<PAGE>
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, 1998
Commission file number 0-1388
WATERS INSTRUMENTS, INC.
(d/b/a Waters Corporation)
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 Company'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, 1998 were $15,785,000.
The aggregate market value of the voting stock held by non-
affiliates of the Company on August 31, 1998 was $ 4,455,598.
The number of shares outstanding of the Company's Common Stock
on August 31, 1998 was 1,467,448.
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 1998 Annual
Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before September 25, 1998.
Transitional Small Business Disclosure Format (Check One) Yes
No X
<PAGE>
PART I ITEM 1. BUSINESS
(a) Business Development
A Minnesota corporation since 1960, Waters Instruments, Inc.
(d/b/a Waters Corporation) is a customer-driven, electronics
manufacturer and marketer of network connectivity, contract
manufacturing, agricultural electric fencing, and medical
products. During Fiscal Year 1998, sales were conducted
through four principal business units: Farm Products {d/b/a
American FarmWorks (AFW)}; Medical Products {d/b/a Waters
Medical Systems (WMS)}; Electrical Products {d/b/a Waters
Technical Systems (WTS), 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, predator, and pet containment. The Company
considers itself the largest of the four 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.
Sales by AFW are made primarily through major farm equipment
and hardware distributors, suppliers and retailers. During
Fiscal Year 1998, sales to AFW's top three customers accounted
for approximately 32.8% of AFW's total sales or 19.4% of the
Company's total sales.
American FarmWorks sells through independent representatives.
Sales by AFW in Fiscal Year 1998 were 59% of the Company's
total sales compared to 65% in Fiscal Year 1997.
There were no significant sales from AFW 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; however, the Company has filed for
a digital control module patent that it believes offers a
differential advantage over competitive products. Trademarks
associated with the business are believed to be of value and
include: American FarmWorks, Blitzer, BullDozer, Captivator,
Cobra, Dyna-Charge, Electro-Line, HOL-DEM, Hot Spark,
International, Jewel, Solar Blitz, Solar Bull, Sting Ray,
Super Charger, ThunderBolt and Wasp.
American FarmWorks' business is seasonal, with peak customer
demand occurring in the spring and summer months. Backlog is
not significant in this unit's operations since most orders
are filled within days after receipt.
<PAGE>
(2) Waters Medical Systems
Waters Medical Systems manufactures and markets electronic
medical instruments for cardiovascular and organ preservation
products used in laboratories and hospitals. In an industry
of numerous medical equipment manufacturers, WMS' sales
contribution is minor; however, it is the dominant supplier in
its specific market niches. Sales by WMS in Fiscal Year 1998
represented 13.3% of the Company's total sales compared to
11.6% in Fiscal Year 1997.
Sales of WMS' products are made to a large number of customers
in the health care field primarily through the use of
independent representatives. WMS' top five customers
contributed 28.8% of the business unit's total sales in Fiscal
Year 1998.
No significant sales are made to the United States Government
and no contracts are subject to renegotiation. This business
unit requires no unusually large working capital funds, but
accounts receivable can approach two month's sales due to the
slow reimbursement practices of third-party insurers and
administrators. Raw materials necessary in the manufacture of
this business unit's products are generally available from a
number of suppliers.
The Company announced on July 31, 1997 that it had received
approval from the Food and Drug Administration (the "FDA") to
market its new RM3 Renal Preservation monitor. The RM3 was
developed by WMS to preserve kidneys for transplant. The RM3
System is a two-part kidney preservation system that includes
a monitor for regulating and monitoring the pulsatile
perfusion of one or two kidneys and a sterile, single-use
disposable cassette that circulates a preservation solution
continuously through the kidneys.
As of June 30, 1998, WMS' order backlog was $211,000, which is
higher than normal. Generally, WMS is able to ship orders
reasonably soon after receipt; however, WMS' backlog increased
due to the Company imposing a stop-ship on the RM3 Renal
Preservation Monitor during the third and fourth quarters.
This was done to address product enhancements and reliability
issues. Customer interest in the RM3 remains strong. The
Company lifted the stop-ship status on the RM3 and resumed
shipping existing backorders on August 12, 1998. As of June
30, 1998 the Company has accrued for additional costs
connected with the product enhancements and reliability issues
relating to units sold before that date.
The Company holds several patents relating to its current and
new medical product lines. The significance of the patents
pending on new products to WMS has yet to be determined.
Waters Medical Systems' business experiences no seasonal sales
variations.
The products of Waters Medical Systems are subject to
governmental regulation by the FDA under the Federal Food and
Drug and Cosmetic Act (the "FDCA"). Before either a Class I
or Class II device may be marketed, Section 510(k) of the FDCA
requires that the manufacturer submit to the FDA, at least 90
days before marketing begins, a premarket notification of its
intent to market the device. If the FDA accepts the
sufficiency of the premarket notification, the device may then
be marketed.
<PAGE>
The FDA classifies medical devices into three categories that
determine the degree of regulatory control to which the
manufacturer of the device is subject. At present, all of
WMS' products are Class II devices, which are subject to
performance standards in addition to general controls, and
have appropriate FDA marketing approvals. Any new versions of
the present product offerings or future new products will
require the lengthy process of receiving FDA approval.
