UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/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 No. 1-12714
OSMONICS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0955759
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5951 CLEARWATER DRIVE, MINNETONKA, MN 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 933-2277
N/A
Former name, former address and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date. At February 28, 1999, 14,008,163 shares of the issuer's
Common Stock, $0.01 par value, were outstanding.
OSMONICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Operations - 2
For the Three and Six Months Ended
June 30, 1998 (as restated) and 1997
Consolidated Balance Sheets - 3
June 30, 1998 (as restated) and December 31, 1997
Consolidated Statements of Cash Flows - 4
For the Six Months Ended
June 30, 1998 (as restated) and 1997
Notes to Consolidated Financial Statements - 5-8
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 12
ITEM 5. A. ISO 9001 CERTIFICATION 13
B. ADVANCE NOTICE REQUIREMENT 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
OSMONICS, INC.
PART I
FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------
(As Restated) * (As Restated) *
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 10,507 10,205 20,381 19,922
Research, development
and engineering 2,519 2,773 4,847 5,559
Special charges 7,988 - 7,988 -
------ ------ ------ ------
Income (loss) from
operations (5,569) 3,880 (1,664) 7,726
Other income (expense) (981) 23 (1,557) (78)
------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes (6,550) 3,903 (3,221) 7,648
Income taxes (1,267) 1,310 (102) 2,621
------ ------ ------ ------
Income (loss) from
continuing operation (5,283) 2,593 (3,119) 5,027
Recovery on
discontinued
operations - - - 325
------ ------ ------ ------
Net income (loss) $(5,283) $2,593 $(3,119) $5,352
====== ====== ====== ======
Earnings per share
- basic
Income (loss) from
continuing operations $ (0.38) $ 0.18 $ (0.22) $ 0.36
Net income $ (0.38) $ 0.18 $ (0.22) $ 0.38
Earnings per share
_ assuming dilution
Income (loss) from
continuing
operations $ (0.38) $ 0.18 $ (0.22) $ 0.35
Net income $ (0.38) $ 0.18 $ (0.22) $ 0.37
Average shares
outstanding
Basic 13,962 14,071 13,956 14,137
Assuming dilution 13,962 14,362 13,956 14,450
* See Restatement of Quarterly Financial Statements in notes to
the condensed consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
June 30, December 31,
1998 1997
-------- --------
ASSETS (As Restated) *
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 51,369 20,325
------- -------
Total assets $201,458 $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 77,009 80,128
Unrealized gain on marketable
securities 1,924 2,180
Foreign currency translation
adjustments (367) (334)
------- -------
Total liabilities and
shareholders' equity $201,458 $164,483
======= =======
* See Restatement of Quarterly Financial Statements in notes to
the condensed consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
1998 1997
-------- --------
(As Restated) *
Cash flows from operations:
Net income (loss) $ (3,119) $ 5,352
Non-cash items included in
net income:
Depreciation and amortization 3,769 2,632
Deferred income taxes (2,602) 111
Gain on sale of investments (180) (560)
Special charges 9,988 -
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
======= =======
* See Restatement of Quarterly Financial Statements in notes to
the condensed consolidated financial statements.
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the 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.
COMPREHENSIVE INCOME:
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) $(3,119) $5,352
Other comprehensive income (loss),
before tax:
Foreign currency translation
adjustments (33) (270)
Unrealized gains/(losses) on
securities (256) (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) $(3,310) $4,796
====== ======
SEGMENT INFORMATION
In June 1997, The Financial Accounting Standards Board issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The
Company believes the required segment information disclosure under
SFAS No. 131 will be more comprehensive than previously provided,
including expanded disclosure income statement and balance sheet
items. The Statement is effective for fiscal years beginning after
December 15, 1997; however, application is not required for interim
periods in the initial year of its application. The Company adopted
the Statement effective January 1, 1998.
ACQUISITION OF COMPANIES:
The Company announced during the first quarter of 1998 the acquisition
for cash of all the equity interest in Micron Separations, Inc. (MSI)
of Westborough, Massachusetts, for a total consideration of
approximately $25,000.
MSI develops, manufactures and markets microfilter membrane products
for diagnostic laboratory and industrial use. The Company believes
that these products are complementary to the cartridge filters
Osmonics manufactures for the pharmaceutical, beverage and ultrapure
water filtration markets. Also, the Company believes that MSI's line
of diagnostic and laboratory membrane products will complement the
Company's Poretics track-etch membrane and give Osmonics a broader
portfolio of products to offer the laboratory and analytical testing
market.
