UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC
20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTER ENDED MARCH 31, 1996.
Commission file number 0-1388:
WATERS INSTRUMENTS, INC.
(Exact name of registrant as specified in its
charter.)
Minnesota 41-
0832194
(State of other jurisdiction of (IRS
Employer
incorporation or organization)
Identification No.)
2411 Seventh Street NW
Rochester, Minnesota 55901
(Address of principal executive offices)
(507) 288-7777
(Registrant's telephone number, including area
code)
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 and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each
of the issuer's classes of common stock, as of
the latest practical date:
Common Stock, $.10 Par Value - 1,462,271 shares
outstanding as of May 14, 1996.
Transitional Small Business Disclosure Format
(check one) : Yes ____ No X
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PART 1
FINANCIAL
INFORMATION
Item 1. Financial Statements
WATERS
INSTRUMENTS, INC.
Balance Sheet
(Thousands)
March 31,
June 30,
1996
1995
(Unaudited)
<S> <C>
<C>
Current Assets
Cash & Cash Equivalents $ 761
$1,241
Net Trade Receivables 1,916
2,150
Inventories 2,205
1,741
Prepaid Exp. & Deferred Items 375
317
Total Current Assets 5,257
5,449
Fixed Assets
Property, Plant & Equipment 4,372
4,065
Less Accumulated Depreciation (2,816)
(2,605)
Net Fixed Assets 1,556
1,460
Other Assets 3
4
Goodwill 102
115
TOTAL ASSETS $ 6,918 $
7,028
Current Liabilities
Current Maturities of Long-term Debt $ 40 $
101
Accounts Payable 986
1,166
Accrued Salaries, Wages and Other Compen 543
464
Product Warranties 305
305
Accrued Other Expenses 183
279
Total Current Liabilities 2,057
2,315
Long-term Debt, Less Current Maturities 8
17
Deferred Income Taxes 30
30
TOTAL LIABILITIES 2,095
2,362
Stockholders' Equity
Common Stock 146
146
Additional Paid-in Capital 1,246
1,246
Retained Earnings 3,431
3,274
TOTAL STOCKHOLDERS' EQUITY 4,823
4,666
TOTAL LIABILITIES & EQUITY $ 6,918 $
7,028
<FN>
Notes to Financial Statements Are An Integral
Part Of This Statement
</FN>
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PART 1
FINANCIAL
INFORMATION
ITEM 1. Financial Statements
WATERS
INSTRUMENTS,INC.
Statement of Cash
Flows (Thousands)
For the Nine
Months
Ended
March
31,
1996 1995
(Unaudited)
(Unaudited)
<S> <C>
<C>
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 10,017 $
8,957
Interest received 40
35
Cash provided from operations 10,057
8,992
Cash paid to suppliers and employees 9,884
8,410
Taxes paid 209
206
Interest paid 9
15
Cash disbursed from operations 10,102
8,631
Net cash provided (used) for operations
(45) 361
CASH FLOWS FROM INVESTING
Net aquisition of fixed assets (307)
(188)
Decrease in other assets
14
Net cash used for investing (307)
(174)
CASH FLOWS FROM FINANCING
Reduction of Long-Term Debt (70)
(66)
Cash Dividend Payment (58)
(58)
Net cash used for financing (128)
(124)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(480) 63
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
1,241 965
CASH AND CASH EQUIVALENTS - END OF PERIOD $
761 $1,028 RECONCILIATION OF NET INCOME TO
NET CASH FROM (USED FOR) OPERATIONS:
Net Income $ 216
$ 141
Depreciation and Amortization 225
197
Provisions For Losses On Accounts Receivable
9 9
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 225
(103)
Inventories (464)
237
Prepaid Expenses and Deferred Income Taxes
(58) (1)
Accounts Payable and Accrued Expenses
(198) (119)
NET CASH FROM (USED FOR) OPERATIONS $ (45)
$ 361
<FN>
See Note to Financial Statements
</FN>
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PART 1
FINANCIAL INFORMATION
ITEM 1. Financial Statements
WATERS
INSTRUMENTS,
INC. Statement
of Operations
(Thousan
ds)
For the Three Months For
the Nine Months Ended
March 31, Ended
March 31,
1996 1995
1996 1995
Unaudited Unaudited Unaudited
Unaudited
<S> <C> <C> <C>
<C>
NET SALES $3,623 $ 3,177 $9,792
$9,051
COST OF GOODS SOLD 2,579 2,223
6,937 6,418
GROSS PROFIT 1044 954
2855 2633
OPERATING EXPENSES
Administrative 358 345
1094 1039
Selling 400 399
1187 1164