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
Waters Technical Systems, (formerly known as Midwest WireTech)
provides custom contract manufacturing including printed
circuit board, cable and harness assemblies to computer,
medical, communication, and office equipment manufacturers.
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 its
regional area.
In Fiscal Year 1998, the Company made investments in sales and
marketing, engineering, and manufacturing to provide long-term
sales growth in this business unit. Sales for Fiscal Year
1998 for this business unit were $2,383,000. This represents
a 14.6% increase over the Fiscal Year 1997 net sales of
$2,079,000.
As of June 30, 1998, WTS' backlog of orders was $262,000.
This backlog is scheduled to be filled within 12 months. This
compares to an order backlog of $530,000 at June 30, 1997.
In Fiscal Year 1998, WTS served a relatively small number of
customers, with ten customers representing about 91.0% of the
business unit's sales.
As a turnkey operation, this business unit is often required
to order significant inventories of raw materials to provide
adequate lead time for meeting customer 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.
(4) Waters Network Systems
Waters Network Systems, a business unit created late in Fiscal
Year 1995, manufactures and markets a wide range of
connectivity products for Token-Ring and Ethernet local area
networks (LANs). The products provide the ability to network
computers throughout school districts or business offices.
While the industry for network products is competitive and
covers a wide range of applications, WNS focuses on the K-12
educational segment to provide solutions not being met by
other manufacturers.
<PAGE>
During Fiscal Year 1998, Waters Network Systems continued to
expand its product line to include Fast Ethernet, dual speed
and switched hubs for both copper and fiber LANs used to
manage networks or increase the speed or capacity of current
networks. The Company believes WNS now offers the widest
range of classroom hubs in the industry. In addition, the
introduction of the new products will position the business
unit to provide complete network connectivity solutions in the
educational as well as commercial market segments.
In response to the needs of the K-12 segment, Waters Network
Systems offers consulting and training services. Numerous
school districts require support on network design and
installation as well as training support staff on courseware
and productivity tools software. Combining these services
along with offering the widest range of classroom hubs in the
industry gives WNS a differential advantage that distinguishes
the Company in the educational market.
The LAN products are sold primarily through dealerships who
resell the products as well as provide network cabling
installations. Less than 30% of the WNS total sales are
purchased directly by school districts or local Boards of
Education. The sales cycle in education is long, frequently
taking a year from having the products specified to the actual
installation. As a start-up business unit, Waters Network
Systems is heavily focusing its efforts on having its products
specified with an increasing number of school districts.
Sales for Fiscal Year 1998 for this business unit increased to
$1,978,000, a 56.1% increase over the Fiscal Year 1997 amount
due to continued aggressive marketing efforts and name
recognition. Many of the dealerships currently have been
awarded the bids for specific school districts, with the
installation to occur early in Fiscal Year 1999. The
educational market for LAN installations is seasonal, with
sales peaking during the summer months when school is out of
session.
The demand for network products exists in virtually all new
schools being built as well as the larger market for
retrofitting most existing schools. While grants and bond
issues fund the majority of networks, over 30,000 school
districts have applied for supplementary funding through the
Federal Communications Commission's (FCC) E-rate program.
Favoring the rural low-income school districts, funding of the
E-rate program will continue to have a strong impact on the
timing of sales for network products. With recent
reorganization, the FCC recently reduced the funding from
$2.25 billion over 12 months to $1.925 billion over 18 months
as well as delaying payments until September 1998. The
Company believes the E-rate program will have an impact on the
timing for WNS sales.
(5) Information as to Company's Business as a Whole
During Fiscal Years 1998 and 1997, the Company expended
$538,000 and $500,000 for research and development activities,
respectively.
The Company had a total of 135 employees as of June 30, 1998,
of which 116 were regular full-time employees. This compares
to a total of 135 employees as of June 30, 1997, of which 104
were regular full-time employees.
(c) Financial Information about Foreign and Domestic
Operations and Export Sales.
<PAGE>
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 $344,000 in Fiscal Year
1998, compared to $331,000 in Fiscal Year 1997. 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. In
Fiscal Year 1998, the Company had 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 10.9 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 with the remaining area used for
manufacturing and warehousing. Approximately 16% is used by
Waters Medical Systems, 24% by Waters Technical Systems, 53%
by American FarmWorks, and 7% by Waters Network Systems. The
Company currently leases 2,500 square feet of office space in
a Plymouth, 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
During Fiscal Year 1998, the Company did not have and
currently does not have any legal proceedings pending which
are outside of routine litigation that is incidental to the
business.
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 1998
Fiscal Year.
PART 1 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 periods of
service as such are as follows:
<TABLE>
<S> <C> <C> <C>
YEAR IN WHICH
FIRST BECAME
NAME AGE POSITION AN OFFICER
Jerry W. Grabowski 46 President, Chief Executive Officer, 1993
and Director
Gregory J. Anshus 41 Chief Financial Officer and Treasurer 1996
</TABLE>
The following information is presented as to the business
experience of each Executive Officer during the past five of
more 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 and
Treasurer in January 1995 and served until his successor,
Gregory J. Anshus, was elected on October 22, 1996. From 1988
until joining the Company, Mr. Grabowski was employed as
General Manager of Onan Power/Electronics Division of the
Cummins Engine Company.