MSI's products will be sold through existing Osmonics distribution
channels. The revenues of MSI were less than $15,000 in each of the
last three years. The acquisition was recorded under the purchase
method of accounting.
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 net liabilities of approximately
$3,000. 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.
Pro forma 1997 combined financial results of Osmonics, Inc., MSI and
Membrex would be as follows:
1997: Osmonics MSI Membrex Combined
---- -------- ------ ------- --------
Sales $164,905 $ 10,038 $ 6,333 $181,276
Income from operations 13,359 244 (1,920) 11,683
Net income 9,793 (1,233) (3,237) 5,323
Net income per share -
assuming dilution $0.68 $0.37
1997 financial results of MSI include $3,200 of non-recurring charges
associated with the settlement of a patent infringement lawsuit.
The pro forma combined impact on financial results for first and
second quarter of 1998 was not material.
RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS:
Subsequent to the issuance of the Company's June 30, 1998 condensed
consolidated financial statements, the Securities and Exchange
Commission (SEC) issued new guidance on its views regarding the
valuation methodology used in determining purchased in-process
technology expensed on the date of acquisition. The Company has not
been contacted by the SEC; however, the Company has modified its
methods used to value the purchased in-process technology related to
the acquisitions of Micron Separations, Inc. and Membrex Corporation.
The revised valuation is based on methods prescribed in a letter
dated September 9, 1999 from the SEC on purchased in-process
technology sent to the American Institute of Certified Public
Accountants. The letter sets forth the SEC's views regarding the
valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development at the
date of acquisition. As a result of the revised valuations, the
Company's financial statements for the period ended June 30, 1998 have
been restated to reduce the amount of purchase price allocated to in-
process technology by $17,718 and to increase intangible assets by
$17,718. The change had no impact on net cash flows from operations.
The following table outlines the revisions to previously published
condensed consolidated financial statements (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
As Previously As Previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
Selling, general
and
administrative $10,359 $10,507 $20,233 $20,381
Special charges 25,706 7,988 25,706 7,988
Income (loss) from
Operations (23,139) (5,569) (19,234) (1,664)
Income (loss) from
continuing
operations
before income
taxes (24,120) (6,550) (20,791) (3,221)
Income taxes (5,303) (1,267) (4,138) (102)
Income (loss)
from continuing
operations (18,817) (5,283) (16,653) (3,119)
Net income (loss) (18,817) (5,283) (16,653) (3,119)
EPS Basic $ (1.35) $ (0.38) $ (1.19) $ (0.22)
EPS Diluted $ (1.35) $ (0.38) $ (1.19) $ (0.22)
At June 30, 1998
As Previously
Reported As Restated
----------- -----------
Other assets $ 37,835 $ 51,369
Total assets 187,924 201,458
Shareholder's equity 85,784 99,318
Total liabilities and
shareholders' equity 187,924 201,458
MANAGEMENTS DISCUSSION AND ANALYSIS OF IN-PROCESS R&D CHARGES:
The In-Process R&D acquired with the acquisition of Micron
Separations, Inc. was determined to have a fair value of $1.9 million
based on the Percent Complete Method. Out of nine on-going
projects, there are three major programs involving development of
specialized membranes for microporous filtration, diagnostics and
genetic research.
The first major project, judged to be 20% complete at acquisition,
could result in a class of membranes that could replace a sole source
product at approximately half the cost. If successful, this will
generate 5-10% margin improvement on products assembled with this
membrane. A patent has since been applied for and the savings are
expected to accrue in third quarter 1999.
The second major project, 40% complete at acquisition, has also
resulted in a patent application. This development allows the
tailoring of membrane to provide unique surface characteristics for
biotech, diagnostic and filtration applications. A patent disclosure
has also been filed on results of a companion project which
successfully allows the treatment of certain membranes to insure their
utility in applications that require membrane wettability.
Commercialization of this project is expected by mid-1999.
The third major project, 50% complete at acquisition, resulted in a
competitive membrane useful in genetic research and protein analysis.
It is expected to be commercialized in late 1998.
The other six projects are expected to result in new or improved
products, and an improved production process that will reduce product
costs.
No material changes from historical pricing, margin and expense levels
are anticipated. A risk-adjusted discount rate of 18% was applied to
the projected cash flows to determine the fair value of the In-Process
R&D. Less than $1 million of funding is projected to complete these
projects, including capital expenditures.
