manufacture, and
distribution of mass spectrometry ("MS") instruments, which are complementary
products that can be integrated and used along with other analytical
instruments, especially HPLC.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect (i) the reported amounts of assets and liabilities, (ii) disclosure of
contingent assets and liabilities at the dates of the financial statements and
(iii) the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, most of which are wholly owned. All material intercompany
balances and transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES
For most of the Company's foreign operations, assets and liabilities are
translated into U.S. dollars at exchange rates prevailing on the balance sheet
date while revenues and expenses are translated at average exchange rates
prevailing during the period. Any resulting translation gains or losses are
included in accumulated other comprehensive (loss) in the consolidated balance
sheets.
CASH AND CASH EQUIVALENTS
Cash equivalents primarily represent highly liquid investments, with original
maturities of 90 days or less, in repurchase agreements and money market funds
which are convertible to a known amount of cash and carry an insignificant risk
of change in value. The Company has periodically maintained balances in various
operating accounts in excess of federally insured limits.
CONCENTRATION OF CREDIT RISK
The Company sells its products to a significant number of large and small
customers throughout the world, with approximately 60% of 1998 net sales to the
pharmaceutical industry. None of the Company's individual customers accounts for
more than 2% of annual Company sales. The Company performs continuing credit
evaluation of its customers and generally does not require collateral, but in
certain circumstances may require letters of credit or deposits. Historically,
the Company has not experienced significant bad debt losses.
INVENTORY
The Company values all of its inventories at the lower of cost or market on a
first-in, first-out basis (FIFO).
INCOME TAXES
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Expenditures for maintenance
and repairs are charged to expense while the costs of significant improvements
are capitalized. Depreciation is provided using the straight line method over
the following estimated useful lives: buildings - 30 years, leasehold
improvements - 15 years, and production and other equipment - 3 to 10 years.
Upon retirement or sale, the cost of assets disposed and the related accumulated
depreciation are eliminated from the balance sheet and related gains or losses
are reflected in income.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs for products offered for sale
in accordance with Statement of Financial Accounting Standard ("SFAS") 86.
Capitalized costs are amortized to cost of sales on a straight-line basis over
the estimated useful lives of the related software products, generally three to
five years. Capitalized software included in other assets, net of accumulated
amortization was $14,191 and $12,006 at December 31, 1998 and 1997,
respectively.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use and provides guidance for determining whether computer software is for
internal use. The Company capitalizes internal software development costs in
accordance with SOP 98-1, which has been adopted in the accompanying financial
statements.
29
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
PURCHASED TECHNOLOGY AND GOODWILL
Purchased technology amounts are recorded at their fair market value as of the
acquisition date and amortized over estimated useful lives ranging from four to
fifteen years. Goodwill is amortized on a straight-line basis over its useful
life, 40 years for current goodwill components. Impairment of purchased
technology amounts and goodwill is measured on the basis of whether anticipated
future undiscounted operating cash flows expected from the acquired business
will recover the recorded respective intangible asset balances over the
remaining amortization period. At December 31, 1998, no amounts have been
determined to be impaired. Purchased technology amounts included in other assets
totalled $30,034 and $33,962, net of accumulated amortization of $11,360 and
$7,231, at December 31, 1998 and 1997, respectively.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized over the life of the related debt using the
effective interest method. At December 31, 1998 and 1997, debt issuance costs
included in other assets amounted to $1,809 and $3,501, net of accumulated
amortization of $1,854 and $2,020, respectively.
HEDGE TRANSACTIONS
The Company maintains debt swap agreements which hedge the U.S. dollar value of
the Company's investment in the net assets of certain foreign subsidiaries. The
Company records any unrealized or realized gains or losses on these transactions
in accumulated other comprehensive (loss) in the consolidated balance sheets.
REVENUE RECOGNITION
Sales of products and service are recorded based on product shipment and
performance of service, respectively. Proceeds received in advance of product
shipment or performance of service are recorded as deferred revenue in the
consolidated balance sheets.
PRODUCT WARRANTY COSTS
The Company provides for estimated warranty costs at the point of sale.
FIELD SERVICE EXPENSES
All expenses of the Company's field service organization are included in
selling, general and administrative expenses in the consolidated statements of
operations.
RECLASSIFICATION
Certain amounts in previous years' financial statements have been reclassified
to conform to current presentation.
INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share," which is effective for periods ending after December 15,
1997. Under SFAS 128, the Company presents two earnings per share ("EPS")
amounts. Income (loss) per basic common share is based on income available to
common shareholders and the weighted average number of common shares outstanding
during the periods presented. Income (loss) per diluted common share includes
additional dilution from potential common stock, such as stock issuable pursuant
to the exercise of stock options outstanding and the conversion of debt.
Accretion of and cumulative dividends on preferred stock have been included in
computing income (loss) per share.
COMPREHENSIVE (LOSS) INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which is effective for periods beginning after
December 15, 1997. The statement establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. The statement
requires that all components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company has adopted SFAS 130 in the accompanying financial
statements.
RETIREMENT PLAN
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
is effective for periods beginning after December 15, 1997. The statement
standardizes employer disclosure requirements about pension and other
postretirement benefit plans by requiring additional information on changes in
the benefit obligations and fair values of plan assets and eliminating certain
disclosures that are no longer useful. It does not change the measurement or
recognition of those plans. The Company has adopted SFAS 132 in the accompanying
financial statements.
BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for periods beginning after December 15, 1997. The statement
establishes standards for reporting information about operating segments in
annual financial statements of public business enterprises and in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company has adopted SFAS 131 in the accompanying financial
statements.
30
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
3 BUSINESS COMBINATIONS
MICROMASS LIMITED ACQUISITION
On September 23, 1997, the Company acquired all of the capital stock of
Micromass Limited, a company headquartered in England, for approximately
$175,000 in cash, common stock (375 shares) and promissory notes. The
acquisition principally was financed through borrowings under the Company's Bank
Credit Agreement. Micromass develops, manufactures, and distributes mass
spectrometry instruments, products that are complementary to Waters' existing
product offering. Micromass offers products ranging from high-end stand-alone
instruments to smaller, easier-to-use detectors that can be integrated and used
along with other analytical instruments, especially HPLC. Micromass is a global
market leader in the field of mass spectrometry. Net sales for Micromass were
approximately $76,600 for the period from January 1, 1997 to September 30, 1997
and $91,000 for the year ended December 31, 1996.
The acquisition of Micromass was accounted for by the purchase method and
the results of its operations have been consolidated with the Company's results
from September 30, 1997, the effective accounting date of the acquisition. In
conjunction with the acquisition, the Company recorded a non-recurring charge of
$55,000 for the write-off of acquired in-process research and development and
revalued acquired inventory by $33,000, which amount was amortized to cost of
sales over a period of approximately six months commencing October 1, 1997. The
technological feasibility of in-process research and development projects had
not been established at the date of acquisition and had no alternative future
use. The Company also recorded other intangible assets in the transaction of
$24,200 and goodwill of $66,914 which will be amortized for a period of 15 and
40 years, respectively, on a straight line basis. The Company also recorded
$8,500 of purchase accounting liabilities in conjunction with the acquisition in
1997, and reversed $4,000 of those purchase accounting liabilities against
goodwill in 1998.
