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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 1995 Commission file
number 0-1388
WATERS INSTRUMENTS, INC.
State of Incorporation: Minnesota
IRS Employer Identification No. 41-0832194
2411 Seventh Street, NW. Rochester, Minnesota 55901
(507)288-7777
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value Per Share
Check whether the issuer (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, and
(2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this
form, and no disclosure will 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-KSB or any amendment to this Form 10-
KSB. X
The net sales for the Company for the Fiscal Year Ended
June 30, 1995 were $13,094,000.
The aggregate market value of the voting stock held
by non-affiliates of the Company on August 31, 1995 was
$6,064,095.
The number of shares outstanding of the Company's Common
Stock on August 31, 1995 was 1,462,271.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instructions E3), the responses to
items 9, 10, 11 and 12 of Part III of this report are
incorporated herein by reference to certain information
contained in the Company's definitive proxy statement for
its 1995 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission on or before
September 28, 1995.
Transitional Small Business Disclosure Format (Check One)
Yes No X
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PART I ITEM 1. BUSINESS
(a) Business Development
Waters Instruments, Inc., a Minnesota corporation since
1960, is a customer-driven, electronics manufacturer
and world-wide marketer of network interconnect,
contract manufacturing, consumer farm, and medical
products. During Fiscal Year 1995, sales were conducted
through four principal business units of the Company: Farm
Products {d.b.a. American FarmWorks (AFW)}; Medical Systems
{d.b.a. Waters Medical Systems (WMS)}; Electrical
Products {d.b.a. Waters Technical Systems (WTS) and
formerly known as Midwest WireTech}; and Network
Connectivity Products {d.b.a. Waters Network Systems
(WNS)}.
(b) Business of Issuer
(1) American FarmWorks
American FarmWorks has been engaged primarily in the
manufacture and sale of electric fence controllers for
livestock containment. The Company considers itself the
largest of the five major suppliers of such controllers in
the United States. Fence controllers convert both AC and DC
power into low-current, high-voltage impulses on a wire
fence producing a stinging but safe shock.
As a result of a program the Company started in October of
1993, a new line of fence controller models with improved
manufacturing processes went into production in September
1994. These products and new manufacturing processes
require fewer employees. As a result of these productivity
improvements, the Company reduced its workforce by
twenty-nine employees during September of 1994. This
employment reduction took place principally in the American
FarmWorks business unit.
In Fiscal Year 1995, the Company began manufacturing and
marketing a new line of mini-solar powered fence controllers
to satisfy existing demand in the marketplace.
Sales by American FarmWorks are made primarily through major
farm equipment distributors, suppliers and retailers. During
Fiscal Year 1995, sales to American FarmWorks' three largest
customers accounted for approximately 24.8% of American
FarmWorks' total sales or 16.9% of the Company's total
sales.
American FarmWorks sells directly to end users and through
representatives. Sales by American FarmWorks in Fiscal Year
1995 were 68% of the Company's total sales compared to 73%
in Fiscal Year 1994.
There were no significant sales from American FarmWorks made
to governmental agencies; likewise, there were no contracts
subject to renegotiation. Raw materials used in the
production of fence controllers are generally available from
a number of suppliers. Patents are not significant to the
manufacture of electric fence controllers, although the
trademarks associated with the business are believed to be
of value. The Company's trademarks include: American
FarmWorks, Blitzer, BullDozer, Captivator, Cobra,
Dyna-Charge, Electro-Line, HOL-DEM, Hot Spark,
International, Sting Ray, Solar Blitz, Solar Bull, and
Jewel.
The business of American FarmWorks is seasonal. Greater
customer demand occurs in the spring and summer months.
Backlog is not significant in this unit's operations since
orders are generally filled relatively soon after receipt.
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(2) Waters Medical Systems
Waters Medical Systems includes sales of cardiovascular and
organ preservation products. This business unit is engaged
in the manufacture and sale of a relatively small number of
electro-medical instruments for hospital and laboratory use.
The Company is one of several medical equipment
manufacturers, and its position in the total medical
instrument field is minor. Sales by Waters Medical Systems
in Fiscal Year 1995 represented approximately 19% of the
Company's total sales compared to 17% in Fiscal Year 1994.
Sales of Waters Medical Systems' products are made to a
large number of customers in the health care field. No
significant sales are made to the United States Government
and no contracts are subject to renegotiation. No unusually
large working capital amounts are required by this business
unit, but accounts receivable can approach two months of
sales due to the slow reimbursement practices of third-party
insurers and administrators.
Waters Medical Systems experiences no significant order
backlog and is generally able to fill orders reasonably soon
after receipt. Raw materials necessary in the manufacture
of this business unit's products are generally available
from a number of suppliers. During Fiscal Year 1993 a
supplier of a raw material used in the manufacture of the
Company's disposable organ cassette discontinued production
of the raw material. The final lot purchase that was made
in Fiscal Year 1993 provided the Company with approximately
a two-year supply. During Fiscal Year 1995, the Company
identified a replacement material from an approved supplier.
The Company holds several patents relating to its current
and new medical product lines. The significance of the
patents on new products to the Medical Systems business unit
cannot presently be determined. Waters Medical Systems
experiences no seasonal variation in its business.
