SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
5951 Clearwater Drive, Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(612) 933-2277
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, par value $0.01 per share New York Stock Exchange
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
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 the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [X].
<P2>
As of March 3, 1997, 14,210,139 Common Shares were outstanding.
The aggregate market value of the Common Shares held by non-affiliates
of the Registrant on such date (based upon the closing price of such
shares on the New York Stock Exchange on March 3, 1997) was
$208,715,715.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year
ended December 31, 1996 (the "Annual Report to Shareholders"), are
incorporated by reference into Parts II and IV. Portions of the
definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on May 14, 1997 (the "Proxy Statement"), and to be filed within
120 days after the Registrant's fiscal year ended December 31, 1996, are
incorporated by reference into Part III.
<P3>
PART I
ITEM 1. BUSINESS
Osmonics, Inc. and its wholly-owned subsidiaries (the "Company")
design, manufacture and market machines, systems and components used in
the processing and handling of fluids. The Company was founded in 1969
and manufactures replaceable, semi-permeable membranes and other filter
media for use in fluid separation and filtration. The Company's
processing equipment employs crossflow filtration (including reverse
osmosis, nanofiltration, ultrafiltration and microfiltration), normal
filtration (including microfiltration and particle filtration),
coalescing filtration, ion exchange, clarification, chromatography,
ozonation and distillation. The Company's fluid handling equipment
includes centrifugal, diaphragm and bellows pumps; electronic
controllers to operate precision valves for water conditioning; flow
control and measuring devices and instrumentation; and specialty holders
and devices for retaining its membranes and filter media.
Crossflow, normal and coalescing filtration are precision
processes in which a semi-permeable membrane or other filter material
separates a fluid's components. Separation is accomplished by applying
pressure to a fluid in order to cause selective passage of some
components of the fluid through the membrane or filter media. Ion
exchange and chromatography are quasi-filtration processes in which
specialized plastic beads are used to selectively remove ionized or
charged particles from a fluid. The fluid is pressurized and passes
through a bed of the plastic beads in a normal filtration mode.
Distillation is the condensation of steam from boiling water to produce
ultrapure water. Ozone generation equipment uses electricity to develop
a corona discharge which produces ozone, a strong oxidant used in the
purification of water and other fluids.
The Company's processing products are used in fractionation,
preferential separation, conditioning and purification in connection
with such processes as purification of water and industrial solutions,
dewatering and recycling of commercial and industrial fluids, pollution
control and seawater desalting. The Company's principal domestic and
international markets, from which it derives more than 50% of its sales,
include the electronics, potable water, health care, biotechnology, food
and beverage, chemical processing and power generation industries.
Filtration processes cover a broad spectrum ranging from those
which separate discrete molecules and ions to those which separate
particles visible to the naked eye. Historically, the Company
specialized in products utilizing crossflow filtration processes
designed to separate particles in the molecular range. Through
acquisitions and internal product developments, the Company now has a
full line of filtration products including depth cartridge filters for
particle filtration and pleated membrane cartridge filters for
microfiltration. The filtration media and membrane is produced
primarily from polymers; however, inorganic membranes and filters of
metal and ceramic are also manufactured. In addition, the Company
manufactures housings to contain the filters. The crossflow filter
membrane elements, and the microfilter and depth filter cartridges are
replaceable while the housings are a permanent fixture in the fluid
processing system.
<P4>
To provide a complete line of products for the production of pure
water, the Company manufactures distillation equipment, both single-
effect and more energy efficient multi-effect. In addition,
deionization and softening equipment in both laboratory size and large
scale is manufactured in multiple locations.
In June 1989, the Company acquired Ozone Research & Equipment
Corporation of Phoenix, Arizona. Ozone Research was founded in 1957 and
is a pioneer in the manufacture of ozone generation equipment for the
purification of water and the testing of elastomeric materials.
In November 1989, the Company acquired certain assets for the
manufacture and sale of MACE flow control and pumping products to
increase its fluid handling offerings. MACE products are made from
Teflon PTFE, the most chemically stable polymer available, and are used
to handle ultrapure and aggressive chemicals.
In December 1990, the Company acquired certain assets of the
FASTEK Division of Eastman Kodak for the production of reverse osmosis
membrane, home reverse osmosis membrane elements, a rolled filter
product, and a blown microfiber filter cartridge product. This
Syracuse, New York facility and manufacturing equipment provides the
Company with added capacity and capability and gives the Company three
sites for manufacturing membrane and membrane elements.
In October 1993, the Company acquired Autotrol Corporation through
a pooling-of-interests, stock-for-stock transaction. Autotrol was
founded in 1962 and is a leader in the manufacture of controllers for
water softening and filtration equipment. In addition, Autotrol
manufactures other fluid control and measuring devices such as a
totalizing flow meter and dosing system to assure proper treatment of
cooling tower water. Most of Autotrol's products are sold to OEM's who
then use them as a component in a water conditioning device which is
then sold to consumers.
In November 1994, the Company acquired substantially all of the
assets of Lakewood Instruments of Phoenix, Arizona. This acquisition
adds a line of instruments, sensors and analyzers used in the
measurement of fluid characteristics in the chemical water treatment and
pure water industries.
In October 1995, the Company acquired the assets and operations of
Western Filter Company, Denver, Colorado, an important supplier to the
beverage and bottled water industry for over 50 years. Western Filter
has extensive experience in providing the beverage market with
conventional water treatment technologies and membrane water treatment.
Western Filter also has experience in coagulation clarification
pretreatment technologies. These technologies will be utilized with
Osmonics' existing distribution channels, allowing the Company to expand
capability in the international markets where conventional water
treatment is required, as well as complement municipal sales in the
United States where ozone disinfection is becoming accepted.
In July 1996, the Company acquired Desalination Systems, Inc.
("Desal") through a pooling-of-interests, stock-for-stock transaction.
Desal manufactures crossflow filtration membrane and membrane elements.
<P5>
Desal has manufacturing facilities in Vista, California, and markets its
products worldwide. Desal's products extend the range of membranes and
membrane elements previously offered by the Company. The acquisition
also extends the Company's distribution network for such products.
In February 1997, the Company acquired AquaMatic, Inc. of
Rockford, Illinois. AquaMatic, started in 1930, offers a line of
specialty valves and controllers for the water conditioning market,
which will be sold through existing Osmonics distribution channels.
The Company focuses the marketing of its products through two
sales groups:
1. Large equipment and systems.
2. Components and product sales.
Both of these sales groups are supported by Application Engineers and
market support personnel.
Products
Membranes and Membrane Elements: The Company markets polymer
membranes for crossflow applications sold in replaceable elements. Most
membranes are produced in a spiral-wound configuration ranging in
diameter from two to twelve inches and in length from twelve to sixty
inches.
Membrane elements are typically replaced every 6 to 60 months,
depending upon the severity of the application. The Company
manufactures the membrane material and membrane elements used in its own
systems, and also manufactures membrane elements for other original
equipment manufacturers (OEM's) who include them as component parts in
their products.
The Company's membranes are used in many bioengineering processes
such as the production of high fructose corn sugar, enzyme purification,
and purification of pharmaceuticals produced by biological processes.
Other uses include water purification applications in hemodialysis,
semiconductor manufacturing, production of pure water for beverages,
production of ultrapure pharmaceutical and boiler feed water, industrial
water purification and waste removal for pollution control compliance.
In addition, the Company sells its home reverse osmosis (HRO) membrane
elements to OEM's who package them into systems for use in homes,
offices and retail vending establishments to produce purified drinking
water. The Company is registered with the United States Food and Drug
Administration for the manufacture and sale of certain membrane elements
used in biological preparations.
