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, 1998
Commission file number 0-1388:
WATERS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter.)
(d/b/a Waters Corporation)
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 - 1,467,448 shares outstanding as of May
14, 1998.
Transitional Small Business Disclosure Format (check one) :
Yes ___ No _X_
<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
For The Three Months For The Nine Months
Ended March 31, Ended March 31,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 3,944 $ 3,570 $ 10,883 $ 10,083
COST OF GOODS
SOLD 2,628 2,481 7,309 7,034
________ _________ _________ _________
GROSS PROFIT 1,316 1,089 3,574 3,049
OPERATING EXPENSES
Administrative 320 324 1,057 998
Selling 595 465 1,552 1,240
Research and
Development 140 128 375 370
_______ _________ _________ _________
Total Operating
Expenses 1,055 917 2,984 2,608
_______ _________ _________ ________
OPERATING INCOME 261 172 590 441
OTHER INCOME (EXPENSE)
Net Interest
Income (Expense) 21 19 67 62
Net Other Income
(Expense) 1 29 6 22
_______ _________ _________ ________
INCOME BEFORE
INCOME TAX 283 220 663 525
INCOME TAX PROVISION 107 84 251 207
_______ _________ _________ ________
NET INCOME $ 176 $ 136 $ 412 $ 318
EARNINGS PER COMMON SHARE
BASIC $ 0.12 $ 0.09 $ 0.28 $ 0.22
DILUTED $ 0.12 $ 0.09 $ 0.27 $ 0.21
_______ _______ _______ _______
Weighted Average
Number of
Shares
Outstanding
- Basic 1,467,448 1,462,271 1,463,971 1,462,271
Weighted Average
Number of
Shares
Outstanding
- Diluted 1,502,046 1,493,133 1,498,858 1,491,718
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<CAPTION>
<S> <C> <C>
March 31, June 30,
1998 1997
(Unaudited) (Unaudited)
Current Assets `
Cash & Cash Equivalents $ 1,511 $ 1,632
Net Trade Receivables 1,814 1,955
Inventories 2,296 1,772
Prepaid Expenses 57 115
Deferred Income Taxes 250 250
_____________ ____________
Total Current Assets 5,928 5,724
Fixed Assets
Property, Plant & Equipment 5,319 4,743
Less Accumulated Depreciation 3,531 3,219
_____________ ____________
Net Fixed Assets 1,788 1,524
Other Assets 3 3
Goodwill 67 80
_____________ _____________
TOTAL ASSETS $ 7,786 $ 7,331
Current Liabilities
Current Maturities of
Long-term Debt $ 12 $ 5
Accounts Payable 812 645
Accrued Salaries, Wages and
Other Compensation 467 392
Product Warranties 229 229
Accrued Other Expenses 43 215
_____________ ____________
Total Current Liabilities 1,563 1,486
Long-term Debt, Less Current
Maturities 38 34
Deferred Income Taxes 50 50
_____________ ___________
TOTAL LIABILITIES 1,651 1,570
Stockholders' Equity
Common Stock 147 146
Additional Paid-in Capital 1,266 1,246
Retained Earnings 4,722 4,369
_____________ ___________
TOTAL STOCKHOLDERS' EQUITY 6,135 5,761
_____________ ___________
TOTAL LIABILITIES & EQUITY $ 7,786 $ 7,331
_____________ _____________
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<CAPTION>
<S> <C> <C>
For the Nine Months
Ended March 31,
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 11,015 $ 10,337
Interest received 72 64
_________ _________
Cash provided from operations 11,087 10,401
Cash paid to suppliers and employees 10,240 9,516
Taxes paid 360 189
Interest paid 6 2
_________ _________
Cash disbursed from operations 10,606 9,707
_________ _________
Net cash provided by operations 481 694
CASH FLOWS FROM INVESTING
Net aquisition of fixed assets (576) (425)
Proceeds from Notes Receivable 0 188
_________ __________
Net cash used for investing (576) (237)
CASH FLOWS FROM FINANCING
Cash Dividend Payment (58) (58)
Proceeds from sale of Common Stock 21 0
Reduction of Long-Term Debt 11 (9)
_________ _________
Net cash used for financing (26) (67)
NET INCREASE IN CASH AND EQUIVALENTS (121) 390
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,632 964
_________ __________
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,511 $ 1,354
_________ __________
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 412 $ 318
Depreciation and Amortization 325 257
Provisions For Losses On Accounts Receivable 9 9
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 132 245
Inventories (524) 175
Prepaid Expenses and Deferred Income Taxes 58 25
Accounts Payable and Accrued Expenses 69 (335)
_________ __________
NET CASH PROVIDED BY OPERATIONS $ 481 $ 694
_________ _________
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
d/b/a Waters Corporation
Notes to Financial Statements
March 31, 1998
The financial statements have been prepared by Waters Corporation
without audit and pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished in the
financial statements includes normal recurring adjustments and reflects
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.