Research and Development 159 107
340 266
Total Operating Expenses 917 851
2621 2469
OPERATING INCOME (LOSS) 127 103
234 164
OTHER INCOME (EXPENSE)
Net Interest Income (Expense) 9 9 31
20
Net Other Income (Expense) -4 0 -10
39
INCOME (LOSS) BEFORE INCOME TAX 132 112 255
223
INCOME TAX PROVISION (RECOVERY) 21 41 39
82
NET INCOME (LOSS) 111 71 216
141
EARNINGS (LOSS) PER COMMON SHARE $ 0.08 $ 0.05
$ 0.15 $0.10
Weighted Average Number of 1,462,271 1,462,271
1,462,271 1,462,271
Shares Outstanding
<FN>
See Note to Financial Statements
</FN>
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
Note to Financial Statements
March 31, 1996
The financial statements have been prepared by
Waters Instruments, Inc., without audit, pursuant
to the rules and regulations of the Securities
and Exchange Commission. The information
furnished in the financial statements include
normal recurring adjustments and reflect all
adjustments which are, in the opinion of
management, necessary for a fair presentation of
such financial statements. Certain information
and footnote disclosures normally included in
financial statements prepared in accordance with
generally accepted accounting principles have
been condensed or omitted pursuant to such rules
and regulations, although the Company believes
that the disclosures are adequate to make the
information presented not misleading. It is
suggested that these condensed financial
statements be read in conjunction with the
financial statements and the accompanying notes
included in the Company's latest Annual Report.
The marketable securities included as cash
equivalents on the balance sheet and cash flow
statements meet the
definition of cash equivalents set forth in
paragraph
8 and 9 of SFAS95.
Inventories at the dates shown consisted of the
following:
<TABLE>
<CAPTION>
March 31, 1996 June
30, 1995
<S> <C>
<C>
Raw Materials $1,634,000
$1,261,000
Work-In-Process 294,000
267,000
Finished Goods 277,000
213,000
Total Inventories $2,205,000
$1,741,000 </TABLE>
Item 2. Management's Discussion and Analysis or
Plan of Operation
Liquidity and Capital Requirements
The Company's working capital position at March
31, 1996 was $3,200,000, a 2% increase from the
$3,134,000 amount
at June 30, 1995. The cash balance for the
Company was $761,000 at March 31, 1996 compared
to the cash balance of $1,241,000 at June 30,
1995.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or
Plan of Operation (continued)
In January 1996, the Company accepted the bank's
$1,000,000 line of credit commitment and extended
it to November 30,
1996. The bank's line of credit charges interest
at the bank's base (prime) rate. There has been
no borrowing against the line of credit. The
prime rate was 8.25% at March 31, 1996.
The Company 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 Fiscal Year 1996 operating
activities and outlays for capital expenditures.
Capital expenditures of $155,000 and $307,000 for
the quarter and nine-month period ended March 31,
1996, respectively, were used to purchase
manufacturing equipment. The Company anticipates
continued improvements in its manufacturing
processes, lower unit costs, and improved gross
margins as a result of these capital
expenditures.
Results of Operations
Net sales for the quarter and nine-month period
ended March 31, 1996 were $3,623,000 and
$9,792,000 respectively.
This represents an increase of 14.0% for the
quarter and 8.2% for the nine months ended March
31, 1996 when comparing to the comparable periods
of the prior year.
Waters Medical Systems net sales for the quarter
and nine-month period ended March 31, 1996 were
$449,000 and
$1,536,000 respectively. This represents a
decrease of 22.3% for the quarter and 18.5% for
the nine months ended March 31, 1996 when
comparing to comparable periods of the prior
year. The decrease in net sales is principally
due to the one-time sale of Thermal Dilution
Cardiac Output Computers to Argon Medical which
represents $254,000 for the nine months ending
March 31, 1995. Argon was subject of a news
release made by the Company on August 1, 1994.
