SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996
OR
Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 1-12714
OSMONICS, INC
(Exact name of registrant as specified in its charter)
Minnesota 41-0955759
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5951 Clearwater Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 933-2277
N/A
Former name, former address and former
fiscal year, if changed since last report
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 (or for such shorter
period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for at least 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 practicable date. At
October 22, 1996, 14,184,091 shares of the issuer's Common Stock,
$0.01 par value, were outstanding.
<P1>
OSMONICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Income - . . . . . . . . 2
For the Three and Nine Month Periods
Ended September 30, 1996 and 1995
Consolidated Balance Sheets - . . . . . . . . . . . 3
September 30, 1996 and December 31, 1995
Consolidated Statements of Cash Flows . . . . . . . 4
For the Nine Months Ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements . . . . . 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF . . . . . . 6-9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . 10-32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . 33
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 34
<P2>
ITEM I - FINANCIAL STATEMENTS
<TABLE>
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $39,493 $31,995 $115,271 $94,829
Cost of sales 23,247 18,533 67,776 53,864
Gross profit 16,246 13,462 47,495 40,965
Less:
Selling, general and
administrative 8,771 7,504 25,664 22,824
Research, development
and engineering 2,750 2,446 7,930 7,101
Income from operations 4,725 3,512 13,901 11,040
Other income 297 502 912 1,228
Income before income
taxes 5,022 4,014 14,813 12,268
Income taxes 1,708 1,301 4,803 3,808
Net income $ 3,314 $ 2,713 $ 10,010 $ 8,460
Net income per common
share $ 0.23 $ 0.19 $ 0.69 $ 0.59
Average common shares
outstanding 14,470 14,371 14,442 14,274
</TABLE>
<P3>
<TABLE>
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,344 $ 4,729
Marketable securities 21,237 26,307
Trade accounts receivable, net of
allowance for doubtful accounts of
$967 in 1996, and $1,177 in 1995 24,789 23,552
Inventories 32,639 28,973
Deferred tax assets 3,907 4,271
Other current assets 3,638 2,181
Total current assets 88,554 90,013
Property and equipment, at cost
Land and land improvements 4,457 4,558
Building 26,793 18,928
Machinery and equipment 43,913 41,592
Construction in progress 7,724 8,009
82,887 73,087
Less accumulated depreciation and
amortization (33,506) (30,598)
49,381 42,489
Other assets 10,814 12,181
$148,749 $144,683
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,815 $ 13,957
Notes payable and current portion
of long-term debt 6,454 3,811
Reserve for discontinued operations 1,957 1,957
Other accrued liabilities 13,358 14,330
Total current liabilities 32,584 34,055
Long-term debt 16,205 20,919
Deferred compensation and other liabilities 224 450
Deferred income taxes 4,840 4,986
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1996: 14,184,091 and
1995: 14,086,007 shares 142 141
Capital in excess of par value 22,966 21,805
Retained earnings 68,324 58,314
Unrealized gain on marketable securities 3,387 3,694
Foreign currency translation adjustments 77 319
Total shareholders' equity 94,896 84,273
$148,749 $144,683
</TABLE>
<P4>
<TABLE>
OSMONICS,INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Cash flows from:
Operations:
Net income $ 10,010 $ 8,460
Non-cash items included in net income:
Depreciation and amortization 3,672 2,992
Gain on sale of investments (1,328) (702)
Gain on sale of land (640) -
Deferred income taxes 366 117
Accounts receivable (1,237) (2,758)
Inventories and other current assets (5,123) (3,376)
Accounts payable and accrued liabilities (4,340) 1,478
Net cash provided by operations 1,380 6,211
Investing activities:
Purchase of investments (608) (4,012)
Sale of investments 6,311 6,374
Purchase of property and equipment (12,167) (15,327)
Sale of property and equipment 2,398 -
Other (841) (5)
Cash provided (used) in investing
activities (4,907) (12,970)
Financing activities:
Notes payable and current debt - 14,956
Reduction of debt (2,071) (7,170)
Issuance of common stock 1,162 548
Application of restricted cash to
property and equipment 2,034 -
Net cash provided (used) in financing
activities 1,125 8,334
Effect of exchange rates on cash 17 (89)
(Decrease)/increase in cash and
cash equivalents (2,385) 1,486
Cash and cash equivalents -
beginning of year 4,729 9,705
Cash and cash equivalents -
end of quarter
$ 2,344 $11,191
</TABLE>
<P5>
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1996, are not
necessarily indicative of the results that may be expected for the
year 1996.
These statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
shareholders and Form 10-K for the year ended December 31, 1995.
<P6>
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes incorporated by
reference in this Prospectus and the other financial information.
Results of Operations:
In July 1996, the Company acquired Desalination Systems, Inc. ("Desal")
in a transaction accounted for as a pooling of interests. Accordingly,
the historical consolidated financial data for all periods presented
here have been restated to include the operations of Desal.
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 57.9 58.9 56.8 58.8
Gross Profit 42.1 41.1 43.2 41.2
SG&A 23.5 22.2 24.1 22.3
RD&E 7.6 7.0 7.5 6.9
Operating Profit 11.0 11.9 11.6 12.0
Other Income 1.6 0.8 1.3 0.8
Income Taxes 4.1 4.3 4.0 4.2
Net Income 8.5 8.4 8.9 8.6
</TABLE>
Comparison of Three Months Ended September 30, 1996, and Three Months
Ended September 30, 1995.
Sales for the quarter ended September 30, 1996, of $39,493 increased 23%
over sales for the third quarter of 1995. The increase was in both
capital and replaceable products. The sales growth reflects the
Company's recent and continued investment in expanded sales efforts, and
the general strength of the economy.