The Company believes the information presented is not misleading. It
is suggested that these condensed financial statements are read in
conjunction with the financial statements and the accompanying notes
included in the Company's 1997 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 of SFAS95.
<TABLE>
<CAPTION>
Inventories consisted of the following:
<S> <C> <C>
March 31, 1998 June 30, 1997
Raw Materials $1,853,000 $1,350,000
Work-In-Process 269,000 256,000
Finished Goods 174,000 166,000
__________ _________
Total Inventories $2,296,000 $1,772,000
</TABLE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Requirements
Waters Corporation's working capital position on March 31, 1998 was
$4,365,000, a 3% increase from $4,238,000 on June 30, 1997.
The cash balance for the Company was $1,511,000 on March 31, 1998
compared to the cash balance of $1,632,000 on June 30, 1997.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
In December 1997, Waters renewed the bank's $1,000,000 line of credit
commitment and extended it to December 15, 1998. The bank's line of
credit charges interest at the bank's base (prime) rate. The prime
rate was 8.5% at March 31, 1998. The Company has not borrowed against
the line of credit during Fiscal Year 1998 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. Waters has not been charged a commitment fee on the bank
line of credit.
Capital expenditures of $300,000 and $576,000 for the quarter and nine-
month period ended March 31, 1998, respectively, were used to purchase
manufacturing equipment and information systems software. The Company
anticipates continued improvements in its overall efficiency and
management of the corporation as a result of these capital
expenditures. Capital expenditures for the remaining quarter of the
current Fiscal Year are estimated at $25,000.
Results of Operations
Net sales for the quarter and nine-month period ended March 31, 1998
were $3,944,000 and $10,883,000, respectively. This represents an
increase of 10% for the quarter and an increase of 8% for the nine
months ended March 31, 1998 as compared to the prior year.
Waters Medical Systems' (WMS) net sales for the quarter and nine-month
period ended March 31, 1998 were $481,000 and $1,642,000 respectively.
This represents an increase of 8% for the quarter and 28% for the nine
months ended March 31, 1998, as compared to the prior year. The Company
anticipates higher revenues for Waters Medical Systems for
the fourth quarter of FY 1998 over the prior year
due to the increasing demand for the
recently released RM3 Renal Preservation Monitor. Shipments of the RM3
began in November 1997 to meet international and domestic sales orders.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Net sales for American FarmWorks (AFW) for the quarter and nine-month
period ended March 31, 1998 were $2,474,000 and $6,403,000
respectively. This represents an increase of 9% for the quarter and 1%
for the nine-month period ended March 31, 1998 as compared to the prior
year. The Company has identified key geographic markets and
invested in establishing new products and
distribution channels to capitalize on future growth potential.
Domestically, the Company continues to market new products
that focus on the growing needs of the hobby farmer and equine (horse)
market. In addition, the Company believes the international
markets offer the greatest potential for growth.
Waters Technical Systems' (WTS) net sales increased 23% to $757,000 for
the third quarter and increased 20% to $1,837,000 for the nine-month
period ended March 31, 1998. The increase was primarily due to sales
from two new accounts that are expected to continue to provide future
growth. WTS continues to focus on improving the efficiency of
its manufacturing processes that it believes will result in
profitability improvements.
