UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 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 1,479,948 shares outstanding as of February 14,
2000.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except
per share data)
<S> <C> <C> <C> <C>
For The Three Months For The Six Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 3,246 $ 2,986 $ 8,035 $ 7,448
COST OF GOODS SOLD 2,249 2,064 5,239 4,812
GROSS PROFIT 997 922 2,796 2,636
OPERATING EXPENSES
Administrative 487 378 922 770
Selling 631 514 1,342 1,075
Research and
Development 138 128 248 248
Total Operating
Expenses 1,256 1,020 2,512 2,093
OPERATING INCOME (LOSS) (259) (98) 284 543
0
OTHER INCOME (EXPENSE)
Net Interest
Income (Expense) 38 35 78 62
Net Other Income
(Expense) 4 (3) 1 (5)
INCOME (LOSS) BEFORE
INCOME TAX (217) (66) 363 600
INCOME TAX PROVISION
(BENEFIT) (82) (25) 138 229
NET INCOME (LOSS) (135) (41) 225 371
EARNINGS (LOSS) PER
COMMON SHARE - Basic
and Diluted $(0.09) $ (0.03) $ 0.15 $ 0.25
Weighted Average
Number of Shares
Outstanding
- Basic 1,471,279 1,467,448 1,471,279 1,467,448
Weighted Average
Number of Shares
Outstanding
- Diluted 1,507,665 1,504,514 1,507,567 1,501,978
<FN>
See Notes to Financial Statements
</FN>
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<S> <C> <C>
December 31, June 30,
1999 1999
(Unaudited) (Unaudited)
Current Assets `
Cash & Cash Equivalents $ 2,439 $ 3,618
Net Trade Receivables 2,020 2,835
Inventories 2,564 1,871
Prepaid Expenses 63 101
Deferred Income Taxes 282 282
Total Current Assets 7,368 8,707
Fixed Assets
Property, Plant & Equipment 5,757 5,617
Less Accumulated Depreciation 4,277 4,058
Net Fixed Assets 1,480 1,559
Other Assets 160 3
Goodwill 36 45
TOTAL ASSETS $ 9,044 $ 10,314
Current Liabilities
Current Maturities of
Long-term Debt $ 31 $ 35
Accounts Payable 764 1,460
Accrued Salaries, Wages and
Other Compensation 360 626
Product Warranties 231 231
Other accrued liabilities 167 128
Income Taxes Payable (141) 399
Total Current Liabilities 1,412 2,879
Long-term Debt, Less Current
Maturities 0 0
Deferred Income Taxes 59 59
TOTAL LIABILITIES 1,471 2,938
Stockholders' Equity
Common Stock 148 147
Additional Paid-in Capital 1,316 1,285
Retained Earnings 6,109 5,944
TOTAL STOCKHOLDERS' EQUITY 7,573 7,376
TOTAL LIABILITIES & EQUITY $ 9,044 $ 10,314
<FN>
Notes to Financial Statements
</FN>
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ITEM 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<S> <C> <C>
For the Six Months
Ended December 31,
1999 1998
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 8,035 $ 8,304
Interest received 81 65
Cash provided from operations 8,116 8,369
Cash paid to suppliers and employees 8,284 6,410
Taxes paid 683 194
Interest paid 1 3
Cash disbursed from operations 8,968 6,607
Net cash provided by operations (852) 1,762
CASH FLOWS FROM (USED IN) INVESTING
Capitalization of Garret merger related costs (157) 0
Net acquisition of fixed assets (140) (91)
Net cash used for investing (297) (91)
CASH FLOWS FROM FINANCING
Cash Dividend Payment (58) (58)
Proceeds from sale of Common Stock 32 19
Reduction of Long-Term Debt (4) (6)
Net cash used for financing (30) (45)
NET INCREASE IN CASH AND EQUIVALENTS (1,179) 1,626
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,618 1,375
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,439 $ 3,001
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY (USED IN) OPERATIONS:
Net Income $ 225 $ 371
Depreciation and Amortization 228 230
Provisions For Losses On Accounts Receivable 6 6
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 815 856
Inventories (693) 230
Prepaid Expenses and Deferred Income Taxes 38 (30)
Accounts Payable and Accrued Expenses (1,439) 99
NET CASH PROVIDED BY (USED IN) OPERATIONS $ (852) $ 1,762
<FN>
See Notes to Financial Statements
</FN>
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[CAPTION]
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
d/b/a Waters Corporation
Notes to Financial Statements
December 31, 1999
The financial statements were 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 10 KSB and
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 paragraphs
8 and 9 of SFAS95.