<PAGE>
Mr. Anshus was elected Chief Financial Officer and Treasurer
on October 22, 1996. Since joining the Company in October
1991, he served in various accounting positions in the
Company. From October 1994 until his election, Mr. Anshus
served as Controller of the Company. Until joining the
Company, Mr. Anshus served as Controller of B&F Companies.
PART II ITEM 5. MARKET FOR THE COMPANY'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 1998 and 1997
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.
<TABLE>
<S> <C> <C>
1998 High Low
First Quarter 9/30/97 7 4-5/8
Second Quarter 12/31/97 7-3/4 5-3/4
Third Quarter 3/31/98 6-1/4 5-1/4
Fourth Quarter 6/30/98 6-3/4 5-1/8
1997
First Quarter 9/30/96 5 3-3/4
Second Quarter 12/31/96 5-1/8 3-3/4
Third Quarter 3/31/97 5-7/8 4-1/4
Fourth Quarter 6/30/97 5-1/2 4
</TABLE>
As of August 31, 1998 the Company had approximately 694
shareholders of record.
Dividend Summary
The Board of Directors of the Company declared a dividend at a
regularly scheduled meeting held on October 23, 1997. The
dividend was based on Fiscal Year 1997 operating results. The
Company paid the dividend in December 1997 at the rate of $.04
per share, or an aggregate amount of $58,000. The Company
also paid a dividend in December 1996 of $.04 per share for 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 22, 1998.
The Company has paid its shareholders annual dividends for 21
of the last 22 years, with the first dividend paid in 1975.
<PAGE>
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, 1998 was $1,375,000, a
decrease of $257,000 from its June 30, 1997 balance of
$1,632,000. The Company's working capital position at June
30, 1998 was $4,684,000, an increase of 10% from the
$4,238,000 amount at June 30, 1997.
In December 1997, the Company 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, which was 8.5% at June 30, 1998.
The Company did not borrow 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.
The decrease in net cash provided by operations during Fiscal
Year 1998 resulted primarily from the Company's efforts to
fund future revenue opportunities with suitable accounts
receivable and inventory investment levels.
Capital expenditures were $626,000 during Fiscal Year 1998, an
increase of $136,000 from Fiscal Year 1997. Improvements to
manufacturing equipment and information systems comprised the
bulk of capital expenditures in Fiscal Year 1998. The Company
anticipates continued improvements in its overall efficiency
and management of the corporation as a result of these capital
expenditures.
In Fiscal Year 1997, the Company received $188,000 in
proceeds, on a note receivable, from a prior year's sale of
unoccupied land adjacent to its manufacturing facilities.
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared with Fiscal Year 1997
Net sales for Fiscal Year 1998 were $15,785,000, an increase
of 9.1% from net sales of $14,466,000 experienced in Fiscal
Year 1997.
Net sales in Waters Medical Systems increased 24.7% in Fiscal
Year 1998 compared to Fiscal Year 1997. The increase was due
to higher sales of Oxicoms as well as the recently released
RM3 Renal Preservation monitor. Shipments of the RM3 began in
November 1997 to satisfy existing demand, but in the third
quarter through the fourth quarter of Fiscal Year 1998, the
Company stopped shipments on the RM3 Renal Preservation
monitor to address product enhancements and reliability
issues. Because of the "stop-ship", the fourth quarter sales
of Fiscal Year 1998 were not as strong as anticipated for this
business unit. The Company lifted the stop ship status on the
RM3 and resumed shipping existing backorders on August 12,
1998. Customer interest in the RM3 Renal Preservation monitor
remains strong. As of June 30, 1998 the Company had accrued
the additional costs connected with the product enhancements
and reliability issues relating to units sold before that
date.
<PAGE>
Waters Technical Systems' (WTS) net sales increased 14.6% to
$2,383,000 compared to Fiscal Year 1997. The increase was
primarily due to sales from two new accounts that are expected
to provide future growth. WTS continues to focus heavily on
improving the efficiency of its manufacturing process. As a
result, the Company anticipates improved profitability.
Net sales in American FarmWorks in Fiscal Year 1998 decreased
1.2% compared to Fiscal Year 1997. A slump in prices for
livestock, corn, soybeans and other commodities plus weather
problems has undercut farm incomes in some areas.
Domestically, the Company continues to aggressively market new
products that focus on the needs of the hobby farmer. In
addition, the Company believes international markets offer
significant potential for growth.
Waters Network Systems' (WNS) net sales increased 56.1% in
Fiscal Year 1998 compared to Fiscal Year 1997. The Company
anticipates higher revenues for Waters Network Systems to
continue due primarily to expansion of distribution, regional
sales offices and new products that specifically address the
growing needs of the K-12 education market.
Additional comparative information about industry segments can
be found in Note 9 to the Financial Statements contained in
this report.