YMC, INC. ACQUISITION
On July 31, 1997, the Company acquired all of the capital stock of YMC, Inc.
("YMC"), a U.S. based company for approximately $9,000 in cash. The acquisition
of YMC was accounted for by the purchase method. YMC is a manufacturer and
distributor of chromatography chemicals and supplies which augment the Waters
consumables product line. Net sales for YMC were approximately $4,300 for the
period from January 1, 1997 to July 31, 1997 and $6,500 for the year ended
December 31, 1996.
TA INSTRUMENTS, INC. ACQUISITION
On May 1, 1996, the Company acquired all of the capital stock of TA Instruments,
Inc., a U.S. based company, for approximately $83,000 in cash. The acquisition
was financed through borrowings under the Bank Credit Agreement. TAI develops,
manufactures, sells and services thermal analysis and rheology instruments which
are used for the physical characterization of polymers and related materials.
Thermal analysis and rheology are among the most prevalent techniques employed
in the analysis of polymers and other organic and inorganic materials. TAI is
the global market leader in the field of thermal analysis. Net sales for TAI
were approximately $14,000 for the period from January 1, 1996 to April 30,
1996. The acquisition was accounted for by the purchase method and the excess
purchase price was allocated to the assets and liabilities of TAI based upon
their estimated fair values. Principle components of this excess amount included
the revaluation of certain inventories ($6,100), in-process research and
development projects ($19,300) and goodwill ($43,780). The technological
feasibility of in-process research and development projects had not been
established at the date of acquisition and had no alternative future use.
PRO FORMA RESULTS OF OPERATIONS
The following unaudited Pro Forma results of operations for the years ended
December 31, 1997 and 1996 give effect to the Company's acquisitions as if the
transactions had occurred at the beginning of each such period. The financial
data are based on the historical consolidated financial statements for the
Company, Micromass, YMC and TAI and include related adjustments. The Pro Forma
results of operations exclude the non-recurring charges that were recorded in
conjunction with the acquisitions in 1997 and 1996 and do not purport to
represent (i) what the Company's results of operations actually would have been
if the acquisitions had occurred as of the beginning of the periods or (ii) what
such results will be for any future periods. The financial data are based upon
assumptions that the Company believes are reasonable and should be read in
conjunction with the consolidated financial statements and accompanying notes
thereto included elsewhere in this report. As there were no significant
acquisitions made in 1998, reference is hereby made to the consolidated
statements of operations for 1998 financial data.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA RESULTS FOR THE YEAR ENDED
----------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Net sales $ 542,045 $ 493,288
Income before extraordinary item 67,204 44,055
Net income 66,262 20,870
Income before extraordinary item per basic common share $ 2.25 $ 1.48
Net income per basic common share 2.25 0.71
Income before extraordinary item per diluted common share $ 2.04 $ 1.35
Net income per diluted common share 2.04 0.65
</TABLE>
31
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,146 $ 3,092
Buildings and leasehold improvements 34,087 31,699
Production and other equipment 92,592 80,745
Construction in progress 4,625 3,206
--------- ----------
134,450 118,742
Less: accumulated depreciation and amortization (45,421) (30,074)
--------- ----------
Property, plant and equipment, net $ 89,029 $ 88,668
--------- ----------
--------- ----------
</TABLE>
5 INVENTORIES
<TABLE>
<CAPTION>
Inventories are classified as follows:
December 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw material $27,327 $22,092
Work in progress 9,572 15,315
Finished goods 43,382 33,468
Revaluation of acquired inventory -- 16,500
--------- ----------
Total inventories $80,281 $87,375
--------- ----------
--------- ----------
</TABLE>
6 DEBT
The Company has a Bank Credit Agreement ("Agreement") that was renegotiated in
1997 which provides a $450,000 line of credit through June 2002. Loans under the
Agreement bear interest for each calendar quarter at an annual rate equal to, at
the Company's option, 1) the applicable LIBOR rate plus a varying margin between
.30% and 1.00% or 2) prime plus a varying margin between zero and .50 %. Margins
vary with Company financial performance. At December 31, 1998 and 1997, the
Company had aggregate borrowings outstanding under the Agreement of $208,275 and
$295,365, respectively, and had additional amounts available to borrow of
approximately $228,617 and $141,700, respectively, after outstanding letters of
credit. The weighted average interest rate on the borrowings at December 31,
1998 and 1997 was 5.64% and 6.78%, respectively. Borrowings are collateralized
by substantially all of the Company's assets. The Company is also required to
meet certain covenants, none of which is considered restrictive to operations.
The Company was in compliance with all covenants as of December 31, 1998. The
Company's foreign subsidiaries also had available short-term lines of credit
totaling $31,616 at December 31, 1998 and $29,804 at December 31, 1997. At
December 31, 1998 and 1997, related short-term borrowings were $4,144 at a
weighted average interest rate of 3.1% and $7,319 at a weighted average interest
rate of 4.3%, respectively.
In September 1997, the Company entered into an interest rate swap agreement
with Bankers Trust Company expiring December 31, 2001. The Company swapped
$135,000 in 1998 and $82,000 in 1997 ($151,000 in 1999, $143,000 in 2000 and
$93,000 in 2001) in notional amount of floating rate LIBOR borrowings for an
equivalent notional amount of borrowings at a fixed interest rate of 6.3%. At
December 31, 1998 and 1997, the fair value of this agreement was an unrealized
loss of $4,437 and $1,616, respectively. The Company also maintains several
interest rate protection agreements contracted prior to 1997.
In 1998, the Company amended debt swap agreements entered in May 1997 which
hedged the U.S. dollar value of the Company's investment in the net assets of
certain foreign subsidiaries. These agreements effectively swapped higher
floating rate LIBOR borrowings for lower fixed rate borrowings in their
respective local currencies. The effect of these debt swap agreements lowers
overall annual interest cost by approximately $2,387 over the lives of the swap
agreements at interest rates in effect in the respective contracts on December
31, 1998. The Company could incur higher or lower principal payments over the
term of the swap agreements. At currency exchange rates in effect on December
31, 1998, the fair market value of those instruments was $177. Details of these
swap agreements are as follows:
<TABLE>
<CAPTION>
Geography Notional Amount Composite Interest Rate Expiration Dates
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan $ 32,307 1.19% July 1999 to January 2001
Europe 26,800 2.02% January 2000
Canada 6,400 4.05% January 2000
----------
Total $ 65,507
----------
----------
</TABLE>
In April 1996, the Company consummated a tender offer to repurchase $75,000
of Senior Subordinated Notes outstanding. The Company recorded an extraordinary
loss of $22,264 related to this early extinguishment.
