UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
MARCH 31, 1999
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 May 14,
1999
Transitional Small Business Disclosure Format (check one) :
Yes ___ No X
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except
per share data)
<CAPTION>
<S> <C> <C> <C> <C>
For The For The For The For The
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 4,342 $ 3,944 $ 11,790 $ 10,883
COST OF GOODS
SOLD 2,722 2,628 7,534 7,309
GROSS PROFIT 1,620 1,316 4,256 3,574
OPERATING EXPENSES
Administrative 421 320 1,191 1,057
Selling 683 595 1,758 1,552
Research and
Development 112 140 360 375
Total Operating
Expenses 1,216 1,055 3,309 2,984
OPERATING INCOME 404 261 947 590
OTHER INCOME (EXPENSE)
Net Interest
Income (Expense) 33 21 95 67
Net Other Income
(Expense) (4) 1 (10) 6
INCOME BEFORE
INCOME TAX 433 283 1,032 663
INCOME TAX PROVISION 164 107 392 251
NET INCOME $ 269 $ 176 $ 640 $ 412
EARNINGS PER COMMON SHARE
BASIC $ 0.18 $ 0.12 $ 0.44 $ 0.28
DILUTED $ 0.18 $ 0.12 $ 0.43 $ 0.27
Weighted Average
Number of
Shares
Outstanding
- Basic 1,471,279 1,467,448 1,468,706 1,463,971
Weighted Average
Number of
Shares
Outstanding
- Diluted 1,501,372 1,502,046 1,499,309 1,498,858
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<CAPTION>
<S> <C> <C>
March 31, June 30,
1999 1998
(Unaudited) (Unaudited)
Current Assets `
Cash & Cash Equivalents $ 3,202 $ 1,375
Net Trade Receivables 2,264 2,667
Inventories 2,027 2,015
Prepaid Expenses 80 72
Deferred Income Taxes 200 200
Total Current Assets 7,773 6,329
Fixed Assets
Property, Plant & Equipment 5,508 5,373
Less Accumulated Depreciation 3,954 3,621
Net Fixed Assets 1,554 1,752
Other Assets 3 3
Goodwill 49 62
TOTAL ASSETS $ 9,379 $ 8,146
Current Liabilities
Current Maturities of
Long-term Debt $ 35 $ 11
Accounts Payable 1,371 898
Accrued Salaries, Wages and
Other Compensation 434 456
Product Warranties 204 195
Accrued Other Expenses 268 85
Total Current Liabilities 2,312 1,645
Long-term Debt, Less Current
Maturities 3 36
Deferred Income Taxes 56 56
TOTAL LIABILITIES 2,371 1,737
Stockholders' Equity
Common Stock 147 147
Additional Paid-in Capital 1,285 1,266
Retained Earnings 5,576 4,996
TOTAL STOCKHOLDERS' EQUITY 7,008 6,409
TOTAL LIABILITIES & EQUITY $ 9,379 $ 8,146
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
ITEM 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<CAPTION>
<S> <C> <C>
For the For the
Nine Months Nine Months
Ended Ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 12,184 $ 11,015
Interest received 99 72
Cash provided from operations 12,283 11,087
Cash paid to suppliers and employees 9,987 10,240
Taxes paid 282 360
Interest paid 4 6
Cash disbursed from operations 10,273 10,606
Net cash provided by operations 2,010 481
CASH FLOWS FROM INVESTING
Net aquisition of fixed assets (135) (576)
Net cash used for investing (135) (576)
CASH FLOWS FROM FINANCING
Cash Dividend Payment (58) (58)
Proceeds from sale of Common Stock 19 21
Reduction of Long-Term Debt (9) 11
Net cash used for financing (48) (26)
NET INCREASE IN CASH AND EQUIVALENTS 1,827 (121)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,375 1,632
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,202 $ 1,511
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 640 $ 412
Depreciation and Amortization 346 325
Provisions For Losses On Accounts Receivable 17 9
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 386 132
Inventories (12) (524)
Prepaid Expenses and Deferred Income Taxes (8) 58
Accounts Payable and Accrued Expenses 641 69
NET CASH PROVIDED BY OPERATIONS $ 2,010 $ 481
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
d/b/a Waters Corporation
Notes to Financial Statements
March 31, 1999
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. These condensed financial statements should be 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>
Inventories consisted of the following:
<CAPTION>
<S> <C> <C>
March 31, 1999 June 30, 1998
Raw Materials $1,660,000 $1,647,000
Work-In-Process 198,000 197,000
Finished Goods 169,000 171,000
Total Inventories $2,027,000 $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 March 31, 1999 was $5,461,000,
a 17% increase from the $4,684,000 amount on June 30, 1998. The cash balance
for the Company was $3,202,000 on March 31, 1999, 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. Under the terms of the
bank's line of credit, interest is charged on outstanding balances at the
bank's base (prime) rate. The prime rate was 7.75% at March 31, 1999.