Beginning in December 1985, the Company funded the start-up of
Poretics Corporation for the development, manufacture, and sale of
polycarbonate track-etched membrane and the hardware for use in a
variety of laboratory and medical diagnostic applications. The Company
also manufactures silver microfiltration membranes and ceramic
microfilters used in the laboratory. Use of the silver membrane in
normal filtration will neither kill bacteria nor cause them to grow,
<P6>
permitting use of this separation process to count bacteria by
collecting them on the membrane. Numerous applications exist for the
Company's microfilters because of unique features, including use in air
monitoring and in laboratory procedures for cancer and other research.
Filters: The Company markets replaceable depth cartridge filters,
pleated cartridge filters, and rolled cartridge filters. The depth
cartridge filters consist of a matrix of thermally-bonded polypropylene
blown microfibers. The structure of these fibers allows particles to be
trapped throughout the depth of the cartridge filter rather than simply
on its surface, enhancing the efficiency of the filtration process. The
pleated cartridge filters use either a specially processed sheet of
blown polypropylene microfibers or microporous membranes and use surface
filtration to act as a very selective filter. Rolled cartridge filters
use media similar to pleated filters in a semicrossflow configuration,
for enhanced filtration in specialized applications. Cartridge filters
are manufactured in a range of pore sizes and particulate retention
ratings. As a result of retention of particles in the filters,
cartridge filters are typically replaced at intervals of eight hours to
four weeks.
The Company markets ceramic cartridge filters for microfiltration
and particulate filtration. The ceramic cartridge filters operate
similar to the pleated cartridge filters in that particles are trapped
on the surface. Ceramic cartridge filters are used to sterilize
pharmaceutical solutions and are used in laboratory applications, where
many analytic and diagnostic procedures require purification or
sterilization.
The Company also markets separation elements and equipment used in
coalescing filtration, a process distinct from crossflow and normal
filtration, which separates different liquids based on their density and
adsorption differences. This process can reduce concentrations of
contaminants of several percent to only a few parts per million.
Applications of coalescing filtration include removal of contaminants
from compressed air and gas lines, dewatering of solvents and jet fuel,
and removal of trace oil from waste water prior to disposal.
Ion Exchange and Chromatography Equipment: The Company markets
equipment using ion exchange technology. Ion exchange plastic beads and
selected polymer gels are utilized to preferentially adsorb ionized and
charged material from a fluid stream. After the ion exchange beads have
adsorbed a certain amount of material, they must be regenerated,
typically with acid or caustic, or in the case of chromatography with a
selected fluid to strip off the adsorbed material. The most used ion
exchange process is for water softening where the ions of calcium and
magnesium are replaced with sodium to reduce soap usage, improve boiler
operation and improve cleaning. The Company is a leader in the
manufacture of the controllers and valves used to effect softening.
Another ion exchange application is to polish ultrapure water for
electronics manufacture and high pressure boiler feed. Chromatography
is primarily used to purify biotech fluids and food proteins.
Distillation Equipment: The Company markets distillation and
related water purification equipment used primarily in the laboratory
and pharmaceutical industries. Distillation, which involves the
<P7>
condensation of steam from boiling water, was one of the first
technologies used to purify water. The Company's distillation product
lines range from laboratory stills to elaborate 2000-gallon-per-hour
multi-stage purifiers.
Ozonation Equipment: The Company markets equipment to generate
ozone from electricity using corona discharge. Ozone is becoming
increasingly important as a bactericide and water purifier because it
kills bacteria, virus and giardia cysts 10 to 300 times faster than
chlorine.
Ozone is also effective in oxidizing trace organic materials in
water which are precursors of the carcinogenic trihalomethanes. Ozone
can also be used to purify solvent-contaminated groundwater and is often
used to de-color water and waste water.
Pumps, Valves and Flow Control Devices: The Company markets a
line of multi-stage centrifugal pumps. These pumps were developed by
the Company to meet the need for dependable high pressure pumps and are
available in 60 standard sizes with flows ranging from 3 gallons per
minute to 500 gallons per minute and pressure capabilities from
25 pounds per square inch (psi) to 500 psi. The pumps are capable of
operating in series to obtain 1000 psi for seawater desalting and other
high pressure applications.
The Company markets two types of chemical-resistant, air-operated
pumps used in both the chemical and electronics industries. These
unique pumps are constructed of Teflon PTFE or polypropylene materials
making them resistant to acids, caustics, solvents and numerous other
aggressive chemicals.
The Company markets a dry chemical feeder system to sanitize well
water and reduce iron and sulfur odors, and also markets the pellets
used in the feeder.
The Company markets totalizing flow meters and electronic
controllers made of corrosion resistant Noryl plastic, as well as a line
of Teflon PTFE fluid control products including valves, fittings and
flow meters used in the electronics, pharmaceutical and chemical
industries. The PTFE is molded and machined into unique shapes to
provide extremely chemical resistant high temperature parts.
The acquisition of Lakewood Instruments brings to the Company a
line of analog and digital instrumentation which strengthens and
broadens corporate offerings to the chemical water treatment and high
purity water industries. Lakewood manufactures conductivity, pH, ORP,
chlorine and specific ion sensors, analyzers and controllers, which
offer unique synergies with Autotrol's flow-based controls, enabling
chemical water treatment companies to offer a comprehensive line of
products for cooling tower and boiler water treatment from a single
source. Lakewood is also developing new local operating network (LON)
communications and data acquisition capabilities, which allow networking
multiple sensors to an individual control/display device using standard
telephone cable.
<P8>
Machines and Systems: The crossflow and normal filtration
machines manufactured by the Company are comprised of one or more
membrane elements, cartridge filters, pumps, valves, controls,
transformers, heat exchangers, pipes and a steel frame on which the
components are mounted. The size and number of membrane elements and
filters can vary greatly. Pumps, pipes and frames of various sizes can
be combined and configured to accommodate the membrane elements or
filters required for various fluid handling or separation tasks.
The systems sold by the Company are comprised of one or more
machines or pieces of equipment designed and manufactured by the Company
as well as ancillary equipment, such as prefilters and postfilters, ion
exchange equipment, ozonator equipment, additional pumps, heat
exchangers and holding tanks. The type, size and number of machines and
the ancillary equipment included in a system will vary with the nature
and size of the fluid separation task.
The Company is registered with the United States Food & Drug
Administration as a Class II medical device manufacturer for certain of
its reverse osmosis machines, as is required to supply water
purification equipment for use in artificial kidney dialysis.
The following table shows the percentage of net sales during the
past five years attributable to the Company's fluid processing and
handling equipment compared to its replaceable components:
Year Ended Replaceable
December 31 Equipment <F1> Components <F2>
1996 49% 51%
1995 48% 52%
1994 51% 49%
1993 49% 51%
1992 50% 50%
F1
Equipment includes: (i) membrane elements, filter elements, ion
exchange resin and filter cartridges sold with machines, (ii)
pumps, controls, instruments, valves, fittings, chemicals, and
other ancillary equipment sold with systems and (iii) pumps,
control valves, instruments and machines sold separately.
F2
Replaceable components include only those membrane elements,
coalescer and dielectric elements, cartridges, membranes, filters
and other components sold by the Company as replacements for its
machines, systems and products, or as replaceable components for
products manufactured by others. They do not include those
components originally sold as parts of new machines or systems
manufactured by the Company. Sales of components and replacement
parts provide the Company with a relatively stable and continuing
source of revenue.
Sales and Marketing
The Company markets its custom machines and systems through its
direct sales force. The Company's standard products are marketed to a
network of independent distributors with the help of Company district
managers. These distributors provide worldwide installation service and
<P9>
stocking of a wide range of the Company's standard products. Some sales
are made directly to certain of the Company's largest customers and to
other manufacturers of filtration equipment and systems.
The Company's marketing activities include appearances at trade
shows, direct mail campaigns, advertisements in professional and trade
journals and appearances before professional organizations. The Company
participates with its customers in planning the systems in which its
products are to be used, particularly if new applications are involved.
