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
SEPTEMBER 30, 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
November 13, 1998.
Transitional Small Business Disclosure Format (check one) :
Yes _ _ No _X_
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except
per share data)
<S> <C> <C>
For The Three Months
Ended September 30,
1998 1997
(Unaudited) Unaudited)
NET SALES $ 4,462 $ 4,000
COST OF GOODS
SOLD 2,748 2,712
_________ ________
GROSS PROFIT 1,714 1,288
OPERATING EXPENSES
Administrative 392 366
Selling 561 519
Research and Development 120 114
_________ ________
Total Operating Expenses 1,073 999
OPERATING INCOME 641 289
OTHER INCOME (EXPENSE)
Net Interest Income (Expense) 27 22
Net Other Income (Expense) (2) 5
_________ ________
INCOME BEFORE INCOME TAX 666 316
INCOME TAX PROVISION 253 119
_________ ________
NET INCOME $ 413 $ 197
EARNINGS PER COMMON SHARE
BASIC $ 0.28 $ 0.13
DILUTED $ 0.28 $ 0.13
Weighted Average
Number of Shares Outstanding - Basic 1,467,448 1,462,271
Weighted Average
Number of Shares Outstanding - Diluted 1,495,928 1,497,159
<FN>
See Notes to Financial Statements
</FN>
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<S> <C> <C>
September 30, June 30,
1998 1998
(Unaudited) (Unaudited)
Current Assets `
Cash & Cash Equivalents $ 2,809 $ 1,375
Net Trade Receivables 2,440 2,667
Inventories 1,633 2,015
Prepaid Expenses 79 72
Deferred Income Taxes 200 200
_____________ ____________
Total Current Assets 7,161 6,329
Fixed Assets
Property, Plant & Equipment 5,411 5,373
Less Accumulated Depreciation 3,732 3,621
_____________ ___________
Net Fixed Assets 1,679 1,752
Other Assets 3 3
Goodwill 58 62
_____________ _____________
TOTAL ASSETS $ 8,901 $ 8,146
Current Liabilities
Current Maturities of
Long-term Debt $ 10 $ 11
Accounts Payable 881 898
Accrued Salaries, Wages and
Other Compensation 587 456
Product Warranties 195 195
Accrued Other Expenses 316 85
_____________ ____________
Total Current Liabilities 1,989 1,645
Long-term Debt, Less Current
Maturities 34 36
Deferred Income Taxes 56 56
_____________ ____________
TOTAL LIABILITIES 2,079 1,737
Stockholders' Equity
Common Stock 147 147
Additional Paid-in Capital 1,266 1,266
Retained Earnings 5,409 4,996
_____________ ____________
TOTAL STOCKHOLDERS' EQUITY 6,822 6,409
_____________ ____________
TOTAL LIABILITIES & EQUITY $ 8,901 $ 8,146
<FN>
See Notes to Financial Statements
</FN>
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ITEM 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<S> <C> <C>
For the Three Months
Ended September 30,
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 4,687 $ 4,219
Interest received 28 23
_________ ________
Cash provided from operations 4,715 4,242
Cash paid to suppliers and employees 3,201 3,582
Taxes paid 38 116
Interest paid 1 1
________ _______
Cash disbursed from operations 3,240 3,699
________ _______
Net cash provided by operations 1,475 543
CASH FLOWS FROM INVESTING
Net aquisition of fixed assets (38) (91)
________ _______
Net cash used for investing (38) (91)
CASH FLOWS FROM FINANCING
Reduction of Long-Term Debt (3) (2)
_______ ______
Net cash used for financing (3) (2)
_______ ______
NET INCREASE IN CASH AND EQUIVALENTS 1,434 450
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,375 1,632
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,809 $ 2,082
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 413 $ 197
Depreciation and Amortization 115 102
Provisions For Losses On Accounts Receivable 3 3
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 224 219
Inventories 382 (81)
Prepaid Expenses and Deferred Income Taxes (7) 18
Accounts Payable and Accrued Expenses 345 85
_________ _________
NET CASH PROVIDED BY OPERATIONS $ 1,475 $ 543
<FN>
See Notes to Financial Statements
</FN>
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<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
d/b/a Waters Corporation
Notes to Financial Statements
September 30, 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 1998 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.
