<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, 1999
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,
1999 were $17,585,000.
The aggregate market value of the voting stock held by non-
affiliates of the Company on August 31, 1999 was $5,936,843. The
number of shares outstanding of the Company's Common Stock on
August 31, 1999 was 1,471,279.
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 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange
Commission on or before October 28, 1999.
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-focused, market-driven
provider of value-added technology solutions. During Fiscal Year
1999, 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)}; and Network Connectivity
Products {d/b/a Waters Network Systems (WNS)}.
(b) Business of Issuer
(1) American FarmWorks
American FarmWorks manufactures and sells electric fence
controllers used 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.
American FarmWorks' sales arise primarily through major farm
equipment and hardware distributors, suppliers and retailers.
During Fiscal Year 1999, sales to AFW's top three customers
accounted for approximately 41.8% of AFW's total sales or 24.2%
of the Company's total sales.
American FarmWorks sells to distribution channels through
independent representatives. Sales by AFW in Fiscal Year 1999
were 57.9% of the Company's total sales compared to 59.1% in
Fiscal Year 1998.
There were no significant sales from AFW made to governmental
agencies; likewise, there are 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 received a patent in fiscal
1999 on a direct discharge design that it believes offers
significant advantages over traditional electric fence
technologies. The new products using the direct discharge
technology will be released in the first quarter of Fiscal Year
2000.
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.
(2) Waters Medical Systems
<PAGE>
Waters Medical Systems manufactures and markets electronic
medical instruments for cardiovascular and organ preservation
used in laboratories, clinics and hospitals. The RM3 Renal
Preservation Monitor, a two-part kidney preservation system, was
developed by WMS to preserve kidneys for transplant while
significantly improving post-surgical patient outcomes. With a
vast medical equipment industry, WMS focuses on being the
dominant supplier in specific market niches. Sales by WMS in both
Fiscal Year 1998 and 1999 represented 13.3% of the Company's
total sales.
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 24.1% of the
business unit's total sales in Fiscal Year 1999.
No significant sales of WMS products are made to the United
States Government and no contracts are subject to renegotiation.
Although this business unit does not require large working
capital funds, 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 holds several patents relating to its current and new
medical product lines. The significance of the patents pending on
new products is 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.
All of WMS' current products are FDA approved.
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 obtaining 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
<PAGE>
Waters Technical Systems provides contract manufacturing of
electromechanical assemblies, wiring harnesses and cable
assemblies for a variety of technology markets. 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 an industry that traditionally provides low margins, WTS was
able to double its gross margins in Fiscal Year 1999 through
cost-containment efforts and engineering and manufacturing
investments. At the same time, sales increased by 12.0% through
the focus and development of larger customer accounts. Sales by
WTS in Fiscal Year 1999 represented 15.2% of the Company's total
sales compared to 15.1% in Fiscal Year 1998.
WTS sells primarily direct through an internal sales team to
OEMs. In Fiscal Year 1999, WTS served a relatively small number
of customers, with ten customers representing about 93.1% of the
business unit's sales. Several key customers, including Winnebago
Industries, signed long-term agreements with WTS.
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 WTS' business.
(4) Waters Network Systems
Waters Network Systems manufactures and markets a wide range of
connectivity products for Ethernet and Token-Ring local area
networks (LANs). The products provide the ability to connect
computers and peripherals to a network within school or business
buildings. While the industry for network products is competitive
and covers a wide range of applications, WNS primarily focuses on
the educational segment to provide classroom solutions not being
met by other manufacturers.
During Fiscal Year 1999, Waters Network Systems continued to
expand its product line to include a wide range of Ethernet, Fast
Ethernet and dual-speed hubs, switches and media converters for
both copper and fiber LANs. These products provide the
flexibility to increase the speed or capacity of current networks
as well as to easily manage LANs. The Company believes WNS offers
the widest range of classroom hubs and switches in the industry.
The LAN products are sold primarily through dealers that resell
the products as well as provide network cabling installations.
Less than 18% 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. Many of the
dealers currently have been awarded the bids for specific school
districts, with the installation to occur in Fiscal Year 2000.
