SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended JUNE 30, 1998
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 Number: 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 No.)
5951 CLEARWATER DRIVE
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2277
NOT APPLICABLE
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 July 31,
1998, 13,982,102 shares of the issuer's Common Stock, $0.01 par value,
were outstanding.
OSMONICS, INC.
INDEX
PAGE(S)
PART I. FINANCIAL INFORMATION -------
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1997 2
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6-9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
ITEM 5. A. ACQUISITION OF COMPANY 10
B. ISO 9001 CERTIFICATION 10
C. ADVANCE NOTICE REQUIREMENT 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
OSMONICS, INC.
PART I
FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
Sales $ 47,353 $ 41,789 $ 89,503 $ 84,102
Cost of sales 31,908 24,931 57,951 50,895
-------- -------- -------- --------
Gross profit 15,445 16,858 31,552 33,207
Less:
Selling, general
and administrative 10,359 10,205 20,233 19,922
Research, development
and engineering 2,519 2,773 4,847 5,559
Special charges 25,706 - 25,706 -
-------- -------- -------- --------
Income (loss) from operations (23,139) 3,880 (19,234) 7,726
Other income (expense) (981) 23 (1,557) (78)
-------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes (24,120) 3,903 (20,791) 7,648
Income taxes (5,303) 1,310 (4,138) 2,621
-------- -------- -------- --------
Income (loss) from continuing
operations (18,817) 2,593 (16,653) 5,027
Recovery on discontinued
operations - - - 325
-------- -------- -------- --------
Net income (loss) $(18,817) $ 2,593 $(16,653) $ 5,352
======== ======== ======== ========
Earnings per share - basic
Income (loss) from
continuing operations $(1.35) $0.18 $(1.19) $0.36
Net income $(1.35) $0.18 $(1.19) $0.38
Earnings per share - assuming
dilution
Income (loss) from
continuing operations $(1.35) $0.18 $(1.19) $0.35
Net income $(1.35) $0.18 $(1.19) $0.37
Average shares outstanding
Basic 13,962 14,071 13,956 14,137
Assuming dilution 13,962 14,362 13,956 14,450
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share Data)
(Unaudited)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 3,899 $ 4,872
Marketable securities 15,632 17,004
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,001 in 1998, and $888 in 1997 30,767 28,969
Inventories 34,391 35,228
Deferred tax assets 7,227 1,413
Other current assets 2,142 1,639
-------- --------
Total current assets 94,058 89,125
-------- --------
Property and equipment, at cost
Land and land improvements 5,606 5,535
Building 30,304 29,278
Machinery and equipment 68,802 62,770
-------- --------
104,712 97,583
Less accumulated depreciation (48,681) (42,550)
-------- --------
56,031 55,033
Other assets 37,835 20,325
-------- --------
Total assets $187,924 $164,483
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,960 $ 9,728
Notes payable and current portion
of long-term debt 32,156 16,174
Other accrued liabilities 18,888 17,950
-------- --------
Total current liabilities 64,004 43,852
-------- --------
Long-term debt 33,819 13,792
Other liabilities 21 25
Deferred income taxes 4,296 4,439
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000 shares
Issued -- 1998: 13,971,873 and
1997: 13,943,544 shares 140 140
Capital in excess of par value 20,612 20,261
Retained earnings 63,475 80,128
Unrealized gain on marketable securities 1,924 2,180
Foreign currency translation adjustments (367) (334)
-------- --------
Total liabilities and shareholders' equity $187,924 $164,483
======== ========
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATIONS:
Net income (loss) $(16,653) $ 5,352
Non-cash items included in net income:
Depreciation and amortization 3,621 2,632
Deferred income taxes (6,638) 111
Gain on sale of investments (180) (560)
Special charges 27,706 -
Changes in assets and liabilities
net of business acquisitions)
Accounts receivable 226 (1,057)
Inventories and other current assets 939 3,450
Accounts payable and accrued liabilities (1,743) (5,884)
-------- --------
Net cash provided by operations 7,278 4,044
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions
(net of cash acquired including
purchased R&D) (40,713) (10,203)
Purchase of investments (457) (461)
Sale of investments 1,615 1,251
Purchase of property and equipment (3,821) (3,498)
Sales of property and equipment 110 57
Other (147) 86
-------- --------