The gross profit improved in Fiscal Year 1998 to 33.2% of net
sales from 31.4% for Fiscal Year 1997. Productivity
improvements primarily within the American FarmWorks, Waters
Medical Systems and Network Systems business units contributed
to improvement in gross profit in Fiscal Year 1998.
Operating expenses were $4,234,000 for Fiscal Year 1998,
representing an increase of $646,000, or 18%, from the
comparable figure of $3,588,000 for Fiscal Year 1997. The
increase in operating expenses resulted from the Company's
efforts to fund future growth opportunities by adding field
sales personnel, pursuing strategic partnerships, expanding
distribution channels and aggressively marketing new products.
In addition, the Company increased the Fourth Quarter
operating expenses to address its Year 2000 challenge with the
launch of its new information system. This added $158,000 in
capital expeditures and a one-time operating expense of
$44,000 to the quarter.
Improved working capital during Fiscal Year 1998 provided
interest income of $93,000, compared to interest income of
$82,000 during Fiscal Year 1997.
Interest expense, principally lease financing on the Company's
equipment, was $7,000 during Fiscal Year 1998, compared to
$4,000 in Fiscal Year 1997.
Net income for the Company for Fiscal Year 1998 was $685,000.
This compares to a net income of $663,000 for Fiscal Year
1997. The primary reasons for the Company's continued
improvement in net income since Fiscal Year 1993 included
reductions in manufacturing costs and recent increases in
sales volume.
Year 2000 Issue
At the turn of the century, time sensitive software using two
digits may not identify the year 2000 (Y2K), which could
disrupt the ability to conduct normal business operations due
to system failure and miscalculations. The Company completed
an assessment for Y2K compliance during fiscal 1998 and
developed a plan to resolve all major issues by the end of
1999.
<PAGE>
The plan consists of identifying those systems with which the
Company has exposure to Y2K issues, development and
implementation of action plans to be Y2K compliant, and the
final testing of each major area of exposure to ensure
compliance. The Company has identified three critical
compliance areas: 1) financial and information system
applications; 2) manufacturing applications; and 3) third-
party relationships.
In accordance with the program, the Company has conducted an
internal review of all systems and contacted all software
suppliers. In the financial and information systems areas, the
Company has replaced the core financial and reporting systems
with Y2K compliant programs. In the manufacturing area, the
Company is in the process of identifying areas of exposure.
The Company has contacted most of its major third parties,
which state they intend to be Y2K compliant by the year 2000.
As of June 30, 1998, the Company has incurred $44,223 in Y2K
compliance costs and $158,162 in capital expenditures for
information systems that are Y2K compliant. The Company
estimates future expenditures to complete Y2K compliance to
approximate $171,000.
Cautionary Statements
Certain statements in this Management's Discussion and
Analysis are forward-looking statements that involve a number
of risks and uncertainties which may cause the Company's
future operations and results of operations to differ
materially from those anticipated in this report.
Specifically, these include statements relating to (A) the
sufficiency of capital, which depends on the Company meeting
its expenses and revenue projections, as well as general
competition and market conditions; (B) profitability
improvements within the WTS business unit, which depend on
improved efficiencies and manufacturing processes; (C)
increased revenues within the WNS unit, which depend on
successful expansion of the Company's distribution and sales
functions and the acceptance and demand of its new products
within the K-12 educational market; and (D) the successful
implementation of the Company's analysis of the Year 2000
issues, which depends on the accuracy of its assessment of the
necessary remediation efforts and projected costs as well as
the accuracy of assurances received from third parties.
<PAGE>
PART II ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
(1) Financial Statements:
Page Number
Management's Responsibility for Financial Reporting 12
Independent Auditor's Report 13
Balance Sheets 14
Statements of Operations 15
Statements of Stockholders' Equity 15
Statements of Cash Flows 16
Notes to Financial Statements 17-24
</TABLE>
<PAGE>
Management's Responsibility for Financial Reporting
August 7, 1998
To the Stockholders of Waters Instruments, Inc.
Rochester, Minnesota
The management of Waters Corporation 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 and cash flows.