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Inventories consisted of the following:
<S> <C> <C>
September 30, 1998 June 30, 1998
Raw Materials $1,348,000 $1,647,000
Work-In-Process 172,000 97,000
Finished Goods 113,000 171,000
--------- ----------
Total Inventories $1,633,000 $2,015,000
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Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Requirements
Waters Corporation's working capital position on September 30, 1998 was
$5,172,000, a 10% increase from the $4,684,000 amount on June 30, 1998.
The cash balance for the Company was $2,809,000 on September 30, 1998,
compared to the cash balance of $1,375,000 on June 30, 1998.
<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
8.25% at September 30, 1998. The Company has not borrowed against the
line of credit during Fiscal Year 1999 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 were $38,000 for the quarter ended September 30,
1998. The company estimates that capital expenditures for the three
remaining quarters of the current Fiscal Year will approach $367,000 in
total. Improvements to manufacturing equipment and information systems
comprised the bulk of the capital expenditures. The company anticipates
continued improvements in its overall efficiency and management of the
corporation as a result of these capital expenditures.
Results of Operations
Net sales for the quarter ended September 30, 1998 were $4,462,000, an
increase of 12% when comparing to the comparable quarter of the prior
year.
Waters Medical Systems (WMS) had net sales of $642,000 for the quarter
ended September 30, 1998, an increase of 38% over the comparable quarter
of the prior year. The company anticipates higher revenues for Waters
Medical Systems for the remainder of FY1999 over the prior year due to
strong sales of the RM3 Renal Preservation Monitor. Independent scientific
research strongly recommends pulsatile preservation as the standard for
renal preservation. To the best of its knowledge, the Company believes the
RM3 is the only perfusion device that is FDA 510(k) approved. The
Company believes the increased demand for the RM3 will more than offset
potential slower demand for its oximetry products.
To heighten the awareness and establish quality standards for preserving
organs, WMS is working with physicians, surgeons, scientists and
preservation specialists to form an international society for organ
preservation. The group intends to develop standards for qualifications,
training and continuing education of the preservation of organs.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
American FarmWorks' (AFW) net sales for the quarter ended September 30,
1998 were $2,533,000 compared to $2,522,000 during the same period of
the prior year. To position American FarmWorks for future international
sales growth, the Company is expanding distribution in Canada with its
recent CSA approval and designing new 220-volt electric fencers required
by most international markets. The Company believes Central and South
America offer excellent potential for AFW sales expansion, where its wide
range of high quality, lower-cost solar, battery and new 220-volt electric
models will provide a differential advantage over competitive models. The
Company expects the 220-volt fencers will be available for sale in the
second quarter of Fiscal Year 1999.
AFW is targeting the equine market by manufacturing and marketing a
fence system that directly meets their needs. The horse market is enjoying
increased popularity with many urbanites using their discretionary income
to purchase rural hobby farms and board horses. The Company believes
electric fencing to be the safest and most cost-effective method to contain
the horses.
Waters Technical Systems' (WTS) net sales were $609,000 for the quarter
ending September 30, 1998, representing an increase of 21% over the
previous year. The increase was primarily due to WTS' focus on providing
turnkey operation services to new customers that expect flexible
manufacturing, short lead times, and a wide range of contract manufacturing
capabilities. WTS continues to focus heavily on improving the efficiency
of its manufacturing processes and anticipates continued margin
improvements. The Company believes continued margin improvement will
result against the backdrop of an industry undergoing tremendous change
and experiencing fundamental shifts in the market place.