32
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
7 INCOME TAXES
<TABLE>
<CAPTION>
Income tax data for 1998, 1997 and 1996 follow in the tables below:
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The components of income (loss) from operations before
income taxes were as follows:
Domestic $ 62,873 $ 64,751 $ 33,534
Foreign 38,674 (57,284) (2,445)
------------ ------------ ------------
Total $ 101,547 $ 7,467 $ 31,089
------------ ------------ ------------
------------ ------------ ------------
The components of the current and deferred income tax provision
from operations were as follows:
Current $ 34,264 $ 20,280 $ 15,430
Deferred (7,116) (4,525) (4,200)
------------ ------------ ------------
Total $ 27,148 $ 15,755 $ 11,230
------------ ------------ ------------
------------ ------------ ------------
The components of the provision for income taxes from
operations were as follows:
Federal $ 6,001 $ 9,383 $ 4,576
State 1,336 878 900
Foreign 19,811 5,494 5,754
------------ ------------ ------------
Total $ 27,148 $ 15,755 $ 11,230
------------ ------------ ------------
------------ ------------ ------------
The differences between income taxes computed at the United States
statutory rate and the provision for income taxes are summarized
as follows:
Federal tax computed at U.S. statutory income tax rate $ 35,541 $ 2,613 $ 10,881
Foreign sales corporation (2,333) (1,826) --
State income tax, net of federal income tax benefit 868 570 585
Deferred tax assets (benefited) (13,254) (12,307) (16,823)
Net effect of foreign operations (191) 1,005 7,339
Nondeductible acquisition costs 5,775 25,025 8,890
Other 742 675 358
------------ ------------ ------------
Provision for income taxes $ 27,148 $ 15,755 $ 11,230
------------ ------------ ------------
------------ ------------ ------------
The tax effects of temporary differences and carryforwards which
gave rise to deferred tax assets and deferred tax (liabilities)
were as follows:
Acquired net operating loss carryforwards $ 608 $ 2,516 $ 3,995
Tax benefit of net operating loss and credits 18,006 4,133 18,126
Estimated loss on disposal of discontinued operations -- -- 991
Goodwill amortization 10,598 10,866 11,731
Deferred compensation 7,984 3,605 2,344
Inventory 6,388 2,452 1,187
Other (68) 2,296 3,561
Depreciation and capitalized software (7,620) (6,481) (4,911)
Valuation allowance (15,439) (9,296) (32,824)
------------ ------------ ------------
Total deferred taxes $ 20,457 $ 10,091 $ 4,200
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
At December 31, 1998, the Company had foreign net operating loss
carryforwards of approximately $6,804, some of which begin to expire in the year
2000 and some of unlimited duration. The goodwill amortization represents the
difference between the book and tax treatment for both goodwill and in-process
research and development. Deferred tax assets are included in other current
assets in the consolidated balance sheets. Realization of deferred tax assets is
contingent upon future taxable income. The valuation allowance relates to
foreign net operating losses and foreign tax credits, the realization of which
is uncertain. The acquired net operating loss carryforward tax benefit of $608
will reduce goodwill but not tax expense when it is realized.
The Company's effective tax rate before the nondeductible acquisition
related expenses for the year ended December 31, 1998 was 23%.
33
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
8 LEASES
Lease agreements, expiring at various dates through 2019, cover buildings,
office equipment and automobiles. Rental expense was approximately $10,766 in
1998, $8,666 in 1997 and $6,474 in 1996. Future minimum rents payable as of
December 31, 1998 under non-cancelable leases with initial terms exceeding one
year were as follows:
<TABLE>
<CAPTION>
-----------------------------------------
<S> <C>
1999 $ 9,995
2000 7,782
2001 4,957
2002 3,402
2003 2,472
Thereafter 11,471
</TABLE>
9 REDEEMABLE PREFERRED STOCK
In conjunction with the August 18, 1994 acquisition of the predecessor HPLC
business of Millipore Corporation ("Millipore"), the Company authorized and
issued one hundred shares of Redeemable Preferred Stock ("Preferred Stock") with
a par value of $.01 per share. The Preferred Stock has a liquidation value of
$10,000 and earns an annual 6% cumulative dividend on the liquidation value. Any
accumulated but unpaid dividends are added to the liquidation value. The Company
may, at any time, redeem the Preferred Stock at the current liquidation value
but in no event later than August 18, 2006. The Preferred Stock was recorded at
its estimated fair value of $5,000 on the date of issuance. The excess of the
liquidation value over the fair market value is being accreted by periodic
charges to additional paid-in capital from the date of issue through August 18,
2006. During the years ended December 31, 1998, 1997, and 1996, $363, $342, and
$321, respectively, were charged against additional paid-in capital for
accretion and $600 was charged in each year for the unpaid dividends.
At December 31, 1998, the total liquidation value was $12,622.
10 STOCK COMPENSATION AND PURCHASE PLANS
BASIS OF ACCOUNTING
The Company has four stock-based compensation plans, which are described below.
The Company uses the intrinsic value method of accounting prescribed by the
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations for its plans. Accordingly, no
compensation expense has been recognized for its fixed stock option plans and
its stock purchase plan under SFAS 123. Had compensation expense for the
Company's four stock-based compensation plans been recorded based on the fair
value of awards at grant date consistent with the alternative method prescribed
by SFAS 123, the Company's pro forma net income (loss) for 1998, 1997 and 1996,
would have been $70,043, $(10,821), and $(4,324). Basic income (loss) per share
for 1998, 1997, and 1996 would have been $2.34, $(0.37), and $(0.15),
respectively. Diluted income (loss) per share for 1998, 1997, and 1996 would
have been $2.17, $(0.37), and $(0.14), respectively. The pro forma amounts
include amortized fair values attributable to options granted after December 31,
1994 only and, therefore, are not likely to be representative of the effects on
reported net income for future years.