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Inventories consisted of the following:
<S> <C> <C>
December 31, 1999 June 30, 1999
Raw Materials $1,621,000 $1,600,000
Work-In-Process 108,000 38,000
Finished Goods 835,000 233,000
__________ __________
Total Inventories $2,564,000 $1,871,000
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Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Requirements
Waters Corporation's working capital position on December 31, 1999 was
$5,956,000, a
2% increase from $5,828,000 on June 30, 1999.
The cash balance for the Company was $2,439,000 on
December 31, 1999, compared to $3,618,000 on June 30, 1999.
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PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
In December 1999, at Waters' request, the bank increased its line of
credit commitment to $2,000,000
and extended it to December 15, 2000. The bank's line of credit
charges interest at the bank's base
(prime) rate. The prime rate was 8.50% on December 31, 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 $693,000 from June 30, 1999
due primarily to the replenishment of depleted
AFW stock and orders that were delayed by WNS' customers.
The depletion of inventory for AFW
resulted from strong customer demand generated during the
quarter ending June 30, 1999. Management
believes existing orders and a continued demand for AFW and
WNS products during the second half of
the Company's Fiscal Year will reduce inventory levels.
Capital expenditures of $87,000 for the second quarter and
$140,000 for the six-month period ended
December 31, 1999, were used to purchase manufacturing
equipment and Y2K compliant information
systems. The Company anticipates continued improvements
in its overall efficiency and management of
the corporation as a result of these capital expenditures.
Capital expenditures for the remaining two
quarters of the current Fiscal Year are estimated at $100,000.
(Do we need to state the purpose for the
additional expenditures? Mfg vs Y2K?)
On October 28, 1999, at a regularly scheduled
meeting of the Company's Board of Directors, the Board
approved a cash dividend of $.04 per share of
the Company's common stock. The dividend was paid on
December 10, 1999 to shareholders of record on
November 12, 1999, which resulted in an aggregate
cash payment of approximately $58,000.
On November 4, 1999, the Company announced that it had
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.
The Company anticipates that the transaction
will be completed in March 2000.
The completion of the merger is subject to
customary closing conditions, including approval by the
Company's shareholders at a shareholders meeting
to be held on March 15, 2000. The agreement
contemplates that the Company's stock will have
a market value of at least $6 per share at the time of
closing.
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PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
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 option grants outstanding for 350,000
shares. Waters intends to use its cash reserves to
fully fund the cash portion of the transaction.
The Company has capitalized approximately $157,000
of merger related costs in the quarter ending
December 31, 1999.
Results of Operations
Net sales for the quarter and six-month period ended
December 31, 1999 were $3,246,000 and
$8,035,000, respectively. These figures represent
a quarterly increase of 9% and a year-to date increase
of 8% as compared to the prior year.
Waters Medical Systems
Waters Medical Systems' (WMS) net sales for the
quarter and six-month period ended December 31,
1999 were $586,000 and $1,079,000, respectively.
These figures represent an increase of 18% for the
quarter and a decrease of 5% for the six months ended
December 31, 1999 as compared to the prior
year. The Company believes this is the result of
timing by its customers in their capital budget ordering
cycles as well as softness in Oxicom demand in the cardiac market.
The Company continues to focus on building
international sales to Europe as a result of receiving the
CE Mark for its RM3 Renal Preservation System.
Independent scientific research continues to support
and strongly recommend pulsatile preservation as the
standard for renal preservation. The Company is
working with the International Society for Organ
Preservation (ISOP) to build awareness and to raise the
training standards for organ preservation specialists.
American FarmWorks
Net sales for American FarmWorks (AFW) for the quarter
and six-month period ended December 31,
1999 were $1,562,000 and $4,466,000, respectively.
This represents an increase of 8% for the quarter
and 12% for the six-month period ended December 31, 1999
as compared to the prior year. The
Company recently partnered with Quality Stores,
one of the largest U.S. agricultural retail chains. 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.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
As a result of AFW's focus on international sales, the
Company now is stocking and servicing electric
fence controllers in Mexico, Costa Rica, Colombia,
Venezuela and Chile.. 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 240-volt 50/60-cycle electric fence
controllers.
AFW's patented Direct Discharge fencers were introduced
to retail distribution in the fall 1999. The UL
listed consumer fencer is safer to use and
easier to install than traditional technologies. The Company
believes the product differentiation, current
advertising campaign, and strong initial interest will contribute
to increased sales in the consumer segment..