Government Regulation. The products of Waters Medical
Systems are subject to governmental regulation by the Food
and Drug Administration (the "FDA") under the Federal Food
and Drug and Cosmetic Act (the "FDCA"). The FDA classifies
medical devices into (3) categories that determine the
degree of regulatory control to which the manufacturer of
the device is subject. In general, Class I devices involve
compliance with labeling and recordkeeping requirements and
are subject to other general controls. Class II devices are
subject to performance standards in addition to general
controls. Class III devices require premarket approval to
assure product safety and effectiveness.
Before either a Class I or Class II device may be marketed,
Section 510(k) of the FDCA requires that the manufacturer
submit a premarket notification of its intent to market the
device to the FDA at least 90 days before marketing begins.
If the FDA accepts the sufficiency of the premarket
notification, the device may then be marketed. While this
FDA decision may be reached within the 90-day period, it
often takes a longer period of time and marketing may be
delayed.
At present, all of the products of Waters Medical Systems
are Class II devices and appropriate marketing approvals
have been received from the FDA. However, failure to
obtain, or delays in obtaining, the required approvals for
any new versions of the present product offerings or future
new products could adversely affect Waters Medical Systems,
as could any product recall.
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All manufacturers of medical devices are subject to general
controls of FDA, which presently include regulations on
annual registration, device listing, good manufacturing
practices, labeling, and the misbranding and adulteration
provisions of the FDCA. The FDCA also provides for the
unscheduled inspection of facilities. Waters Medical
Systems believes that it is in compliance with all
applicable FDA regulations and practices, and that continued
compliance will not result in significant additional
expenditures.
(3) Waters Technical Systems (formerly known as Midwest
WireTech)
Waters Technical Systems performs contract manufacturing
including product assemblies, and cable harness assemblies
sold on a specific order basis mainly to computer,
communication, and office equipment manufacturers. Cable
harness assemblies are used to make multiple electrical
connections. The industry in which the business unit
operates is marked by a large number of relatively small
suppliers operating predominantly on a regional basis. The
Company believes Waters Technical Systems competes
effectively within Minnesota. The Company, in Fiscal Year
1995, made investments in sales and marketing to provide
long-term sales growth in this business unit. Sales for
Fiscal Year 1995 for Waters Technical Systems were
$1,603,000. This represents a 36% increase over the Fiscal
Year 1994 net sales of $1,178,000.
In Fiscal Year 1995, Waters Technical Systems served a
relatively small number of customers, with ten customers
representing $1,309,000 or about 82% of the business unit's
sales.
As of June 30, 1995, Waters Technical Systems' backlog of
orders was $360,000. This compares to an order backlog of
$365,000 at June 30, 1994, all of which orders are scheduled
to be filled within 12 months.
This business unit is often required to order significant
inventories of raw materials to provide lead time for
meeting delivery requirements. Raw materials necessary to
this unit's business are generally available from a number
of suppliers. Patents and proprietary rights are of no
significance to its business. This business unit has no
current contracts with the United States Government and
therefore no contract is subject to renegotiation.
(4) Waters Network Systems
During Fiscal Year 1995, Waters Network Systems began
manufacturing and marketing a wide range of connectivity
products for Token-Ring and Ethernet LANs, designed
specifically for school systems. The products offer the
ability to network computers throughout school systems.
Waters Network Systems' sales for Fiscal Year 1995 were
$144,000.
(5) Information as to Company's Business as a Whole
During Fiscal Year 1995, the Company expended a total of
$480,000 for research and development activities. This
compares to spending of $350,000 in Fiscal Year 1994.
The Company had a total of 168 employees as of June 30,
1995, of which 98 were regular full-time employees. This
compares to a total of 135 employees as of June 30, 1994, of
which 122 were regular full-time employees.
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(c) Financial Information About Foreign and Domestic
Operations and Export Sales.
The Company maintains no office or facilities outside of the
United States and sells the majority of its products in the
United States. Export sales were $480,000 in Fiscal Year
1995, compared to $502,000 in Fiscal Year 1994. Most sales
for foreign exports have been made through unrelated foreign
dealers in major European, Asian, and South American markets
and by a number of export dealers in outlying countries.
The Company has no significant activities outside of the
United States.
PART 1 ITEM 2 PROPERTIES
The Company owns a 66,000 square-foot, steel and cement
block building located on 13.4 acres in Valley High
Industrial Park, Rochester, Minnesota. The building
houses the corporate headquarters and production
facilities for all of the business units. Fourteen
thousand square feet are devoted to office and engineering
space and the remaining area is used for
manufacturing and warehousing, approximately 15% by
Waters Medical Systems, 25% by Waters Technical Systems, 55%
by American FarmWorks, and 5% by Waters Network
Systems. The Company currently leases 1200 square feet
of office space in a Wayzata, Minnesota office complex
for use as sales and development offices.
The Company believes that insurance coverage on its
properties is adequate.
PART 1 ITEM 3 LEGAL PROCEEDINGS
In June 1993, an attorney representing Cook Composites
and Polymers Company ("CCP"), notified the Company that CCP
believes it has evidence that the Company is responsible
for groundwater pollution in Saukville, Wisconsin,
attributable to trichlorethylene ("TCE"). From
approximately 1961 to November 1971, the Company had
leased and occupied property in Saukville as the
manufacturing site for its Northern Signal Division.