Cash used in investing activities (43,413) (12,768)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and debt 37,000 12,284
Reduction of debt (2,156) (103)
Issuance of common stock 351 545
Purchase of company stock - (5,249)
-------- --------
Net cash provided by financing activities 35,195 7,477
-------- --------
Effect of exchange rate changes on cash (33) 270
Decrease in cash and cash equivalents (973) (977)
Cash and cash equivalents -
beginning of year 4,872 5,392
-------- --------
Cash and cash equivalents -
end of quarter $ 3,899 $ 4,415
======== ========
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
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.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which establishes standards for the reporting of comprehensive
income and its components. The Company has the following components of
comprehensive income:
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
Net income (loss) $(16,653) $ 5,352
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Foreign currency translation adjustments (33) (270)
Unrealized gains/(losses) on securities:
Unrealized holding losses arising
during period (436) (1,132)
Less: reclassified adjustment for gains
included in net income (loss) 180 (256) 560 (572)
---- ---- ----- ----
Other comprehensive income (loss), before tax (289) (842)
Income tax expense related to items of
other comprehensive income (loss) (98) (286)
------ -----
Other comprehensive income (loss), net of tax (191) (556)
------- --------
Comprehensive income (loss) $(16,844) $ 4,796
======== ========
Operating results for the three months and six months ended June 30,
1998, are not necessarily indicative of the results that may be expected
for the full year 1998.
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, 1997.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars In Thousands, Except Share Data)
As an aid to understanding the Company's operating results, the following
table shows the percentage of sales that each income statement item
represents for the three months and six months ended June 30, 1998 and
1997.
PERCENT OF SALES PERCENT OF SALES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------ ------ ------ ------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.4 59.7 64.7 60.5
------ ------ ------ ------
Gross profit 32.6 40.3 35.3 39.5
Selling, general and
administrative 21.9 24.4 22.6 23.7
Research, development and
engineering 5.3 6.6 5.4 6.6
Special charges 54.3 - 28.7 -
------ ------ ------ ------
Operating expenses 81.5 31.0 56.7 30.3
Income (loss) from operations (48.9) 9.3 (21.5) 9.2
Other income (expense) (2.0) - (1.7) (0.1)
------ ------ ------ ------
Income (loss) from continuing
operations before income
taxes (50.9) 9.3 (23.2) 9.1
Income taxes (11.2) 3.1 (4.6) 3.1
------ ------ ------ ------
Income (loss) from continuing
operations (39.7) 6.2 (18.6) 6.0
Recovery on discontinued
operations - - - 0.4
------ ------ ------ ------
Net income (39.7)% 6.2% (18.6)% 6.4%
====== ====== ====== ======
SALES
Sales for the second quarter ended June 30, 1998 of $47,353 increased
13.3% from sales for the second quarter of 1997. Year-to-date 1998 sales
through June increased 6.4% over the corresponding 1997 level. Sales of
replaceable products increased to 53% and equipment decreased to 47% of
second quarter sales. Comparing same business activity before
acquisitions, sales were 6.3% higher in second quarter of 1998 than
second quarter of 1997 and were 8.6% over sales for the first quarter of
1998. This increase in sales was primarily the result of several large
capital equipment orders being shipped during the second quarter.
Domestic market pricing is very competitive. International sales have
been down in the Asia/Pacific and Latin America markets; however,
Euro/Africa sales were strong enough to offset the Asia/Pacific weakness.
GROSS MARGIN
Gross margin for the second quarter of 1998 was 32.6% versus 40.3% for
the corresponding period in 1997. The gross margin for the six months
ended June 30 was 35.3% in 1998 compared to 39.5% in 1997. In the second
quarter of 1998, the Company recorded a special charge of $2.0 million
for slow moving inventory. This charge accounted for 4.2 and 2.2
percentage points of the second quarter 1998 and year-to-date 1998 gross
margin declines, respectively. Gross margins for the second quarter 1998
were also negatively affected by several large capital equipment sales,
lower utilization rates at several production facilities and general
pricing pressures in most markets.