Sales by WNS in Fiscal Year 1999 increased 20.8% over the prior
year, representing 13.6% of the Company's total sales compared to
12.5% in Fiscal Year 1998. 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 all new schools being
built as well as for retrofitting and upgrading technology in
most existing schools. While grants and bond issues fund the
majority of networks, over 30,000 school districts and libraries
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. In the 1999/2000 school year, the FCC will fund
$2.25 billion of the $2.44 billion requested by schools and
libraries through the E-rate program for internal connections
(wide and local area networks) and telecommunications
services/Internet access. The Company believes that WNS will
realize increased sales growth resulting from the $1.5 billion
being requested for internal connections through E-rate funding.
5) Information as to Company's Business as a Whole
<PAGE>
During Fiscal Years 1999 and 1998, the Company expended $526,000
and $538,000 for research and development activities,
respectively.
The Company had a total of 146 employees as of June 30, 1999, of
which 117 were regular full-time employees. This compares to a
total of 135 employees as of June 30, 1998, of which 116 were
regular full-time employees.
(c) Financial Information about Foreign and Domestic Operations
and Export Sales
The Company maintains no offices or facilities outside of the
United States and sells the majority of its products in the
United States. Export sales were $463,000 in Fiscal Year 1999,
compared to $344,000 in Fiscal Year 1998. 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 1999, 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 corporate offices.
The lease extends through October 31, 2001 and requires a monthly
payment of $ 2,079.00.
The Company believes that insurance coverage on its properties is
adequate.
PART 1 ITEM 3. LEGAL PROCEEDINGS
During Fiscal Year 1999, 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 1999 Fiscal Year.
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 under the symbol WTRS. Below are the high and low bid
prices for each quarter of Fiscal Years 1999 and 1998 as reported
on the NASDAQ National Market. These quotations represent prices
between dealers, do not include retail markups, markdowns, or
commissions, and may not represent actual transactions.
<TABLE>
<S> <C> <C> <C>
1999 High Low
First Quarter 9/30/98 5-1/2 3-5/8
Second Quarter 12/31/98 6-3/8 3-7/8
Third Quarter 3/31/99 5-3/4 4
Fourth Quarter 6/30/99 5-1/2 3-7/8
1998
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
</TABLE>
<PAGE>
As of August 31, 1999 the Company had approximately 670
shareholders of record.
Dividend Summary
The Board of Directors of the Company declared a dividend at a
regularly scheduled meeting held on October 22, 1998. The
dividend was based on Fiscal Year 1998 operating results. The
Company paid the dividend in December 1998 at the rate of $.04
per share, or an aggregate amount of $58,000. The Company also
paid a dividend in December 1997 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 in connection with the Company's 1999 Annual Meeting of
Shareholders.
The Company has paid its shareholders annual dividends for 22 of
the last 23 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, 1999 was $3,618,000, an
increase of $2,243,000 from its June 30, 1998 balance of $1,375,
000. The Company's working capital position at June 30, 1999 was
$5,828,000, an increase of 24% from the $4,684,000 amount at June
30, 1998.
In December 1998, the Company 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, which was 7.75% at June 30, 1999. The Company did not
borrow 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 increase in net cash provided by operations during Fiscal
Year 1999 resulted primarily from the Company's increased
earnings and the temporary delay in accounts payable
disbursements during the Company's successful implementation of
Y2K compliant information systems.
Capital expenditures were $244,000, during Fiscal Year 1999, a
decrease of $382,000 from Fiscal Year 1998. Improvements to
manufacturing equipment and information systems comprised the
bulk of capital expenditures in Fiscal Year 1999. The Company
anticipates continued improvements in its overall efficiency and
management of the corporation as a result of these capital
expenditures.
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared with Fiscal Year 1998
Net sales for Fiscal Year 1999 were $17,585,000, an increase of
11.4% from net sales of $15,785,000 experienced in Fiscal Year
1998.
Net sales in Waters Medical Systems increased 11.4% in Fiscal
Year 1999 compared to Fiscal Year 1998. Increased demand for the
Company's oximetry and the recently released RM3 renal
preservation devices were the primary factors for Waters Medical
Systems' higher revenues for Fiscal Year 1999 as compared to the
prior year.
Independent scientific research strongly recommends pulsatile
preservation as the standard for renal preservation. Consequently
WMS 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.
Waters Medical Systems recently obtained CE Mark approval for its
RM3 Renal Preservation Monitor, a requirement to sell in Europe.