/s/ Gregory J. Anshus
Gregory J. Anshus
Chief Financial Officer
<PAGE>
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. (d/b/a Waters Corporation) as of June 30,
1998 and 1997 and the related statements of operations,
stockholders' equity, 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 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, 1998 and
1997 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
Rochester, Minnesota
August 7, 1998
<PAGE>
<TABLE>
<S> <C> <C>
Balance Sheets
June 30, 1998
In Thousands June 30, 1998 June 30, 1997
Current assets
Cash and equivalents (Note 2) $ 1,375 $ 1,632
Trade receivables (Note 3) 2,667 1,955
Inventories (Note 4) 2,015 1,772
Prepaid expenses 72 115
Deferred income taxes (Note 6) 200 250
_____ _____
Total current assets 6,329 5,724
Property, plant and equipment (Note 5)
Land 128 128
Building 1,505 1,497
Machinery and equipment 2,220 2,040
Office furniture and equipment 1,520 1,078
_____ _____
5,373 4,743
Less accumulated depreciation 3,621 3,219
______ ______
Net property, plant and equipment 1,752 1,524
Other assets
Costs in excess of net assets of businesses
acquired, net of amortization 62 80
Investments 3 3
_____ _____
Total other assets 65 83
_____ _____
Total assets $8,146 $7,331
Current liabilities
Current maturities of long-term debt (Note 5) 11 5
Trade payables 898 645
Accrued expenses
Salaries, wages, and other compensation 456 392
Product warranties 195 229
Other accrued liabilities 85 215
______ ______
Total current liabilities 1,645 1,486
Long-term debt (Note 5) 36 34
Deferred income taxes (Note 6) 56 50
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: 1,467,448 shares (1998),
1,462,271 shares (1997) 147 146
Additional paid-in capital 1,266 1,246
Retained earnings 4,996 4,369
_____ _____
Total stockholders' equity 6,409 5,761
______ ______
Total liabilities and equity $8,146 $7,331
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
</FN>
<PAGE>
<TABLE>
Statements of Operations
<S> <C> <C>
June 30
In Thousands, except per share data
1998 1997
Net sales $15,785 $14,466
Cost of goods sold 10,547 9,921
Gross profit 5,238 4,545
Operating expenses
Administrative 1,463 1,282
Selling 2,233 1,806
Research and development 538 500
_____ _____
Total operating expenses 4,234 3,588
Operating income 1,004 957
Other income
Interest income 93 82
Interest expense (7) (4)
Other income, net 15 17
______ _____
Income before income taxes 1,105 1,052
Income tax provision (Note 6) 420 389
______ _____
Net income $ 685 $ 663
Net income per share - basic (Note 8) $ .47 $ .45
Net income per share - diluted (Note 8) $ .46 $ .44
Weighted average number of shares
outstanding - basic 1,464,838 1,462,271
Weighted average number of shares
outstanding - diluted 1,500,272 1,491,971
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Statement of Stockholders' Equity
Common Stock
In Thousands Outstanding Additional Paid Retained
Shares Amount In Capital Earnings
Balance June 30, 1996 1,462 $ 146 $ 1,246 $ 3,764
Net Income for the period - - - 663
Dividends paid - - - (58)
______ ______ ________ _______
Balance June 30, 1997 1,462 146 1,246 4,369
Net Income for the period - - - 685
Dividends paid - - - (58)
Issuance of common stock 5 1 20 -
______ _____ _______ _______
Balance June 30, 1998 1,467 $ 147 $ 1,266 $ 4,996
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
</FN>
<PAGE>
<TABLE>
Statements of Cash Flows
<S> <C> <C>
Year Ended June 30
(In Thousands) 1998 1997
Cash flows from operations
Cash received from customers $15,061 $14,652
Interest received 93 82
Cash paid to suppliers and employees (14,289) (13,448)
Interest paid (7) (4)
Income taxes paid (445) (242)
______ _______
Net cash provided by operations 413 1,040
Cash flows from investing
Proceeds from note receivable - 188
Capital expenditures (626) (490)
Proceeds from sales of property and equipment 3 -
_____ _____
Net cash used for investing (623) (302)
Cash flows from financing
Proceeds from sale of common stock 21 -
Payment of long-term debt (10) (12)
Dividends paid (58) (58)
______ _____
Net cash used for financing (47) (70)
Net increase (decrease) in cash and equivalents (257) 668
Cash and equivalents, beginning of year 1,632 964
_______ _______
Cash and equivalents, end of year $ 1,375 $ 1,632
Reconciliation of net income to net cash
from operations:
Net income $ 685 $ 663
Depreciation and amortization 425 361
Loss on sale of property and equipment 6 -
Deferred income taxes 56 75
Changes in assets and liabilities
Accounts receivables (712) 186
Inventories (243) 261
Prepaid expenses 43 (82)
Trade payables 253 (258)
Accrued expenses (100) (178)
______ _______
Net cash provided by operations $ 413 $ 1,040
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements
</FN>
<PAGE>
Notes to Financial Statements
1. Nature of Business and Significant Accounting Policies
A. Nature of Business
The Company operates four principle business units: 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 custom contract manufacturing of printed circuit board,
cable and harness assemblies for the construction, industrial,
communications and computer industries. American FarmWorks
manufactures and sells electric fence controllers for animal
management to agricultural cooperatives and 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 conditions and generally requires no collateral.
B. Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts
receivable, and accounts payable approximate the carrying
amount because of the short maturity of those instruments.
C. Financial Statement Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
D. Inventories
Inventories are recorded at the lower of FIFO (first-in,
first-out) method cost or market.
E. Property, Plant and Equipment
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.
<PAGE>
F. Intangible Asset
Cost in excess of net assets 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, 1998 and 1997 was
$288,000 and $270,000, respectively.
G. Long-lived Assets and Goodwill
The Company assesses long-lived assets for impairment under
FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Under those rules, property and equipment and goodwill
associated with assets acquired in a purchase business
combination are included in impairment evaluations when events
or circumstances exist that indicate the carrying amount of
those assets may not be recoverable.
H. Product Warranty
Some of 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.