In some cases, the sale of a system designed for a particular customer
may result from an engineering and service relationship which has
extended over several years.
Research and Development
Research and development activities emphasize product development
and applied research, with the goal of developing proprietary products.
Such expenditures totaled $10,937,000 in 1996, $9,399,000 in 1995, and
$8,989,000 in 1994. The Company anticipates that research and
development expenditures in 1997 will be similar to the 1996 level as a
percent of sales.
Patents and Trademarks
The Company has been granted domestic and certain foreign
trademarks on numerous product names, and on its logo-types. The
Company holds domestic and foreign patents on certain of its filter
media, filters, controlling valves, machine designs and other products.
Although the Company believes that its patents have value, the Company's
business is not dependent on any patent or group of related patents.
The Company considers its technological position to be based primarily
on its proprietary manufacturing methods, innovative engineering and
marketing expertise.
Employees
As of December 31, 1996, the Company employed 1,402 persons,
including 247 holding engineering or technical degrees.
Competition
The Company experiences competition from a variety of sources with
respect to virtually all of its products, although the Company knows of
no single entity that competes with it across the full range of its
products and systems. Competition in the markets served by the Company
is based on a number of factors, which may include price, technology,
applications experience, know-how, availability of financing,
reputation, product warranties, reliability, service and distribution.
With respect to the Company's membrane and related water treatment
equipment business activity, there are a number of companies, including
several sizable chemical companies, that manufacture membranes, but not
equipment. There are numerous smaller companies, primarily fabricators,
that build water treatment and desalination equipment, but which
generally do not have their own proprietary membrane technology. A
limited number of companies manufacture both membranes and equipment.
<P10>
In ozone and distillation equipment, there are both large and small
competitors with no single dominant competitor. In water softener
controls and valves, the Company has three primary and numerous
secondary competitors. Some competitors sell only controller valves and
some sell complete softeners. The Company has numerous competitors in
its conventional water treatment and filtration products business
activities.
With respect to the Company's disposable filter and lab products,
two companies, Pall and Millipore, dominate the industry with several
smaller companies competing in selected product lines.
With respect to the Company's pump and fluid handling products,
there are numerous competitors of larger size and with greater resources
than the Company. Some competitors have significantly broader product
lines than the Company.
The Company is unable to state with certainty its relative market
position in all aspects of its business. Many of its competitors have
financial and other resources greater than those of the Company.
Raw Materials
The principal raw materials used by the Company are various
plastic materials including polyvinyl chloride, polypropylene, Noryl
PPO, cellulose acetate, polycarbonate, polyester, polysulfone, and PTFE;
ceramic and glass materials, stainless steel, steel, brass, copper,
titanium, silver and various synthetic materials, all of which are
normally available from sources within the continental United States.
Most raw materials used by the Company are available from multiple
sources of supply. A limited number of materials are proprietary
products of major chemical companies which, if not available, would have
a material effect on the Company's sales and profits. The Company
believes it could find substitutes for these materials if they should
become unavailable, but has no assurance that the substitute would
perform as well or be priced as favorably.
To date, the Company has experienced no difficulty in securing any
of its needed raw materials and components.
Customers
No one customer accounted for 10 percent or more of the Company's
consolidated revenue in 1996, 1995 or 1994.
Backlog
The dollar amount of the Company's backlog of orders considered to
be firm at December 31, 1996, was $27.9 million. The comparable backlog
at December 31, 1995, was $20.6 million. The Company expects that
nearly all orders included in the backlog at December 31, 1996, will be
filled during the 1997 fiscal year. The Company does not believe that
its backlog at any time is necessarily indicative of annual sales. The
business of the Company is not subject to significant seasonal
variations.
<P11>
Governmental Regulation
Certain applications of the Company's reverse osmosis and
ultrafiltration products and distillation equipment are subject to
governmental regulation. Systems used for fractionation of cheese whey
for human consumption are subject to regulation by the United States
Department of Agriculture. Reverse osmosis, ultrafiltration and
distillation systems used in medical applications, particularly the
systems used in artificial kidney dialysis equipment and pharmaceutical
water for injection, are subject to regulation by the United States Food
and Drug Administration. Ultrafiltration and microfiltration products
used for biological separations are subject to regulation by the United
States Food and Drug Administration.
To date, compliance with federal, state and local provisions
relating to the protection of the environment has had no material effect
upon the capital expenditures, earnings or competitive position of the
Company.
Foreign Operations
Substantially all of the Company's operations and assets are
located in the United States. The Company has sales offices and
distribution facilities in France, Thailand, Switzerland, Hong Kong,
Japan, Singapore and China. Limited assembly is conducted in Europe and
Asia. The profitability of domestic and foreign sales is substantially
equal. Sales to Canada are made on the same trade terms as are
available to U.S. customers.
Large export sales are primarily made on the basis of confirmed
irrevocable letters of credit or time drafts to selected customers in
U.S. dollars. Therefore, the Company believes that problems of currency
fluctuation or political and economic stability do not constitute
substantial risks. See Note 11 of Notes to Consolidated Financial
Statements for a breakdown of the Company's foreign operations and
export sales by geographic area.
ITEM 2. PROPERTIES
The executive offices and principal manufacturing facilities of
the Company are located in Minnetonka, Minnesota, a suburb of
Minneapolis.
<P12>
A summary of the Company's main operating facilities is as
follows:
Location Status Size Function
Minnetonka, MN Owned 309,600 sq ft Sales, Manufacturing,
Warehouse
Milwaukee, WI Owned 103,700 sq ft Sales, Manufacturing,
Warehouse
Phoenix, AZ Owned 57,600 sq ft Sales, Manufacturing,
Warehouse
Vista, CA Owned 110,000 sq ft Sales, Manufacturing,
Warehouse
Escondido, CA Leased 30,000 sq ft Manufacturing
Rockland, MA Leased 38,200 sq ft Sales, Manufacturing,
Warehouse
Syracuse, NY Owned 48,500 sq ft Sales, Manufacturing,
Warehouse
Upland, CA Leased 22,000 sq ft Sales, Manufacturing,
Warehouse
Denver, CO Owned 20,700 sq ft Sales, Manufacturing,
Warehouse
Ft. Lauderdale, FL Leased 20,000 sq ft Sales, Warehouse
Livermore, CA Leased 6,000 sq ft Sales, Manufacturing,
Warehouse
Emmetsburg, IA Leased 8,800 sq ft Manufacturing, Warehouse
Bryan, TX Owned 2,500 sq ft Manufacturing, Warehouse
Le Mee, France Owned 18,300 sq ft Sales, Manufacturing,
Warehouse
Neuchatel, Leased 4,000 sq ft Sales, Warehouse
Switzerland
Total Owned 670,900 sq ft
Total Leased 129,000 sq ft
Total Owned and Leased 799,900 sq ft
<P13>
Certain debts of the Company are collateralized by real property
of the Company.
The current manufacturing facilities are adequate for
intermediate-term operations. In addition, the Company leases space in
Thailand, Japan, Hong Kong, Switzerland and Singapore that are used
primarily for sales activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in several lawsuits incidental
to its business. Management does not believe that any of the lawsuits
will have a material adverse effect on the Company's financial position
or results of operations.
Autotrol's rotating biological contactor assemblies (the "RBC's")
were a product which Autotrol discontinued producing and selling in
1982. Currently there are no performance claims pending against the
Company with respect to the RBC's, and, as of December 31, 1996, the
Company has reserves to cover potential future liability with respect to
the RBC's.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange
under the symbol "OSM".
Shareholders of record on March 3, 1997 numbered 2,630. The
Company estimates that an additional 2,500 shareholders own stock held for
their account at brokerage firms and financial institutions.