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. The Company has not been charged
a commitment fee on the bank's line of credit.
Capital expenditures of $45,000 and $135,000 for the quarter and nine-month
periods ended March 31, 1999, 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 quarter of the current Fiscal Year are estimated at
$100,000.
Results of Operations
Net sales for the quarter and nine-month period ended March 31, 1999 were
$4,342,000 and $11,790,000, respectively. This represents an increase of 10%
for the quarter and 8% for the nine months ended March 31, 1999 as compared to
the prior year.
Waters Medical Systems' (WMS) net sales for the quarter and nine-month period
ended March 31, 1999 were $560,000 and $1,697,000, respectively. This
represents an increase of 16% for the quarter and 3% for the nine months ended
March 31, 1999, as compared to the prior year. Increased demand for the
Company's oximetry and RM3 renal preservation products were the primary factors
for Waters Medical Systems' higher revenues for the quarter ended March 31,
1999 as compared to the prior year.
Independent scientific research strongly recommends pulsatile preservation as
the standard for renal preservation. As a result, the Company is actively
working with physicians, surgeons, scientists and preservation specialists to
increase public awareness and establish quality standards for preserving
organs. The Company believes that heightened public awareness
regarding the results of clinical research on the benefits of
pulsatile preservation will result in increased demand for its RM3.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
Net sales for American FarmWorks (AFW) for the quarter and nine-month period
ended March 31, 1999 were $2,694,000 and $6,669,000 respectively. This
represents an increase of 9% for the quarter and 4% for the nine-month period
ended March 31, 1999, as compared to the prior year. The Company believes that
AFW's sales and market share will increase as a result of the U.S. agricultural
retail industry consolidation, the Company's new product development, lower
costs through the development of singular, metrics-based, supplier
relationships, and AFW's best-in-class quality and on-time delivery performance.
The Company continues to position American FarmWorks for future international
sales growth. With its recent CSA approval, distribution has recently been
expanded into Canada. The Company believes Central and South America offers
excellent potential for AFW sales expansion, as AFW has a differential
advantage over competitors with its wide range of high quality,
lower-cost solar, battery and new 240-volt electric fence controllers.
Shipments of the 240-volt electric fencers began in November 1998
to satisfy existing customer orders.
AFW is directly targeting the equine market by manufacturing and marketing a
fencer and fence system that directly meets the unique needs of horse owners.
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, has
placed stocking orders for AFW's John Lyons Signature Series equine fencers.
Shipments of the John Lyons Signature Series equine fencers began in January
1999.
The Company has received a patent on a revolutionary concept for electric fence
controllers. This unique state-of-the-art technology provides improved benefits
over traditional continuous current technology by offering lower costs,
eliminating the need for a separate grounding system and qualifying for UL
listing.
Waters Technical Systems' (WTS) net sales increased 8% to $814,000 for the
third quarter and increased 8% to $1,993,000 for the nine-month period ended
March 31, 1999 as compared to the prior year. 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 as well
as continuing to focus on improving the efficiency of its manufacturing
processes.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
WTS recently established a partnership with Winnebago, a leading world class
motor home manufacturer, to provide harness assemblies. Shipments began in the
third quarter and are expected to ramp up during the fourth quarter of Fiscal
Year 1999.