Waters Technical Systems
Waters Technical Systems' (WTS) net sales
increased 28% to $731,000 for the second quarter and
increased 20% to $1,415,000 for the six-month
period ended December 31, 1999. The sales increases
resulted from of strengthening current customer
partnerships by becoming the sole supplier of cable and
harness assemblies to Winnebago Industries and other key customers.
The Company continues to focus
on improving profitability through advancing the
efficiency of its manufacturing processes and actively
using quotation input filters to target specific customers,
markets and business levels.
Waters Network Systems
Waters Network Systems' (WNS) net sales for the quarter and
six-month period ending December 31,
1999 were $367,000 and $1,075,000, respectively.
This represents decreases of 23% for the quarter and
7% for the six months ended December 31, 1999 as
compared to the prior year. The Company believes
the declines resulted primarily from the timing of
its customers' procurement cycles as WNS products
that are specified on project bids have been
delayed for delivery until the second half of the Company's
fiscal year.
In February, WNS received a letter of intent from one
of its largest customers to purchase over $2
million in workgroup switches and media converters
for delivery in fiscal year 2001. The primary
reasons for the school district's choosing Waters
Network Systems' products relate to the newly released
10/100Mbps fiber switches that were designed specifically
for classroom applications and to the media
converters that were designed with modular flexibility.
In addition, the Company is expanding beyond
the educational market to stocking product with major national distributors.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation (continued)
For the quarter ended December 31, 1999, gross
profit for the Company declined to
30.7 % of net sales, down from 30.9% for the
comparable period of last year. Gross profit for the six-
month period ended December 31, 1999 was 34.8%
of net sales compared to 35.4% for the comparable
period of the prior year. The Company believes
higher than expected WTS nonrecurring customer
startup costs contributed to the decline in gross margin.
Operating expenses were $1,256,000 for the quarter
and $2,512,000 for the six-month period ended
December 31, 1999, representing an increase of
$236,000 and $419,000 as compared to 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 (loss) for the Company for the
quarter ended December 31, 1999 was a loss of ($135,000),
or ($0.09) per share, on revenues of $3,246,000.
For the comparable quarter of the prior year, the
Company had recorded a loss of ($41,000),
or ($0.03) per share, on revenues of $2,986,000. The 1999
quarter loss was primarily attributed to the
higher than expected nonrecurring customer startup costs in
the Company's contract manufacturing business unit.
Net income for the Company's six-month period
ended December 31, 1999 was a profit of $225,000, or
$0.15 per share, on revenues of $8,035,000.
For the comparable six-month period of the prior year, the
Company had a net income of $371,000, or
$0.25 per share, on revenues of $7,448,000. The 39%
decrease in net income for the six-month
period primarily related to higher than expected nonrecurring
customer startup costs in the Company's
contract manufacturing business unit.
The weighted average number of shares of
common stock used to compute the basic earnings per share
was increased by 36,386 and 37,066 shares
for the quarters ended December 31, 1999 and 1998,
respectively, and 36,288 and 34,530 shares
for the six months ended December 31, 1999 and 1998,
respectively. The increases resulted from the
assumed exercise of the employee stock options in
computing the diluted per-share data.
Year 2000
The Company completed an extensive assessment
for Y2K compliance during fiscal year 1998 and
implemented a plan intended to resolve all
major issues by the end of calendar year 1999. The
Company's plan identified those systems that had
exposure to Y2K issues, developed and implemented
action plans focused on Y2K compliance, and
tested each major area of exposure to work toward
material compliance. The Company believes that it
has addressed all material areas of exposure prior to
calendar year end 1999 and has not experienced any
material Y2K problems to date.
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
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) sufficient demand for
AFW and WNS products to reduce current inventory
levels depends on actual customer demand as well
as general market and competitive conditions;
(C) the completion of the transaction with Garrett
depends on shareholder approval and conditions set
forth in the Company's agreement with Garrett;
(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 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 I
FINANCIAL INFORMATION
Exhibits and Item 6. 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
February 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-END> Dec-31-1999
<CASH> 2,439
<SECURITIES> 0
<RECEIVABLES> 2,070
<ALLOWANCES> 50
<INVENTORY> 2,564
<CURRENT-ASSETS> 7,368
<PP&E> 5,757
<DEPRECIATION> 4,277
<TOTAL-ASSETS> 9,044
<CURRENT-LIABILITIES> 1,412
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 7,425
<TOTAL-LIABILITY-AND-EQUITY> 9,044
<SALES> 8,035
<TOTAL-REVENUES> 8,035
<CGS> 5,239
<TOTAL-COSTS> 5,239
<OTHER-EXPENSES> 2,512
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 363
<INCOME-TAX> 138
<INCOME-CONTINUING> 225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225
<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