The fair value of each option grant under SFAS 123 was estimated on the
date of grant using the Black-Scholes option-pricing model. The following table
presents the annualized weighted average values of the significant assumptions
used to estimate the fair values of the options:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Options issued 528 499 358
Risk-free interest rate 4.7% 5.8% 6.4%
Expected life in years 7.5 7.2 7.4
Expected volatility 0.454 0.609 0.674
Expected dividends 0 0 0
</TABLE>
34
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
The following table details the weighted average exercise price and fair
values of options on the date of grant:
<TABLE>
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options exercise prices are less than the market price
Exercise price $ 31.50
Fair value $ 13.50
Options exercise prices are equal to the market price
Exercise price $ 78.53 $ 42.75
Fair value $ 43.71 $ 29.15
Options exercise prices exceed the market price
Exercise price $ 34.21
Fair value $ 20.89
</TABLE>
The following table details the weighted average remaining contractual life
of options outstanding at December 31, 1998 by range of exercise prices:
<TABLE>
<CAPTION>
Remaining Contractual
Exercise Number of Shares Exercise Life of Options Number of Shares Exercise
Price Range Outstanding Price Outstanding Exercisable Price
---------------- ---------------- -------- -------------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.00 to $5.00 603 $ 4.00 5.7 years 358 $ 4.00
$5.01 to $10.00 905 $ 9.50 5.9 years 804 $ 9.50
$10.01 to $20.00 2,447 $ 16.28 5.6 years 1,909 $ 16.28
$20.01 to $40.00 337 $ 34.16 7.3 years 125 $ 34.17
$40.01 to $60.00 470 $ 42.77 8.8 years 86 $ 42.75
$60.01 to $80.00 525 $ 78.74 9.9 years 0 $ 0.00
---------------------------------------------------------------------------------
5,287 $ 23.42 6.5 years 3,282 $ 14.66
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
STOCK OPTION PLANS
On May 7, 1996, the Company's shareholders approved the 1996 Long-Term Incentive
Plan ("1996 Plan"), which provides for the granting of 1,000 shares of Common
Stock, in the form of incentive or non-qualified stock options, stock
appreciation rights ("SARs"), restricted stock or other types of awards. Under
the 1996 Plan, the exercise price for stock options may not be less than the
fair market value of the underlying stock at the date of grant. On December 2,
1997, the Board of Directors approved an additional 2,000 shares of Common Stock
for issue under the 1996 Plan. The 1996 Plan is scheduled to terminate on May 7,
2006, unless extended for a period of up to five years by action of the Board of
Directors. Options generally will expire no later than ten years after the date
on which they are granted and will become exercisable as directed by the
Compensation Committee of the Board of Directors. An SAR may be granted alone or
in conjunction with an option or other award. No SARs, restricted stock, or
other types of awards were outstanding as of December 31, 1998.
The Company's 1994 Stock Option Plan ( "1994 Plan") provided for the
granting of 5,035 options to purchase shares of common stock to certain key
employees of the Company. The exercise price of the options was determined by a
committee of the Board of Directors of the Company. Options granted have a term
of ten years and vest in five equal installments on the first five anniversaries
after the grant.
On May 7, 1996, the Company's shareholders approved the 1996 Non-Employee
Director Deferred Compensation Plan ("Deferred Compensation Plan") and the 1996
Non-Employee Director Stock Option Plan ("Director Stock Option Plan"). Under
the Deferred Compensation Plan, outside directors may elect to defer their fees
and credit such fees to either a cash account which earns interest at a
market-based rate or to a common stock unit account, for which 100 shares of
Common Stock have been reserved. Under the Director Stock Option Plan, each
outside director will receive an annual option to purchase one thousand shares
of Common Stock. Fifty thousand shares of Common Stock may be issued under the
plan. Options have a term of ten years and, with the exception of options
granted in 1996, which vest in one year, vest in five equal installments on the
first five anniversaries following the date of grant and have option prices no
less than fair market value at the date of grant.
35
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
The following table summarizes stock option activity for the plans:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Price Per Share Exercise Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 5,035 $ 4.00 to $16.28 $ 11.76
Granted 358 $34.21 to $34.50 $ 34.21
Exercised (128) $ 4.00 to $16.28 $ (10.48)
Canceled (3) $34.21 $ (34.21)
------------
Outstanding at December 31, 1996 5,262 $ 4.00 to $34.50 $ 13.31
Granted 499 $32.20 to $42.75 $ 42.40
Exercised (265) $ 4.00 to $34.21 $ (7.90)
Canceled (36) $ 9.50 to $34.21 $ (20.05)
------------
Outstanding at December 31, 1997 5,460 $ 4.00 to $42.75 $ 16.19
Granted 528 $37.56 to $78.75 $ 78.53
Exercised (694) $ 4.00 to $42.75 $ (8.25)
Canceled (7) $32.20 to $42.75 $ (39.68)
------------
Outstanding at December 31, 1998 5,287 $ 4.00 to $78.75 $ 23.42
------------ ----------------- ------------
------------ ----------------- ------------
</TABLE>
Options exercisable at December 31, 1998, 1997, and 1996 were 3,282, 3,028
and 2,439, respectively. The weighted average exercise prices of options
exercisable at December 31, 1998, 1997, and 1996 were $14.66, $12.43 and $11.30,
respectively. Available stock options for grant at December 31, 1998 were 1,715.
EMPLOYEE STOCK PURCHASE PLAN
On February 26, 1996, the Company adopted the 1996 Employee Stock Purchase Plan
under which eligible employees may contribute up to 15% of their earnings toward
the quarterly purchase of the Company's Common Stock. The plan makes available
250 shares of the Company's Common Stock commencing October 1, 1996. As of
December 31, 1998, approximately 48 shares have been issued under the plan. Each
plan period lasts three months beginning on January 1, April 1, July 1, and
October 1 of each year. The purchase price for each share of stock is the lesser
of 90% of the market price on the first day of the plan period or 100% of the
market price on the last day of the plan period. No compensation expense is
recorded in connection with the plan.
36
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
11 EARNINGS PER SHARE
Basic and diluted EPS calculations are detailed as follows:
<TABLE>
<CAPTION>
Year Ended 1998
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net income $74,399
Less: Accretion of and 6% dividend on preferred stock 963
--------- ---------- ---------
Income per basic common share from operations $73,436 29,930 $ 2.45
--------- ---------- ---------
--------- ---------- ---------
Effect of dilutive securities:
Options outstanding 2,202
Options exercised 189
--------- ---------- ---------
Income per diluted common share from operations $73,436 32,321 $ 2.27
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended 1997
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net (loss) $(8,288)
Less: Accretion of and 6% dividend on preferred stock 942
--------- ---------- ---------
(Loss) per basic common share from operations $(9,230) 29,127 $ (.32)
--------- ---------- ---------
--------- ---------- ---------
Effect of dilutive securities --------- ---------- ---------
(Loss) per diluted common share from operations $(9,230) 29,127 $ (.32)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended 1996
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net income before extraordinary item $19,859
Less: Accretion of and 6% dividend on preferred stock 921
--------- ---------- ---------
Income per basic common share from operations $18,938 28,841 $ .66
--------- ---------- ---------
--------- ---------- ---------
Effect of dilutive securities:
Options outstanding 2,765
Options exercised 22
--------- ---------- ---------
Income per diluted common share from operations $18,938 31,628 $ .60
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
For the years ended December 31, 1998, 1997, and 1996, the Company had 525,
5,460, and 350 stock option securities that were antidilutive, respectively.
These securities were not included in the computation of diluted EPS, but could
potentially dilute basic EPS in the future.