Gross Margin for the third quarter of 1996 was 41.1% versus 42.1% in the
corresponding period of 1995. The lower gross margin was primarily due
to a less favorable product mix, as well as some raw material cost
increases and more aggressive pricing.
<P7>
Operating Expenses decreased from 31.1% of sales in the third quarter of
1995 to 29.2% in the third quarter of 1996. The decrease in operating
expense is primarily attributable to improved operating efficiency
realized in the integration of the Company's recent acquisitions.
Other Income decreased by $0.2 million from the third quarter of 1995 to
the third quarter of 1996. The decrease is due to lower interest income
and higher acquisition-related expense.
Net Income for the quarter ended September 30, 1996, was $3,314, up
22.2% from $2,713 in the corresponding quarter last year. Net income
per common share for the quarter increased to $0.23 from $0.19 in the
prior year.
Comparison of Nine Months Ended September 30, 1996, and Nine Months
Ended September 30, 1995
Net Sales for the nine months ended September 30, 1996, increased $20.4
million or 21.6% to $115.3 million as compared to net sales of $94.8
million for the nine months ended September 30, 1995. The sales
increase was realized across nearly all product lines, and for both
domestic and international markets.
Gross Profit increased $6.5 million or 15.9% to $47.5 million in the
nine months ended September 30, 1996, compared to $41.0 million in the
nine months ended September 30, 1995. As a percentage of net sales,
gross profit decreased to 41.2% from 43.2%. The reduction in gross
profit was due to a less favorable sales mix, more aggressive pricing in
certain product lines, and some effect of higher material costs. Sales
in 1996 included some order backlog acquired from Western Filter in
October 1995, which was at lower gross margins than other of the
Company's products.
Selling, General and Administrative Expenses increased $2.8 million or
12.4% to $25.7 million in the nine months ended September 30, 1996,
compared to $22.8 million in the nine months ended September 30, 1995.
As a percentage of sales, SG&A expense decreased to 22.3% from 24.1%,
primarily reflecting improved productivity of both sales and
administrative personnel.
Research, Development and Engineering Expenses increased $0.8 million to
$7.9 million in the nine months ended September 30, 1996, from $7.1
million in the nine months ended September 30, 1995. As a percentage of
sales, these expenses were 6.9% of sales in the nine months ended
September 30, 1996, compared to 7.5% in the nine months ended September
30, 1995. The Company believes the current level of funding is adequate
to support its product development program.
The effective tax rate for each of the nine months ended September 30,
1996 and 1995 were 32.4% and 31.0%, respectively. The increase in the
tax rate is primarily due to the reduced availability of tax loss
carryforwards and credits from Autotrol and its subsidiaries.
<P8>
Net Earnings increased $1.6 million or 18.3% to $10.0 million or $0.69
per share for the nine months ended September 30, 1996, compared to
$8.5 million or $0.59 per share for the nine months ended September 30,
1995. As a percentage of net sales, net earnings were 8.6% in the nine
months ended September 30, 1996, compared to 8.9% in the nine months
ended September 30, 1995.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash and marketable securities of
$23.6 million as compared to $31.0 million at December 31, 1995. The
reduction in cash and marketable securities was primarily the result of
investments of $12.2 million in facilities and equipment during the
first nine months of 1996.
Cash provided by operating activities was $1.4 million, $8.4 million,
and $10.1 million for the nine month period ended September 30, 1996,
and the years ending December 31, 1995 and 1994 respectively. The
decrease in cash provided by operating activities in 1996 and 1995 was
principally due to increased working capital requirements to support the
Company's sales growth. The current ratio was 2.7 at September 30,
1996, compared to 2.6 at year-end 1995.
Capital expenditures for the nine months ended September 30, 1996, and
the years ending December 31, 1995, and 1994 were $12.2 million, $20.8
million, $4.2 million, respectively. During 1995, the Company purchased
its previously leased Milwaukee facility for $3.1 million and invested
$4.6 million in the expansion of its Minnetonka facility. For the year
ending December 31, 1996, capital expenditures are expected to be
$15.0 million. The level of capital expenditures in 1997 is expected to
be less than the levels of 1996 and 1995.
The Company has negotiated a new $7 million unsecured revolving line of
credit for working capital needs. The revolving line of credit is for
two years with an annual interest rate of LIBOR plus 50 basis points.
This revolving line of credit replaces a $1 million line of credit. At
September 30, 1996, the Company had $6.7 million available under the
revolving line of credit.
The Company's operating cash requirements consist principally of working
capital requirements, capital expenditures and scheduled payments of
principal on outstanding indebtedness. The Company believes that its
cash and marketable securities, cash flow from operating activities and
borrowings under its bank facility will be adequate to meet the
Company's liquidity and capital investment requirements in the
foreseeable future.
<P9>
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in
this Form 10-Q and other materials filed or to be filed with the
Securities and Exchange Commission (as well as information included in
oral or other written statements made or to be made by the Company)
contains statements that are forward-looking. Such statements may
relate to plans for future expansion, business development activities,
other capital spending, financing, or the effects of regulation and
competition. Such information involves important risks and
uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in
any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to product development activities, dependence on existing
management, global economic and market conditions, and changes in
federal or state laws.
<P10>
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 5. Other Information
On July 24, 1996, the Registrant acquired Desalination Systems,
Inc. ("Desal") in a transaction accounted for as a pooling-of-
interests. The following information has been restated for all
periods presented to give effect to the acquisition as though
the companies had operated together from the beginning of the
earliest period presented.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Osmonics, Inc.