OPERATING EXPENSES
Operating expenses were recorded at 81.5% of sales for the second quarter
of 1998 compared to 31.0% in the second quarter of 1997. In the second
quarter of 1998, the Company recorded a special charge of $25.7 million
as operating expense (see Special Charge discussion below). Operating
expenses, excluding special charges, decreased to 27.2% in the second
quarter of 1998 from 31.0% in the second quarter of 1997.
On a year-to-date basis, excluding special charges, operating expenses
were 28.0% for the six months ended June 30, 1998 versus 30.3% for the
same period last year. The second quarter and year-to-date improvement
in operating expenses is the result of continued expense control efforts.
SPECIAL CHARGES
In second quarter 1998, the Company recorded special charges of $27,706
($21,217 net-of-tax or $1.52 per share assuming dilution). Charges
include a $23,940 charge to operating expense for purchased research and
development related to the acquisitions of Micron Separations, Inc.
($8,620) and Membrex Corp. ($15,320) and a $2,000 charge to cost of sales
for slow moving inventory. The special charges also include operating
expense charges of $875 for corporate restructuring and consolidation of
operations, and $891 for re-engineering costs and write-downs of assets
in connection with the Company's implementation of a global information
system. The special charges are summarized below:
In-process R&D $ 23,940
Corporate restructuring 875
SAP / Re-engineering costs 891
Slow moving inventory 2,000
--------
Gross special charges $ 27,706
Less slow moving inventory - in COS (2,000)
--------
Special charge in Operating Expense $ 25,706
OTHER EXPENSE
Other expense increased by approximately $1,000 in the second quarter of
1998 versus the same period for 1997. The increase is primarily the
result of an increase in interest expense of $375 and $225 for the
additional borrowing of $20,000 and $18,000 for the acquisitions of
Micron Separations, Inc. during the first quarter of 1998 and Membrex
Corp. during the second quarter of 1998. Also, gains recorded on the
sale of investments during the second quarter of 1998 decreased $485 in
comparison to the same period in 1997.
INCOME TAXES
The effective tax rate for the six months ended June 30, 1998 was 34.0%
based on the forecast for the full year. This rate represents an
increase over the 31.7% rate incurred for calendar year 1997, due
primarily to lower R&D tax credits. Under purchase accounting for a
nontaxable business combination, the Micron Separations, Inc. purchased
research and development special charge of $8,620 was expensed on a gross
basis (not tax-effected).
RECOVERY ON DISCONTINUED OPERATIONS
The Company recognized $325 ($0.02 per share assuming dilution) in after
tax income in the first quarter of 1997 from a reduction in the reserve
for discontinued operations from the Autotrol merger. There was no
similar recovery in 1998.
NET INCOME
Net income for the quarter ended June 30, 1998 was $(18,817). Excluding
special charges, net income was $2,400 versus $2,593 for the quarter
ended June 30, 1997. Net income per common share assuming dilution for
the quarter was $(1.35) or $0.17 excluding special charges, versus $0.18
for the same period last year. Year-to-date net income was $(16,653) or
$4,564 excluding special charges, versus $5,352 for the same period last
year. Net income per common share assuming dilution year-to-date was
$(1.19) or $0.32 excluding special charges, versus $0.37 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash, cash equivalents and
marketable securities of $19,531 versus $21,876 at December 31, 1997.
The current ratio was 1.5 at June 30, 1998 as compared to 2.0 at year end
1997.
The Company's long-term debt increased from $13,792 at December 31, 1997
to $33,819 at June 30, 1998. This increase was the result of entering
into a new $20,000 long-term loan from an insurance company in March.
The company's current debt increased from $16,174 at December 31, 1997 to
$32,156 at June 30, 1998. The increase was the result of the Company
using its revolving line of credit to fund the Membrex Corp. acquisition
during the second quarter.
The Company believes that its current cash and investments position, its
cash flow from operations, and amounts available from bank credit will be
adequate to meet its anticipated cash needs for working capital, capital
expenditures, and potential acquisitions during the foreseeable future.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act 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 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 acquisition and development activities, capital spending,
financing, or the effects of regulation and competition. Such
information involves important risks and uncertainties that could
significantly affect results in the future. Such results may differ from
those expressed in any forward-looking statements made by the Company.