1996 1995
Quarterly Prices<F1> High Low High Low
First Quarter 20 3/8 18 1/4 16 5/8 13 1/4
Second Quarter 24 7/8 18 1/2 18 1/4 15 1/2
Third Quarter 22 3/4 18 1/4 17 7/8 15 1/2
Fourth Quarter 22 1/8 18 5/8 21 1/4 16 5/8
F1 Adjusted for splits.
"Notes to Consolidated Financial Statements," pages 19-23 of the
Annual Report to Shareholders, are incorporated herein by reference.
As of March 14, 1997 there were 2,650 shareholders of record.
The Company has not paid cash dividends on its common shares. The
Board of Directors currently intends to retain its earnings for the
expansion of the Company's business. The Company has issued promissory
notes which contain a covenant limiting the payment of dividends to
shareholders. At December 31, 1996, approximately $33,583,000 of retained
earnings was restricted under this covenant.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data," page 29 of the Annual Report to
Shareholders, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," pages 24 and 25 of the Annual Report to
Shareholders, is incorporated herein by reference.
<P14>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial information of the Registrant
and its subsidiaries, included in the Annual Report to Shareholders, is
incorporated herein by reference:
Page(s)
Consolidated Statements of Income . . . . . . 16
Consolidated Balance Sheets . . . . . . . . . 17
Consolidated Statements of Cash Flows . . . . 18
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . 19
Independent Auditors' Report . . . . . . . . 24
Notes to Consolidated Financial Statements . . 19-23
Quarterly Income Data . . . . . . . . . . . . 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
Officer
Name and Age Position with Company Since
D. Dean Spatz (52) President and Chairman 1969
of the Board
Ruth Carol Spatz (52) Secretary 1969
Howard W. Dicke (59) Vice President Human Resources 1978
and Corporate Development,
and Treasurer
L. Lee Runzheimer (54) Chief Financial Officer 1988
James J. Carbonari (55) Vice President Sales & Marketing 1989
Kenneth E. Jondahl (40) Vice President International 1991
Andrew T. Rensink (40) Vice President Technology 1991
All of the executive officers, except Messrs. Jondahl and Rensink,
have been officers of the Company for more than five years. Mr. Jondahl
joined the Company in 1981 as an Application Engineer. Since then he
has served as a Regional Sales Manager, Dairy Market Specialist, General
Manager of Osmonics Asia/Pacific, General Manager of Osmonics Europa,
<P15>
Marketing Manager and International Sales Manager. He was promoted to
Vice President International in April 1991. Mr. Rensink joined the
Company as Vice President Technology in September 1991. Prior to that
he had been a plant manager and manufacturing manager for Mantaline, an
elastomeric extrusion company. Previously he held various management
positions in both engineering and manufacturing in several General
Electric business units. All executive officers are elected annually
by, and serve at the direction of, the Board of Directors.
D. Dean Spatz and Ruth Carol Spatz are husband and wife.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) (1) Financial Statement
The consolidated financial statements of the
Registrant and its subsidiaries, included in the
Annual Report to Shareholders, are incorporated by
reference in Item 8, and are also incorporated herein
by reference.
(a) (2) Financial Statement Schedules
Reports of Independent Public Accountants on
Supplemental Schedules to the Consolidated Financial
Statements.
Valuation and qualifying accounts.
Schedules not listed above have been omitted because
they are either not applicable, not material or the
required information has been given in the financial
statements or in the notes to the financial
statements.
<P16>
(2) Agreement and Plan of Merger among Desalination
Systems, Inc., Osmonics, Inc. and DSI Acquisition
Corp. dated May 17, 1996. (Incorporated herein by
reference to Exhibit 2 to Registration Statement on
Form S-3, File No. 33-05029.)
(3)A. Certificate of Incorporation of the
Registrant, as amended. (Incorporated herein
by reference to Exhibit 3.1 to Registration
Statement on Form S-2, File No. 33-336.)
Certificate of Amendment. (Incorporated
herein by reference to Exhibit (3)A on Form
10-K for fiscal year ended December 31, 1987,
File No. 0-8282.)
B. By-Laws of the Registrant. (Incorporated
herein by reference to Exhibit 3.2 to
Registration Statement on Form S-2, File No.
33-336.)
(4)A. Note Purchase Agreement dated July 12, 1991.
(Incorporated herein by reference to Annual
Report on Form 10-K for fiscal year ended
December 31, 1991.)
(10)A.* 1993 Stock Option Plan and related form of
stock option agreement. (Incorporated herein
by reference to Annex C of the Registrant's
Joint Proxy Statement/Prospectus dated
September 10, 1993.)
B. Stock Option Agreement with Michael L. Snow,
Director. (Incorporated herein by reference
to Annual Report on Form 10-K for fiscal year
ended December 31, 1993.)
C.* 1983 Stock Option Plan and related form of
stock option agreement. (Incorporated herein
by reference to Exhibit 10.2 to Registration
Statement on Form S-2, File No. 33-336.)
D. 1995 Employee Stock Purchase Plan.
(Incorporated herein by reference to the
Registrant's Proxy Statement dated
March 27, 1995.)
E.* 1995 Director Stock Option Plan.
(Incorporated herein by reference to the
Registrant's Proxy Statement dated
March 27, 1995.)
<P17>
* Denotes Executive Compensation Plan.
(13) 1996 Annual Report to Shareholders. (Only
those portions incorporated herein by
reference shall be deemed filed with the
Commission.)
(21) Subsidiaries of the Registrant.
(23) Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended December 31, 1996.
<P18>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OSMONICS, INC.