Net sales for American FarmWorks for the quarter
and nine-month period ended March 31, 1996 were
$2,306,000 and
$6,222,000 respectively. This represents a 5.4%
increase for the quarter and 1.0% increase for
the nine months ended March 31, 1996 when
comparing to the comparable periods of the prior
year.
Waters Technical Systems had net sales of
$840,000 for the quarter and $1,940,000 for the
nine months ended March 31, 1996. This
represents an increase of 104.2% for
the quarter and 98.6% for the nine months ended
March 31, 1996.
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.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or
Plan of Operation (continued)
Net income for the Company for the quarter ended
March 31, 1996 was a profit of $111,000 or $.08
per share on revenues
of $3,623,000. For the comparable quarter of the
prior year, the Company had a profit of $71,000
or
$.05 per share on revenues of $3,177,000.
Net income for the nine-month period ended March
31, 1996 was an income of $216,000 or $.15 per
share on revenues of $9,792,000. For the
comparable nine-month period of
the prior year, the Company had a net income of
$141,000 or $.10 per share on revenues of
$9,051,000. The nine-month net income results
represents an increase of 53% from the comparable
period of the prior year.
The income tax provision for the quarter ended
March 31, 1996 is lower than expected as a result
of recognition of a reduction in the valuation
allowance of deferred tax
assets.
PART-II
OTHER INFORMATION
Item 1. Legal Proceedings
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 entered
into before current management was appointed.
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.
In January, 1996, the Company was successful in
obtaining a judicial order that stated
contractual amounts of approximately $200,000
were unenforceable penalties, however, the same
order found the Company liable for breach of the
agreement. As a result, the remaining issue in
the suit is the amount of damages recoverable
from the Company to Wedge-Loc. Since the court's
finding of liability, Wedge-Loc has provided
information to the Company which Wedge-Loc claims
establish damages in amounts that are
significantly higher than any amounts previously
claimed or disclosed. The amounts currently
claimed total approximately $500,000. A trial on
the issue of damages payable by the Company is
scheduled for the end of May, 1996.
<PAGE>
The Company believes the court erred in finding
the Company liable under the written agreement.
The Company
expects to ask the court to reconsider its
earlier finding. If the Company is unsuccessful
in persuading the court to reconsider its finding
and disagrees with
the result of the trial, the Company will
consider an appeal of the court's finding at the
appropriate time.
PART-II
OTHER INFORMATION
Item 1. Legal Proceedings (continued)
The Company believes its accrued loss contingency
reserves are adequate and that current earnings
will not be
materially affected by a finding of liability up
to $500,000. However, cashflow will be
materially and adversely affected if the Company
is found liable for a significant amount and,
rather than appealing the finding, pays the
liability established by the court. The Company
has no current borrowings under its established
$1,000,000 line of credit and believes cash from
earnings and the line will enable the Company to
satisfy any judgment that may result from the
suit.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
Financial Data Schedule (submitted only in
electronic format).
(B) No report on Form 8-K has been filed during
the last quarter of the period covered by this
report.
In accordance with the requirements of the
Exchange Act, the Company caused this report to
be signed on its behalf
by the undersigned, thereunto duly authorized.
WATERS INSTRUMENTS, INC.
Jerry W. Grabowski
Jerry W. Grabowski
President, CEO and
Chief Financial Officer
May 14, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-
1996 <PERIOD-END> MAR-
31-1996
<CASH> 761
<SECURITIES> 0
<RECEIVABLES> 1,957
<ALLOWANCES> 41
<INVENTORY> 2,205
<CURRENT-ASSETS> 5,257
<PP&E> 4,372
<DEPRECIATION> 2,816
<TOTAL-ASSETS>
6,918
<CURRENT-LIABILITIES> 2,057
<BONDS> 8
<COMMON> 146
0
0
<OTHER-SE> 4,677
<TOTAL-LIABILITY-AND-EQUITY> 6,918
<SALES> 9,792
<TOTAL-REVENUES> 9,792
<CGS> 6,937
<TOTAL-COSTS> 6,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 255
<INCOME-TAX> 39
<INCOME-CONTINUING> 216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