Minnetonka, Minnesota
We have audited the accompanying consolidated balance sheets of Osmonics, Inc.
and subsidiaries (the Company) as of December 31, 1995 and 1994 and the
related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. Our audits also included the financial statement schedule Valuation
and Qualifying Accounts for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on the 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 signifigant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits and the report of the other auditors provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Osmonics, Inc. and subsidiaries at December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therin.
As discussed in Note 4 to the financial statements, in 1994 the Company
adopted Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
October 22, 1996
<P11>
<TABLE>
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Sales $130,783 $112,908 $108,212
Cost of sales 74,670 62,503 59,885
Gross profit 56,113 50,405 48,327
Operating expenses:
Selling, general and administrative 31,377 27,967 26,831
Research, development and engineering 9,399 8,989 8,322
Embezzlement recovery (Note 3) - - (562)
Merger and transition expense - - 1,644
40,776 36,956 36,235
Income from operations 15,337 13,449 12,092
Other income (expense), net (Note 4):
Interest income 1,649 1,543 1,279
Interest expense (1,565) (878) (1,017)
Other 1,412 148 476
1,496 813 738
Income before income taxes 16,833 14,262 12,830
Income taxes (Note 11) 4,954 3,808 3,536
Net income $ 11,879 $10,454 $ 9,294
Net income per common and $ 0.83 $ 0.74 $ 0.66
common equivalent share
Weighted average number of common and 14,365,000 14,206,000 14,075,000
common equivalent shares outstanding
</TABLE>
<P12>
<TABLE>
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 4,729 $ 9,705
Marketable securities (Note 4) 26,307 27,623
Trade accounts receivable, net of allowance for doubtful
accounts of $1,177 in 1995 and $1,329 in 1994 23,552 18,324
Inventories (Note 5) 28,973 21,743
Deferred tax assets (Note 12) 4,271 3,685
Other current assets 2,181 1,483
Total current assets 90,013 82,563
Property and equipment, at cost
Land and land improvements 4,558 1,951
Buildings 18,928 13,093
Machinery and equipment 41,592 36,886
Construction in progress 8,009 818
73,087 52,748
Less accumulated depreciation and amortization (30,598) (27,933)
42,489 24,815
Cash restricted for purchase and
construction of equipment (Note 6) 2,034 -
Goodwill, net of accumulated amortization of
$289 in 1995 and $170 in 1994 7,655 1,695
Other assets, net of accumulated amortization of intangible
assets of $230 in 1995 and $145 in 1994 2,492 1,642
Total assets $144,683 $110,715
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 13,957 $ 7,319
Line of credit advances (Note 8) 1,619 1,312
Notes payable and current portion of
long-term debt (Note 9) 2,192 961
Accrued compensation and employee benefits 4,231 4,860
Reserve for discontinued operations 1,957 2,088
Other accrued liabilities (Note 7) 10,099 7,311
Total current liabilities 34,055 23,851
Long-term debt (Note 9) 20,919 14,475
Deferred income taxes (Note 12) 4,986 2,774
Other liabilities 450 689
Commitments and contingencies (Note 14) - -
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1995: 14,086,007 and 1994: 13,999,457 141 140
Capital in excess of par value 21,805 21,045
Retained earnings 58,314 46,525
Unrealized gain on marketable securities (Note 4) 3,694 1,038
Cumulative effect of foreign currency
translation adjustments 319 178
Total shareholders' equity 84,273 68,926
Total liabilities and shareholders' equity $144,683 $110,715
</TABLE>
<P13>
<TABLE>
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operations:
Net income $11,879 $10,454 $ 9,294
Non-cash items included in net income:
Depreciation and amortization 3,795 3,523 3,449
Deferred income taxes (71) (231) 112
Gain on sale of land and investments (810) - (484)
Changes in assets and liabilities
(net of business acquisitions)
Reserve for VAT tax - (1,605) (1,030)
Accounts receivable (4,494) (1,902) (518)
Inventories (6,517) (2,617) 2,778
Other current assets (727) 1,479 (287)
Accounts payable and accrued liabilities 5,798 1,074 289
Reserve for deferred compensation (432) 78 72
Reserves for losses of discontinued operations - - (471)
Net cash provided (used) by operations 8,421 10,097 13,204
Cash flows from investing activities:
Business acquisitions (net of cash acquired) (5,380) (673) -
Purchase of investments (6,633) (17,467) (15,253)
Maturities and sales of investments 13,228 11,225 8,680
Purchase of property and equipment (20,818) (4,212) (4,074)
Proceeds from sale of subsidiary - - 798
Other (367) 367 (111)
Net cash provided (used) for investing
activities (19,970) (10,760) (9,960)
Cash flows from financing activities:
Notes payable and current debt 13,928 1,674 784
Reduction of long-term debt (5,898) (1,365) (833)
Cash restricted for purchase and construction
of equipment (2,034) - -
Issuance of common stock 761 680 295
Re-acquisition and retirement of common stock - - (893)
Dividends paid by a pooled company (90) (180) (240)
Net cash provided (used) in financing
activities 6,667 809 (887)
Effect of exchange rate changes on cash (94) (444) 143
Increase (decrease) in cash and cash equivalents (4,976) (298) 2,500
Cash and cash equivalents - beginning of year 9,705 10,003 7,503
Cash and cash equivalents - end of year $ 4,729 $ 9,705 $10,003
</TABLE>
<P14>
<TABLE>
OSMONICS, INC.