By /s/ D. Dean Spatz
D. Dean Spatz, President
Dated: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
Signatures Title Date
/s/ L. Lee Runzheimer Chief Financial Officer March 26, 1997
L. Lee Runzheimer (Principal Finance and
Accounting Officer)
/s/ Howard W. Dicke Vice President Human March 26, 1997
Howard W. Dicke Resources and Corporate
Development, and Treasurer
/s/ Ruth Carol Spatz Director March 27, 1997
Ruth Carol Spatz
/s/ Michael L. Snow Director March 18, 1997
Michael L. Snow
/s/ Ralph E. Crump Director March 18, 1997
Ralph E. Crump
/s/ Verity C. Smith Director March 17, 1997
Verity C. Smith
/s/ Charles W. Palmer Director March 17, 1997
Charles W. Palmer
/s/ D. Dean Spatz President, Chairman of March 26, 1997
D. Dean Spatz the Board and Director
(Principal Executive Officer)
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Year ended December 31,
1996 1995 1994
Sales $155,946 $130,783 $112,908
Cost of sales 92,523 74,670 62,503
Gross profit 63,423 56,113 50,405
Operating expenses:
Selling, general and administrative 35,079 31,377 27,967
Research, development and engineering 10,937 9,399 8,989
46,016 40,776 36,956
Income from operations 17,407 15,337 13,449
Other income (expense), net:
Interest income 1,023 1,649 1,543
Interest expense (1,594) (1,565) (878)
Other 3,072 1,412 148
2,501 1,496 813
Income before income taxes 19,908 16,833 14,262
Income taxes (Note 11) 6,441 4,954 3,808
Net income $ 13,467 $ 11,879 $ 10,454
Net income per common and
common equivalent share $ 0.93 $ 0.83 $ 0.74
Weighted average number of common and
common equivalent shares outstanding 14,458,000 14,365,000 14,206,000
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,392 $ 4,729
Marketable securities (Note 3) 19,028 26,307
Trade accounts receivable, net of allowance for doubtful
accounts of $907 in 1996 and $1,177 in 1995 28,200 23,552
Inventories (Note 4) 32,322 28,973
Deferred tax assets (Note 12) 1,559 2,007
Other current assets 2,026 2,181
Total current assets 88,527 87,749
Property and equipment, at cost:
Land and land improvements 5,485 4,558
Buildings 27,158 18,928
Machinery and equipment 50,045 41,592
Construction in progress 3,438 8,009
86,126 73,087
Less accumulated depreciation and amortization (34,332) (30,598)
51,794 42,489
Cash restricted for purchase and construction of
equipment (Note 5) 1,960 2,034
Goodwill, net of accumulated amortization of
$553 in 1996 and $289 in 1995 7,395 7,655
Long-term investments 726 142
Other assets, net of accumulated amortization of
intangible assets of $342 in 1996 and $230 in 1995 1,774 2,350
Total assets $152,176 $142,419
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,511 $ 13,957
Line of credit advances (Note 7) 2,511 1,619
Notes payable and current portion of
long-term debt (Note 9) 4,982 2,192
Accrued compensation and employee benefits 5,254 4,231
Reserve for discontinued operations 1,957 1,957
Other accrued liabilities (Note 8) 7,306 10,099
Total current liabilities 34,521 34,055
Long-term debt (Note 9) 15,900 20,919
Deferred income taxes (Note 12) 3,616 2,722
Other liabilities 196 450
Commitments and contingencies (Note 14)
Shareholders' equity (Note 10):
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1996: 14,193,239 and 1995: 14,086,007 142 141
Capital in excess of par value 23,128 21,805
Retained earnings 71,781 58,314
Unrealized gain on marketable securities (Note 3) 2,864 3,694
Cumulative effect of foreign currency
translation adjustments 28 319
Total shareholders' equity 97,943 84,273
Total liabilities and shareholders' equity $152,176 $142,419
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1996 1995 1994
Cash flows from operations:
Net income $13,467 $11,879 $10,454
Non-cash items included in net income:
Depreciation and amortization 4,874 3,795 3,523
Deferred income taxes 1,849 (71) (231)
Gain on sale of land and investments (3,396) (810) -
Changes in assets and liabilities
(net of business acquisitions):
Reserve for VAT tax - - (1,605)
Accounts receivable (4,648) (4,494) (1,902)
Inventories (3,349) (6,517) (2,617)
Other current assets 155 (727) 1,479
Accounts payable and accrued liabilities (3,216) 5,798 1,074
Reserve for deferred compensation - (432) (78)
Net cash provided (used) by operations 5,736 8,421 10,097
Cash flows from investing activities:
Business acquisitions (net of cash acquired) - (5,380) (673)
Purchase of investments (1,418) (6,633) (17,467)
Maturities and sales of investments 9,570 13,228 11,225
Purchase of property and equipment (15,658) (20,818) (4,212)
Sales of property and equipment 2,535 - -
Other (169) (367) 367
Net cash provided (used) for investing
activities (5,140) (19,970) (10,760)
Cash flows from financing activities:
Notes payable and current debt 882 13,928 1,674
Reduction of long-term debt (2,219) (5,898) (1,365)
Cash restricted for purchase and construction
of equipment 74 (2,034) -
Issuance of common stock 1,324 761 680
Dividends paid by a pooled company - (90) (180)
Net cash provided (used) in financing
activities 61 6,667 809
Effect of exchange rate changes on cash 6 (94) (444)
Increase (decrease) in cash and cash equivalents 663 (4,976) (298)
Cash and cash equivalents - beginning of year 4,729 9,705 10,003
Cash and cash equivalents - end of year $ 5,392 $ 4,729 $ 9,705
<TABLE>
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
Unrealized
Capital Gain on Cumulative
Common Stock in Excess Retained Marketable Translation
Shares Amount Par Value Earnings Securities Adjustments
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 as
previously reported 12,637,473 $126 $20,321 $31,453 - $ 170
Restatement for pooling of
interests 1,298,416 13 45 4,798 - -
____________________________________________________________________________________________________
Balance - January 1, 1994
as restated 13,935,889 139 20,366 36,251 - 170
Net income - - - 10,454 - -
Translation adjustment - - - - - 8
Change in 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 13,999,457 140 21,045 46,525 1,038 178
Net income - - - 11,879 - -
Translation adjustment - - - - - 141
Change in 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
Net income - - - 13,467 - -
Translation adjustment - - - - - (291)
Change in unrealized gain on
marketable securities - - - - (830) -
Employee stock purchase
plans 107,232 1 1,323 - - -
____________________________________________________________________________________________________
Balance - December 31, 1996 14,193,239 $142 $23,128 $71,781 $2,864 $ 28
FIVE-YEAR RESULTS
(In thousands, except per share amounts)
INCOME DATA: (Restated for poolings-of-interests)
Year ended December 31,
1996 1995 1994 1993 1992
Sales $155,946 $130,783 $112,908 $108,212 $99,992
Net income 13,467 11,879 10,454 9,294 4,482(a)
Net income per common
and common
equivalent share $0.93 $0.83 $0.74 $0.66 $0.32(a)
Average shares
outstanding 14,458 14,365 14,206 14,075 14,036
BALANCE SHEET DATA: (Restated for poolings-of-interests)
Total assets $152,176 $142,419 $110,715 $ 96,812 $89,730
Long-term debt 15,900 20,919 14,475 14,532 14,705
________________________________________________________________________________________________________________
</TABLE>
<TABLE>
ELEVEN-YEAR RESULTS
(In thousands, except per share amounts)
<CAPTION>
SUPPLEMENTARY DATA:
These schedules present the prior eleven-year results of the Company as originally reported, before restatement
of prior period data for those acquisitions accounted for as poolings-of-interests, to show the effect of the
Company's strategic acquisition activity.
INCOME DATA: (As Originally Reported)
Year ended December 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $155,946 $111,610 $96,180 $89,043 $50,541 $46,738 $43,553 $36,223 $31,058 $20,464 $15,472
Net income 13,467 11,212 9,955 7,895 4,528<Fa> 3,902 3,714 4,047 2,990 1,151 836
Net income per
common and
common
equivalent
share $0.93 $0.88 $0.79 $0.63 $0.50<Fa> $0.43 $0.40 $0.34 $0.25 $0.10 $0.08
Average shares
outstanding 14,458 12,745 12,668 12,624 9,065 8,999 9,246 11,853 11,820 11,801 10,773
BALANCE SHEET DATA: (As Originally Reported)
Total
assets $152,176 $125,058 $102,035 $88,826 $60,300 $54,931 $54,370 $45,884 $43,430 $37,715 $33,328
Working
capital 54,006 54,224 55,995 45,281 29,471 25,955 21,692 21,117 15,707 13,836 17,660
Long-term
debt 15,900 12,441 14,050 13,913 13,221 13,697 13,761 3,788 3,664 3,753 3,618
Shareholders'
equity 97,943 78,471 63,751 52,070 33,793 28,891 24,720 33,067 28,909 25,598 24,664
<FN>
<Fa>Includes an increase in earnings of $420 ($0.05 per share) as a result of adopting the Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes."
</FN>
</TABLE>
QUARTERLY INCOME DATA
(In thousands, except per share amounts)
Quarterly Income Data - 1996
Quarter Ended
March 31 June 30 September 30 December 31
Sales $39,051 $36,727 $39,493 $40,675
Gross profit 16,024 15,225 16,246 15,928
Net income 3,635 3,061 3,314 3,457
Net income per share $0.25 $0.21 $0.23 $0.24
Quarterly Income Data - 1995
Quarter Ended
March 31 June 30 September 30 December 31
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
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 and instruments, 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 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 repayment 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 Milwaukee Operation which has 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. In accordance with SFAS 121 on impairment of
assets, the carrying values of these intangibles are reviewed
quarterly for impairment. Other intangibles are carried at cost and
amortized using the straight-line method over their estimated lives
of 5 to 20 years.
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.
Certain reclassifications have been made to prior year amounts to
conform with current year presentations.