12 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 74,399 $ (8,288) $ (2,405)
Foreign currency translation adjustments before income taxes (58) (3,976) 1,265
Income tax (benefit) expense (13) (795) 252
-------- --------- ---------
Foreign currency translation adjustments, net of tax (45) (3,181) 1,013
Minimum pension liability adjustments before income taxes -- -- 505
Income tax expense -- -- 101
-------- --------- ---------
Minimum pension liability adjustments, net of tax -- -- 404
-------- --------- ---------
Other comprehensive (loss) income (45) (3,181) 1,417
-------- --------- ---------
Comprehensive income (loss) $ 74,354 $(11,469) $ (988)
-------- --------- ---------
-------- --------- ---------
</TABLE>
37
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
13 RETIREMENT PLANS
The Company has two retirement plans for employees: the Waters Employee
Investment Plan, a defined contribution plan, and the Waters Retirement Plan, a
defined benefit cash balance plan.
In conjunction with its 1994 acquisition of the predecessor HPLC business
of Millipore, the Company had asserted a claim contending that Millipore had
understated the amount of assets it was obligated to transfer from the Millipore
retirement plan to the Waters Retirement Plan. The Federal court subsequently
ruled in favor of Millipore's position with respect to the claim. On appeal, the
Federal court ruling was upheld, and $2,440 was transferred to the Waters
Retirement Plan on June 2, 1998.
U.S. employees are eligible to participate in the Waters Employee
Investment Plan after one month of service. Employees may contribute from 1% to
20% of eligible pay on a pre-tax basis. The Company makes a matching
contribution of 50% for contributions up to 6% of eligible pay. Employees are
100% vested in company matching contributions after one year of service. For the
years ended December 31, 1998, 1997 and 1996, the Company's matching
contributions amounted to $1,839, $1,559, and $1,318, respectively. Effective
January 1, 1998, the Micromass, Inc. 401(k) Plan was merged into the Waters
Employee Investment Plan and YMC employees joined the Waters Employee Investment
Plan. Effective December 31, 1996, the TA Instruments, Inc. Savings and
Investment Plan was merged into the Waters Employee Investment Plan. TAI's
matching contributions from May 1, 1996 to December 31, 1996 were $127.
U.S. employees are eligible to participate in the Waters Retirement Plan
after one year of service. The Company makes an annual contribution to each
employee's account as a percentage of eligible pay based on years of service. In
addition, each employee's account is credited for investment returns at the
beginning of each year for the prior year at the average 12 month Treasury Bill
rate plus 0.5%, limited to a minimum rate of 5% and a maximum rate of 10%. An
employee does not vest until the completion of five years of service at which
time the employee becomes 100% vested.
The net periodic pension cost under SFAS 87 is made up of several
components that reflect different aspects of the Company's financial
arrangements as well as the cost of benefits earned by employees. These
components are determined using the projected unit credit actuarial cost method
and are based on certain actuarial assumptions. The Company's accounting policy
is to reflect in the projected benefit obligation all benefit changes to which
the Company is committed as of the current valuation date; use a market-related
value of assets to determine pension expense; amortize increases in prior
service costs on a straight-line basis over the expected future service of
active participants as of the date such costs are first recognized; and amortize
cumulative actuarial gains and losses in excess of 10% of the larger of the
market-related value of plan assets and the projected benefit obligation over
the expected future service of active participants. Summary data for the Waters
Retirement Plan are presented in the following tables:
<TABLE>
<CAPTION>
Reconciliation of Projected Benefit Obligation 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit obligation, January 1 $ 15,904 $ 10,552
Service cost 2,513 2,043
Interest cost 1,369 1,053
Employee rollovers 160 57
Actuarial loss 1,312 2,363
Disbursements (328) (164)
-------- --------
Benefit obligation, December 31 $ 20,930 $ 15,904
-------- --------
-------- --------
Reconciliation of Fair Value of Assets 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Fair value of assets, January 1 $ 16,008 $ 13,987
Actual return on plan assets 1,322 1,653
Company contributions -- 475
Disbursements (328) (164)
Employee rollovers 160 57
-------- --------
Fair value of assets, December 31 $ 17,162 $ 16,008
-------- --------
-------- --------
38
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
Reconciliation of Funded Status, December 31 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $(20,930) $(15,904)
Fair value of plan assets 17,162 16,008
-------- --------
Projected benefit obligation (in excess of)/less than fair value of plan assets (3,768) 104
Unrecognized prior service cost (1,324) (1,423)
Unrecognized net actuarial loss/(gain) 198 (1,183)
-------- --------
Accrued benefit (liability) $ (4,894) $ (2,502)
-------- --------
-------- --------
The projected benefit obligation was calculated using the following weighted average assumptions:
Discount rate 7.00% 7.25%
Return on assets 9.00% 9.00%
Increases in compensation levels 4.75% 4.75%
</TABLE>
<TABLE>
<CAPTION>
Components of Net Periodic Pension Cost, Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,513 $ 2,043 $ 2,025
Interest cost 1,369 1,054 938
Return on plan assets (1,391) (1,190) (732)
Net amortization:
Prior service cost (99) (99) 21
Net actuarial (gain)/loss -- (39) 7
-------- -------- --------
Net periodic pension cost $ 2,392 $ 1,769 $ 2,259
-------- -------- --------
-------- -------- --------
Reconciliation of (Accrued) Pension Cost 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(Accrued) pension cost, January 1 $ (2,502) $ (1,208) $ (1,559)
Acquisition of TAI as of May 1, 1996 -- -- (2,767)
FAS 87 (cost) (2,392) (1,769) (2,259)
Contributions made during the year -- 475 5,377
-------- -------- --------
(Accrued) pension cost, December 31 $ (4,894) $ (2,502) $ (1,208)
-------- -------- --------
-------- -------- --------
</TABLE>
The Company also sponsors several unfunded defined benefit post-retirement
plans covering U.S. employees. The plans provide medical insurance benefits and
are, depending on the plan, either contributory or non-contributory. The
Company's accrued post-retirement benefit obligation was $2,532 and $2,488 at
December 31, 1998 and 1997, respectively, and is included in other liabilities
in the consolidated balance sheets.
14 RELATED PARTY TRANSACTIONS
In 1996 and 1995, the Company made loans to certain executive officers of the
Company. The loans are collateralized by a pledge of shares of common stock held
by these executive officers. The 1995 loans bear interest at 5.83% per annum and
mature on December 1, 2000. The 1996 loans bear interest at 5.65% per annum and
mature on January 8, 2001. Loans receivable of $2,436 at December 31, 1998 and
$2,623 at December 31, 1997 are included in other assets in the consolidated
balance sheets.
In connection with the acquisition of the predecessor HPLC business on
August 18, 1994, the Company and Millipore entered into a Transition Support and
Service Agreement ("Transition Agreement") whereby Millipore agreed to (i) lease
office space, (ii) transfer certain personnel, (iii) provide management
information systems, administrative, distribution and facilities management
support, (iv) provide access to its telephone network and (v) supply
professional support services. The Transition was substantially complete as of
December 31, 1996. The Company believes that the costs incurred under the
Transition Agreement were representative of charges that would have been levied
by independent third parties for similar services. The Company incurred net
expenses pursuant to this agreement of $38, $1,273 and $4,165, for the years
ended December 31, 1998, 1997, and 1996, respectively. These expenses are
included in selling, general and administrative expenses in the consolidated
statements of operations.
