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, 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 - 1,471,279 shares outstanding as
of February 12, 1999.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except
per share data)
<CAPTION>
<S> <C> <C>
For The Three Months For The Six Months
Ended December 31, Ended December 31,
<C> <C> <C> <C>
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $2,986 $2,939 $7,448 $6,939
COST OF GOODS SOLD 2,064 1,968 4,812 4,680
GROSS PROFIT 922 971 2,636 2,259
OPERATING EXPENSES
Administrative 378 369 770 735
Selling 514 439 1,075 958
Research and
Development 128 122 248 236
Total Operating Expenses 1,020 930 2,093 1,929
OPERATING INCOME (LOSS) (98) 41 543 330
OTHER INCOME (EXPENSE)
Net Interest
Income (Expense) 35 25 62 47
Net Other Income
(Expense) (3) (1) (5) 4
INCOME (LOSS) BEFORE
INCOME TAX (66) 65 600 381
INCOME TAX PROVISION
(BENEFIT) (25) 25 229 144
NET INCOME (LOSS) (41) 40 371 237
EARNINGS (LOSS) PER
COMMON SHARE - Basic
and Diluted $(0.03) $ 0.03 $ 0.25 $ 0.16
Weighted Average
Number of Shares
Outstanding
- Basic 1,467,448 1,462,271 1,467,448 1,462,271
Weighted Average
Number of Shares
Outstanding
- Diluted 1,504,514 1,504,646 1,501,978 1,501,879
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<CAPTION>
<S> <C> <C>
December 31, June 30,
1998 1998
(Unaudited) (Unaudited)
Current Assets `
Cash & Cash Equivalents $ 3,001 $ 1,375
Net Trade Receivables 1,805 2,667
Inventories 1,785 2,015
Prepaid Expenses 102 72
Deferred Income Taxes 200 200
Total Current Assets 6,893 6,329
Fixed Assets
Property, Plant & Equipment 5,464 5,373
Less Accumulated Depreciation 3,843 3,621
Net Fixed Assets 1,621 1,752
Other Assets 3 3
Goodwill 54 62
TOTAL ASSETS $ 8,571 $ 8,146
Current Liabilities
Current Maturities of
Long-term Debt $ 11 $ 11
Accounts Payable 946 898
Accrued Salaries, Wages and
Other Compensation 437 456
Product Warranties 195 195
Accrued Other Expenses 155 85
Total Current Liabilities 1,744 1,645
Long-term Debt, Less Current
Maturities 30 36
Deferred Income Taxes 56 56
TOTAL LIABILITIES 1,830 1,737
Stockholders' Equity
Common Stock 147 147
Additional Paid-in Capital 1,285 1,266
Retained Earnings 5,309 4,996
TOTAL STOCKHOLDERS' EQUITY 6,741 6,409
TOTAL LIABILITIES & EQUITY $ 8,571 $ 8,146
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
ITEM 1. Financial Statements
<TABLE>
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<CAPTION>
<S> <C>
For the Six Months
Ended December 31,
<C> <C>
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 8,304 $ 7,541
Interest received 65 50
Cash provided from operations 8,369 7,591
Cash paid to suppliers and employees 6,410 6,578
Taxes paid 194 277
Interest paid 3 3
Cash disbursed from operations 6,607 6,858
Net cash provided by operations 1,762 733
CASH FLOWS FROM INVESTING
Net aquisition of fixed assets (91) (276)
Net cash used for investing (91) (276)
CASH FLOWS FROM FINANCING
Cash Dividend Payment (58) (58)
Proceeds from sale of Common Stock 19 21
Reduction of Long-Term Debt (6) 13
Net cash used for financing (45) (24)
NET INCREASE IN CASH AND EQUIVALENTS 1,626 433
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,375 1,632
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,001 $ 2,065
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 371 $ 237
Depreciation and Amortization 230 214
Provisions For Losses On Accounts Receivable 6 6
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 856 602
Inventories 230 (176)
Prepaid Expenses and Deferred Income Taxes (30) (73)
Accounts Payable and Accrued Expenses 99 (77)
NET CASH PROVIDED BY OPERATIONS $ 1,762 $ 733
<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, 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.