CCP is the apparent successor to Freeman Chemical
Corporation ("Freeman"), which operated a manufacturing
facility in Saukville adjacent to the Company's leased
property. In 1987, Freeman executed a consent decree
with the US Environmental Protection Agency ("EPA"). Under
that decree, executed pursuant to the EPA's authority
under the Resource Conservation and Recovery Act ("RCRA"),
Freeman agreed to clean up pollution attributable to
numerous chemicals, including TCE, at Saukville. CCP's
attorney advised the Company that CCP has assumed
responsibility for Freeman's Saukville cleanup and that
CCP's cleanup costs to date were substantial. Neither the
Company nor its counsel have had contact with CCP or its
counsel since January 1994.
Neither the EPA nor the Wisconsin Department of Natural
Resources have notified the Company that it may have
violated any environmental laws or may be liable for the
contamination at Saukville.
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Wedge-Loc Company vs. Waters Instruments, Inc. The Company
was sued in February 1994 by Wedge-Loc Company in federal
district court in Arizona. The Company was a distributor
of Wedge-Loc products pursuant to a written agreement.
Wedge-Loc terminated the agreement because of alleged
insufficient purchases by the Company. Wedge-Loc then
started a declaratory judgment action to determine whether
its termination of the agreement was proper and whether it
was entitled to recover damages because of the
Company's alleged breach of the agreement. The Company does
not believe the results of this action will have a material
adverse affect on the Company's future financial results.
During Fiscal Year 1995, the Company did not have and
currently does not have any other legal proceedings
pending which are material to its business or financial
position.
PART 1 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matters were submitted to a vote of the Company's
shareholders during the fourth quarter of the Company's 1995
Fiscal Year.
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ
National Market System under the symbol WTRS. Below are the
high and low bid prices for each quarter of Fiscal Years
1995 and 1994 as reported on the NASDAQ/NMS. These
quotations represent prices between dealers, do not
include retail markups, markdowns, or commissions, and may
not represent actual transactions.
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1995 High Low
First Quarter 2-1/4 1-1/4
Second Quarter 2-1/2 1-3/8
Third Quarter 2-3/4 1-1/4
Fourth Quarter 3-3/4 2-1/4
1994
First Quarter 2-3/4 2
Second Quarter 2-1/2 1-1/2
Third Quarter 2-9/16 1-7/8
Fourth Quarter 2-1/2 1-7/8
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As of August 31, 1995 the Company had approximately
918 shareholders of record.
Dividend Summary
The Board of Directors of the Company declared a dividend
at a regularly scheduled meeting held on October 27,
1994. The
dividend was based on Fiscal Year 1994 operating results.
The
dividend payment was made by the Company in December 1994 at
the rate of $.04 per share, or an aggregate amount of
$58,000. The Board of Directors will review its dividend
policy and make an appropriate decision at its regularly
scheduled meeting to be held on October 19, 1995.
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PART II ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance on June 30, 1995 was
$1,241,000, an increase of $276,000 from its June 30, 1994
balance of $965,000. Improved operating results during
Fiscal Year 1995 contributed to the Company's cash position
and liquidity at June 30, 1995.
The Company's working capital position at June 30, 1995
was $3,134,000, an increase of 15% from the $2,732,000
amount at June 30, 1994.
In February 1995, the Company renewed a $750,000 line of
credit with its Bank. The line of credit carries an
interest rate of 0.75% over the bank's base (prime) rate.
The prime rate was 9.0% at June 30, 1995. The Company had
not borrowed against the line of credit during Fiscal Year
1995 and believes that its existing funds, cash generated
from operations and short-term borrowing under the
Company's line of credit will be adequate to meet the
Company's foreseeable operating activities and outlays
for capital expenditures.
In September 1995, the Company's bank offered to increase the
line of credit from $750,000 to $1,000,000. The bank's offered
line of credit charges interest at the bank's base (prime) rate.
It is management's intention to accept the bank's loan commit-
ment and extend it to November 30, 1995.
Capital expenditures were $266,000 during Fiscal Year
1995, an increased amount of $27,000 from Fiscal Year
1994. The Company anticipates continued improvements
in its manufacturing processes, lower unit costs, and
improved gross margins as a result of these capital
expenditures.
Reductions of long-term debt, primarily lease payments on
the Company's computer software, of $89,000 were the other
major cash transactions in Fiscal Year 1995.
RESULTS OF OPERATIONS
Fiscal Year 1995 Compared with Fiscal Year 1994
Net sales for Fiscal Year 1995 were $13,094,000, an
increase of 3.3% from net sales of $12,675,000
experienced in Fiscal Year 1994. Net sales in Waters
Medical Systems advanced 9.7% in Fiscal Year 1995
compared to Fiscal Year 1994. Net sales in Waters
Technical Systems (formerly known as Midwest WireTech)
increased 36.1% in Fiscal Year 1995 compared to Fiscal Year
1994.
Net sales declined 3.9% in American FarmWorks in Fiscal Year
1995 compared to Fiscal Year 1994. This reduction
represents the planned discontinuance of certain accessory
products.
Additional comparative information about industry segments
can be found in Note 9 to the Financial Statements under
Item 7 in this Form 10-KSB.
The gross profit improved in Fiscal Year 1995 to 29.3% of
net sales from 26.9% for Fiscal Year 1994. Productivity
improvements within the entire organization, but
principally in its American FarmWorks' business unit
contributed to improvement in gross profit. Starting in
October 1993, the Company commenced on a program
designed to reduce manufacturing cost of fence
controllers in its American FarmWorks' business unit.
Gross profit in Fiscal Year 1993 was 26.6% of net sales.