Waters Network Systems' (WNS) net sales increased 33% to $678,000 for
the first quarter ending September 30, 1998 compared to $508,000 the prior
year. With its recent new product introductions, the Company believes it
now offers the widest range of classroom LAN connectivity products
available in the educational market. WNS expects higher sales for the
remainder of FY1999 over the prior year due primarily to the expansion of
regional sales offices and adding manufacturer representatives in select
regions.
For the quarter ended September 30, 1998, gross profit, for the Company as
a whole, improved to 38.4% of net sales, up from 32.2% reported for the
comparable period of last year. The Company's focus on increased sales,
introduction of new product technologies, cost reductions resulting from
product innovations 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 $1,073,000 for the quarter ended September 30,
1998, representing an increase of $74,000 from the comparable figure of
$999,000 for the prior year. The increased operating expenses resulted
from the Company's efforts to fund future growth opportunities by
investing in new technologies and service and market strategies, are
believed to be critical to the long term success.
Net income for the Company for the quarter ended September 30, 1998 was
a profit of $413,000, or $.28 per share, on revenues of $4,462,000. For the
comparable quarter of the prior year, the Company had a profit of $197,000,
or $0.13 per share, on revenues of $4,000,000.
The weighted-average number of shares of common stock used to compute
the basic earnings per share was increased by 28,480 and 34,888 shares for
the quarter ended September 30, 1998 and 1997, respectively, for the
assumed exercise of the employee stock options in computing the diluted
per-share data.
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
business operations due to system failure and miscalculations. The
Company substantially completed an assessment for Y2K compliance
during fiscal year 1998 and developed a plan intended to resolve all major
issues by the end of 1999.
The plan consists of identifying those systems with which the Company has
exposure to Y2K issues, development and implementation of action plans
with the goal to be Y2K compliant, and the final testing of each major area
of exposure to become materially compliant. 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 its software suppliers. In the financial
and information systems areas, the Company has replaced the core financial
and reporting systems with programs it believes are Y2K compliant. In the
manufacturing area, the Company is in the process of identifying areas of
exposure. The Company has contacted most of the third parties, with who it
has significant relationships, most of which state they intend to be Y2K
compliant by the Year 2000. The Company will continue to monitor such
relationships and the third party readiness throughout 1999.
As of September 30, 1998, the Company has incurred $11,598 in Y2K
compliance costs and $2,448 in capital expenditures for new information
systems. The Company estimates future expenditures to complete Y2K
compliance to approximate $158,000.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
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. 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) expected capital
expenditures for the remainder of Fiscal Year 1999 and the resulting
improvements in the Company's efficiency and management, which depend
on the acquisition rational and deployment of Company assets; (C) the
expected demand and increased revenue from the RM3 Renal Preservation
System which depend on RM3 market acceptance; (D) new product
development and marketing and international sales expansion within AFW
which depend on market acceptance and demand of the new 220-volt
model, as well as market acceptance of its other products; (E) profitability
improvements within WTS business unit, which depend on improved
efficiencies and manufacturing processes; (F) 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 (G) the successful
implementation of the Company's Year 2000 efforts, which depends on the
accuracy of its assessment of the necessary remediation efforts and
projected costs as well as the accuracy and reliability of assurances received
from third parties.
<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
November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-END> Sep-30-1998
<CASH> 2,809
<SECURITIES> 0
<RECEIVABLES> 2,481
<ALLOWANCES> 41
<INVENTORY> 1,633
<CURRENT-ASSETS> 7,161
<PP&E> 5,411
<DEPRECIATION> 3,732
<TOTAL-ASSETS> 8,901
<CURRENT-LIABILITIES> 1,991
<BONDS> 34
<COMMON> 147
0
0
<OTHER-SE> 6,675
<TOTAL-LIABILITY-AND-EQUITY> 8,901
<SALES> 4,462
<TOTAL-REVENUES> 4,462
<CGS> 2,748
<TOTAL-COSTS> 2,748
<OTHER-EXPENSES> 1,073
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 666
<INCOME-TAX> 253
<INCOME-CONTINUING> 413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 413
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