In addition, during FY1999, the WMS business unit received ISO
9002 and EN 46002 certification. The Company believes that the CE
Mark approval for the RM3 and ISO and EN certification for its
medical products will provide further market penetration and
sales growth.
Waters Technical Systems' (WTS) net sales increased 12.0% to
$2,669,000 compared to Fiscal Year 1998. WTS recently established
a partnership agreement with Winnebago Industries, a leading
world-class motor home manufacturer, to provide wire harness
assemblies. Shipments began in the third quarter of Fiscal Year
1999 and are expected to continue to ramp up during Fiscal Year
2000. 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>
Net sales in American FarmWorks in Fiscal Year 1999 increased 9.
2% compared to Fiscal Year 1998. The Company believes that AFW's
sales and market share will increase 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 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 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' (WNS) net sales increased 20.8% in Fiscal
Year 1999 compared to Fiscal Year 1998. 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.
Additional comparative information about industry segments can be
found in Note #9 in Notes to Financial Statements contained in
this report.
The gross profit improved in Fiscal Year 1999 to 36.2% of net
sales from 33.2% for Fiscal Year 1998. Productivity improvements
within the American FarmWorks, Waters Medical Systems, Waters
Technical Systems and Waters Network Systems business units
contributed to improvement in gross profit in Fiscal Year 1999.
Operating expenses were $4,862,000 for Fiscal Year 1999,
representing an increase of $628,000, or 14.8%, from the
comparable figure of $4,234,000 for Fiscal Year 1998. 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 marketing new products.
Improved working capital during Fiscal Year 1999 provided
interest income of $138,000, compared to interest income of
$93,000 during Fiscal Year 1998.
Interest expenses, principally lease financing on the Company's
equipment, were $5,000 during Fiscal Year 1999, compared to
$7,000 in Fiscal Year 1998.
Net income for the Company for Fiscal Year 1999 was $1,006,000
compared to a net income of $685,000 in Fiscal Year 1998. In
addition to increased sales in each industry segment, a
significant reason for the Company's continued improvement in net
income since Fiscal Year 1993 relates to continuous reductions in
manufacturing costs and increases in sales volume.
<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 Y2K compliant programs. 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
throughout 1999.
As of June 30, 1999, the Company has incurred $34,951 in Y2K
compliance costs and $85,530 in capital expenditures for
information systems that are Y2K compliant. The Company estimates
future expenditures not to exceed $50,000 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, as well as general competition and market
conditions; (B) increased shipments within the WTS business unit
which 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; (D) increased demand for the RM3
depends on the Company's success in increasing the public's
awareness of the product's benefits; (E) further market
penetration and sales growth within WMS depend on the actual
impact of CE Mark approval and ISO and EN certification, as well
as general competitive and market conditions; (F) 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; and (G) 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.
<PAGE>
PART II ITEM 7. FINANCIAL STATEMENTS
<TABLE>
INDEX TO FINANCIAL STATEMENTS
(a) The following documents are filed as part of this report:
(1) Financial Statements:
<S> <C>
Page Number
Management's Responsibility for Financial Reporting 11
Independent Auditor's Report 12
Balance Sheets 13
Statements of Operations 14
Statements of Stockholders' Equity 14
Statements of Cash Flows 15
Notes to Financial Statements 16-24
</TABLE>
<PAGE>
Management's Responsibility for Financial Reporting
August 11, 1999
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, was retained 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, 1999
and 1998 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, 1999 and 1998 and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Rochester, Minnesota
September 28, 1999
<PAGE>
<TABLE>
Balance Sheets
<S> <C> <C>
June 30
In Thousands 1999 1998
Current assets
Cash and equivalents (Note 2) $ 3,618 $ 1,375
Trade receivables (Notes 3 and 5) 2,835 2,667
Inventories (Notes 4 and 5) 1,871 2,015
Prepaid expenses 101 72
Deferred income taxes (Note 6) 282 200
_______ _______
Total current assets 8,707 6,329
Property, plant and equipment (Note 5)
Land 128 128
Building 1,510 1,505
Machinery and equipment 2,342 2,220
Office furniture and equipment 1,637 1,520
______ ______
5,617 5,373
Less accumulated depreciation 4,058 3,621
______ ______
Net property, plant and equipment 1,559 1,752
Other assets
Costs in excess of net assets of