<PAGE>
Operating expenses were $3,401,000 for Fiscal Year
1995, representing an increase of $293,000 from the
comparable figure of $3,108,000 for Fiscal Year 1994.
Increases in selling expenses of $80,000 and engineering
expenses of $130,000 account for 71.7% of the increase when
comparing to the comparable period for the prior year.
Increased cash balances during Fiscal Year 1995 provided
interest income of $48,000 compared to interest income of
$19,000 during Fiscal Year 1994.
Interest expense, principally lease financing on the
Company's computer equipment and software, were $19,000
during Fiscal Year 1995 compared to $22,000 in Fiscal Year
1994.
Other income of $91,000 for Fiscal Year 1995 represents
$19,000 for sales tax refunds received by the Company. In
addition, the Company sold 97,000 square feet of unoccupied
land adjacent to its manufacturing facilities for a gain
of $44,000. The current year's other income includes the
receipt of $31,000 as final distribution in connection
with a bankruptcy case involving Storage Technology
Corporation. The receipt concludes this bankruptcy case.
The prior year's other income included the receipt of
$50,000 for the sale of the Company's rights to
Cardiosol, a discontinued research and development project.
Net income for the Company for Fiscal Year 1995 was a
profit of $458,000. Included in this amount was a one-
time reorganization charge of $139,000 relating primarily
to employee termination expense. This reorganization
charge was incurred in connection with productivity
improvements within the entire operation, but principally
in its American FarmWorks' business unit. This compares
to a net income of $255,000 for Fiscal Year 1994.
The Company posted a net loss of $432,000 for Fiscal Year
1993.
The primary reasons for the Company's improvement in net
income since Fiscal Year 1993 were improving operating
profit results and funding business growth opportunities.
The income tax provision is lower than expected as a
result of change in the realizability of the deferred tax
assets.
The Company settled a claim involving a breach of
contract dispute with a supplier during October 1994 in
the amount of $75,000. The Company had accrued an
estimated amount of $50,000 during Fiscal Year 1994 and
recorded an additional $25,000 in Fiscal Year 1995.
The Company from time-to-time creates reserves for
loss
contingencies based on the Company's estimates of the
expected size of such losses.
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PART II ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
(a) The following documents are filed as part of this
report:
(1) Financial Statements:
Page Number
Independent Auditor's Report 11
Management's Responsibility for Financial Reporting12
Balance Sheets as of June 30, 1995 and 1994 13
Statements of Operations and Retained Earnings 14
Statements of Cash Flows 15
Notes to Financial Statements 16 - 24
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Independent Auditor's Report
To the Stockholders and Board of Directors
Waters Instruments, Inc.
Rochester, Minnesota
We have audited the accompanying balance sheets of Waters Instruments,
Inc. as of June 30, 1995 and 1994, and the related statements of
operations and retained earnings, and cash flows for the years then
ended. 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 have conducted our audits in accordance with generally accepted
auditing standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Waters
Instruments, Inc. as of June 30, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Rochester, Minnesota
August 17, 1995
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Management's Responsibility for Financial Reporting
August 17, 1995
To the Stockholders of Waters Instruments, Inc.
Rochester, Minnesota
The management of Waters Instruments, Inc. has prepared
and is responsible for the financial statements and
related financial information contained in this report.
The financial statements were prepared in accordance with
generally accepted accounting principles, using
management's best judgment and estimates. The other
financial data contained in this report is consistent with
that in the financial statements.
The Company maintains internal accounting control
systems designed to provide reasonable assurance that
assets are safeguarded from loss or unauthorized use.
The management further maintains that it is conducting its
affairs according to the highest of personal and
corporate conduct. We believe our systems for these
purposes are effective and the cost of the systems does
not exceed the benefits obtained.
The Audit Committee, composed exclusively of outside
directors, meets periodically with the Company's management
and independent auditors on financial reporting matters.
The independent public accountants have free access to the
Audit Committee and have met with the Committee, without
management present, to discuss their audit results and
opinions on the quality of financial reporting.
McGladrey & Pullen, LLP, independent auditors, are
engaged to audit Waters' financial statements and to
issue a professional opinion as to whether such
statements present fairly, in all material respects, the
Waters' financial position, results of operations,
retained earnings, and cash flows.