<TABLE>
<CAPTION>
Inventories consisted of the following:
<S> <C> <C>
December 31, 1998 June 30, 1998
Raw Materials $1,626,000 $1,647,000
Work-In-Process 60,000 197,000
Finished Goods 99,000 171,000
Total Inventories $1,785,000 $2,015,000
</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,
1998 was $5,149,000, a 10% increase from the $4,684,000 amount
on June 30, 1998. The cash balance for the Company was
$3,001,000 on December 31, 1998, compared to a 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 1998, Waters renewed the bank's $1,000,000 line of
credit commitment and extended it to December 15, 1999. The
bank's line of credit charges interest at the bank's base (prime)
rate. The prime rate was 7.75% at December 31, 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 of $53,000 and $91,000 for the quarter and
six-month period ended December 31, 1998, respectively, were
used to purchase manufacturing equipment and Y2K compliant
information systems. 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 22, 1998, 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 11, 1998 to shareholders of record on
November 13, 1998, 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,
1998 were $2,986,000 and $7,448,000, respectively. This
represents an increase of 2% for the quarter and an increase of 7%
for the six months ended December 31, 1998 as compared to the
prior year.
Waters Medical Systems' (WMS) net sales for the quarter and six-
month period ended December 31, 1998 were $495,000 and
$1,137,000, respectively. This represents a decrease of 29% for
the quarter and a decrease of 2% for the six months ended
December 31, 1997 as compared to the prior year. The Company
believes this is the result of timing by its customers' in their capital
budget ordering cycles as well as softness in Oxicom demand in
the cardiac market.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan
of Operation (continued)
Independent scientific research strongly recommends pulsatile
preservation as the standard for renal preservation. The Company
is working with physicians, surgeons, scientists and preservation
specialists to increase public awareness and establish quality
standards for preserving organs. The Company believes heightened
public awareness regarding the benefits of pulsatile preservation,
along with clinical outcomes recognized by educational and
research foundations, will result in an increased demand for its
RM3.
Net sales for American FarmWorks (AFW) for the quarter and six-
month period ended December 31, 1998 were $1,442,000 and
$3,974,000, respectively. This represents an increase of 3% for the
quarter and 1% for the six-month period ended December 31, 1998
as compared to the prior year. The Company recently partnered
with Quality Stores, one of the largest U.S. agricultural retail
chains, as Quality's sole source supplier of electric fence
controllers.
The Company continues to position American FarmWorks for
future international sales growth by expanding distribution into
Canada with its recent CSA approval and launch of 240-volt
electric fencers required by most international markets. The
Company believes Central and South America offer excellent
potential for AFW sales expansion because American FarmWorks'
wide range of high quality, lower-cost solar, battery and new 240-
volt electric models provide a differential advantage over
competitive models. Shipments of the 240-volt electric fencers
began in November 1998 to satisfy existing customer orders.
AFW is targeting the equine market by manufacturing and
marketing a fencer and fence system that directly meets their
needs. The horse market is enjoying increased popularity with
many urbanites using their discretionary income to purchase hobby
farms or board horses. The Company believes electric fencing to
be the safest and most cost-effective method to contain horses. The
Company's largest customer, Tractor Supply Company (TSC), has
placed stocking orders for AFW's John Lyons Signature Series
equine fencers for shipment to all their stores in the third quarter of
fiscal year 1999.
Waters Technical Systems' (WTS) net sales decreased 1% to
$571,000 for the second quarter and increased 9% to $1,180,000
for the six-month period ended December 31, 1998. WTS
continues to focus on providing turnkey operation services to new
customers that expect flexible manufacturing, short lead times, and
a wide range of contract manufacturing capabilities. The Company
believes that increased sales and margin improvement can be
achieved by providing turnkey operation services and continuing to
focus on improving the efficiency of its manufacturing processes.
WTS has established a partnership with Winnebago, a leading
motor home manufacturer, to provide harness assemblies.
Shipments are expected to start in the third quarter of fiscal year
1999.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan
of Operation (continued)
Waters Network Systems' (WNS) net sales for the quarter and six-
month period ending December 31, 1998 were $478,000 and
$1,157,000, respectively. This represents an increase of 82% for
the quarter and 50% for the six months ended December 31, 1998
when compared to the prior year. WNS expects higher sales for the
remainder of FY1999 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, 1998, gross profit for the
Company declined to 30.9% of net sales, down from 33.0%
reported for the comparable period of last year. Gross profit for
the six-month period ended December 31, 1998 was 35.4% of net
sales compared to 32.6% for the comparable period of the prior
year. The Company believes lower oximetry sales in medical
products business unit contributed to the second quarter decline.
The RM3 renal preservation device is anticipated to more than
offset the softening in demand for its oximetry products in the
future.
Operating expenses were $1,020,000 for the quarter and
$2,093,000 for the six-month period ended December 31, 1998,
representing an increase of $90,000 and $164,000 when compared
to the prior year. The increased operating expenses resulted
primarily 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,
1998 was a loss of ($41,000), or ($.03) per share, on revenues of
$2,986,000. For the comparable quarter of the prior year, the
Company had a profit of $40,000, or $0.03 per share, on revenues
of $2,939,000. The loss was primarily attributed to the softness in
Oxicom demand in the cardiac market of the Company's medical
business unit.