businesses acquired, net of
amortization 45 62
Investments 3 3
________ _______
Total other assets 48 65
________ ________
Total assets $ 10,314 $ 8,146
Current liabilities
Current maturities of long-term
debt (Note 5) 35 11
Trade payables 1,460 898
Accrued expenses
Salaries, wages, and other
Compensation 626 456
Product warranties 231 195
Other accrued liabilities 128 12
Income taxes payable 399 73
______ ______
Total current liabilities 2,879 1,645
Long-term debt (Note 5) 0 36
Deferred income taxes (Note 6) 59 56
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: 1,471,279
shares (1999), 1,467,448 shares
(1998) 147 147
Additional paid-in capital
1,285 1,266
Retained earnings 5,944 4,996
______ _____
Total stockholders' equity 7,376 6,409
_______ ______
Total liabilities and equity $10,314 $8,146
<FN>
The accompanying notes are an integral part of the financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Operations
<S> <C> <C>
Year ended June 30
In Thousands, except per share data 1999 1998
Net sales $ 17,585 $ 15,785
Cost of goods sold 11,225 10,547
Gross profit 6,360 5,238
Operating expenses
Administrative 1,759 1,463
Selling 2,577 2,233
Research and development 526 538
Total operating expenses 4,862 4,234
Operating income 1,498 1,004
Other income
Interest income 138 93
Interest expense (5) (7)
Other income, net (7) 15
_______ ______
Income before income taxes 1,624 1,105
Income tax provision (Note 6) 618 420
_______ ______
Net income $ 1,006 $ 685
Net income per share - basic (Note 8) $ .68 $ .47
Net income per share - diluted
(Note 8) $ .67 $ .46
Weighted average number of shares
outstanding - basic 1,469,348 1,464,838
Weighted average number of shares
outstanding - diluted 1,500,757 1,500,272
</TABLE>
<TABLE>
Statements of Stockholderhareholder's' Equity Investment
<S> <C> <C> <C> <C>
Common Stock Additional
In Thousands Outstanding Paid In Retained
Shares Amount Capital Earnings
Balance June 30,
1997 1,462 146 1,246 4,369
Net Income for
the period - - - 685
Dividends paid
($.04/share) - - - (58)
Issuance of common
Stock 5 1 20 -
Balance June 30,
1998 1,467 $ 147 $ 1,266 $ 4,996
Net Income for
the period - - - 1006
Dividends paid
($.04/share) - - - (58)
Issuance of
common stock 4 - 19 -
Balance June 30,
1999 1,471 $ 147 $ 1,285 $ 5,944
<FN>
The accompanying notes are an integral part of the financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Cash Flow
<S> <C> <C>
(In Thousands)
Year Ended June 30
1999 1998
Cash flows from operations
Cash received from customers $17,417 $15,061
Interest received 138 93
Cash paid to suppliers and
employees (14,642) (14,289)
Interest paid (5) (7)
Income taxes paid (370) (445)
_______ ________
Net cash provided by operations 2,538 413
Cash flows from investing
Capital expenditures (244) (626)
Proceeds from sales of property
and equipment 0 3
_______ ______
Net cash used for investing (244) (623)
Cash flows from financing
Proceeds from sale of common stock 19 21
Payment of long-term debt (12) (10)
Dividends paid (58) (58)
_______ _______
Net cash used for financing (51) (47)
Net increase (decrease) in cash and
equivalents 2,243 (257)
Cash and equivalents, beginning
of year 1,375 1,632
_______ _______
Cash and equivalents, end of
year $ 3,618 $ 1,375
_______ _______
Reconciliation of net income to net
cash from operations:
Net income $ 1,006 $ 685
Depreciation and amortization 454 425
Loss on sale of property and
equipment 0 6
Deferred income taxes (79) 56
Changes in assets and liabilities
Accounts receivables (168) (712)
Inventories 144 (243)
Prepaid expenses (29) 43
Trade payables 562 253
Accrued expenses 322 (100)
Income taxes payable 326 0
_______ _______
Net cash provided by operations $ 2,538 $ 413
<FN>
The accompanying notes are an integral part of the financial
statements
</FN>
</TABLE>
<PAGE>
Notes to Financial Statements
1. Nature of Business and
Significant Accounting Policies
A. Nature of Business
The Company operates four principal business units: Waters Network
Systems (WNS), Waters Technical Systems (WTS), 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, the most recently formed business unit,
addresses local area network connectivity
solutions for educational and other markets. Waters Technical
Systems is a contract manufacturer of electromechanical assemblies,
cable and harness assemblies for the construction, industrial,
communications and computer industries. American FarmWorks
manufactures and markets electric fence controllers for animal
containment to agricultural cooperatives, mass merchandisers
focusing on the retailer market, and lawn and garden stores. Waters
Medical Systems designs and manufactures organ preservation devices
and cardiovascular analytical instruments used in hospitals and
laboratories. The Company extends credit in the normal course of
business and performs ongoing credit evaluations of its customers'
financial conditions, but 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, and 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.