Jerry W. Grabowski
Chief Financial Officer
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B a l a n c e S h e e t s
in Thousands 1995 1994
Current assets
Cash and equivalents (Note 2) $1,241 $965
Trade receivables (Note 3) 2,150 1,609
Inventories (Note 4) 1,741 1,794
Prepaid expenses 57 58
Deferred income taxes (Note 6) 260 168
Total current assets 5,449 4,594
Property, plant and equipment (Note 5)
Land 237 330
Building 1,291 1,255
Machinery and equipment 1,534 1,444
Office furniture and equipment 1,003 939
Less accumulated depreciation 2,605 2,396
Net property, plant, and equipment 1,460 1,572
Other assets
Costs in excess of net assets of
businesses acquired, net of amortization115 133
Investments 4 4
Total other assets 119 137
Total assets $7,028 $6,303
Current liabilities
Current maturities of long-term debt (Note 5) $101
$88
Trade payables 1,166 724
Accrued expenses
Salaries, wages, and other compensation 464 558
Product warranties (Note 1) 305 275
Other accrued liabilities 279 217
Total current liabilities 2,315 1,862
Long-term debt (Note 5) 17 112
Deferred income taxes (Note 6) 30 63
Stockholders' equity (Note 7)
Preferred stock, par value $25,
Authorized, 120,000 shares
issued and outstanding, none
Common stock, par value $.10 per share,
authorized 5,000,000 shares issued
and outstanding, shares (1995 and 1994
1,462,271 146 146
Additional paid-in capital 1,246 1,246
Retained earnings 3,274 2,874
Total stockholders' equity 4,666 4,266
Total liabilities and equity $7,028 $6,303
Notes to Financial Statements are an integral part of these
Balance Sheets
</TABLE>
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S t a t e m e n t s o f O p e r a t i o n s a n d R e
t a i n e d E a r n i n g s
Year Ended June 30
in Thousands 1995 1994
Net sales $13,094 $12,675
Cost of goods sold 9,263 9,264
Gross profit 3,831 3,411
Operating expenses
Administrative 1,272 1,189
Selling 1,649 1,569
Research and development 480 350
Total operating expenses 3,401 3,108
Operating income 430 303
Other income
Interest income 48 19
Interest expense (19) (22)
Other income, net 91 35
Income before income taxes 550 335
Income tax provision (Note 6) 92 80
Net income 458 255
Retained earnings - beginning of year 2,874 2,619
Dividends paid - December 1994 - $.04 (58) 0
Retained earnings - end of year $3,274 $2,874
Earnings per common share $.31 $.17
Notes to Financial Statements are an integral part of these
Statements
</TABLE>
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S t a t e m e n t s o f C a s h F l o w s
in Thousands 1995 1994
Cash flows from operations
Cash received from customers $12,553 $12,659
Interest received 48 19
Income Taxes refunded 0 46
Cash provided from operations 12,601 12,724
Cash paid to suppliers and employees 11,819 11,870
Interest paid 19 22
Income taxes paid 230 0
Cash disbursed for operations 12,068 11,892
Net cash provided by operations 533 832
Cash flows from investing
Capital expenditures (259) (239)
Proceeds from sales of property and
equipment 149 0
Other assets decrease 0 31
Net cash used for investing (110) (208)
Cash flows from financing
Payments of long-term debt (89) (58)
Dividends paid (58) 0
Net cash used for financing (147) (58)
Net increase in cash and equivalents 276 566
Cash and equivalents, beginning of year 965 399
Cash and equivalents, end of year $1,241 $965
Reconciliation of net income to net cash
from operations:
Net income $458 $255
Depreciation and amortization 298 275
Gain on sale of property and equipment(51) 0
Provision for losses on accounts
receivable 12 12
Changes in assets and liabilities
Accounts receivables (553) (28)
Refundable income taxes 0 51
Inventories 53 (21)
Prepaid expenses and deferred
income (91) 73
taxes
Trade payables 442 (135)
Accrued expenses (2) 393
Deferred income taxes (33) (43)
Net cash from operations $533 $832
Notes to Financial Statements are an integral part of these
Statements
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N o t e s t o F i n a n c i a l S t a t e m e n t s
1. N a t u r e o f B u s i n e s s a n d S i g n i f i
c a n t A c c o u n t i n g P o l i c i e s
A. N a t u r e o f B u s i n e s s
The Company operates four principle business groups:
Waters Network Systems (WNS), Waters Technical Systems
(WTS, formerly known as Midwest WireTech), American
FarmWorks (AFW), and Waters
Medical Systems (WMS). The sales of products from all
four business units occur principally within the
United States. Waters Network Systems, a newly formed
business unit, addresses local area network connectivity
solutions for the K-12 educational market. Waters
Technical Systems is engaged in the subcontract
manufacturing of product assemblies and cable harness
assemblies for the communications and computer
industries. American FarmWorks manufactures and sells
electric fence controllers for animal management to
retailers. Waters Medical Systems produces medical
equipment and analytical instruments for hospital and
laboratory use. The Company extends credit in the normal
course of business. The Company performs ongoing credit
evaluations of its customers' financial condition and
generally requires no collateral.
B. I n v e n t o r i e s
Inventories are recorded at the lower of FIFO (first-in,
first-out) method cost or market.
C. P r o p e r t y, P l a n t, and E q u i p m e n t
Property, plant and equipment are recorded at cost
less accumulated depreciation. Depreciation is computed
on the straight-line method over estimated useful lives of 5
to 40 years for buildings and improvements, 3 to 10 years
for machinery, equipment, and office furniture. The
present values of capital lease obligations are
classified as long-term debt and the related assets
are included in equipment. Amortization of equipment
under capital leases is included in depreciation
expense.
D. I n c o m e T a x e s
Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary
differences are the differences between the reported
amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
<PAGE>
E. I n t a n g i b l e A s s e t
Cost in excess of net sales acquired is amortized on a
straight-line basis over a twenty-year period
beginning in 1983. Amortization of $18,000 is
recorded annually. Accumulated amortization at June 30,
1995 and 1994 was $235,000 and $217,000, respectively.
F. R e s e a r c h a n d D e v e l o p m e n t
Research and Development costs are expensed as incurred.
G. E m p l o y e e B e n e f i t s
The Company has a 401(k) deferred savings plan for all
employees who have completed six months of service. The
Company may make matching and discretionary
contributions. The Plan has a calendar year-end.
During the year ending June 30, 1995 the Company accrued
$11,000 in anticipation of a matching contribution
subject to Board approval. The Company did not make a
matching contribution for the year ending June 30, 1994.