2. Business Acquisitions
Pending Acquisition
In December 1996, the Company announced an agreement in principle to
acquire AquaMatic, Inc. of Rockford, Illinois. AquaMatic products
will be sold through existing Osmonics distribution channels,
offering a more complete line of specialty valves and controllers
for the water treatment market. Revenues of AquaMatic were less
than $15,000 in 1996 and 1995. The acquisition will be recorded
under the purchase method of Accounting.
Completed Acquisitions
On July 24, 1996, Desalination Systems, Inc. (DSI) merged with the
Company through an exchange of 1,312,827 shares of the Company's
common stock for the Class A common stock and Class B common stock
of DSI. The transaction was accounted for as a pooling-of-
interests. DSI's principal business is the manufacture of membranes
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 six months ended June 30, 1996 and the years ended
December 31, 1995 and 1994 were as follows:
Six Months
ended June 30, Year ended December 31,
1996 1995 1994
Sales:
Osmonics $ 64,405 $111,610 $ 96,180
DSI 11,642 20,348 17,610
Eliminations (269) (1,175) (882)
Combined $ 75,778 $130,783 $112,908
Net income:
Osmonics $ 5,975 $11,212 $ 9,955
DSI 721 667 499
Combined $ 6,696 $11,879 $10,454
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 which
are being amortized on the straight line method over 30 years.
Western Filter products are being 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 1995 and 1994. The purchase method of accounting
was used. 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.
On November 18, 1994, the Company acquired the assets of Lakewood
Instruments, Inc. 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.
The Western Filter, Lakewood, and Poretics minority interest
acquisitions had no significant pro forma effect on the Company's
sales, net income, or net income per share in 1995 or 1994. The
results of operations of Western Filter, Lakewood and Poretics are
included in the consolidated statements of income from the
respective dates of acquisition.
3. Marketable Securities
The Company considers all of its marketable securities available-
for-sale. Marketable securities at December 31, 1996 consisted of
the following:
AmortizedUnrealized Unrealized Fair
Cost Gains (Losses) Value
U.S. government securities
0-5 year maturity $ 3,781 $ 29 $ (49) $ 3,761
6 year or greater maturity 447 0 (10) 437
Municipal bonds
0-5 year maturity 2,836 118 - 2,954
6 year or greater maturity 2,281 134 - 2,415
Corporate debt securities and other
0-5 year maturity 866 - (67) 799
6 year or greater maturity 299 - (3) 296
Equity securities 3,897 4,612 (143) 8,366
Total before tax effect $14,407 4,893 (272) $19,028
Deferred tax effect of
unrealized (gains) losses (1,860) 103
Net unrealized gains (losses) on
marketable securities $3,033 $(169)
Marketable securities at December 31, 1995 consisted of the following:
AmortizedUnrealized Unrealized Fair
Cost Gains (Losses) Value
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 (gains) losses (2,329) 65
Net unrealized gains (losses) on
marketable securities $3,799 $(105)
Market values are based on quoted market prices.
In 1996, proceeds from sales of available-for-sale securities were
$8,068. The net gain on these sales was $2,788, determined on the
specific identification method.
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.
4. Inventories
Inventories consist of the following:
December 31,
1996 1995
Finished goods $ 5,276 $ 4,979
Work in process 9,319 7,759
Raw materials 18,416 16,884
33,011 29,622
Less adjustment to reduce
inventories of $6,016 and $4,728
to last-in, first-out method
(See Note 1) (689) (649)
$32,322 $28,973
5. Restricted Cash
Cash restricted for purchase and construction of equipment at
December 31, 1996 and 1995 represents proceeds received from the
issuer of Industrial Development Revenue Bonds (see Note 9)
restricted to the purchase and construction of property and
equipment used in the Company's operations.
6. Note Receivable - Fully Reserved
In 1988, DSI, a pooled company, sold its 50% interest in another
company in exchange for a $750 note receivable due in October of
1998. The note receivable is secured only by the shares of the
company sold. Because the company sold has no significant book
value, the note receivable has been fully reserved.
7. Line of Credit
In 1996, the Company established a $7,000 unsecured revolving line
of credit for working capital needs. The revolving line of credit
is for two years with a variable interest rate which is a function
of the LIBO rate and the Federal Reserve System reserve requirement
for Eurocurrency liabilities. The terms of the credit agreement
contain certain restrictions related to financial ratios,
indebtedness, tangible net worth and capital expenditures. At
December 31, 1996, the Company had borrowings outstanding under the
line of $2,511, and the interest rate was 6.19%. In January 1997
the line of credit agreement was amended and increased to $12,000.
Prior to its 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. At December 31, 1995, DSI had outstanding borrowings
under the line of $1,619.
8. Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1996 1995
Warranty and start-up $1,802 $1,868
Professional fees and other accruals 1,592 2,425
Acquisition liabilities - 1,827
Customer deposits 3,024 2,258
Accrued property taxes, income
taxes and other taxes 888 1,721
$7,306 $10,099
9. Debt
Long-term debt is as follows:
December 31,
1996 1995
Promissory notes; interest payable
quarterly at the three month LIBOR
rate plus 80 b.p.; due through
2001. The interest rate on
December 31, 1996 was 6.46%. $ 8,575 $10,000
Industrial development revenue bonds
(IDRB's), principal due in varying
annual payments over 30 years; interest
payable monthly at a variable rate
determined periodically by the bond
remarketing agent (4.25% at
December 31, 1996). 8,270 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, 1996
was 5.97%. 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, 1996 was 3.83%. 727 928
Other notes 510 833
20,882 23,111
Less current portion (4,982) (2,192)
$15,900 $20,919
The IDRB debt, IRB debt and mortgage notes payable to French banks
are collateralized by real and personal property of the Company.
Aggregate maturities of long-term debt outstanding at December 31,
1996 are:
1997 - $4,982; 1998 - $2,150; 1999 - $2,150; 2000 - $2,242;
2001 - $3,692; beyond 2001 - $5,666.
The interest rate on the IRB's is determined in part by the amount
of collateral held by the lender. At December 31, 1996 and 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 promissory notes contain a covenant which limits the payment of
dividends to shareholders. At December 31, 1996 approximately
$33,583 of retained earnings were restricted under this covenant.
In addition, the Company's various debt agreements 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
$1,551, $1,409, and $865, for 1996, 1995, and 1994, respectively.
10. Stock Options
At December 31, 1996, the Company had reserved 7,500 common shares
for issuance to key employees under a 1983 stock option plan.
Options were issued at a price not less than market value on the
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.
1996 1995 1994
Options held by employees
at December 31 7,500 86,206 121,126
Exercise price range on $10.50 to $ 6.45 to $ 3.63 to
options held at December 31 $10.50 $13.50 $13.50
Number of options exercised
during the year 65,805 34,920 22,724
Price range of options $ 6.45 to $ 3.63 to $ 3.63 to
exercised during the year $13.50 $10.16 $10.16
Exercisable options held at
December 31 7,500 84,330 97,500
Exercise price range of $10.50 to $ 6.45 to $ 3.63 to
exercisable options $10.50 $13.50 $13.50
The Company also has reserved 299,050 common shares at December 31,
1996 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.
1996 1995 1994
Options held by employees
at December 31 50,200 34,163 12,633
Exercise price range on $13.67 to $13.67 to $13.67 to
options held at December 31 $22.38 $18.25 $14.50
Number of options exercised
during the year 263 500 187
Price range of options $13.67 to $14.38 to $13.67 to
exercised during the year $14.38 $14.38 $13.67
Exercisable options held at
December 31 10,687 2,463 375
Exercise price range of $13.67 to $13.67 to $13.67 to
exercisable options $18.25 $14.50 $13.67
Desalination Systems, Inc. (DSI), a pooled company (Note 2), has a
stock option plan for which 371,841 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.
