UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 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 or 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 November 12,
1999.
Transitional Small Business Disclosure Format (check one) :
Yes _ _ No _X_
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except
per share data)
<TABLE>
<CAPTION>
For The Three Months
Ended September 30,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
NET SALES $ 4,789 $ 4,462
COST OF GOODS
SOLD 2,990 2,748
----------- -----------
GROSS PROFIT 1,799 1,714
OPERATING EXPENSES
Administrative 435 392
Selling 711 561
Research and Development 110 120
----------- -----------
Total Operating Expenses 1,256 1,073
OPERATING INCOME 543 641
OTHER INCOME (EXPENSE)
Net Interest Income (Expense) 41 27
Net Other Income (Expense) (4) (2)
----------- -----------
INCOME BEFORE INCOME TAX 580 666
INCOME TAX PROVISION 220 253
----------- -----------
NET INCOME $ 360 $ 413
=========== ===========
EARNINGS PER COMMON SHARE
BASIC $ 0.24 $ 0.28
DILUTED $ 0.24 $ 0.28
=========== ===========
Weighted Average
Number of Shares Outstanding - Basic 1,471,279 1,467,448
Weighted Average
Number of Shares Outstanding - Diluted 1,507,469 1,495,928
</TABLE>
See Notes to Financial Statements
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Unaudited)
------- -------
<S> <C> <C>
Current Assets `
Cash & Cash Equivalents $ 3,581 $ 3,618
Net Trade Receivables 2,718 2,835
Inventories 2,361 1,871
Prepaid Expenses 86 101
Deferred Income Taxes 282 282
------- -------
Total Current Assets 9,028 8,707
Fixed Assets
Property, Plant & Equipment 5,670 5,617
Less Accumulated Depreciation 4,167 4,058
------- -------
Net Fixed Assets 1,503 1,559
Other Assets 3 3
Goodwill 41 45
------- -------
TOTAL ASSETS $10,575 $10,314
======= =======
Current Liabilities
Current Maturities of
Long-term Debt $ 33 $ 35
Accounts Payable 1,601 1,460
Accrued Salaries, Wages and
Other Compensation 493 626
Product Warranties 246 231
Other accrued liabilities 136 128
Income Taxes Payable 271 399
------- -------
Total Current Liabilities 2,780 2,879
------- -------
Long-term Debt, Less Current
Maturities 0 0
Deferred Income Taxes 59 59
------- -------
TOTAL LIABILITIES 2,839 2,938
------- -------
Stockholders' Equity
Common Stock 147 147
Additional Paid-in Capital 1,285 1,285
Retained Earnings 6,304 5,944
------- -------
TOTAL STOCKHOLDERS' EQUITY 7,736 7,376
======= =======
TOTAL LIABILITIES & EQUITY $10,575 $10,314
======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
ITEM 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1999 1998
(Unaudited) (Unaudited)
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 4,903 $ 4,687
Interest received 42 28
------- -------
Cash provided from operations 4,945 4,715
Cash paid to suppliers and employees 4,577 3,201
Taxes paid 349 38
Interest paid 1 1
------- -------
Cash disbursed from operations 4,927 3,240
------- -------
Net cash provided by operations 18 1,475
CASH FLOWS FROM INVESTING
Net acquisition of fixed assets (53) (38)
------- -------
Net cash used for investing (53) (38)
CASH FLOWS FROM FINANCING
Reduction of Long-Term Debt (2) (3)
------- -------
Net cash used for financing (2) (3)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37) 1,434
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,618 1,375
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,581 $ 2,809
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 360 $ 413
Depreciation and Amortization 113 115
Provisions For Losses On Accounts Receivable 3 3
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 114 224
Inventories (490) 382
Prepaid Expenses and Deferred Income Taxes 15 (7)
Accounts Payable and Accrued Expenses (97) 345
------- -------
NET CASH PROVIDED BY OPERATIONS $ 18 $ 1,475
======= =======
</TABLE>
See Notes to Financial Statements
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
d/b/a Waters Corporation
Notes to Financial Statements
September 30, 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. 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 10KSB 1999 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.