The Company offers medical insurance to its employees
which it self-insures up to $25,000 per individual and
$1,000,000 in aggregate.
H. E a r n i n g s P e r C o m m o n S h a r e
Earnings per common share amounts were computed using
the weighted average number of shares outstanding during
each year. Average shares outstanding for years ending
June 30, 1995 and 1994 were 1,462,271 and 1,460,938,
respectively. Options for purchase of stock which are
common stock equivalents do not have a material dilutive
effect on per share amounts and have not been included in
the computations.
I. S t a t e m e n t o f C a s h F l o w s
For purposes of the statement of cash flows, highly
liquid investments purchased with maturities of three months
or less are considered to be cash equivalents.
J. P r o d u c t W a r r a n t y
The Company's products are currently covered by
product warranties for one year after date of purchase. At
the time of sale, the Company recognizes an estimated
warranty cost based on prior history and expected future
claims.
2. C a s h a n d E q u i v a l e n t s
At June 30, 1995 and 1994, the Company had cash balances
totaling $294,000 and $181,000, respectively, at one
bank located in Minnesota. The balances are insured by
the Federal Deposit Insurance Corporation up to $100,000.
In addition, the Company maintains cash balances in a
mutual fund with Norwest Funds. Such funds are not
insured and totaled $947,000 at June 30, 1995 and $784,000
at June 30, 1994.
<PAGE>
3. T r a d e A c c o u n t s R e c e i v a b l e
Trade accounts receivable consist of the following:
<TABLE>
<S> <C> <C>
in Thousands 1995 1994
Trade accounts receivable $2,181 $1,663
Less allowance for doubtful accounts 31 54
Totals $2,150 $1,609
</TABLE>
4. I n v e n t o r i e s
Inventories consist of the following:
<TABLE>
<S> <C> <C>
in Thousands 1995 1994
Raw materials $1,261 $927
Work-in-process 267 235
Finished goods 213 632
Totals $1,741 $1,794
</TABLE>
5. L o n g - T e r m D e b t
Long-term debt consists of the following:
<TABLE>
<S> <C> <C>
in Thousands 1995 1994
Capital lease obligations due in
varying monthly installments
through March 1999 secured by related
equipment $118 $200
less current maturities 101 88
Net long-term debt $17 $112
</TABLE>
Scheduled maturities, by fiscal year, of long-term debt
are as follows:
<TABLE>
<S> <C>
1996 $101
1997 12
1998 3
1999 2
Total long-term debt $118
</TABLE>
At June 30, property, plant and equipment includes the
following amounts for capital leases:
<TABLE>
<S> <C> <C>
1995 1994
Office furniture and equipment $398 $390
Accumulated amortization 261 194
Net assets under capital lease $137 $196
</TABLE>
<PAGE>
At June 30, 1995, the Company had the following
minimum commitments for payment of rentals under capital
leases:
<TABLE>
<S> <C>
1996 $ 109
1997 13
1998 3
1999 3
Total lease commitments $ 128
Less amount representing interest 10
Present value of lease
payments, included in long-term debt $ 118
</TABLE>
6. I n c o m e T a x e s
The income tax provision charged to continuing operations
for the years ended June 30, 1995 and 1994 are as follows:
<TABLE>
<S> <C> <C>
in Thousands 1995 1994
Current:
US federal $214 $121
State 3 2
Total Current 217 123
Deferred:
US federal (107) (43)
State (18) 0
Total Deferred (125) (43)
Total current and deferred: $92 $80
The income tax provision differs from the amount of income
tax determined by applying the US federal income tax rate
to pretax income for the continuing operations for the
years ended June 30, 1995 and 1994 due to the following:
1995 1994
Computed "expected" tax expense $187 $114
Increase(decrease)in income taxes
resulting from:
Non-deductible expenses 34 7
Change in Valuation Allowance (107) 0
State taxes net of NOL carryforward (1) 2
Tax credits (20) (34)
Other (1) (9)
Total $92 $80
Net deferred tax assets consist of the following components
as of June 30, 1995:
1995 1994
Deferred tax assets
Employee benefits and severance $86 $ 108
Inventory and receivable allowances 70 53
Warranty and contingency reserves 189 146
Other 0 53
Total deferred tax assets 345 360
Less valuation allowance (85) (192)
Net deferred tax assets $260 $168
Deferred tax liabilities
Property and equipment $(30) $(63)
</TABLE>
<PAGE>
7. S t o c k O p t i o n s
An Incentive Stock Option Plan was adopted in 1985 (the
"1985 ISO Plan") and 150,000 shares of common stock were
reserved for future stock options to be granted on a one-
for-one basis. The Plan terminated on March 20, 1995.
Options under the 1985 ISO Plan were granted to eligible
employees at not less than 100% of fair value of the
Company's common stock. The options had terms which ranged
from twenty percent of the options exercisable annually
beginning six months from date of grant, to fifty
percent of the options exercisable annually beginning one
year from date of grant. Options could be exercised over
terms not to exceed 10 years. The following is a summary of
transactions.
