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 DECEMBER 31, 1997
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 February 13,
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 Six Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 2,939 $ 2,587 $ 6,939 $ 6,512
COST OF GOODS
SOLD 1,968 1,787 4,680 4,553
_________ __________ _________ __________
GROSS PROFIT 971 800 2,259 1,959
OPERATING EXPENSES
Administrative 369 321 735 731
Selling 439 349 958 718
Research and
Development 122 143 236 241
_________ __________ _________ __________
Total Operating
Expenses 930 813 1,929 1,690
_________ __________ _________ __________
OPERATING INCOME 41 (13) 330 269
OTHER INCOME (EXPENSE)
Net Interest
Income (Expense) 25 23 47 43
Net Other Income
(Expense) (1) (3) 4 (7)
_________ __________ _________ __________
INCOME BEFORE
INCOME TAX 65 7 381 305
INCOME TAX PROVISION 25 3 144 123
_________ __________ _________ __________
NET INCOME 40 4 237 182
EARNINGS PER
COMMON SHARE - Basic
and Diluted $ 0.03 $ 0.00 $ 0.16 $ 0.12
_________ __________ _________ __________
Weighted Average
Number of
Shares
Outstanding
- Basic 1,462,271 1,462,271 1,462,271 1,462,271
Weighted Average
Number of
Shares
Outstanding
- Diluted 1,499,496 1,492,097 1,497,303 1,491,011
<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>
December 31, June 30,
1997 1997
(Unaudited) (Unaudited)
Current Assets `
Cash & Cash Equivalents $ 2,065 $ 1,632
Net Trade Receivables 1,347 1,955
Inventories 1,948 1,772
Prepaid Expenses 188 115
Deferred Income Taxes 250 250
_____________ _____________
Total Current Assets 5,798 5,724
Fixed Assets
Property, Plant & Equipment 5,019 4,743
Less Accumulated Depreciation 3,424 3,219
_____________ _____________
Net Fixed Assets 1,595 1,524
Other Assets 3 3
Goodwill 71 80
_____________ _____________
TOTAL ASSETS $ 7,467 $ 7,331
_____________ _____________
Current Liabilities
Current Maturities of
Long-term Debt $ 11 $ 5
Accounts Payable 661 645
Accrued Salaries, Wages and
Other Compensation 435 392
Product Warranties 229 229
Accrued Other Expenses 80 215
_____________ _____________
Total Current Liabilities 1,416 1,486
_____________ _____________
Long-term Debt, Less Current
Maturities 41 34
Deferred Income Taxes 50 50
_____________ _____________
TOTAL LIABILITIES 1,507 1,570
_____________ _____________
Stockholders' Equity
Common Stock 147 146
Additional Paid-in Capital 1,266 1,246
Retained Earnings 4,547 4,369
_____________ _____________
TOTAL STOCKHOLDERS' EQUITY 5,960 5,761
_____________ _____________
TOTAL LIABILITIES & EQUITY $ 7,467 $ 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 Six Months
Ended December 31,
1997 1996
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 7,541 $ 7,450
Interest received 50 45
___________ _________
Cash provided from operations 7,591 7,495
Cash paid to suppliers and employees 6,578 6,122
Taxes paid 277 136
Interest paid 3 1
___________ _________
Cash disbursed from operations 6,858 6,259
___________ _________
Net cash provided by operations 733 1,236
CASH FLOWS FROM INVESTING
Net aquisition of fixed assets (276) (240)
___________ _________
Net cash used for investing (276) (240)
CASH FLOWS FROM FINANCING
Cash Dividend Payment (58) (58)
Proceeds from sale of Common Stock 21 0
Reduction of Long-Term Debt 13 (6)
___________ _________
Net cash used for financing (24) (64)
___________ _________
NET INCREASE IN CASH AND EQUIVALENTS 433 932
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,632 964
___________ _________
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,065 $ 1,896
___________ _________
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 237 $ 182
Depreciation and Amortization 214 172
Provisions For Losses On Accounts Receivable 6 6
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 602 938
Notes Receivable 188
Inventories (176) 230
Prepaid Expenses and Deferred Income Taxes (73) (51)
Accounts Payable and Accrued Expenses (77) (429)
___________ _________
NET CASH PROVIDED BY OPERATIONS $ 733 $ 1,236
___________ _________
<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
December 31, 1997
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 and 9 of SFAS95.