RESTATED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
Unrealized
Capital in Gain on Cumulative
Common Stock Excess of Retained Marketable Translation
Shares Amount Par Value Earnings Securities Adjustment
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 as
previously reported 12,607,707 $126 $20,026 $23,558 $ - $133
Restatement for pooling of
interests 1,368,665 14 50 4,526
Balance, January 1, 1993
as restated 13,976,372 140 20,076 28,084 0 133
Net income 9,294
Translation adjustment 37
Dividend of pooled company (240)
Employee stock purchase
plan 29,766 295
Re-acquisition and retirement
of common shares of pooled
company (70,249) (1) (5) (887)
Balance - December 31, 1993
as restated 13,935,889 139 20,366 36,251 0 170
Net income 10,454
Translation adjustment 8
Unrealized gain on
marketable securities 1,038
Dividend of pooled company (180)
Business combinations 7,000 102
Employee stock purchase
plans 56,568 1 577
Balance - December 31, 1994
as restated 13,999,457 140 21,045 46,525 1,038 178
Net income 11,879
Translation adjustment 141
Unrealized gain on
marketable securities 2,656
Dividend of pooled company (90)
Employee stock purchase
plans 86,550 1 760
Balance - December 31, 1995 14,086,007 $141 $21,805 $58,314 $3,694 $319
as restated
</TABLE>
<P15>
<TABLE>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<CAPTION>
INCOME DATA:
Year ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Sales $130,783 $112,908 $108,212 $99,992 $90,242
Income from continuing
operations 11,879 10,454 9,294 4,482 6,174
Income from continuing
operations per share $0.83 $0.74 $0.66 $0.32 $0.44
Average shares
outstanding 14,365 14,206 14,075 14,036 13,926
BALANCE SHEET DATA:
Total assets $144,683 $110,715 $96,812 $89,730 $87,708
Long-term debt 20,919 14,475 14,532 14,705 15,940
</TABLE>
<P16>
<TABLE>
QUARTERLY INCOME DATA
(In thousands, except per share amounts)
<CAPTION>
Quarterly Income Data - 1995
Quarter Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Sales $31,412 $31,422 $31,995 $35,954
Gross profit 13,700 13,803 13,462 15,148
Net income 2,926 2,821 2,713 3,419
Net income per share $0.20 $0.20 $0.19 $0.24
<CAPTION>
Quarterly Income Data - 1994
Quarter Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Sales $27,252 $29,293 $27,581 $28,782
Gross profit 12,077 12,853 12,181 13,294
Net income 2,435 2,647 2,468 2,904
Net income per share $0.17 $0.19 $0.17 $0.21
</TABLE>
<P17>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
The Company is a manufacturer and marketer of high technology water
purification, fluid filtration, fluid separation, and fluid transfer
equipment, as well as the replaceable components used in
purification, filtration, and separation equipment. These products
are used by a broad range of industrial, commercial and
institutional customers.
The consolidated financial statements include the accounts of
Osmonics, Inc. and its wholly and majority owned subsidiaries (the
Company). Significant intercompany accounts and transactions have
been eliminated.
Sales are recorded when the product is shipped.
The estimated fair value for cash and cash equivalents, trade
accounts receivable, accounts payable, notes payable, and long-term
debt approximates carrying value due to the relatively short-term
nature of the instruments and/or due to the short-term floating
interest rates on the borrowing. The estimated fair value of notes
receivable approximates the net carrying value, as management
believes the respective interest rates are commensurate with the
credit, interest rate, and prepayment risks involved.
The Company considers highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Inventories are stated at lower of cost (FIFO method) or market for
all operations except the Autotrol subsidiary domestic operations
which have historically valued inventory on the LIFO method.
Depreciation and amortization of property and equipment are provided
on the straight-line method over estimated lives of 3 to 40 years.
Deferred income taxes have been provided for income and expenses
which are recognized in different accounting periods for financial
reporting purposes than for income tax purposes.
The Company accrues for the estimated cost of warranty and start-up
obligations at the time revenue is recognized.
The excess of cost over the fair market value of assets acquired in
acquisitions is amortized over not more than 40 years, with the
majority at 30 years. The carrying values of these intangibles are
reviewed quarterly based on the sales and profitability of the
acquired assets. Other intangibles are carried at cost and
amortized using the straight-line method over their estimated lives
of 5 to 17 years.
<P18>
Net income per common and common equivalent share is based on the
weighted average number of shares outstanding during each year and,
when applicable, those outstanding options that are dilutive. Fully
diluted earnings per share did not differ significantly from primary
earnings per share in any period presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." The Company will
evaluate adoption of SFAS 123 in 1996.
Certain reclassifications have been made to prior year amounts to
conform with current year presentation.
2. Business Acquisitions
On July 24, 1996, Desalination Systems, Inc. (DSI) merged with the
Company through an exchange of 144.070 shares of the Company's
common stock for each share of Class A common stock of DSI and
157.107 shares of the Company's common stock for each share of
pooling-of-interests. DSI's principal business is the manufacture
of membrane used for reverse osmosis, nanofiltration,
ultrafiltration, and microfiltration.
The historical financial statements of the Company have been
restated to give effect to the acquisition as though the companies
had operated together from the beginning of the earliest period
presented.
Separate results of operations of the combined entities for the
years ended December 31, 1995, 1994, and 1993 were as follows:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Sales:
Osmonics
(as previously reported) $111,610 $96,180 $89,043
DSI 20,348 17,610 19,721
Eliminations (1,175) (882) (552)
Combined $130,783 $112,908 $108,212
Net income:
Osmonics
(as previously reported) $11,212 $ 9,955 $ 7,895
DSI 667 499 1,399
Combined $11,879 $10,454 $ 9,294
</TABLE>
<P19>
The eliminations represent sales between the combined entities prior
to the combination. The sales elimination had no significant effect
on net income in the years presented.
On October 4, 1995, the Company acquired the assets and operations
of Western Filter Co., Denver, Colorado. The purchase price was
approximately $7,000 and included $5,780 of intangible assets.