<TABLE>
<S> <C> <C>
1995 1994
Options outstanding beginning of year: 59,500 104,500
Terminated 59,500 (95,000)
Granted 5,000 50,000
Options outstanding, end of year 5,000 59,500
($2.1875 to $4.66))
Options exercisable, end of year 0 9,500
($4.66)
A Nonqualified Stock Option Plan was also adopted in 1985
and 45,000 shares of common stock were reserved for future
grants. Under this Plan, the Company could grant options
to directors. Options granted were at approximately the
fair value of the Company's common stock. The
following is a summary of transactions:
1995 1994
Options outstanding beginning of year: 6,000 6,000
Terminated 6,000 0
Options outstanding and exercisable, 0 6,000
end of year ($3.33)
</TABLE>
<PAGE>
The Board of Directors adopted the 1995 Stock Option Plan
(the "Plan") in May 1995 subject to shareholders
approval at the Company's annual meeting in October 1995.
The Plan combines both the Incentive and Nonqualified
Stock Option plans under which 150,000 shares of common
stock were reserved for future stock options to be
granted on a one-for-one basis. Options may be granted to
eligible employees and directors at not less than 100% of
fair value of the Company's common stock. Options may
be exercised over terms not to exceed 10 years. The
following is a summary of transactions.
<TABLE>
<S> <C>
1995
Options outstanding at 5-1-95: 0
Terminated 0
Granted 50,000
Options outstanding, end of year 50,000
($2.1275)
Options exercisable, end of year 50,000
($2.1275)
</TABLE>
8. O t h e r M a t t e r s
The Company has a $750,000 line of credit with its
bank. Borrowings under the line are charged interest at
0.750% over the prime rate and are collateralized by
accounts receivable and inventories. The prime rate was
9.0% at June 30, 1995. The credit agreement expires
November 30, 1995. The loan agreement requires the
Company to meet certain financial ratios and
covenants. There were no borrowings outstanding under the
line of credit at June 30, 1995.
The Company also has a documentary letter of credit to the
purchase of inventories. At June 30, 1995, the Company had
letter of credit facilities of $200,000, of which
$17,000 of letter of credit commitments were outstanding.
The Company has been asked by an unrelated company to
voluntarily contribute to the cost of cleaning up
pollution in connection with land near a manufacturing
facility the former Flo-Tronics, Inc. had leased and
occupied from approximately 1961 to 1971 for its Northern
Signal Division. (Flo-Tonics was a predecessor of Waters
Instruments, Inc.) At no time has there been a notice
from either the Environmental Protection Agency or the
Wisconsin Department of Natural Resources that the Company
has violated environmental laws or regulations and no
enforcement proceedings against Waters Instruments, Inc.
have been commenced.
<PAGE>
9. I n d u s t r y S e g m e n t s a n d S i g n i f i
c a n t C u s t o m e r s
Operating income is total revenue less operating
expenses, excluding interest and general corporate
expenses. The Company did not have any sales between
industry segments. Identifiable assets by industry
segment includes both assets directly identified with
those operations and an allocable share of jointly
used assets. General corporate assets consist primarily of
cash, cash equivalents and building costs. The
following table summarizes data by industry segment ($'s in
000's).
<TABLE>
<S> <C> <C>
in Thousands 1995 1994
Net Sales
WNS $144 $0
WTS 1,603 1,178
AFW 8,914 9,279
WMS 2,433 2,218
$13,094 $ 12,675
Operating Income (Loss)
WNS $(38) $0
WTS (6) 34
AFW 824 660
WMS 923 798
$1,703 $1,492
General Corporate Expenses, net 1,153 1,157
Income before income taxes $550 $335
Capital Expenditures
WNS $11 $0
WTS 26 4
AFW 112 171
WMS 38 2
187 177
Depreciation and Amortization
WNS $2 $0
WTS 10 10
AFW 74 83
WMS 42 42
$128 $135
Identifiable Assets
WNS $334 $0
WTS 544 356
AFW 2,711 2,797
WMS 839 762
Corporate 2,600 2,388
$7,028 $6,303
Significant customers
WTS
No. of customers 10 10
Sales to those customers $1,309 $899
AFW
No of customers 1 1
Sales to that customer $1,435 $1,208
</TABLE>
<PAGE>
PART II ITEM 8. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Audit Committee of the Company approved and
recommended to the Board of Directors and the Board of
Directors approved that the firm of McGladrey & Pullen
LLP be selected as the Company's independent auditors
beginning with the fiscal year ending June 30, 1994. The
firm of Boulay, Heutmaker, Zibell & Co., had served as
the Registrant's independent auditors for the fiscal year
ending June 30, 1993. The firm of Boulay, Heutmaker, Zibell
& Co. became the Company's independent auditors starting
with the fiscal year ending January 31, 1986 and served in
that capacity until the Board initiated the change that
took place in May of 1994.
The Company believes there were no disagreements with
Boulay, Heutmaker, Zibell & Co. within the meaning of
Instruction 4 of Item 304 of Regulation S-B on any matter
of accounting principles or practices, financial statement
disclosure, or auditing scope of procedure in connection
with the audits of the Company's financial statements for
the fiscal years ended June 30, 1993 and 1992 or for any
subsequent interim period, which disagreements if not
resolved to their satisfaction would have caused Boulay,
Heutmaker, Zibell & Co. to issue an adverse opinion or
disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles.
The firm of Boulay, Heutmaker, Zibell & Co. has
issued an "unqualified opinion" on the Company's financial
statements for the fiscal years ended June 30, 1993 and
1992. An "unqualified opinion" means there was no adverse
opinion, no disclaimer of opinion, and there was no
modification as to uncertainty, audit scope, or accounting
principles.