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 $17,000 is recorded annually. Accumulated amortization at June
30, 1999 and 1998 was $305,000 and $288,000, 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,
1999 and 1998, the Company expensed $25,000 and $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: 1999 1998
Supplemental schedule of non-cash
investing and financing activities:
Office furniture and equipment
acquired with capital lease $ 0 $ 18
</TABLE>
K. Revenue Recognition
The Company recognizes revenue when the product is shipped from its
warehouse.
L. Research and Development
Research and Development costs are expensed as incurred.
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, 1999 and 1998 were $398,000 and $390,000,
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. Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS N. 130
requires other comprehensive income to include foreign currency
translation adjustments, unrealized gains and losses on marketable
securities and minimum pension liability adjustments. The June 30,
1999 financial statements do not reflect any items of comprehensive
income.
2. Credit Risks and Concentrations
At June 30, 1999 and 1998, 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 $3,486,000 at
June 30, 1999 and $1,528,000 at June 30, 1998. The Company has not
incurred any losses in such accounts.
3. Trade Accounts Receivable
<TABLE>
Trade accounts receivable consist of the following:
<S> <C> <C>
In Thousands 1999 1998
Trade accounts receivable $2,877 $2,705
Less allowance for doubtful
accounts 42 38
______ ______
Totals $2,835 $2,667
</TABLE>
4. Inventories
<TABLE>
Inventories consist of the following:
<S> <C> <C>
In Thousands 1999 1998
Raw materials $1,600 $1,647
Work-in-process 38 197
Finished goods 233 171
______ ______
Totals $1,871 $2,015
</TABLE>
5. Long-term Debt and Line of Credit
<TABLE>
Long-term debt consists of the following:
<S> <C> <C>
In Thousands 1999 1998
Capital lease obligations
due in varying monthly
installments through
January 2000 collateralized
by related equipment. $ 35 $47
Less current maturities 35 11
____ ____
Net long-term debt $ 0 $ 36
</TABLE>
Scheduled maturities, by fiscal year, of long-term debt
are as follows:
2000 $35
<TABLE>
At June 30, property, plant and equipment includes the
following amounts for capital leases:
<S> <C> <C>
In Thousands 1999 1998
Property, plant and
equipment $ 54 $ 67
Accumulated amortization 16 18
____ ____
Net assets under capital
lease $ 38 $ 49
</TABLE>
<TABLE>
At June 30, 1999, the Company had the following minimum
commitments for payment of rentals under capital leases:
<S> <C>
2000 $37
___
Total lease commitments 37
Less amount representing
interest 2
____
Present value of lease
payments, included in
long-term debt $ 35
</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 7.75% at June 30, 1999. The credit agreement expires
December 15, 1999. The credit agreement requires the Company to meet
certain financial ratios and covenants. There were no borrowings
outstanding under the line of credit at June 30, 1999.