I. Employee Benefits
The Company has a 401(k) deferred savings plan for all
employees (associates) who have completed six months of
service. The Company may make matching and discretionary
contributions. The Plan has a calendar year-end. During each
of the fiscal years ending June 30, 1998 and 1997, the Company
expensed $24,000 in matching contributions, respectively.
The Company offers medical insurance to its associates which
it self-insures up to $25,000 per individual and $1,000,000 in
aggregate.
J. Statement of Cash Flows
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.
<TABLE>
<S> <C> <C>
In thousands: 1998 1997
Supplemental schedule of non-cash
investing and financing activities:
Office furniture and equipment
acquired with capital lease $ 18 $ 35
</TABLE>
K. Revenue Recognition
The Company recognizes revenue when the product is shipped
from their warehouse.
L. Research and Development
Research and Development costs are expensed as incurred.
<PAGE>
M. Advertising Costs
The Company follows the policy of charging the production
costs of advertising to expense as incurred. Advertising
expenses for the years ended June 30, 1998 and 1997 were
$390,000 and $251,000, respectively.
N. Income Taxes
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.
O. Net Income per Common Share
Net income per basic share is computed based upon the weighted
average number of common shares issued and outstanding during
each year. Dilutive per share amounts assume conversion,
exercise or issuance of all potential common stock instruments
(stock options and warrants as discussed in Note 7) unless the
effect is to reduce a loss or increase income per share.
P. Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130. "Reporting
Comprehensive Income." Statement No. 130 establishes
standards for the reporting of comprehensive income and its
components in a full set of general-purpose financial
statements. The Company will be required to adopt Statement
No 130 in fiscal year 1999 and does not expect the measure of
comprehensive income to be materially different from the
measure of net income.
In June, 1997, the FASB also issued SFAS No. 131. "Disclosures
about Segments of an Enterprise and Related Information."
Statement No. 131 revises information regarding the reporting
of operating segments. It also establishes standards for
related disclosures about products and services, geographic
areas and major customers. The company will be required to
adopt Statement No. 131 in fiscal year 1999. The Company does
not believe that the adoption of this standard will result in
segment disclosures that are materially different than those
provided under current accounting standards.
2. Credit Risks and Concentrations
At June 30, 1998 and 1997, the Company had cash with a
financial institution in excess of the Federal Deposit
Insurance Corporation insurance coverage. The Company has
performed an evaluation of the relative credit standing of
this financial institution and believes it has limited its
credit exposure accordingly. In addition, the Company
maintains cash balances in a money market mutual fund with
Norwest Funds. Such funds are not insured and totaled
$1,528,000 at June 30, 1998 and $1,486,000 at June 30, 1997.
The Company has not incurred any losses in such accounts.
<PAGE>
3. Trade Accounts Receivable
Trade accounts receivable consist of the following:
<TABLE>
<S> <C> <C>
In Thousands 1998 1997
Trade accounts receivable $2,705 $1,987
Less allowance for doubtful accounts 38 32
______ ______
Totals $2,667 $1,955
</TABLE>
4. Inventories
Inventories consist of the following:
<TABLE>
<S> <C> <C>
In Thousands 1998 1997
Raw materials $1,647 $1,350
Work-in-process 197 256
Finished goods 171 166
______ ______
Totals $2,015 $1,772
</TABLE>
5. Long-term Debt and Line of Credit
Long-term debt consists of the following:
<TABLE>
<S> <C> <C>
In Thousands 1998 1997
Capital lease obligations due in
varying monthly installments through
January 2000 secured by related equipment $ 47 $ 39
Less current maturities 11 5
____ ____
Net long-term debt $ 36 $ 34
</TABLE>
<TABLE>
<S> <C>
Scheduled maturities, by fiscal year, of long-term debt are as follows:
1999 11
2000 36
___
Total long-term debt $ 47
</TABLE>
<PAGE>
<TABLE>
At June 30, property, plant and equipment includes the
following amounts for capital leases:
<S> <C> <C>
In Thousands 1998 1997
Property, plant and equipment $ 67 $ 49
Accumulated amortization 18 10
____ ____
Net assets under capital lease $ 49 $ 39
</TABLE>
<TABLE>
At June 30, 1998, the Company had the following minimum
commitments for payment of rentals under capital leases:
<S> <C>
1999 16
2000 38
___
Total lease commitments $ 54
Less amount representing interest 7
____
Present value of lease payments, included in long-term debt $ 47
</TABLE>
Line of Credit:
The Company has a $1,000,000 line of credit with its bank.
Borrowings under the line are charged interest at the prime
rate and are collateralized by accounts receivable and
inventories. The prime rate was 8.5% at June 30, 1998. The
credit agreement expires December 15, 1998. 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, 1998.