Western Filter products will be sold through the existing Osmonics
distribution channels, offering a more complete line of water and
waste water treatment options. Revenues of Western Filter were less
than $10,000 in 1994 and 1995. The purchase method of accounting
was used.
On November 18, 1994, the Company acquired the assets of Lakewood
Instruments, Inc. The Company also obtained noncompetition
agreements from two previous Lakewood directors. The purchase
method of accounting was used.
On January 1, 1994, the Company acquired the 18% minority
shareholder interest of its majority-owned subsidiary, Poretics.
The Company owns 100% of Poretics' shares after the transaction.
The purchase method of accounting was used.
These acquisitions had no significant pro forma effect on the
Company's sales, net income, or net income per share in 1995 or
1994.
On October 15, 1993, Autotrol Corporation (Autotrol) merged with
Osmonics through an exchange of 0.77 of a share of Osmonics common
stock for each share of Autotrol common stock. The exchange ratio
and share amounts, when revised to reflect Osmonics' 3-for-2 stock
split on March 21, 1994, equate to an exchange of 1.155 shares of
Osmonics common stock for each of the 3.0 million shares of Autotrol
common stock. The transaction was accounted for as a pooling-of-
interests. Autotrol's principal business is the manufacture and
marketing of controls, valves and measuring devices related to water
conditioning.
The historical financial statements of the Company have been
restated to give effect to the Autotrol acquisition as though the
companies had operated together from the beginning of the earliest
period presented. Before pooling, results for the first nine months
of 1993 for Osmonics were net sales of $41,213 and net income of
$3,678, and for Autotrol were sales of $25,272 and net income of
$2,076.
3. Embezzlement
In February 1993, Autotrol, prior to acquisition by Osmonics,
discovered that a former employee of its French subsidiary had been
embezzling funds for several years. The funds were embezzled
through the issuing of fraudulent checks by the former employee and
the falsifying of value added tax (VAT) returns and diverting the
funds received from the French government.
<P20>
Autotrol's investigation of the embezzlement revealed that
approximately $4,750 was embezzled from 1988 to 1992. The prior
years' financial statements reflect embezzlement losses in the year
the embezzlement initially occurred. The Company had net recoveries
of $562 in 1993 from insurance and reductions in VAT payable.
4. Marketable Securities
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standard No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," which requires
the Company to report certain marketable securities at fair market
value. The Company considers all of its marketable securities
available-for-sale. Marketable securities at December 31, 1995
consisted of the following:
<TABLE>
Fair
Amortized Unrealized Unrealized Market
Cost Gain (Loss) Value
<S> <C> <C> <C> <C>
U.S. government securities
0-5 year maturity $ 4,784 $ 60 $ (23) $ 4,821
6 year or greater maturity 648 24 - 672
Municipal bonds
0-5 year maturity 2,320 112 - 2,432
6 year or greater maturity 4,777 211 - 4,988
Corporate debt securities and other
0-5 year maturity 1,505 24 (43) 1,486
6 year or greater maturity 699 16 - 715
Equity securities 5,616 5,681 (104) 11,193
Total before tax effect $20,349 6,128 (170) $26,307
Deferred tax effect of
unrealized (gain) loss (2,329) 65
Unrealized gain (loss) on marketable
securities $3,799 $(105)
</TABLE>
<P21>
<TABLE>
Marketable securities at December 31, 1994 consisted of the
following:
<CAPTION>
Fair
Amortized Unrealized Unrealized Market
Cost Gain (Loss) Value
<S> <C> <C> <C> <C>
U.S. government securities
0-5 year maturity $ 6,479 $ - $ (318) $ 6,161
6 year or greater maturity 1,748 - (101) 1,647
Municipal bonds
0-5 year maturity 1,977 100 - 2,077
6 year or greater maturity 6,348 28 (374) 6,002
Corporate debt securities and other
0-5 year maturity 3,764 15 - 3,779
6 year or greater maturity 599 - (44) 555
Equity securities 5,104 2,319 (21) 7,402
Total before tax effect $26,019 2,462 (858) $27,623
Deferred tax effect of
unrealized (gain) loss (869) 303
Unrealized gain (loss) on marketable
securities $1,593 $ (555)
</TABLE>
Market values are based on quoted market prices.
In 1995, proceeds from sales of available-for-sale securities were
$7,037. The net gain on these sales was $919, determined on the
specific identification method.
In 1994, proceeds from sales of available-for-sale securities were
$2,846. There were no material gross realized gains or losses on
these sales, as determined on the specific identification method.
5. Inventories
Inventories consist of the following:
December 31,
1995 1994
Finished goods $ 4,979 $ 3,409
Work in process 7,759 5,946
Raw materials 16,884 13,037
29,622 22,392
Less adjustment to reduce
inventories of $4,728 and $3,475
to last-in, first-out method
(See Note 1) (649) (649)
$28,973 $21,743
<P22>
6. Cash Restricted for Purchase and Construction of Equipment
Cash restricted for purchase and construction of equipment at
December 31, 1995 represents proceeds received from the issuer of
Industrial Development Revenue Bonds (see Note 8) restricted to use
in the purchase and construction of property and equipment used in
the Company's operations.
7. Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1995 1994
Warranty and start-up $1,868 $1,981
Professional fees and other accruals 4,252 2,395
Customer deposits 2,258 1,074
Accrued property taxes, income
taxes and other taxes 1,721 1,861
$10,099 $7,311
8. Line of Credit
Prior to the merger with the Company, DSI had an available bank line
of credit which provided for borrowings up to $4,000. Advances
under the line were repaid after the merger and the line has been
terminated. Advances under the line bore interest at 25 b.p. over
the bank's prime rate (the bank's prime rate was 8.5% at December
31, 1995). Advances under the line were collateralized by trade
receivables, inventories and equipment of DSI. Under the terms of
the agreement, DSI was required to maintain certain minimum
financial ratios and a minimum amount of working capital and
tangible net worth. At December 31, 1995 and 1994 DSI had
outstanding borrowings under the line of $1,619 and $1,312,
respectively.