These risks and uncertainties include, but are not limited to, those
relating to product development, computer systems development, dependence
on existing management, global economic and market conditions, and
changes in federal or state laws.
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May
13, 1998. The following members were elected to the Company's
Board of Directors to hold office for the ensuing three years:
Nominee In Favor Withheld
------- -------- --------
William Eykamp 11,771,260 250,754
Michael L. Snow 11,770,165 251,849
R. Carol Spatz 11,776,547 245,467
Also, the matter of amending the Osmonics 1993 Stock Option
and Compensation Plan to increase the shares reserved from
300,000 to 800,000 was approved by the shareholders. Vote
results were as follows:
In Favor Withheld Abstain
-------- -------- -------
Amend 1993 Stock Option and
Compensation Plan 9,595,493 2,347,241 79,280
Item 5. OTHER INFORMATION (Dollars in Thousands)
A. ACQUISITION OF COMPANY
The Company announced during the second quarter of 1998 the acquisition
for cash of all the equity interest in Membrex Corp. ("Membrex") of
Fairfield, New Jersey. The acquisition was approved by Membrex
shareholders on April 15, 1998 and was recorded under the purchase method
of accounting. Total consideration of the acquisition approximated
$16,000 plus assumed debt of approximately $2,000. Membrex sales in 1997
were less than $10 million and would not have had a material impact on
Osmonic's earnings.
Membrex, a 13-year-old, privately held company, designs and manufactures
membrane products and fluid treatment systems for industrial customers.
Applications include recycling machine tool coolant and cleaners, and
minimizing oily waste water.
Membrex has developed what the Company believes is the most hydrophilic
ultrafiltration (UF) membrane on the market today. The patented,
solvent-resistant membrane separates oil from water and recyclable
cleaners at least five times faster than competitive products, without
fouling. The technology allows service stations, repair facilities and
manufacturing plants to cost-effectively clean oily parts, meet stricter
environmental regulations and reuse valuable cleansing agents. Other
potential markets for the membrane include high fouling applications in
biotechnology, laboratory operations and chemical processes.
To finance the acquisition, the Company expanded its revolving line of
credit with a commercial bank to $35,000.
B. ISO 9001 CERTIFICATION
The Company announced that its Minnetonka Operation has received ISO 9001
Certification. The operation is Osmonics' worldwide headquarters and
primary design and manufacturing facility for filters, membrane elements,
pumps, and machines used in fluid purification and separation.
The Certificate of Registration issued by SGS International Certification
Services, Inc., Rutherford, New Jersey, certifies that the Osmonics
Quality Management System followed by the facility's employees conforms
to ANSI-ASCQ-9001/ISO 9001.
ISO 9001 is an internationally recognized quality certification program
which originated with the International Organization for Standardization
in Geneva, Switzerland. It is administered and audited by accredited
registrars throughout the world. ISO 9001 is a standard that covers over
20 elements in a quality system that includes design, development,
manufacturing, installation, and servicing activities.
The registrars establish that management is involved in the quality
system and that detailed procedures and instructions are documented for
all operations within the company that affect quality - and that
employees are trained to carry out every operation. An on-site audit of
the complete Quality System is then conducted to verify ISO 9001
compliance.
C. ADVANCE NOTICE REQUIREMENT
Discretionary Proxy Voting Authority / Shareholder Proposals
On May 21, 1998 the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities and Exchange
Act of 1934. The amendment to Rule 14a-4(c-1) governs the Company's use
of its discretionary proxy voting authority with respect to a shareholder
proposal which the shareholder has not sought to include in the Company's
proxy statement. The new amendment provides that if a proponent of a
proposal fails to notify the company at least 45 days prior to the month
and day of mailing of the prior year's proxy statement, then the
management proxies will be allowed to use their discretionary voting
authority when the proposal is raised at the meeting, without any
discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Shareholders, if the
Company is not provided notice of a shareholder proposal, which the
shareholder has not previously sought to include in the Company's proxy
statement, by February 20, 1999, the management proxies will be allowed
to use their discretionary authority as outlined above.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) During the quarter ended June 30, 1998 the Registrant did not
file a Form 8-K report.
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: August 14, 1998
-----------------
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
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<PERIOD-START> JAN-01-1998
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<COMMON> 140
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