1996 1995 1994
Options held by employees
at December 31 371,841 371,841 386,248
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 31 360,315 351,672 354,553
Exercise price range of $3.18 to $3.18 to $3.18 to
exercisable options $6.94 $6.94 $6.94
The Company also had a 1985 Employee Stock Purchase Plan. In 1995
and 1994, 14,548 and 33,657 shares were issued, respectively, under
the 1985 Plan at an average price of $13.58 and $12.80,
respectively. No additional shares may be issued under the 1985
Plan.
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 1996 and 1995, 41,154 and 22,175
shares were issued, respectively, under the 1995 Plan at an average
price per share of $17.41 and $14.79, respectively. At December 31,
1996, 336,666 shares remain unissued in the 1995 Plan.
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 1996,
options to purchase 18,000 shares at a price of $19.88 were issued
under this plan. In 1995, options to purchase 18,000 shares at a
price of $17.13 were issued under this plan. At December 31, 1996,
18,000 options were exercisable under this plan at a price of
$17.13.
The Company applies APB Opinion No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for
its stock-based compensation plans. Had compensation costs been
determined based on the fair value of the 1996 and 1995 stock option
grants consistent with the requirements of SFAS No. 123 "Accounting
for Stock-Based Compensation" (FAS 123), there would have been no
material effect on the Company's pro forma net income or net income
per common and common equivalent share for 1996 or 1995.
The Company had 500,000 authorized and unissued shares of preferred
stock at December 31, 1996 and 1995.
11. Income Taxes
Income tax expense consists of:
Year ended December 31,
1996 1995 1994
Current:
Federal $3,556 $4,219 $3,520
State 395 429 370
Foreign 640 372 156
Deferred:
Depreciation 370 144 (204)
Valuation allowance adjustment - (197) -
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals 462 314 (223)
Discontinued operations - 228 350
Other 1,018 (555) (161)
$6,441 $4,954 $3,808
Cash payments for income taxes were $5,716, $5,382, and $3,195 for
1996, 1995, and 1994, respectively.
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,
1996 1995 1994
Taxes at Federal rate (35%) $6,968 $5,892 $4,992
Increase (decrease) resulting from:
Valuation allowance adjustment - (471) (608)
State taxes, net of Federal tax
benefit 397 201 231
Foreign Sales Corp. benefit (361) (248) (223)
Tax credits (197) (273) (312)
Tax exempt interest/dividend
deduction (128) (200) (193)
Effect of foreign affiliates with
different tax rates or net losses 12 245 (324)
Uncollectible account write-off (442) - -
Other 192 (192) 245
$6,441 $4,954 $3,808
12. Deferred Tax Assets and Liabilities
Temporary differences which give rise to Deferred Tax Assets and
Liabilities are as follows as of December 31:
1996 1995
Current assets:
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals $3,627 $3,863
Unrealized gain on marketable
securities (1,757) (2,264)
Inventory costs capitalized for tax 115 363
Other (426) 45
Total current deferred assets $1,559 $2,007
Noncurrent liabilities:
Depreciation $3,130 $2,641
Other 486 81
Total non-current deferred
tax liabilities $3,616 $2,722
The deferred tax asset valuation reserve decreased $471 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.
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, instruments and components used in
the processing of fluids).
1996 1995 1994
Sales to unaffiliated customers from:
United States $141,124 $116,964 $100,632
Foreign operations 14,822 13,819 12,276
Transfers from (to) geographic areas:
United States 7,890 7,936 6,699
Foreign operations (7,890) (7,936) (6,699)
$155,946 $130,783 $112,908
Pretax income:
United States $ 18,225 $ 16,190 $ 12,950
Foreign operations 1,683 643 1,312
$ 19,908 $ 16,833 $ 14,262
Identifiable assets:
United States $144,609 $134,408 $103,184
Foreign operations 7,567 8,011 7,531
$152,176 $142,419 $110,715
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,
1996 1995 1994
Asia/Pacific $14,661 $10,915 $ 8,187
Europe 9,181 7,798 7,853
Rest of the World 9,222 9,641 7,841
$33,064 $28,354 $23,881
Total international sales for the Company were as follows:
1996 - $47,886; 1995 - $42,173; and 1994 - $36,157.
14. Commitments and Contingencies
The Company leases facilities for sales, service or manufacturing
purposes in Wisconsin, Massachusetts, California, Florida, Iowa,
Arizona, Switzerland, Hong Kong, Japan, Singapore, and Thailand.
Future minimum lease payments on all operating leases of $2,750 are
as follows: 1997 - $780; 1998 - $584; 1999 - $395; 2000 - $271;
2001 - $180; and beyond 2001 - $540. Rent expense for the past
three years was: 1996 - $1,100; 1995 - $1,718; and 1994 - $1,851.
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.
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 $1,435, $996, and $1,077 in 1996, 1995, and 1994, respectively.
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, 1996 and 1995 and the
related consolidated statements of income, changes in shareholders' equity,
and chash flow for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express and 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the financial position of
Osmonics, Inc. and subsidiaries at December 31, 1996 and 1995 and the
results of their operations and their cash flow for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte and Touche LLP
Minneapolis, Minnesota
February 10, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes included in this
report.
Results of Operations
The following table sets forth certain statement of operations
data as a percentage of net sales for the periods indicated.
Years Ending Percentage
December 31, Increase (Decrease)
1996 vs 1995 vs
1996 1995 1994 1995 1994
Net Sales 100.0% 100.0% 100.0% 19.2% 15.8%
Cost of Goods Sold 59.3 57.1 55.4 23.9 19.5
Gross Profit 40.7 42.9 44.6 13.0 11.3
SG&A 22.5 24.0 24.7 11.8 12.2
RD&E 7.0 7.2 8.0 16.4 4.6
Operating Profit 11.2 11.7 11.9 13.5 14.0
Other Income 1.5 1.2 0.8 67.2 84.0
Income Taxes 4.1 3.8 3.4 30.0 30.1
Net Income 8.6 9.1 9.3 13.4 13.6
Comparison of Years Ended December 31, 1996 and December 31, 1995
Net Sales for 1996 increased $25,163 or 19.2% to $155,946 as
compared to net sales of $130,783 for 1995. The sales increase was
realized across nearly all product lines, and for both domestic and
international markets.
Gross Profit increased $7,310 or 13.0% to $63,423 in 1996,
compared to $56,113 in 1995. As a percentage of net sales, gross profit
decreased to 40.7% from 42.9%. 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 $3,702 or
11.8% to $35,079 in 1996, compared to $31,377 in 1995. As a percentage
of sales, SG&A expense decreased to 22.5% from 24.0%, primarily
reflecting improved productivity of both sales and administrative
personnel.
The Company's marketing priority is to get its products into
distribution as soon as possible. In 1994, 1995 and 1996, the Company
invested significantly in growing its sales and marketing organization.
The number of sales personnel increased by 24%, 26% and 6% in 1994, 1995
and 1996, respectively. As a result of the Company's acquisitions, the
Company inherited a number of separate sales forces selling individual
products. In 1996, the Company reorganized and centralized its sales
groups to focus responsibility for customer relationships for all
products through expanded local sales offices and to provide technical
sales support from the appropriate product manufacturing site. The
Company believes these changes will enhance customer service and
increase market penetration in the future.
Research, Development and Engineering Expenses increased $1,538 to
$10,937 in 1996, from $9,399 in 1995. As a percentage of sales, these
expenses were 7.0% of sales in 1996, compared to 7.2% in 1995. The
Company believes the current level of funding is adequate to support its
product development programs.
Other Income increased to $2,501 in 1996, compared to $1,496 in
1995, due primarily to gains on the sale of investments.
The effective tax rate for the years ended December 31, 1996 and
1995 were 32.4% and 29.4%, 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.