The fair value of the In-Process R&D acquired with Membrex was valued
at $4.3 million by the Percent Complete Method. Two products
contributed to the total value: 1) WasteWizard fluid separation units
valued at $3.2 million, and 2) Mini WasteWizard units valued at
$1.1 million.
The WasteWizard unit is an ultrafiltration system used for recycling
of various aqueous based fluids including hard surface cleaners and
metal cutting fluids. The new product could provide significant
process cost savings by minimizing chemical usage and wastewater
generation. The Mini WasteWizard unit is a smaller version of the
of the WasteWizard unit with a process capacity of less than 50
gallons per day. Both are protected by 5 U.S. patents pending.
At the time of the acquisition, the WasteWizard unit and Mini
WasteWizard unit were 85% and 50% complete, respectively. The
WasteWizard unit is scheduled to be completed and introduced in
Q2 1999 with full sales impact anticipated in Q3 1999. The Mini
WasteWizard is scheduled for field trials through Q4 1999 and market
introduction in Q1 2000. Less than $1 million of funding is
projected to complete these projects, including capital expenditures
for molds and other tooling.
No material changes from historical pricing, margin and expense levels
are anticipated. A risk-adjusted discount rate of 20% was applied to
the projected cash flows to determine the fair value of the In-Process
R&D.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
The Company has restated its financial statements as disclosed in
the notes to the financial statements.
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 22.2 24.4 22.8 23.7
Research, development
and engineering 5.3 6.6 5.4 6.6
Special charges 16.9 - 8.9 -
----- ----- ----- -----
Operating expenses 44.4 31.0 37.1 30.3
Income (loss) from
operations (11.8) 9.3 (1.8) 9.2
Other income (expense) (2.0) - (1.7) (0.1)
----- ----- ----- -----
Income (loss) from
Continuing operations
before income taxes (13.8) 9.3 (3.5) 9.1
Income taxes (2.7) 3.1 - 3.1
----- ----- ----- -----
Income (loss) from
continuing operations (11.1) 6.2 (3.5) 6.0
Recovery on discontinued
operations - - - 0.4
----- ----- ----- -----
Net income (11.1)% 6.2% (3.5)% 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 44.4% 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 $7,988 as operating expense (see Special Charge
discussion below). Operating expenses, excluding special
charges, decreased to 27.5% 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 28.2% 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
$9,988 ($7,569 net-of-tax or $0.54 per share assuming dilution).
Charges include a $6,222 charge to operating expense for
purchased research and development related to the acquisitions of
Micron Separations, Inc. ($1,902) and Membrex Corp. ($4,320) 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 * $ 6,222
Corporate restructuring 875
SAP / Re-engineering costs 891
Slow moving inventory 2,000
-------
Gross special charges $ 9,988
Less slow moving inventory in COS (2,000)
-------
Special charge in Operating Expense $ 7,988
=======
* See Restatement of Quarterly Financial Statements in notes
to the condensed consolidated financial statements.
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
3.2%. This rate represents a decrease from the 31.7% rate
incurred for calendar year 1997, due primarily to the non-
deductibility of the Micron Separations, Inc. in-process R&D that
was written off in second quarter 1998 and 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 $1,902 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 (LOSS)
Net income (loss) for the quarter ended June 30, 1998 was
$(5,283). 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 $(0.38) or
$0.17 excluding special charges, versus $0.18 for the same period
last year. Year-to-date net income (loss) was $(3,119) 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 $(0.22) 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, changes in federal or state laws, and revisions
in accounting industry methodology.
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 2,347,24 179,280
Item 5. OTHER INFORMATION
A. 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.
B. 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: March 29, 1999
--------------
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>
<ARTICLE> 5
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,899
<SECURITIES> 15,632
<RECEIVABLES> 31,768
<ALLOWANCES> 1,001
<INVENTORY> 34,391
<CURRENT-ASSETS> 94,058
<PP&E> 104,712
<DEPRECIATION> 48,681
<TOTAL-ASSETS> 201,458
<CURRENT-LIABILITIES> 64,004
<BONDS> 33,819
0
0
<COMMON> 140
<OTHER-SE> 99,178
<TOTAL-LIABILITY-AND-EQUITY> 201,458
<SALES> 89,503
<TOTAL-REVENUES> 89,503
<CGS> 57,951
<TOTAL-COSTS> 57,951
<OTHER-EXPENSES> 33,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,557
<INCOME-PRETAX> (3,221)
<INCOME-TAX> (102)
<INCOME-CONTINUING> (3,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,119)
<EPS-PRIMARY> ($0.22)
<EPS-DILUTED> ($0.22)
</TABLE>