9. Debt
Long-term debt is as follows:
December 31,
1995 1994
Promissory Notes; interest payable
quarterly at the three month LIBOR
rate plus 80 b.p.; due 1996 through
2001. The interest rate on
December 31, 1995 was 6.64%. $10,000 $10,000
<P23>
December 31,
1995 1994
Industrial development revenue bonds,
(IDB's) secured by a bank letter of credit
under which all assets of the Company
have been pledged as collateral,
principal due in varying annual
payments over 30 years, interest
payable monthly at a variable rate
determined periodically by the bond
remarketing agent (5.45% at
December 31, 1995). 8,550 -
Industrial revenue bonds (IRB's);
interest payable at LIBOR plus 45 to
95 b.p. depending on collateral
deposited with the lender; due in 1997.
The interest rate on December 31, 1995
was 6.29%. 2,800 2,800
Mortgage notes payable to two French
banks; interest payable monthly at PIBOR
plus 40 b.p. The interest rate on
December 31, 1995 was 5.43%. 928 993
Note payable to a bank, collateralized by
the Company's accounts receivable,
inventory and equipment, due in monthly
installments of $18 with interest at
the bank's prime rate plus 75 b.p.
(9.5% at December 31, 1995). 425 642
Other notes 408 1,001
23,111 15,436
Less current portion (2,192) (961)
$20,919 $14,475
The IRB debt and mortgage notes payable to French banks are
collateralized by real and personal property of the Company.
The aggregate maturities of outstanding long-term debt are:
1996 - $2,192; 1997 - $4,987; 1998 - $2,159; 1999 - $2,159;
2000 - $2,250; beyond 2000 - $9,364.
The interest rate on the IRB's is determined in part by the amount
of collateral held by the lender. At December 31, 1995, $2,000 of
collateral was held by the lender, resulting in an interest rate of
LIBOR plus 45 b.p. The $2,000 of collateral is included in
marketable securities.
The Company has a $1,000 line of credit with a bank, with interest
at the bank reference rate (8.5% at December 31, 1995) and which
<P24>
requires a 5% compensating cash balance. The line of credit was
unused at year end and the $50 compensating balance is included in
the balance of cash and cash equivalents.
Subsequent to December 31, 1995, the Company negotiated a new
$7 million unsecured revolving line of credit for working capital
needs. The revolving line of credit is for two years with an annual
interest rate of LIBOR plus 50 basis points. This revolving line of
credit replaces a $1 million line of credit.
The promissory notes contain a covenant which limits the payment of
dividends to shareholders. At December 31, 1995, approximately
$24,742 of retained earnings was restricted under this covenant. In
addition, the promissory notes and IRB debt contain certain
restrictions related to financial ratios, indebtedness, tangible net
worth and capital expenditures.
Cash payments for interest related to all debts of the Company were
$1,409, $865, and $1,029, for 1995, 1994, and 1993, respectively.
10. Stock Options
At December 31, 1995, the Company had reserved 86,206 common shares
for issuance to key employees under a 1983 stock option plan.
Options are issued at a price not less than market value on date of
grant and become exercisable over a five-year period, after which
they expire. The following is a summary of activity under the 1983
stock option plan. No additional options can be granted under the
1983 plan.
Year ended December 31,
1995 1994 1993
Options held by employees
at December 31 86,206 121,126 143,850
Exercise price range on $ 6.45 to $ 3.63 to $3.63 to
options held at December 31 $13.50 $13.50 $13.50
Number of options exercised
during the year 34,920 22,724 1,875
Price range of options $ 3.63 to $ 3.63 to $10.16 to
exercised during the year $10.16 $10.16 $10.16
Exercisable options held at
December 31 84,330 97,500 83,289
Exercise price range of $ 6.45 to $ 3.63 to $ 3.63 to
exercisable options $13.50 $13.50 $13.50
The Company also has reserved 299,313 common shares at December 31,
1995 for issuance to key employees under a 1993 Stock Option Plan.
Options are granted at a price not less than market value on the
date of the grant and become exercisable over a period of up to ten
years, after which they expire. The following is a summary of
activity under the 1993 Stock Option Plan.
<P25>
Year ended December 31,
1995 1994 1993
Options held by employees
at December 31 34,163 12,633 2,250
Exercise price range on $13.67 to $13.67 to $13.67
options held at December 31 $18.25 $14.50
Number of options exercised
during the year 500 187 0
Price range of options $14.38 to $13.67 to N/A
exercised during the year $14.38 $13.67
Exercisable options held at
December 31 2,463 375 0
Exercise price range of $13.67 to $13.67 to N/A
exercisable options $14.50 $13.67
The Company also had a 1985 Employee Stock Purchase Plan. No
additional shares may be issued under the 1985 Plan. The following
is a summary of shares issued under this plan:
1985 Plan
1995 1994 1993
Number of shares 14,548 34,048 23,380
Average price per share $13.58 $12.80 $10.62
The 1985 Plan was superseded by the 1995 Employee Stock Purchase
Plan, approved by the shareholders at the 1995 Annual Meeting and
effective June 1, 1995. Employees may purchase common shares of the
Company at 85% of market price. In 1995, 22,175 shares were issued
under the 1995 Plan at an average price per share of $14.79. At
December 31, 1995, 377,825 shares remain unissued in the 1995 Plan.