During the years ended December 31, 1998, 1997 and 1996, the Company sold
products and service totaling $148, $32 and $86, respectively, to Millipore.
These sales are included in net sales in the consolidated statements of
operations.
39
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
15 BUSINESS SEGMENT INFORMATION
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements of public business enterprises. It also
establishes standards for related disclosures about products and service,
geographic areas, and major customers. The Company evaluated its business
activities that are regularly reviewed by the Chief Executive Officer for which
discrete financial information is available. As a result of this evaluation, the
Company determined that it has three operating segments: Waters, TAI and
Micromass.
Waters is in the business of manufacturing and distributing HPLC
instruments, columns and other consumables, and related service; TAI is in the
business of manufacturing and distributing thermal analysis and rheology
instruments; and Micromass is in the business of manufacturing and distributing
mass spectrometry instruments that can be integrated and used along with other
analytical instruments, particularly HPLC. For all three of these operating
segments within the analytical instrument industry; economic characteristics,
production processes, products and services, types and classes of customers,
methods of distribution, and regulatory environments are similar. Because of
these similarities, the three segments have been aggregated into one reporting
segment for financial statement purposes. The accounting policies of the
reportable segment are the same as those described in the Summary of Significant
Accounting Policies. Please refer to the consolidated financial statements for
financial information regarding the one reportable segment of the Company. The
Company sells products and service within this reportable segment, detailed as
follows:
<TABLE>
<CAPTION>
Revenue 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Products $500,671 $371,928 $313,948
Service 118,142 93,542 77,165
-------- -------- --------
Total $618,813 $465,470 $391,113
-------- -------- --------
-------- -------- --------
</TABLE>
Geographic information is presented below:
<TABLE>
<CAPTION>
United States Europe Japan Asia Other Int'l Elimination Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Sales:
Unaffiliated sales $ 258,050 $ 208,168 $ 46,098 $ 21,923 $ 44,578 $ -- $ 578,817
Unaffiliated export sales to Japan -- 12,199 -- -- -- -- 12,199
Unaffiliated export sales to Asia 5,276 6,896 -- -- -- -- 12,172
Unaffiliated export sales to Other Int'l 12,347 3,278 -- -- -- -- 15,625
Transfers between areas 153,666 49,148 -- -- -- (202,814) --
--------- --------- --------- --------- --------- --------- ---------
Total sales $ 429,339 $ 279,689 $ 46,098 $ 21,923 $ 44,578 $(202,814) $ 618,813
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Long-lived assets:
Unaffiliated $ 213,219 $ 98,058 $ 2,775 $ 367 $ 11,658 $ -- $ 326,077
Between affiliates 234,652 20,963 2,180 -- 3,790 (261,585) --
--------- --------- --------- --------- --------- --------- ---------
Total long-lived assets $ 447,871 $ 119,021 $ 4,955 $ 367 $ 15,448 $(261,585) $ 326,077
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
1997
Sales:
Unaffiliated sales $ 187,136 $ 138,591 $ 46,077 $ 29,635 $ 37,744 $ -- $ 439,183
Unaffiliated export sales to Japan 74 4,132 -- -- -- -- 4,206
Unaffiliated export sales to Asia 8,009 1,792 -- -- -- -- 9,801
Unaffiliated export sales to Other Int'l 12,280 -- -- -- -- -- 12,280
Transfers between areas 131,441 12,471 -- -- -- (143,912) --
--------- --------- --------- --------- --------- --------- ---------
Total sales $ 338,940 $ 156,986 $ 46,077 $ 29,635 $ 37,744 $(143,912) $ 465,470
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Long-lived assets:
Unaffiliated $ 223,258 $ 103,500 $ 2,444 $ 550 $ 5,808 $ -- $ 335,560
Between affiliates 219,149 20,550 2,181 -- 24 (241,904) --
--------- --------- --------- --------- --------- --------- ---------
Total long-lived assets $ 442,407 $ 124,050 $ 4,625 $ 550 $ 5,832 $(241,904) $ 335,560
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
1996
Sales:
Unaffiliated sales $ 145,578 $ 118,433 $ 48,876 $ 34,828 $ 37,230 $ -- $ 384,945
Unaffiliated export sales to Asia 283 -- -- -- -- -- 283
Unaffiliated export sales to Other Int'l 5,885 -- -- -- -- -- 5,885
Transfers between areas 122,575 -- -- -- -- (122,575) --
--------- --------- --------- --------- --------- --------- ---------
Total sales $ 274,321 $ 118,433 $ 48,876 $ 34,828 $ 37,230 $(122,575) $ 391,113
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Long-lived assets:
Unaffiliated $ 201,535 $ 11,870 $ 2,148 $ 311 $ 5,606 $ -- $ 221,470
Between affiliates 40,283 21,350 2,181 -- 12 (63,826) --
--------- --------- --------- --------- --------- --------- ---------
Total long-lived assets $ 241,818 $ 33,220 $ 4,329 $ 311 $ 5,618 $ (63,826) $ 221,470
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The United States category includes Puerto Rico. The Other category includes
Canada, South America, Australia, India, Eastern Europe and Central Europe.
Transfer sales between geographical areas are generally made at a discount from
list price. None of the Company's individual customers accounts for more than 2%
of annual Company sales.