6. Income Taxes
<TABLE>
The income tax provision charged to continuing operations for
the years ended June 30, 1998 and 1997 are as follows:
<S> <C> <C>
In Thousands 1998 1997
Current:
US federal $ 418 $ 410
State 58 54
_____ _____
Total current 476 464
Deferred:
US federal (50) (58)
State (6) (17)
_____ ____
Total deferred (56) (75)
_____ ____
Total current and deferred: $ 420 $ 389
</TABLE>
<PAGE>
<TABLE>
The income tax provision differs from the amount of income tax
determined by applying the US federal income tax rate to
pretax income for continuing operations for the years ended
June 30, 1998 and 1997 due to the following:
<S> <C> <C>
In Thousands 1998 1997
Computed "expected" tax expense $ 387 $ 400
Increase (decrease) in income taxes
resulting from:
Non-deductible expenses 12 12
State taxes, net of federal tax
benefits 31 48
Tax credits (22) (65)
Other 12 (6)
____ _____
Total $ 420 $ 389
</TABLE>
<TABLE>
Net deferred tax assets consist of the following components as
of June 30, 1998 and 1997:
<S> <C> <C>
In Thousands 1998 1997
Deferred tax assets
Employee benefits and severance $ 87 $ 85
Inventory and receivable allowances 42 61
Warranty and contingency reserves 71 104
______ ______
Total deferred tax assets $ 200 $ 250
Deferred tax liabilities
Property and equipment $ 56 $ 50
Total deferred tax liabilities 56 50
Net deferred tax assets $ 144 $ 200
</TABLE>
<TABLE>
The components giving rise to the net deferred tax assets
described above have been included in the Company's Balance
Sheets as of June 30, 1998 and 1997 as follows:
<S> <C> <C>
In Thousands 1998 1997
Current assets $ 200 $ 250
Noncurrent liabilities (56) (50)
______ ______
Net deferred tax assets $ 144 $ 200
</TABLE>
<PAGE>
7. Stock Options
In 1985, the Company adopted an Incentive Stock Option Plan
(the "1985 ISO Plan") and a Non-Qualified Stock Option Plan
(the "1985 NQ Plan"), both of which had a term of ten years
and terminated on March 20, 1995. As of June 30, 1995, all
options granted under the 1985 ISO Plan and the 1985 NQ Plan
had terminated except for one option for the purchase of 5,000
shares exercisable at $2.1875 per share.
The Board of Directors adopted the 1995 Stock Option Plan (the
"1995 Plan") in May 1995 and the shareholders of the Company
approved the 1995 Plan at the Company's annual meeting in
October 1995. The 1995 Plan provides for the grant of both
incentive stock options and non-qualified stock options and
reserves 150,000 shares of the Company's Common Stock for
issuance under the 1995 Plan and any previous plans of the
Company, to be granted on a one-for-one basis. The
outstanding 5,000 share option under the Company's 1985 ISO
Plan therefore reduces the shares reserved for issuance under
the 1995 Plan to 145,000 shares.
In December 1996, the Board of Directors adopted the
Associates Stock Purchase Plan (the "ASP Plan") which was
approved by shareholders at the 1997 Annual Meeting. The ASP
Plan is available to associates who have worked at least six
months with the Company and are regularly scheduled to work at
least 20 hours a week. The ASP Plan is carried out in 12-
month phases commencing on January 1, 1997. Company stock
bought under the ASP Plan is purchased at the lesser of 85% of
the stock price at the beginning or end of the phase.
Grants under these plans are accounted for using APB Opinion
No. 25 and related interpretations. Accordingly, no
compensation cost has been recognized for grants under these
plans. Had compensation cost for the plans based on their
grant date fair value of awards (the method described in FASB
Statement No. 123) reported net income and earnings per share
would have been reduced to the pro forma amounts shown below:
<TABLE>
<S> <C> <C>
1998 1997
Net Income (000's)
As reported $ 685 $ 663
Pro forma 601 663
Basic Earnings per Share
As reported $ .47 $ .45
Pro forma .41 .45
Diluted Earnings per Share
As reported $ .46 $ .44
Pro forma .40 .44
</TABLE>
The fair value of each option has been estimated at the grant
date using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in 1998,
dividend rate of .58% to .70%; price volatility of 43.1%,
risk-free interest rates of 5.7% and 5.8% and expected lives
of 10 years.
<PAGE>
<TABLE>
A summary of the status of the stock option plan at June 30,
1998 and 1997, and changes during the years ended on those
dates are as follows:
<S> <C> <C> <C> <C>
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding,
beginning of year 55,000 $ 2.13 55,000 $ 2.13
Granted 38,300 6.05 - -
Exercised/forfeited - - - -
Outstanding, ______ ______
end of year 93,300 $ 3.74 55,000 $ 2.13
Exercisable at ______ ______
end of year 93,300 55,000
Weighted-average fair
value per
Share of options
granted during
the year $ 3.53 $ -
</TABLE>
At June 30, 1998, the options outstanding have exercise prices
ranging from $2.13 to $6.88 and a weighted average remaining
contractual life of 8 years. All but 55,000 shares are
exercisable at prices ranging from $5.75 to $6.88. 50,000
shares are exercisable at $2.13 and 5,000 shares at $2.19.