<TABLE>
<CAPTION>
Inventories consisted of the following:
<S> <C> <C>
December 31, 1997 June 30, 1997
Raw Materials $1,497,000 $1,350,000
Work-In-Process 243,000 256,000
Finished Goods 208,000 166,000
_________ _________
Total Inventories $1,948,000 $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 December 31, 1997 was
$4,382,000, a 3% increase from the $4,238,000 amount on June 30, 1997.
The cash balance for the Company was $2,065,000 on December 31, 1997
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 December 31, 1997.
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 $185,000 and $276,000 for the quarter and six-month
period ended December 31, 1997, 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 two quarters of the current Fiscal Year are
estimated at $200,000.
On October 23, 1997, at a regularly scheduled meeting of the Company's Board of
Directors, the Board approved a cash dividend. A dividend of $.04 per share of
the Company's common stock was paid on December 8, 1997 to shareholders of
record on November 7, 1997, which resulted in an aggregate cash payment of
approximately $58,000.
Results of Operations
Net sales for the quarter and six-month period ended December 31, 1997 were
$2,939,000 and $6,939,000 respectively. This represents an increase of 14% for
the quarter and an increase of 7% for the six months ended December 31, 1997 as
compared to the prior year.
Waters Medical Systems' (WMS) net sales for the quarter and six-month period
ended December 31, 1997 were $695,000 and $1,161,000 respectively. This
represents an increase of 63% for the quarter and 38% for the six months ended
December 31, 1997 as compared to the prior year. The Company anticipates
higher revenues for Waters Medical Systems for the remainder of FY1998
over the prior year due to the demand for the recently released
RM3 Renal Preservation Monitor. WMS believes the RM3 will exceed
projected sales expectations. Shipments of the RM3 began in November 1997 to
satisfy existing customer 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 six-month period
ended December 31, 1997 were $1,406,000 and $3,928,000 respectively. This
represents a decrease of 3% for the quarter and six-month period ended December
31, 1997 as compared to the prior year. The Company anticipated a slight
softening in demand to continue through the second quarter of FY1998 due to
industry declines in demand for electric fencing products. To offset the
decline, AFW aggressively marketed its new products introduced over the past
year to new markets, including the lawn and garden segment. In addition, AFW
is launching an international sales expansion by establishing products and
distribution channels in Central America and Scandinavia.
Over the prior year, Waters Technical Systems' (WTS) net sales increased 34% to
$576,000 for the second quarter and increased 19% to $1,080,000 for the six-
month period ended December 31, 1997. The increase was primarily due to sales
from two new accounts that are expected to provide continued growth. WTS
continues to focus heavily on improving the efficiency of its manufacturing
processes and anticipates improved profitability as a result.
Waters Network Systems' (WNS) net sales for the quarter and six-month period
ending December 31, 1997 were $262,000 and $770,000, respectively. This
represents a decrease of 5% for the quarter and an increase of 11% for the six
months ended December 31, 1997 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 needs of the K-12 educational market. The
Company anticipates these investments will result in stronger sales growth in
the future.
For the quarter ended December 31, 1997, gross profit improved to 33.0% of net
sales, up from 30.1% reported for the comparable period of last year. Gross
profit for the six-month period ended December 31, 1997 was 32.6% of net sales
compared to 30.1% for the comparable period of the prior year. The Company's
recent shipments of the RM3 medical device 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 $930,000 for the quarter and $1,929,000 for the six-
month period ended December 31, 1997, representing an increase of $117,000 and
$239,000 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 December 31, 1997 was a profit
of $40,000, or $.03 per share, on revenues of $2,939,000. For the comparable
quarter of the prior year, the Company had a profit of $4,000, or $0.00 per
share, on revenues of $2,587,000.
Net income for the six-month period ended December 31, 1997 was a profit of
$237,000, or $.16 per share, on revenues of $6,939,000. For the comparable
six-month period of the prior year, the Company had a net income of $182,000,
or $.12 per share, on revenues of $6,512,000.