Desalination Systems, Inc. (DSI), a pooled company (Note 2), has a
stock option plan for which 386,298 equivalent shares of the
Company's common stock are reserved. Options issued under the plan
vest in varying periods of up to 5 years and expire on various dates
through March 2003. The following is a summary of activity under
the plan. No additional options can be granted under the DSI plan.
<P26>
Year ended December 31,
1995 1994 1993
Options held by employees
at December 31 371,841 386,248 229,142
Exercise price range on $3.18 to $3.18 to $3.18 to
options held at December 31 $6.94 $6.94 $6.94
Number of options exercised
during the year 14,407 - -
Price range of options
exercised during the year $3.47 - -
Exercisable options held at
December 31 351,672 354,553 185,921
Exercise price range of $3.18 to $3.18 to $3.18 to
exercisable options $6.94 $6.94 $6.94
The Company had 500,000 authorized and unissued shares of preferred
stock at December 31, 1995 and 1994.
In 1993, the Company granted a director an option to purchase
45,000 shares of common stock at an exercise price of $12.33 per
share. This option vests over a five-year period.
In 1995, the Board of Directors adopted a 1995 Director Stock Option
Plan. The plan provides that each director of the Company shall
automatically receive, as of the date of each Annual Meeting of
Shareholders, a non-qualified option to purchase 3,000 shares of the
Company's common stock. The options have a ten year term and are
exercisable one year after the grant date at an exercise price equal
to the fair market value of the shares on the grant date. In 1995,
options to purchase 18,000 shares at a price of $17.13 were issued
under this plan. No options were exercisable at December 31, 1995.
<P27>
11. Income taxes
Income tax expense consists of:
Year ended December 31,
1995 1994 1993
Current:
Federal $4,219 $3,520 $3,292
State 429 370 282
Foreign 372 156 (250)
Deferred:
Depreciation 144 (204) (129)
Valuation allowance adjustment (197) 0 0
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals 314 (223) 10
Discontinued operations 228 350 524
Other (555) (161) (193)
$4,954 $3,808 $3,536
Cash payments for income taxes were $5,382, $3,195, and $3,700 for
1995, 1994, and 1993, respectively.
<P28>
A reconciliation of the income taxes computed at the Federal
statutory rate to the Company's income tax expense is as follows:
Year ended December 31,
1995 1994 1993
Taxes at federal rate (35% in $5,892 $4,992 $4,362
1995 and 1994, and 34% in 1993)
Increase (decrease) resulting from:
Valuation allowance adjustment (471) (608) (350)
State taxes, net of Federal tax
benefit 201 231 81
Foreign Sales Corp. benefit (248) (223) (243)
Tax credits (273) (312) (265)
Tax exempt interest/dividend
deduction (200) (193) (176)
Effect of foreign affiliates with
different tax rates or net losses 245 (324) (446)
Nondeductibility of merger costs - - 363
Other (192) 245 210
$4,954 $3,808 $3,536
During 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes," which requires the Company to adjust its deferred tax
assets and liabilities to reflect current tax rates. Autotrol
Corporation and its subsidiaries adopted SFAS 109 in 1993, prior to
the merger of Osmonics, Inc. and Autotrol Corporation. As a result
of the adoption of SFAS 109, Autotrol Corp. increased its current
deferred tax assets from zero to $4,328 and its long-term deferred
tax assets from zero to $14. These increases in deferred tax assets
were accompanied by increases in offsetting valuation reserves for
the same amounts, thus creating no increase or decrease in income
for the year ending December 31, 1993.
As a result of the merger between Osmonics, Inc., and Autotrol Corp.
in 1993, value was created for the deferred tax assets of Autotrol
Corp., due to the deductibility of Autotrol expenses on future
consolidated tax returns. This increased Autotrol Corp.'s equity
value by $2,081 above its previously stated book value prior to the
merger. The combination of adopting SFAS 109, and the merger in
1993, resulted in increased tax expense from continuing operations
for Autotrol Corporation of $384 for the year ended December 31,
1993.
<P29>
12. Deferred Tax Assets and Liabilities
Temporary differences which give rise to Deferred Tax Assets and
Liabilities are as follows as of December 31:
1995 1994
Current assets:
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals $3,863 $3,699
Inventory costs capitalized for tax 363 179
Net operating loss and credit
carryforwards 61 335
Other (16) (3)
Less valuation allowance - (525)
Total current deferred assets $4,271 $3,685
Noncurrent liabilities:
Depreciation $2,641 $2,562
Unrealized gain on marketable
securities 2,264 566
Investment in business transferred
under contractual arrangement (334) (306)
Other 415 (48)
Total non-current deferred
tax liabilities $4,986 $2,774
The Company had outstanding net operating loss carryforwards and tax
credit carryforwards of $61 and $633 at December 31, 1995 and 1994,
respectively. The carryforwards will expire in the years of 2008 to
2009.
The valuation reserve decreased by $527 to $0 during the year ended
December 31, 1995. This decrease was due to the use of net
operating loss carryforwards and credits during the year, as offsets
against taxable income, and to the determination that the remaining
deferred tax assets are more likely than not to confer future tax
benefits to the Company. The carryforwards outstanding at December
31, 1994 have been fully offset by valuation reserves.
<P30>
13. Sales and Segment Information
All continuing operations for which geographic data is presented
below are in one principal industry (design, manufacture and
marketing of machines, systems, and components used in the
processing of fluids).