8. Earnings per Share
Effective December 31, 1997, the Company adopted FASB
Statement No. 128, Earnings Per Share. The statement requires
the presentation of earnings per share by all entities that
have common stock or potential common stock, such as options,
warrants and convertible securities outstanding that trade in
a public market. Those entities that have only common stock
outstanding are required to present basic earnings per share
amounts. All other entities are required to present basic and
diluted per share amounts. Diluted per share amounts assume
the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or
increase the income per common share from continuing
operations. As required by the statement, the Company has
restated all per share information from prior years to conform
to the statement.
The weighted-average number of shares of common stock used to
compute the basic earnings per share were increased by 35,434
in 1998 and 29,700 in 1997 for the assumed exercise of the
stock options and warrants (Note 7), in computing the diluted
earnings per share data.
<PAGE>
9. Industry Segments and Significant Customers
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 include 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.
<TABLE>
<S> <C> <C>
In Thousands 1998 1997
Net Sales
WNS $ 1,978 $ 1,267
WTS 2,383 2,079
AFW 9,325 9,437
WMS 2,099 1,683
_______ _______
$15,785 $14,466
Operating Income (Loss)
WNS $ (193) $ (50)
WTS (165) (156)
AFW 1,957 1,905
WMS 867 540
General Corporate Expenses $(1,462) $(1,282)
_______ _______
Operating Income $ 1,004 $ 957
Capital Expenditures
WNS 28 -
WTS 142 12
AFW 208 166
WMS 39 36
______ ______
$ 417 $ 214
Depreciation and Amortization
WNS 6 5
WTS 46 31
AFW 193 168
WMS 21 21
______ ______
$ 266 $ 225
Identifiable Assets
WNS $1,260 $ 462
WTS 781 570
AFW 2,625 2,686
WMS 710 631
Corporate 2,770 2,982
$8,146 $7,331
Significant customers (sales > 10% of net sales)
WTS
No. of customers 4 10
Sales to those customers $1,703 $1,862
AFW
No of customers 1 1
Sales to that customer $2,140 $1,961
WNS
No. of customers 3 -
Sales to those customers $ 761 -
</TABLE>
<PAGE>
PART II ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
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 as part of Part I hereof, the
additional information required under this item is
incorporated by reference to the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders.
PART III ITEM 10. EXECUTIVE COMPENSATION
Information required under this item is incorporated by
reference to the Company's definitive Proxy Statement for its
1998 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
1998 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
1998 Annual Meeting of Shareholders.
PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(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 1998.
<PAGE>
Signatures
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 25, 1998.
WATERS INSTRUMENTS, INC.
/s/ Jerry W. Grabowski
By Jerry W. Grabowski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the Company in the capacities and on the dates
indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Jerry W. Grabowski President, Chief Executive
_____________________________ Officer (Principal Executive
Jerry W. Grabowski Officer) and Director 9-25-98
/s/ Gregory J. Anshus Chief Financial Officer
______________________________ (Principal Financial Officer) 9-25-98
Gregory J. Anshus
/s/ William R. Franta
_______________________________ Director 9-25-98
William R. Franta
/s/ John A. Grimstad
_______________________________ Director and Secretary 9-25-98
John A. Grimstad
/s/ Charles G. Schiefelbein
________________________________ Director 9-25-98
Charles G. Schiefelbein
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (No. 33-64937) and (No.
333-42415) of the Waters Instruments, Inc. 1995 Stock Option
Plan and 1997 Associates Stock Purchase Plan, respectively, of
our report dated August 7, 1998, on the financial statements
of Waters Instruments, Inc., which report, appears in the
Annual Report on Form 10-KSB for the year ended June 30, 1998.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Rochester, Minnesota
September 25, 1998
<PAGE>
Exhibit Index for Form 10-KSB (for the Fiscal Year ended June 30, 1998)
<S>
<C> <C> <C>
Page Number
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, incorporated by
reference to the description of such amendment set forth
under the caption "Amendment to Bylaws" of the Company's
definitive proxy statement for its 1988 Annual Meeting of
Shareholders. *
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 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) *
10.5 1995 Stock Option Plan incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1996. *
10.6 Settlement Agreement with Wedge-Loc providing for the
$240,000, incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1996. *
10.7 1997 Associates Stock Purchase Plan *
23.1 Independent Auditor's Consent *
24.1 Power of Attorney. *
27 Financial Data Schedule (filed in electronic formal only) *
(1) Indicates a management compensatory plan.
*Incorporated by reference; SEC File No. 0-1388.
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,375
<SECURITIES> 0
<RECEIVABLES> 2,705
<ALLOWANCES> 38
<INVENTORY> 2,015
<CURRENT-ASSETS> 6,329
<PP&E> 5,373
<DEPRECIATION> 3,621
<TOTAL-ASSETS> 8,146
<CURRENT-LIABILITIES> 1,645
<BONDS> 36
<COMMON> 147
0
0
<OTHER-SE> 6,262
<TOTAL-LIABILITY-AND-EQUITY> 8,146
<SALES> 15,785
<TOTAL-REVENUES> 15,785
<CGS> 10,547
<TOTAL-COSTS> 10,547
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 1,105
<INCOME-TAX> 420
<INCOME-CONTINUING> 685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 685
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