40
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
16 QUARTERLY RESULTS
The Company's unaudited quarterly results are summarized below (In thousands,
except per share data):
<TABLE>
<CAPTION>
1998 First Quarter Second Quarter Third Quarter Fourth Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $138,725 $149,311 $151,793 $178,984 $618,813
Cost of sales 51,920 55,848 57,832 66,897 232,497
Revaluation of acquired inventory 16,500 -- -- -- 16,500
----------- ----------------- ----------------- ---------------- ---------------
Gross profit 70,305 93,463 93,961 112,087 369,816
Selling, general and
administrative expenses 49,988 51,952 49,276 54,995 206,211
Research and development expenses 8,372 8,246 8,512 9,303 34,433
Goodwill and purchased
technology amortization 2,275 2,231 2,537 2,304 9,347
----------- ----------------- ----------------- ---------------- ---------------
Operating income 9,670 31,034 33,636 45,485 119,825
Interest expense, net 5,063 4,888 4,416 3,911 18,278
----------- ----------------- ----------------- ---------------- ---------------
Income from operations
before income taxes 4,607 26,146 29,220 41,574 101,547
Provision for income taxes 4,363 6,033 7,264 9,488 27,148
----------- ----------------- ----------------- ---------------- ---------------
Net income 244 20,113 21,956 32,086 74,399
Less: Accretion of and dividend
on preferred stock 239 240 241 243 963
----------- ----------------- ----------------- ---------------- ---------------
Net income available to common
stockholders $ 5 $ 19,873 $ 21,715 $ 31,843 $ 73,436
----------- ----------------- ----------------- ---------------- ---------------
----------- ----------------- ----------------- ---------------- ---------------
Net income per basic common share $ .00 $ .67 $ .72 $ 1.06 $ 2.45
----------- ----------------- ----------------- ---------------- ---------------
----------- ----------------- ----------------- ---------------- ---------------
Weighted average number of basic
common shares 29,708 29,877 30,014 30,165 29,930
----------- ----------------- ----------------- ---------------- ---------------
----------- ----------------- ----------------- ---------------- ---------------
Net income per diluted common share $ .00 $ .59 $ .67 $ .98 $ 2.27
----------- ----------------- ----------------- ---------------- ---------------
----------- ----------------- ----------------- ---------------- ---------------
Weighted average number of diluted
common shares and equivalents 33,161 33,519 32,411 32,614 32,321
----------- ----------------- ----------------- ---------------- ---------------
----------- ----------------- ----------------- ---------------- ---------------
Stock price range 36 1/2 - 52 49 5/16 - 62 14/16 52 6/16 - 68 5/16 53 2/16 - 87 1/2 36 1/2 - 87 1/2
</TABLE>
<TABLE>
<CAPTION>
1997 First Quarter Second Quarter Third Quarter Fourth Quarter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $102,431 $106,240 $105,044 $151,755 $465,470
Cost of sales 37,765 38,703 38,598 58,209 173,275
Revaluation of acquired inventory -- -- -- 16,500 16,500
----------- ---------------- ---------------- ---------------- ----------------
Gross profit 64,666 67,537 66,446 77,046 275,695
Selling, general and administrative
expenses 39,076 38,909 39,008 50,297 167,290
Research and development expenses 5,786 5,806 6,259 7,899 25,750
Goodwill and purchased technology
amortization 1,357 1,415 1,444 2,252 6,468
Expensed in-process research and
development -- -- 55,000 -- 55,000
----------- ---------------- ---------------- ---------------- ----------------
Operating income (loss) 18,447 21,407 (35,265) 16,598 21,187
Interest expense, net 3,024 2,959 2,334 5,403 13,720
----------- ---------------- ---------------- ---------------- ----------------
Income (loss) from operations
before income taxes 15,423 18,448 (37,599) 11,195 7,467
Provision for income taxes 3,085 3,689 3,480 5,501 15,755
----------- ---------------- ---------------- ---------------- ----------------
Net income (loss) 12,338 14,759 (41,079) 5,694 (8,288)
Less: Accretion of and dividend
on preferred stock 234 234 237 237 942
----------- ---------------- ---------------- ---------------- ----------------
Net income (loss) available to
common stockholders $ 12,104 $ 14,525 $(41,316) $ 5,457 $ (9,230)
----------- ---------------- ---------------- ---------------- ----------------
----------- ---------------- ---------------- ---------------- ----------------
Net income (loss) per basic
common share $ .42 $ .50 $ (1.42) $ .18 $ (.32)
----------- ---------------- ---------------- ---------------- ----------------
----------- ---------------- ---------------- ---------------- ----------------
Weighted average number of basic
common shares 28,927 28,957 29,074 29,551 29,127
----------- ---------------- ---------------- ---------------- ----------------
----------- ---------------- ---------------- ---------------- ----------------
Net income (loss) per diluted
common share $ .38 $ .46 $ (1.42) $ .17 $ (.32)
----------- ---------------- ---------------- ---------------- ----------------
----------- ---------------- ---------------- ---------------- ----------------
Weighted average number of diluted
common shares and equivalents 31,867 31,560 29,074 32,936 29,127
----------- ---------------- ---------------- ---------------- ----------------
----------- ---------------- ---------------- ---------------- ---------------
Stock price range 26 - 31 3/8 23 1/8 - 37 3/4 31 7/16 - 45 1/4 36 - 48 7/16 23 1/8 - 48 7/16
</TABLE>
41
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share data and employees)
<TABLE>
<CAPTION>
The Company
--------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended August 19 to
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $618,813 $465,470 $391,113 $332,972 $131,057
Cost of sales 232,497 173,275 145,254 126,216 49,740
Revaluation of acquired inventory (B) 16,500 16,500 6,100 925 38,424
------------ ------------ ------------ ------------ ------------
Gross profit 369,816 275,695 239,759 205,831 42,893
Selling, general and administrative expenses 206,211 167,290 148,513 132,746 44,522
Research and development expenses 34,433 25,750 20,898 17,681 6,790
Goodwill and purchased technology amortization 9,347 6,468 5,219 3,629 1,227
Expensed in-process research and development (B) -- 55,000 19,300 -- 53,918
Management fee (B) -- -- -- 5,393 552
Restructuring charge (B) -- -- -- -- 3,500
------------ ------------ ------------ ------------ ------------
Operating income (loss) 119,825 21,187 45,829 46,382 (67,616)
Interest expense, net (C) 18,278 13,720 14,740 30,315 12,011
(Gains) on cash flow hedges (B) -- -- -- (1,175) (923)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations before income taxes 101,547 7,467 31,089 17,242 (78,704)
Provision for income taxes 27,148 15,755 11,230 3,129 1,487
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 74,399 (8,288) 19,859 14,113 (80,191)
Income (loss) from discontinued operations, net of tax (B) -- -- -- -- (7,213)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item 74,399 (8,288) 19,859 14,113 (87,404)
Extraordinary item-(loss) on early retirement of debt -- -- (22,264) (12,112) --
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle 74,399 (8,288) (2,405) 2,001 (87,404)
Cumulative effect of change in accounting principle (B) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) 74,399 (8,288) (2,405) 2,001 (87,404)
Less: Accretion of and dividend on preferred stock 963 942 921 902 330
------------ ------------ ------------ ------------ ------------
Net income (loss) available to common stockholders $73,436 $(9,230) $(3,326) $1,099 $(87,734)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Income (loss) per basic common share:
Income (loss) per common share before extraordinary item $2.45 $(.32) $.66 $.59 $(3.74)
(Loss) per common share from discontinued operations -- -- -- -- (.34)
Extraordinary (loss) per common share -- -- (.78) (.54) --
------------ ------------ ------------ ------------ ------------
Net income (loss) per common share $2.45 $(.32) $(.12) $.05 $(4.08)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average number of basic common shares 29,930 29,127 28,841 22,326 21,482
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------
Income (loss) per diluted common share:
Income (loss) per common share before extraordinary item $2.27 $(.32) $.60 $.54 $(3.74)
(Loss) per common share from discontinued operations -- -- -- -- (.34)
Extraordinary (loss) per common share -- -- (.71) (.49) --
------------ ------------ ------------ ------------ ------------
Net income (loss) per common share $2.27 $(.32) $(.11) $.05 $(4.08)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average number of diluted common shares
and equivalents 32,321 29,127 31,628 24,582 21,482
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
BALANCE SHEET AND OTHER DATA (D):
Working capital $ 66,051 $ 45,843 $ 61,227 $ 56,385 $ 87,357
Total assets $577,701 $552,059 $365,502 $299,816 $331,598
Long term debt, including current maturities (C) $218,250 $305,340 $210,470 $158,500 $275,000
Redeemable preferred stock $ 9,058 $ 8,096 $ 7,153 $ 6,232 $ 5,330
Stockholders' equity (deficit)/parent company investment $150,119 $ 62,297 $ 57,780 $ 58,118 $(22,670)
Employees 2,758 2,640 2,135 1,934 2,021
Depreciation and amortization for the period $ 27,248 $ 20,010 $ 16,709 $ 13,774 $ 4,394
Capital expenditures for the period $ 20,616 $ 23,393 $ 13,822 $ 9,878 $ 2,191
</TABLE>
(A) Results of predecessor HPLC business of former parent Millipore
Corporation acquired by Company on August 18,1994.