1995 1994 1993
Sales to unaffiliated customers from:
United States $116,964 $100,632 $ 96,381
Foreign operations 13,819 12,276 11,831
Transfers from (to) geographic areas:
United States 7,936 6,696 7,139
Foreign operations (7,936) (6,699) (7,139)
$130,783 $112,908 $108,212
Pretax income from continuing operations:
United States $ 16,190 $ 12,950 $ 12,311
Foreign operations 643 1,312 519
$ 16,833 $ 14,262 $ 12,830
Identifiable assets:
United States $136,672 $103,184 $ 87,443
Foreign operations 8,011 7,531 9,369
$144,683 $110,715 $ 96,812
NOTE: Transfers are made at market value.
Sales by United States operations to unaffiliated customers in
foreign geographic areas are as follows:
Year ended December 31,
1995 1994 1993
Asia/Pacific $10,915 $ 8,187 $ 7,403
Europe 7,798 7,853 6,044
Rest of the World 9,641 7,841 9,478
$28,354 $23,881 $22,925
Total international sales for the Company were as follows:
1995 - $42,173; 1994 - $36,157; and 1993 - $34,756.
<P31>
14. Commitments and Contingencies
The Company leases facilities for sales, service or manufacturing
purposes in Minnesota, Wisconsin, Massachusetts, California, Iowa,
Arizona, Switzerland, Hong Kong, Japan, Singapore, Indonesia, and
Thailand.
Future minimum lease payments on all operating leases of $3,715 are
as follows: 1996 - $1,254; 1997 - $733; 1998 - $500; 1999 - $281;
2000 - $256; and beyond 2000 - $727. Rent expense for the past
three years was: 1995 - $1,718; 1994 - $1,851; and 1993 - $1,995.
The Company is involved in certain legal actions arising in the
ordinary course of business. In the opinion of management, based on
the advice of legal counsel, such litigation and claims will be
resolved without a material effect on the Company's financial
position or results of operations.
The Company may be required to make additional payments of up to
$2,000 over the period ending December 1998, contingent upon the
sales and gross margins of Western Filter Co.
15. Stock Split
On February 18, 1994, the Company approved a three-for-two stock
split in the form of a 50% stock dividend for shareholders of record
March 4, 1994. All share and per share amounts have been restated
to reflect the stock split.
16. Employee Benefit Plans
The Company has a noncontributory discretionary profit sharing plan
covering certain employees meeting age and length of service
requirements. The Company contributes annually to the plan an
amount established at the discretion of the Board of Directors.
Total expense recognized by the Company under these plans amounted
to $996, $1,077, and $1,115 in 1995, 1994, and 1993, respectively.
<P32>
<TABLE>
OSMONICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Years Ended December 31, 1995, 1994 and 1993
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance Charged Charged Balance
at to to at
Beginning Cost and Other End of
Description of Period Expensed Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Current Operations:
Allowance for Doubtful Accounts $1,329 $ 80 $109(F3) $ 341(F1) $1,177
Warranty and Start-up Reserve $1,981 $1,406 $1,519(F2) $1,868
Discontinued Operations:
Allowance for Doubtful Accounts $ 46 $ 46(F1) $ 0
Warranty Reserve $1,961 $ 4(F2) $1,957
Reserve for Discontinued Operations $ 127 $ 127 $ 0
Year Ended December 31, 1994:
Current Operations:
Allowance for Doubtful Accounts $1,276 $ 134 $ 81(F1) $1,329
Warranty and Start-up Reserve $1,996 $1,350 $1,365(F2) $1,981
Discontinued Operations:
Allowance for Doubtful Accounts $ 87 $ 41(F1) $ 46
Warranty Reserve $1,972 $ 10(F2) $1,961
Reserve for Discontinued Operations $ 240 $ 113 $ 127
Year Ended December 31, 1993:
Current Operations:
Allowance for Doubtful Accounts $ 803 $ 556 $ 83(F1) $1,276
Warranty and Start-up Reserve $1,901 $1,257 $1,162(F2) $1,996
Discontinued Operations:
Allowance for Doubtful Accounts $ 149 $ 62(F1) $ 87
Warranty Reserve $2,134 $ 162(F2) $1,972
Reserve for Discontinued Operations $ 549 $ 309 $ 240
<FN>
<F1>
Uncollectible accounts charged against allowance.
<F2>
Actual warranty claims and start-up costs charged against reserve.
<F3>
Addition due to acquisition.
</FN>
</TABLE>
<P33>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 23 - Consent of Deloitte & Touche, LLP
Exhibit 27 - Financial Data Schedule
(b) Form 8-K was filed on July 25, 1996, reporting on Items 2
and 7. The 8-K reported on Financial Statements
previously reported on the S-3 Registration Statement,
File Number 33-05029.
<P34>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: October 25, 1996
OSMONICS, INC.
(Registrant)
/s/ L. Lee Runzheimer
L. Lee Runzheimer
Chief Financial Officer
/s/ Howard W. Dicke
Howard W. Dicke
Treasurer and Vice President
Corporate Development
/s/ D. Dean Spatz
D. Dean Spatz
Chief Executive Officer
INDEPENDENT AUDITORS' CONSENT
Osmonics, Inc.
We consent to the incorporation by reference in Registration Statements
No. 33-25228 and No. 33-537 of Osmonics, Inc. on Forms S-3 and S-8 of
our report dated October 22, 1996 appearing in this Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, which includes
in Item 5, the consolidatred balance sheet of Osmonics, Inc. as of
December 31, 1995 and 1994, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995 which have been
adjusted to reflect the pooling of interest of Osmonics, Inc. and Desalination
Systems.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
October 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-Q for the quarter ended September 30, 1996, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2344
<SECURITIES> 21237
<RECEIVABLES> 24789
<ALLOWANCES> 967
<INVENTORY> 32639
<CURRENT-ASSETS> 88554
<PP&E> 82887
<DEPRECIATION> 33506
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0
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