6. Income Taxes
<TABLE>
The income tax provision charged to continuing operations for the
years ended June 30, 1999 and 1998 are as follows:
<S> <C> <C>
In Thousands 1999 1998
Current:
US federal $628 $418
State 69 58
____ ____
Total current 697 476
Deferred:
US federal (69) (50)
State (10) (6)
____ ____
Total deferred (79) (56)
____ ____
Total current and deferred: $618 $420
</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, 1999
and 1998 due to the following:
<TABLE>
<S> <C> <C>
In Thousands 1999 1998
Computed "expected" tax expense $568 $387
Increase (decrease) in income
taxes resulting from:
Non-deductible expenses 14 12
State taxes, net of federal
tax benefits 56 31
Tax credits (27) (22)
Other 7 12
____ ____
Total $618 $420
</TABLE>
<TABLE>
Net deferred tax assets consist of the following components as of
June 30, 1999 and 1998:
<S> <C> <C>
In Thousands 1999 1998
Deferred tax assets
Employee benefits and
severance $119 $ 87
Inventory and receivable
allowances 77 42
Warranty and contingency
reserves 86 71
____ ____
Total deferred tax assets $282 $200
Deferred tax liabilities
Property and equipment $ 59 $ 56
____ ____
Total deferred tax liabilities 59 56
____ ____
Net deferred tax assets $223 $144
</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, 1999 and 1998 as follows:
<S> <C> <C>
In Thousands 1999 1998
Current assets $282 $200
Noncurrent liabilities (59) (56)
____ ____
Net deferred tax assets $223 $144
</TABLE>
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
reported below:
<TABLE>
<S> <C> <C>
1999 1998
Net Income In thousands
As reported $1006 $ 685
Pro forma 934 601
_____________________________________________________
Basic Earnings per Share
As reported $ .68 $ .47
Pro forma .64 .41
_____________________________________________________
Diluted Earnings per Share
As reported $ .67 $ .46
Pro forma .62 .40
______________________________________________________
</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 1999, dividend rate of
.74% to 1.00%; price volatility of 57.8% to 70.2%, risk-free
interest rates of 4.9% and 5.5% and expected lives of 10 years.
A summary of the status of the stock option plan at June 30, 1999
and 1998, and changes during the years ended on those dates are as
follows:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding,
beginning of year 93,300 $3.74 55,000 $2.13
Granted 32,550 4.99 38,300 6.05
Exercised/forfeited - - - -
Outstanding,
end of year 125,850 $4.06 93,300 $3.74
Exercisable at
end of year 125,850 93,300
Weighted-average
fair value per
share of options
granted during
the year $ 3.55 $ 3.53
</TABLE>
<TABLE>
As of June 30, 1999, the options outstanding have a weighted average
remaining contractual life of 7.62 years, and exercise prices and
unexercised options as follows:
<S> <C> <C>
Exercise Price Shares Average Contractual Life
2.13 50,000 6 years
2.19 5,000 5.5 years
4 10,050 9.33 years
5.438 22,500 9.5 years
5.75 28,250 8.5 years
6.88 10,050 8.33 years
</TABLE>
Earnings per Share
The weighted-average number of shares of common stock used to
compute the basic earnings per share were increased by 31,409 in
1999 and 35,434 in 1998 for the assumed exercise of the stock
options and warrants (Note 7), in computing the diluted earnings per
share data.
9. Industry Segments and Significant Customers
Effective July 1, 1998, the Company adopted FASB Statement No. 131,
Disclosures about Segment of an Enterprise and Related Information.
Statement No. 131 superseded FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise. Statement No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and in interim financial reports. Statement No. 131 also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of
Statement No. 131 did not affect results of operations or financial
position, or the disclosure of segment information.
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 accounting policies applied to determine segment
information are the same as those described in the summary of
significant accounting policies. Management evaluates the
performance of each segment based on profit and loss from operations
before income taxes, exclusive of non-recurring gains or losses. The
following table summarizes data by industry segment.