(B) Nonrecurring charges and (gains).
(C) Interest expense through August 18, 1994 was an allocation of Millipore's
worldwide net interest expense based upon the ratio of the Predecessor's
net assets to Millipore's net assets. No debt obligations of Millipore
were reflected on the Predecessor's balance sheets.
(D) As a publicly held company, the Company has not declared or paid any
dividends on common stock.
42
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share data and employees)
<TABLE>
<CAPTION>
Predecessor Business (A)
-------------------------------------------------------
January 1 to Year Ended Year Ended
August 18, December 31, December 31,
1994 1993 1992
------------ ------------ ---------
<S> <C> <C> <C>
$176,097 $304,927 $309,287
73,446 124,387 123,342
-- -- --
--------- --------- ---------
102,651 180,540 185,945
85,216 132,452 138,318
13,399 18,525 19,142
-- -- --
-- -- --
-- -- --
-- 13,000 --
--------- --------- ---------
4,036 16,563 28,485
828 2,072 2,107
-- -- --
--------- --------- ---------
3,208 14,491 26,378
916 4,169 6,180
--------- --------- ---------
2,292 10,322 20,198
(448) (9) 108
--------- --------- ---------
1,844 10,313 20,306
-- -- --
--------- --------- ---------
1,844 10,313 20,306
-- -- (2,228)
--------- --------- ---------
$ 1,844 $ 10,313 $ 18,078
--------- --------- ---------
--------- --------- ---------
$ 100,528 $112,905
$ 189,592 $199,513
$ -- $ --
$ -- $ --
$ 149,095 $163,157
2,069 2,009 2,180
$ 6,323 $ 9,265 $ 8,857
$ 5,935 $ 8,439 $ 10,739
</TABLE>
43
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
(This page is intentionally left blank.)
44
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
[Inside back cover]
WATERS CORPORATION AND SUBSIDIARIES
WATERS CORPORATION 1998 ANNUAL REPORT
DIRECTORS
Douglas A. Berthiaume
Chairman, President, and Chief Executive Officer
Waters Corporation
Joshua Bekenstein
Managing Director
Bain Capital, Inc.
Dr. Michael J. Berendt
Senior Vice President
Bayer Corporation
Philip Caldwell
Retired Chairman and Chief Executive Officer
Ford Motor Company
Edward Conard
Managing Director
Bain Capital, Inc.
Dr. Laurie H. Glimcher
Professor of Immunology and Medicine
Harvard School of Public Health and Harvard Medical School
William J. Miller
Chairman and Chief Executive Officer
Avid Technology, Inc.
Thomas P. Salice
Managing Director
AEA Investors, Inc.
OFFICERS
Douglas A. Berthiaume
Chairman, President, and Chief Executive Officer
Arthur G. Caputo
Senior Vice President
Worldwide Sales and Marketing
Thomas W. Feller
Senior Vice President
Operations
John R. Nelson
Senior Vice President
Research, Development, and Engineering
Philip S. Taymor
Senior Vice President
Finance and Administration and Chief Financial Officer
Brian K. Mazar
Vice President
Human Resources and Investor Relations
Devette W. Russo
Vice President
Chromatography Consumables Division
TRANSFER AGENT
BankBoston, N.A.
c/o EquiServe LP
P.O. Box 8040
Boston, Massachusetts 02266-8040
781-575-3120
www.equiserve.com
AUDITORS
PricewaterhouseCoopers LLP
One Post Office Square
Boston, Massachusetts 02109
ATTORNEYS
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110-1726
STOCKHOLDERS' MEETING
Date: May 4, 1999, 11 a.m.
Place: Waters Corporation
34 Maple Street
Milford, Massachusetts
Directions: Call 800-252-4752 Ext. 3314
STOCKLIST SYMBOL
NYSE: WAT
FORM 10K
A copy of the Company's 10K, filed with the Securities and Exchange Commission,
is available without charge upon written request to:
Waters Corporation
34 Maple Street
Milford, Massachusetts 01757
OFFICES
Corporate Headquarters
Waters Corporation
34 Maple Street
Milford, Massachusetts 01757
Phone: 508-478-2000
Toll free: 800-252-4752
FAX: 508-872-1990
Email: [email protected]
URL: www.waters.com
Waters, Millennium, Alliance, Oasis, and Symmetry are registered trademarks of
Waters Corporation. CapLC, SymmetryShield, PerformancePLUS, Quattro, Quattro
Ultima, uTA, TA Instruments, Q-tof, MUX, and Micromass are trademarks of Waters
Corporation. Connections is a service mark of Waters Corporation. Microsoft,
Windows, and Windows NT are trademarks of Microsoft Corporation.
(recycling symbol) Contains Recycled Fibers.
<PAGE>
(Back Cover)
(FRONT COVER IMAGE WRAPS AROUND TO BACK COVER.)
Waters
34 Maple Street Milford MA 01757
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Waters Corporation on Form S-8 (File Nos. 333-08191 and 333-18371) of our
report dated January 22, 1999, on our audits of the consolidated financial
statements of Waters Corporation and Subsidiaries as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
which report is incorporated by reference in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,497
<SECURITIES> 0
<RECEIVABLES> 139,772
<ALLOWANCES> 2,966
<INVENTORY> 80,281
<CURRENT-ASSETS> 251,624
<PP&E> 134,450
<DEPRECIATION> 45,421
<TOTAL-ASSETS> 577,701
<CURRENT-LIABILITIES> 185,573
<BONDS> 218,250
9,058
0
<COMMON> 303
<OTHER-SE> 149,816
<TOTAL-LIABILITY-AND-EQUITY> 577,701
<SALES> 618,813
<TOTAL-REVENUES> 618,813
<CGS> 232,497
<TOTAL-COSTS> 248,997
<OTHER-EXPENSES> 249,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,278
<INCOME-PRETAX> 101,547
<INCOME-TAX> 27,148
<INCOME-CONTINUING> 74,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,399
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 2.27
</TABLE>