The weighted-average number of shares of common stock used to compute the basic
earnings per share was increased by 37,225 and 29,826 shares for the quarters
ended December 31, 1997 and 1996, respectively, and 35,032 and 28,740 shares
for the six months ended December 31, 1997 and 1996, 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) the expected revenue from the RM3 Renal Preservation System, new product
development and marketing and international sales expansion within AFW, and
(ii) expected growth from two new accounts as well as improved manufacturing
efficiencies within WTS are subject to the risks of
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 conditions and competitive conditions and on the effectiveness of the
expanded distribution and regional sales office as well as
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 4. Submission of Matters to a Vote of Security Holders
On October 23, 1997, the Company held its Annual Meeting of Shareholders.
Proxies received and counted before the meeting for representation at the
meeting were 1,020,537 or 69.8% of the issued and outstanding shares
(1,462,271). For matters brought to vote before the Shareholders, the
Company's Bylaws require the affirmative vote of the greater of: (1) a
majority of the voting power of the shares represented in person or by
proxy at the Annual Meeting with authority to vote on such matters
(50.01%); or (2) a majority of the voting power of the minimum number
of shares that would constitute a quorum for the transaction of business
at the Annual Meeting (33-1/3%).
<TABLE>
<CAPTION>
The following people were elected to serve as directors of the Company for the
ensuing year:
<S> <C> <C> <C>
Name Age Position with the Company Year in Which First
and Principal Occupation Became a Director
William R.
Franta 55 Director. Business Development 1997
& Technology Consultant in
Minneapolis, Minnesota.
Jerry W.
Grabowski 45 President, Chief Executive Officer 1993
and Director of the Company.
John A.
Grimstad 47 Secretary and General Counsel of the 1996
Company. Vice President of Fredrikson
& Byron, P. A. in Minneapolis, Minnesota
Charles G.
Schiefelbein 58 Director. President of Capital Growth
Services of Minneapolis, Minnesota. 1986
</TABLE>
Submitted for vote at the meeting were the following three proposals:
1) To establish the number of Directors at four.
Proxies voted for the resolution totaled 1,018,587 shares or 99.81% of the
1,020,537 shares represented in person or by proxy at the Annual Meeting.
Proxies voting against proposal No. 1. were 1,425 or .14%; and shares
abstaining were 525 or .05% of the 1,020,537 shares represented in person
or by proxy at the Annual Meeting.
2) Slate of Directors
Proxies voted for the slate of Directors were 1,020,312 shares or 99.98% of
the 1,020,537 shares represented in person or by proxy at the Annual Meeting.
Proxies withholding authority were 225 or .02% of the 1,020,537 shares
represented in person or by proxy at the Annual Meeting.
<PAGE>
PART-II
OTHER INFORMATION
<TABLE>
<CAPTION>
Proxies withholding authority for individual Directors were:
<S> <C>
William Franta 75
Jerry Grabowski 0
John Grimstad 4695
Charlie Schiefelbein 0
</TABLE>
3) Approval of the Company's 1997 Associate Stock Purchase Plan.
Proxies voted for this proposal totaled 693,914 or 68% of the 1,020,537 shares
represented in person or by proxy at the Annual Meeting. Proxies voting against
proposal No. 3 were 19,112 or 2.17%; and shares abstaining were 3,017 or .3% of
the 1,020,537 shares represented in person or by proxy at the Annual Meeting.
There were also 16 broker non-votes.
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
February 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Dec-31-1997
<CASH> 2,065
<SECURITIES> 0
<RECEIVABLES> 1,382
<ALLOWANCES> 35
<INVENTORY> 1,948
<CURRENT-ASSETS> 5,798
<PP&E> 5,019
<DEPRECIATION> 3,424
<TOTAL-ASSETS> 7,476
<CURRENT-LIABILITIES> 1,416
<BONDS> 41
<COMMON> 147
0
0
<OTHER-SE> 5,813
<TOTAL-LIABILITY-AND-EQUITY> 7,467
<SALES> 6,939
<TOTAL-REVENUES> 6,939
<CGS> 4,680
<TOTAL-COSTS> 4,680
<OTHER-EXPENSES> 1,929
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 381
<INCOME-TAX> 144
<INCOME-CONTINUING> 237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