During the two most recent fiscal years and through
present, there have been no reportable events (as defined
in Item 304 of Regulation S-B) with Boulay, Heutmaker,
Zibell & Co. The Company did not consult with McGladrey
& Pullen LLP prior to their selection regarding the
application of accounting principles to a specified
transaction or the type of audit opinion that might be
rendered on the Company's financial statements during the
most recent fiscal years through present.
A letter of Boulay, Heutmaker, Zibell & Co. addressed to
the Securities and Exchange Commission was included as
Exhibit 16 to a Form 8-K filed in May of 1994. Such
letter states that such firm agrees with the statements
made by the Company in its SEC filing.
The change of auditors was approved by the Audit Committee
and its Board of Directors of the Company on April 28, 1994.
There were no changes in or disagreements with
accountants on accounting and financial disclosure.
<PAGE>
PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
Other than information included in "Executive Officers of
the Company" which is set forth below, the additional
information required under this item is incorporated by
reference to pages 2 to 5 of the Company's definitive Proxy
Statement for its Fiscal Year 1995 Annual Meeting of
Shareholders.
EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification
The names and ages of executive officers of the Company,
their positions and offices presently held, and the period
of service as such are as follows:
YEAR IN
WHICH
NAME AGE POSITION(S) FIRST
BECAME
AN
OFFICER
Jerry W. 43 President, Chief Executive 1993
Grabowski Officer, Chief Financial
Officer, Secretary, Treasurer,
and Director
Lewis N. 48 Vice President/Engineering 1992
Harrold
The following information is presented as to the
business experience of each Executive Officer during the
past five years:
Mr. Grabowski was elected President, Chief Executive
Officer, and a member of the Company's Board of Directors
on August 1, 1993. He was additionally elected Chief
Financial Officer, Secretary and Treasurer in January
1995 to fill the position left vacant by the resignation of
William Birmingham in December 1994. From 1988 until
joining the Company, Mr. Grabowski was employed as General
Manager of Onan Power/Electronics Division.
Mr. Harrold was elected Vice President/Engineering in
August of 1992. He has been employed by the Company for
more than five years and has served in a number of
scientific, engineering and research roles, with a
special concentration in the areas of medical device
technology and product development.
* William J. Birmingham, former Chief Financial Officer,
Vice President of Finance, Secretary, and Treasurer
resigned in December 1994. Jerry W. Grabowski was
elected to serve additionally as Chief Financial Officer
to fill the vacancy left open by Mr. Birmingham's
resignation. Robert D. Dunbar, former Vice President, also
resigned in December 1994.
<PAGE>
PART III ITEM 10. EXECUTIVE COMPENSATION
Information required under this item is incorporated by
reference to the Company's definitive Proxy Statement for
its Fiscal Year 1995 Annual Meeting of Shareholders.
PART III ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is incorporated by
reference to the Company's definitive Proxy Statement for
its Fiscal Year 1995 Annual Meeting of Shareholders.
PART III ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Information required under this item is incorporated by
reference to the Company's definitive Proxy Statement for
its Fiscal Year 1995 Annual Meeting of Shareholders.
PART IV ITEM 13. Exhibits and Reports on Form 8-KSB
(a)Exhibits:
See Exhibit Index following the signature page of this
report.
(b)Reports on Form 8-K
There were no reports on Form 8-K filed by the Company
during the fourth quarter of Fiscal Year 1995.
Signatures
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Company has duly
caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Rochester,
Minnesota, on September 7, 1995.
WATERS INSTRUMENTS, INC.
By: Jerry W. Grabowski
Jerry W. Grabowski
President, Chief Executive, Chief Financial Officer,
Secretary, and Treasurer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed by the following
persons on behalf of the Company in the capacities
and on the dates indicated.
Signature Title
Date
President, Chief
Jerry W. Grabowski Executive Officer,
Jerry W. Grabowski Chief Financial
September 7, 1995
Officer, Secretary,
Treasurer, and Director
Stewart D. Siebens
Stewart D. Siebens Chairman of the Board
September 7, 1995
and Director
Charles G. Schiefelbein
Charles G. Schiefelbein Director
September 7, 1995
<PAGE>
Exhibit Index for Form 10-KSB (for the Fiscal Year ended
June 30, 1995)
3.1 Restated Articles of Incorporation, as amended to
date,
incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
January 31, 1989. *
3.2 Restated Bylaws, as amended to date. *
10.1 Management Incentive Compensation Plan,
incorporated by reference to the description of such Plan
set forth under the caption "Compensation Plans" of the
Company's definitive proxy statement for its 1989 Annual
Meeting of Shareholders. (1) *
10.2 1985 Incentive Stock Option Plan and Form of Stock
Option Agreement, incorporated by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1985. *
10.3 1985 Nonqualified Stock Option Plan and Form of
Stock Option Agreement, incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1986. *
10.4 Distribution Agreement dated June 11, 1992 between
the Company and Wisconsin Porcelain incorporated by
reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992. *
10.5 Employment agreement dated July 28, 1993 between
the Company and Gerald W. Grabowski incorporated by
reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1993. (1)
*
10.6 Distributor's Agreement dated October 26, 1992
between the Company and Wedge-Loc Company incorporated by
reference to Exhibit 10.12 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1993.
(1) Indicates a management compensatory plan.
*Incorporated by reference; SEC File No. 0-1388.