Inventories consisted of the following:
September 30, 1999 June 30, 1999
-------------------------------------------------------------------
Raw Materials $1,942,000 $1,600,000
Work-In-Process 50,000 38,000
Finished Goods 369,000 233,000
------------------------------------------------------------------
Total Inventories $2,361,000 $1,871,000
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Requirements
Waters Corporation's working capital position on September 30, 1999 was
$6,248,000, a 7% increase from the $5,828,000 amount on June 30, 1999. The cash
balance for the Company was $3,581,000 on September 30, 1999, compared to the
cash balance of $3,618,000 on June 30, 1999.
<PAGE>
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 8.25% at September 30, 1999.
The Company has not borrowed against the line of credit during Fiscal Year 2000
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.
Inventories increased by $490,000 from the June 30, 1999 amount due primarily to
the replenishment of depleted AFW stock resulting from strong customer demand
generated during the quarter ending June 30, 1999 and a surplus resulting from
the Company's safety stock requirements. Management believes that these
inventories will be reduced to acceptable levels in the second quarter of FY2000
as seasonal demand begins to ramp up for AFW.
Capital expenditures were $53,000 for the quarter ended September 30, 1999. The
company estimates that capital expenditures for the three remaining quarters of
the current Fiscal Year will approach $300,000 in total. Improvements to
manufacturing equipment and information systems comprised the bulk of the
quarter's capital expenditures. The company anticipates continued improvements
in its overall efficiency and management of the corporation as a result of these
capital expenditures.
On November 4, 1999, the Company announced that it has signed a definitive
agreement for its Waters Network Systems business unit to merge with Garrett
Communications, Inc., a San Jose, California company that serves the computer
networking market. It is anticipated that the transaction will be completed in
January 2000.
The completion of the merger is subject to customary closing conditions,
including approval by the Company's shareholders. The agreement contemplates
that the Company's stock will have a market value of at least $6 per share at
the time of closing.
The agreement calls for Waters to issue 375,000 shares of its common stock and
pay $2,250,000 in cash for all outstanding stock of Garrett. In addition,
outstanding options to purchase Garrett stock will be converted to options to
purchase Waters common stock at a ratio of one (1) option share of Waters for
every three (3) option shares of Garrett. Garrett presently has grants
outstanding for 350,000 shares.
Waters intends to use its cash reserves to fully fund the cash portion of the
transaction.
Results of Operations
Net sales for the quarter ended September 30, 1999 were $4,789,000, an increase
of 7% when comparing to the comparable quarter of the prior year.
<PAGE>
Waters Medical Systems (WMS) had net sales of $493,000 for the quarter ended
September 30, 1999, a decrease of 23% over the comparable quarter of the prior
year. The Company believes this resulted from its customers' timing in their
capital budget ordering cycles as well as softness in Oxicom demand in the
cardiac market.
Independent scientific research strongly recommends pulsatile preservation as
the standard for renal preservation. To the best of the Company's knowledge, the
RM3 is the only perfusion device that is FDA 510(k) approved.
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.
American FarmWorks
American FarmWorks' (AFW) net sales for the quarter ended September 30, 1999
were $2,904,000 compared to $2,533,000 during the same period of the prior year.
The Company believes that AFW's sales and market share will increase during the
remainder of the fiscal year as a result of the U.S. agricultural retail
industry consolidation, the launch of new products, lower cost procurement, high
quality products and on-time delivery performance.
The Company continues to position American FarmWorks for future international
sales growth. With its recent CSA approval, required for sales into Canada,
distribution has recently been established. The Company believes Central and
South America offer significant sales potential, as AFW has a differential
advantage over competitors with its wide range of high quality, lower-cost
solar, battery and new 240-volt 50/60-cycle electric fence controllers.
Shipments of the 240-volt electric fencers began in November 1998.
AFW directly targets the equine market by manufacturing and marketing a fencer
and fence system that 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 and/or board horses. The Company believes
electric fencing to be the safest and most cost-effective method to contain
horses.
AFW has received a patent on its Direct Discharge design, a revolutionary
concept for electric fence controllers. This unique state-of-the-art technology
provides improved benefits over traditional available technologies by reducing
hardware and installation costs through eliminating the need for a separate
grounding system and improving customer safety by qualifying for UL listing.
Waters Network Systems
Waters Network Systems' (WNS) net sales for the quarter ended September 30, 1999
increased to $708,000 compared to $678,000 the prior year. The Company
anticipates higher revenues for Waters Network Systems to continue due primarily
to expansion of distribution channels, regional sales offices and new products.
In addition, the Company intends to expand beyond the education market to OEM,
industrial and commercial markets.