Net income for the Company's six-month period ended December
31, 1998 was a profit of $371,000, or $.25 per share, on revenues
of $7,448,000. For the comparable six-month period of the prior
year, the Company had a net income of $237,000, or $.16 per
share, on revenues of $6,939,000.
The weighted-average number of shares of common stock used to
compute the basic earnings per share was increased by 37,066 and
42,375 shares for the quarters ended December 31, 1998 and 1997,
respectively, and 34,530 and 39,608 shares for the six months
ended December 31, 1998 and 1997, respectively, which results
from the assumed exercise of the employee stock options in
computing the diluted per-share data.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan
of Operation (continued)
Year 2000
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
calendar year 1999.
The plan consists of identifying those systems with which the
Company has exposure to Y2K issues, developing and
implementing action plans focused on Y2K compliance, 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 area, the Company has
replaced its 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 which 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.
Based on the final testing results of each major area, the Company
intends to resolve all remaining material exposures with a
contingency plan addressing such issues prior to calendar year-end
1999.
As of December 31, 1998, the Company has incurred $14,695 in
Y2K compliance costs and $56,232 in capital expenditures for new
information systems. The Company estimates future expenditures
of approximately $102,000 to complete Y2K compliance.
<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. Particularly, those statements relating to (i) improved
efficiency and management of the Company as a result of capital
expenditures in the first half of fiscal year 1999, depend on the
effectiveness of such equipment and the basis for deployment; (ii)
increased demand for the RM3 Renal Preservation System which
depends on the Company's ability to increase public awareness of
its benefits as well as general market and competitive conditions;
(iii) expected increases in sales for the remainder of fiscal year
1999 for WNS depends on the effectiveness of the recently
expanded distribution and regional sales offices and the demand
for new products designed to meet the needs of the K-12
educational market, as well as general market and competitive
condition; and (iv) Year 2000 compliance, which depend on the
accuracy and reliability of the Company's testing procedures as
well as the assurances of third parties.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders
On October 22, 1998, the Company held its Annual Meeting of
Shareholders. Proxies received and counted before the meeting for
representation at the meeting were 1,007,004 or 68.6% of the
issued and outstanding shares (1,467,448). 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%).
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders (continued)
<TABLE>
<CAPTION>
All directors are elected annually at the Annual Meeting of
Shareholders. 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
and Principal Occupation. First Became a
Director
William R. Franta. 56 Director. Business
Development & Technology
Consultant in Minneapolis,
Minnesota. 1997
Jerry W. Grabowski 46 President, Chief Executive
Officer and Director of the
Company. 1993
John A. Grimstad 48 Secretary and General Counsel
of the Company. Vice President
of Fredrikson & Byron, P. A. in
Minneapolis, Minnesota. 1996
Charles G.
Schiefelbein. 59 Director. President of Capital
Growth Services of Minneapolis,
Minnesota. 1986
</TABLE>
Submitted for vote at the meeting were the following two proposals:
1) To establish the number of Directors at four.
Proxies voted for the resolution totaled 1,002,958 shares or 99.6% of the
1,007,004 shares represented in person or by proxy at the Annual Meeting.
Proxies voting against proposal No. 1 were 2,510 or .25%; and shares
abstaining were 1,536 or .15% of the 1,007,004 shares represented in
person or by proxy at the Annual Meeting. There were no shares
represented by broker non-votes.
2) Slate of Directors
Proxies voted for each of the Directors nominated were 1,005,929 shares
or 99.89% of the 1,007,004 shares represented in person or by proxy at the
Annual Meeting. Proxies withholding authority were 1,075 or .10% of the
1,007,004 shares represented in person or by proxy at the Annual Meeting.
<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
February 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-END> Dec-31-1998
<CASH> 3,001
<SECURITIES> 0
<RECEIVABLES> 1,849
<ALLOWANCES> 44
<INVENTORY> 1,785
<CURRENT-ASSETS> 6,893
<PP&E> 5,464
<DEPRECIATION> 3,843
<TOTAL-ASSETS> 8,571
<CURRENT-LIABILITIES> 1,744
<BONDS> 30
<COMMON> 147
0
0
<OTHER-SE> 6,594
<TOTAL-LIABILITY-AND-EQUITY> 8,571
<SALES> 7,448
<TOTAL-REVENUES> 7,448
<CGS> 4,812
<TOTAL-COSTS> 4,812
<OTHER-EXPENSES> 2,093
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 600
<INCOME-TAX> 229
<INCOME-CONTINUING> 371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 371
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