<TABLE>
<S> <C> <C>
In Thousands 1999 1998
Net Sales
WNS $ 2,390 $ 1,978
WTS 2,669 2,383
AFW 10,187 9,325
WMS 2,339 2,099
_______ _______
$17,585 $15,785
Operating Income (Loss)
WNS $ (133) $ (193)
WTS 73 (165)
AFW 2,425 1,957
WMS 888 867
General Corporate Expenses $(1,755) $ (1,462)
_______ ________
Operating Income $ 1,498 $ 1,004
Provision for income taxes
WNS $ (84) $ (101)
WTS (106) (174)
AFW 488 383
WMS 271 274
Corporate 49 38
_______ _______
$ 618 $ 420
Capital Expenditures
WNS $ 0 $ 28
WTS 44 142
AFW 96 208
WMS 4 39
_______ _______
$ 144 $ 417
Depreciation and Amortization
WNS $ 8 $ 6
WTS 64 46
AFW 173 193
WMS 25 21
_______ _______
$ 270 $ 266
Identifiable Assets
WNS $ 1,142 $ 1,260
WTS 736 781
AFW 2,679 2,625
WMS 747 710
Corporate 5,010 2,770
_______ _______
$10,314 $ 8,146
</TABLE>
<TABLE>
Significant customers (sales > 10% of net sales)
<S> <C> <C>
WTS
No. of customers 2 4
Sales to those customers $ 1,546 $ 1,703
AFW
No. of customers 2 1
Sales to those customers $ 3,800 $ 2,140
WNS
No. of customers 1 3
Sales to those customers $ 944 $ 761
</TABLE>
<TABLE>
Information of geographic information:
<S> <C> <C>
Revenues 1999 1998
United States $17,122,000 $15,441,000
Other Regions 463,000 344,000
___________ ___________
Total $17,585,000 $15,785,000
Long-lived assets 1999 1998
United States $1,607,000 $1,817,000
Other Regions - -
__________ __________
Total $1,607,000 $1,817,000
</TABLE>
PART II ITEM 8. 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
(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>
NAME AGE POSITION YEAR IN WHICH
FIRST BECAME
AN OFFICER
Jerry W. Grabowski 47 President, Chief
Executive Officer,
and Director 1993
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 or 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.
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.
Additional information required under this item is incorporated by
reference to the Company's definitive Proxy Statement for its 1999
Annual Meeting of Shareholders.
<PAGE>
PART III ITEM 10. EXECUTIVE COMPENSATION
Information required under this item is incorporated by reference to
the Company's definitive Proxy Statement for its 1999 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 1999 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 1999 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 1999.
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 28, 1999.
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.
Signature Title Date
/s/ Jerry W. Grabowski
___________________________________
Jerry W. Grabowski
President, Chief Executive Officer, (Principal Executive Officer) and
Director
September 28, 1999
/s/ Gregory J. Anshus
___________________________________
Gregory J. Anshus
Chief Financial Officer (Principal Financial Officer)
September 28, 1999
/s/ William R. Franta
___________________________________
William R. Franta
Director
September 28, 1999
/s/ John A. Grimstad
___________________________________
John A. Grimstad
Director and Secretary
September 28, 1999
/s/ Charles G. Schiefelbein
___________________________________
Charles G. Schiefelbein
Director
September 28, 1999
<P>
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 11, 1999, 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, 1999.
/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Rochester, Minnesota
September 28, 1999
<PAGE>
Power of Attorney
KNOW ALL BY THESE PRESENTS that each of the undersigned officers and
directors of Waters Instruments, Inc., a Minnesota corporation (the
"Company"), constitute and appoint Jerry W. Grabowski and John A.
Grimstad with full powers of substitution, his true and lawful
Attorney-in-Fact and agent and on the undersigned's behalf in his
name, place, and stead, in any and all capacities, to sign, execute
and file any and all documents with the Securities and Exchange
Commission (SEC), the National Association of Securities Dealers,
Inc. (NASDAQ), state securities administrations and any other
agencies or administrations as may be deemed necessary or advisable
by said Attorneys-in-Fact and agents, or each of them, with full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in order to effectuate the same
as fully to all intents and purposes as the undersigned might or
could do if personally present, hereby ratifying and confirming all
that the above-names Attorneys-in-Fact and agents, or each of them,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands
this 17th day of August 1999.
/s/ Jerry W. Grabowski
_______________________
Jerry W. Grabowski
/s/ William R. Franta
_______________________
William R. Franta
/s/ John A. Grimstad
_______________________
John A. Grimstad
/s/ Charles G. Schiefelbein
_______________________
Charles G. Schiefelbein
<PAGE>
<TABLE>
Exhibit Index for Form 10-KSB (for the Fiscal
<S> <C>
Year ended June 30, 1999) 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 1993 Employment Agreement 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 incorporated by
reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
June 30, 1998. *
23.1 Independent Auditor's Consent 27
24.1 Power of Attorney 28
27 Financial Data Schedule (filed in electronic formal only)
<FN>
(1) Indicates a management compensatory plan.
*Incorporated by reference; SEC File No. 0-1388.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,618
<SECURITIES> 0
<RECEIVABLES> 2,877
<ALLOWANCES> 42
<INVENTORY> 1,871
<CURRENT-ASSETS> 8,707
<PP&E> 5,617
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0
0
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</TABLE>