Waters Network Systems' (WNS) net sales for the quarter ending March
31, 1998 were $232,000, comparable to the same period of the prior
year. For the nine months ended March 31, 1998, net sales increased 8%
to $1,001,000 when compared to the prior year. WNS expects higher
sales for the remainder of FY1998 over the prior year due primarily to
the expansion of distribution, regional sales offices, and new products
that specifically address the growing technology needs of the K-12
educational market. The Company also anticipates stronger sales growth in
the remaining quarter of FY1998 as a result of
the federal government's E-Rate program money and
successfully bidding and obtaining orders from several school districts.
For the quarter ended March 31, 1998, gross profit improved to 33.4% of
net sales, up from 30.5% reported for the comparable period of last
year. Gross profit for the nine-month period ended March 31, 1998 was
32.8% of net sales compared to 30.2% for the comparable period of the
prior year. The Company's increased sales and continued improvements
of key manufacturing metrics have contributed significantly to the
improvements in gross margin.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Operating expenses were $1,055,000 for the quarter and $2,984,000 for
the nine-month period ended March 31, 1998, representing an increase of
$138,000 and $376,000 when compared to the prior year. The increased
operating expenses resulted from the Company's efforts to fund future
growth opportunities by pursuing strategic partnerships, aggressively
marketing new products and laying the groundwork for launching global
distribution channels.
Net income for the Company for the quarter ended March 31, 1998 was a
profit of $176,000, or $.12 per share, on revenues of $3,944,000. For
the comparable quarter of the prior year, the Company had a profit of
$136,000, or $0.09 per share, on revenues of $3,570,000.
Net income for the nine-month period ended March 31, 1998 was a profit
of $412,000, or $.28 per share, on revenues of $10,883,000. For the
comparable nine-month period of the prior year, the Company had a net
income of $318,000, or $.22 per share, on revenues of $10,083,000.
The weighted-average number of shares of common stock used to compute
the basic earnings per share was increased by 34,598 and 30,862 shares
for the quarters ended March 31, 1998 and 1997, respectively, and
34,887 and 29,447 shares for the nine months ended March 31, 1998 and
1997, respectively, for the assumed exercise of the
employee stock options in computing the diluted per-share data.
Certain statements in this Management's Discussion and Analysis are
forward-looking and are subject to a number of risks and uncertainties
that may cause the Company's future operations and results of
operations to differ materially from those projected in this report.
Particularly, those statements relating to (i) improvements in efficiency
and management as a result of capital expenditures, (ii) the expected revenue
from the RM3 Renal Preservation System, (iii) new product development
and marketing and international sales expansion within AFW, and (iv)
expected growth from two new accounts as well as improved manufacturing
efficiencies within WTS are subject to the risks of continued product
acceptance and product demand, fluctuations in the price of raw materials,
competition, success in obtaining manufacturing efficiencies, and
facilities utilization. The higher sales expectancy for WNS depends on
general market and competitive conditions, the
effectiveness of the expanded distribution and regional sales offices,
and development and market acceptance of its new products. Readers are
cautioned not to place undue reliance on these forward-looking
statements, as actual results could differ.
<PAGE>
PART-II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule (submitted only in
electronic format).
(B) No report on Form 8-K has been filed during 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.
By: /S/ Jerry W. Grabowski
Jerry W. Grabowski
President and Chief
Executive Officer
May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Mar-31-1998
<CASH> 1,511
<SECURITIES> 0
<RECEIVABLES> 1,854
<ALLOWANCES> 40
<INVENTORY> 2,296
<CURRENT-ASSETS> 5,928
<PP&E> 5,319
<DEPRECIATION> 3,531
<TOTAL-ASSETS> 7,786
<CURRENT-LIABILITIES> 1,563
<BONDS> 38
<COMMON> 147
0
0
<OTHER-SE> 5,988
<TOTAL-LIABILITY-AND-EQUITY> 7,786
<SALES> 10,883
<TOTAL-REVENUES> 10,883
<CGS> 7,309
<TOTAL-COSTS> 7,309
<OTHER-EXPENSES> 2,984
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 663
<INCOME-TAX> 251
<INCOME-CONTINUING> 412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
</TABLE>