Waters Network Systems' (WNS) net sales for the quarter ending March 31, 1999
were $274,000 compared to $231,000 for the same period of the prior year. For
the nine months ended March 31, 1999, net sales increased 43% to $1,431,000
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.
The gross profit for Waters Corporation improved to 37.3% of net sales for the
quarter ended March 31, 1999, up from 33.4% reported for the prior year's
comparable period. Gross profit for the nine-month period ended
March 31, 1999 was 36.1% of net sales compared to 32.8% for the comparable
period of the prior year. The Company's increased sales in all four-business
units and continued improvements of key manufacturing metrics have
contributed significantly to the improvements in gross margin.
Operating expenses were $1,216,000 for the quarter and $3,309,000 for the nine-
month period ended March 31, 1999, representing an increase of $161,000 and
$325,000, respectively, when compared to comparable periods for the prior
year.
The increased operating expenses resulted from the Company's efforts to fund
future growth opportunities by pursuing strategic partnerships, aggressively
marketing new products and laying the groundwork for launching global
distribution channels.
Net income for the Company for the quarter ended March 31, 1999 was a
profit of $269,000, or $.18 per share, on revenues of $4,342,000.
For the comparable quarter of the prior year, the Company had a profit of
$176,000, or $0.12 per share, on revenues of $3,944,000.
Net income for the nine-month period ended March 31, 1999 was a profit of
$640,000, or $.44 per share, on revenues of $11,790,000. For the comparable
nine-month period of the prior year, the Company had a net income of $412,000,
or $.28 per share, on revenues of $10,883,000.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
The weighted-average number of shares of common stock was increased to allow
for the assumed exercise of employee stock options in computing the per-share
data.
The basic earnings per share was increased by 30,093 and 34,598 shares for the
quarters ended March 31, 1999 and 1998, respectively, and 30,603 and 34,887
shares for the nine months ended March 31, 1999 and 1998, respectively.
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
completed an extensive 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 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 its systems and contacted its software suppliers. The Company has replaced
its core financial and information systems with software programs it believes
are Y2K compliant. In the manufacturing area, the Company has identified
areas of exposure. The Company has contacted its significant third party
relationships, with most having stated 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.
During the nine months ended March 31, 1999, the Company has incurred $22,000
in Y2K compliance costs and $59,000 in capital expenditures for new
information systems. The Company estimates future expenditures of
approximately $92,000 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) the expected revenue from the RM3 Renal Preservation System, uncertainties
in new product development, marketing and international sales expansion within
AFW, and (ii) expected growth from two new accounts as well as improved
manufacturing efficiencies within WTS are subject to the risks of product
acceptance and product demand, fluctuations in the price of raw materials,
competition, success in obtaining manufacturing efficiencies, and facilities
utilization. The higher sales expectancy for WNS depends on: general market
conditions; competitive conditions; the effectiveness of the expanded
distribution and regional sales offices; and development and market acceptance
of its new products. Readers are cautioned not to place undue reliance on
these forward-looking statements, as actual results could differ.
<PAGE>
PART-II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule (submitted only in electronic format).
(B) No report on Form 8-K has been filed during the period covered by this
report.
In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WATERS INSTRUMENTS, INC.
By: /S/ Jerry W. Grabowski
Jerry W. Grabowski
President and Chief Executive Officer
May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-END> Mar-31-1999
<CASH> 3,202
<SECURITIES> 0
<RECEIVABLES> 2,318
<ALLOWANCES> 54
<INVENTORY> 2,027
<CURRENT-ASSETS> 7,773
<PP&E> 5,508
<DEPRECIATION> 3,954
<TOTAL-ASSETS> 9,379
<CURRENT-LIABILITIES> 2,312
<BONDS> 3
<COMMON> 147
0
0
<OTHER-SE> 6,861
<TOTAL-LIABILITY-AND-EQUITY> 9,379
<SALES> 11,790
<TOTAL-REVENUES> 11,790
<CGS> 7,534
<TOTAL-COSTS> 7,534
<OTHER-EXPENSES> 3,309
<LOSS-PROVISION> 17
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 1,032
<INCOME-TAX> 392
<INCOME-CONTINUING> 640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