<PAGE>
Waters Technical Systems
Waters Technical Systems' (WTS) net sales were up slightly to $684,000 for the
first quarter ending September 30, 1999 compared to $609,000 the prior year. The
Company expects shipments to ramp up during Fiscal Year 2000 including to
Winnebago Industries, a leading world-class motor home manufacturer. 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.
General
For the quarter ended September 30, 1999, gross profit, for the Company as a
whole, decreased to 37.6% of net sales, down from 38.4% reported for the
comparable period of last year. This slight reduction in gross margins occurred
as a result of a temporary product mix shift.
Operating expenses were $1,256,000 for the quarter ended September 30, 1999,
representing an increase of $183,000 from the comparable figure of $1,073,000
for the prior year. The increased operating expenses resulted from the Company's
efforts to fund long-range strategic initiatives, the expansion of distribution
channels, and deployment of new product technologies.
Net income for the Company for the quarter ended September 30, 1999 was a profit
of $360,000, or $.24 per share, on revenues of $4,789,000. For the comparable
quarter of the prior year, the Company had a profit of $413,000, or $0.28 per
share, on revenues of $4,462,000.
The weighted-average number of shares of common stock used to compute the basic
earnings per share was increased by 36,190 and 28,480 shares for the quarters
ended September 30, 1999 and 1998, respectively, for the assumed exercise of the
employee stock options in computing the diluted per-share data.
Provided the acquisition is completed, the Company's transaction with Garrett
Communications, Inc. will impact the Company's results of operations. Garrett's
sales in 1998 were $8.1 million, with a year-to-date growth rate of 35 percent
through the third quarter of 1999. The Company expects revenue of the two
companies after completion of the merger to approach $30 million, with the
combined Garrett and Waters Network Systems operating as a wholly owned
subsidiary of Waters Instruments, Inc.
<PAGE>
Year 2000 Issue
At the turn of the century, time sensitive software using two digits may not
identify the year 2000 (Y2K). This 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 December 1999.
The plan consists of identifying those systems where 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 for 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 area, the Company has replaced the core financial and
reporting systems with programs believed to be Y2K compliant. In the
manufacturing area, the Company has reviewed all areas and believes them to be
materially 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 for the remainder of
1999.
As of September 30, 1999, the Company had incurred $16,723 in Y2K compliance
costs and $6,741 in capital expenditures for information systems that are Y2K
compliant. The Company estimates future expenditures not to exceed $15,000 to
complete Y2K compliance.
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, the completion and
success of the transaction with Garrett Communications, Inc., as well as general
competition and market conditions; (B) increased shipments within the WTS
business unit, including to Winnebago Industries, depend on continued expansion
of key customers; (C) increased revenues within the WNS unit, which depend on
the expanded distribution channels, the success of the new regional sales
offices and the acceptance and demand of its new products within the educational
market as well as the OEM, industrial and commercial markets; (D) sales and
market share increases within AFW depend on the actual effect of U.S.
agricultural retail industry consolidation, the acceptance and demand of new AFW
products, as well as general competitive and market conditions; (E) the
completion of the merger with Garrett and the combined revenues depend on
certain conditions (discussed in this report) being met, the success of the
integration of the two companies, and general business and competitive
conditions; and (F) the success of the Company's Year 2000 compliance efforts,
which depend 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. Such risks and uncertainties could cause actual results to differ
from those projected.
<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) A Form 8-K dated November 4, 1999 was filed on November 4, 1999 to
report the Company's announcement of the merger of Waters Network Systems and
Garrett Communications, Inc.
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 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-END> Sep-30-1999
<CASH> 3,581
<SECURITIES> 0
<RECEIVABLES> 2,764
<ALLOWANCES> 46
<INVENTORY> 2,361
<CURRENT-ASSETS> 9,028
<PP&E> 5,670
<DEPRECIATION> 4,167
<TOTAL-ASSETS> 10,575
<CURRENT-LIABILITIES> 2,780
<BONDS> 0
<COMMON> 147
0
0
<OTHER-SE> 7,589
<TOTAL-LIABILITY-AND-EQUITY> 10,575
<SALES> 4,789
<TOTAL-REVENUES> 4,789
<CGS> 2,990
<TOTAL-COSTS> 2,990
<OTHER-EXPENSES> 1,256
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 580
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</TABLE>