Net Earnings increased $1,588 or 13.4% to $13,467 or $0.93 per
share for 1996, compared to $11,879 or $0.83 per share for 1995. As a
percentage of net sales, net earnings were 8.6% for 1996 compared to
9.1% for 1995.
Comparison of Years Ended December 31, 1995 and December 31, 1994
Net Sales for 1995 increased $17,875 or 15.8% to $130,783 from
$112,908 for 1994. International sales increased at approximately the
same rate as domestic sales in 1995 due to improved marketing and
selling efforts in the Asia/Pacific and Americas areas. The 1995 sales
growth also benefited from the October 1995 acquisition of Western
Filter and the November 1994 acquisition of Lakewood Instruments.
Gross Profit increased $5,708 or 11.3% to $56,113 in 1995 compared
to $50,405 in 1994. As a percentage of net sales, gross profit
decreased to 42.9% in 1995, compared to 44.6% in 1994. The decrease was
due to an increased mix of sales of lower margin products, increased
material costs and more aggressive pricing.
Selling, General and Administrative Expenses increased $3,410 or
12.2% to $31,377 in 1995 compared to $27,967 in 1994. As a percentage
of net sales, these expenses were 24.0% in 1995, compared to 24.7% in
1994. The increase in spending was attributable to increased marketing
programs and expanded domestic and international selling efforts. These
expenses did not increase at as high a rate as the sales increase due to
the continued cost savings in administrative expenses as recent
acquisitions were assimilated.
Research, Development and Engineering Expenses increased $410 or
4.6% to $9,399 in 1995 compared to $8,989 in 1994. As a percentage of
net sales, these expenses were 7.2% in 1995, compared to 8.0% in 1994.
Other Income increased to $1,496 in 1995, compared to $813 in
1994, due primarily to gains on the sale of land and investments.
The Company's effective tax rate for 1995 was 29.4% compared to
26.7% in 1994. The increase in the tax rate was primarily due to the
reduced availability of tax loss carryforwards and credits from Autotrol
and its subsidiaries.
Net Earnings increased $1,425 or 13.6% to $11,879 ($0.83 per
share) in 1995 compared to $10,454 ($0.74 per share) in 1994. As a
percentage of net sales, net earnings were 9.1% in 1995, compared to
9.3% in 1994.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and marketable
securities of $24,420 as compared to $31,036 at December 31, 1995. The
reduction in cash and marketable securities was primarily the result of
investments of $15,658 in facilities and equipment during 1996.
Cash provided by operations was $5,736, $8,421, and $10,097 for
the years ending December 31, 1996, 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.
Capital expenditures for the years ending December 31, 1996, 1995
and 1994 were $15,658, $20,818, and $4,212, respectively. In 1995 and
1996, the Company expanded and reconfigured its Minnetonka, Minnesota
and Vista, California facilities. During 1995, the Company also
purchased its previously leased Milwaukee facility for $3,100. The
Company currently has eleven manufacturing facilities in the U.S. and
one in France. The level of capital expenditures in 1997 is expected to
be less than the levels of 1996 and 1995.
The Company in 1996 negotiated a $7,000 unsecured revolving line
of credit for working capital needs. The revolving line of credit is
for two years with a variable interest rate which is a function of the
LIBO rate and the Federal Reserve System reserve requirement for
Eurocurrency liabilities. This revolving line of credit replaced a
$1,000 line of credit. At December 31, 1996, the Company had $4,489
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.
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 Annual Report 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.
Percentage
Ownership
100% VAPONICS, INC. A Massachusetts Corporation
100% AQUA MEDIA INTERNATIONAL A Deleware Corporation
100% AQUA MEDIA OF ASIA LTD. A Hong Kong Corporation
100% PORETICS CORPORATION A Deleware Corporation
100% OSMONICS ASIA/PACIFIC LTD. A Hong Kong Corporation
100% OSMONICS EUROPA, S.A. A Switzerland Corporation
100% OSMONICS INTERNATIONAL LTD. A Jamaica Corporation
100% OSMONICS INTERNATIONAL, INC. A Minnesota Corporation
100% OZONE RESEARCH & EQUIPMENT CORP. An Arizona Corporation
100% GHIA, INC. A Nevada Corporation
100% AUTOTROL CORPORATION A Wisconsin Corporation
100% AUTOTROL (FAR EAST) LTD. A Japan Corporation
100% AUTOTROL S.A. A France Corporation
100% OSMONICS INTERNATIONAL SALES CORP. A Virginia Islands Corporation
100% AUTOTROL PTY. LTD. An Australia Corporation
100% MICROL SYSTEMS, LTD. An England Corporation
100% PETECO CORPORATION A Minnesota Corporation
50% NIPPON AUTOTROL K.K. A Japan Corporation
INDEPENDENT AUDITORS' CONSENT
Osmonics, Inc.
We consent to the incorporation by reference in Registration Statements
No. 33-25228 and 33-537 of Osmonics, Inc. on Form S-8 and Registration
Statement No. 33-05029 filed on Form S-3 of our reports Dated February 10,
1997 appearing and incorporated by reference in this Annual Report on Form
10-K of Osmonics, Inc. for the year ended December 31, 1996.
/s/ Deloitte and Touch LLP
Minneapolis, Minnesota
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5392
<SECURITIES> 19028
<RECEIVABLES> 28200
<ALLOWANCES> 907
<INVENTORY> 32322
<CURRENT-ASSETS> 88527
<PP&E> 86126
<DEPRECIATION> 34322
<TOTAL-ASSETS> 152176
<CURRENT-LIABILITIES> 34521
<BONDS> 15900
<COMMON> 142
0
0
<OTHER-SE> 97801
<TOTAL-LIABILITY-AND-EQUITY> 152176
<SALES> 155946
<TOTAL-REVENUES> 155946
<CGS> 92523
<TOTAL-COSTS> 92523
<OTHER-EXPENSES> 46016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1594
<INCOME-PRETAX> 19908
<INCOME-TAX> 6441
<INCOME-CONTINUING> 13467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13467
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
INDEPENDENT AUDITORS' REPORT
Osmonics, Inc.
We have audited the consolidated financial statements of Osmonics, Inc.
(the Company) as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 and have issued our report
thereon dated February 10, 1997. Such financial statements and report are
included in the Company's 1996 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of the Company, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte and Touche LLP
Minneapolis, Minnesota
February 10, 1997
<TABLE>
OSMONICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Years Ended December 31, 1996, 1995 and 1994
<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, 1996:
Current Operations:
Allowance for Doubtful Accounts $1,177 $ 59 $ 329(FA) $ 907
Warranty and Start-up Reserve $1,868 $2,414 $2,480(FB) $1,802
Discontinued Operations:
Warranty Reserve $1,957 $1,957
Year Ended December 31, 1995:
Current Operations:
Allowance for Doubtful Accounts $1,329 $ 80 $109(FC) $ 341(FA) $1,177
Warranty and Start-up Reserve $1,981 $1,406 $1,519(FB) $1,868
Discontinued Operations:
Allowance for Doubtful Accounts $ 46 $ 46(FA) $ 0
Warranty Reserve $1,961 $ 4(FB) $1,957
Reserve for Discontinued Operations $ 127 $ 127 $ 0
Year Ended December 31, 1994:
Current Operations:
Allowance for Doubtful Accounts $1,276 $ 134 $ 81(FA) $1,329
Warranty and Start-up Reserve $1,996 $1,350 $1,365(FB) $1,981
Discontinued Operations:
Allowance for Doubtful Accounts $ 87 $ 41(FA) $ 46
Warranty Reserve $1,972 $ 10(FB) $1,961
Reserve for Discontinued Operations $ 240 $ 113 $ 127
<FN>
<FA> Uncollectible accounts charged against allowance.
<FB> Actual warranty claims and start-up costs charged against reserve.
<FC> Addition due to acquisition.
</FN>
</TABLE>
