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 September 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
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 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 Nine Months Ended
September 30, 1998 (as restated) and 1997
Consolidated Balance Sheets 3
September 30, 1998 (as restated) and December 31, 1997
Consolidated Statements of Cash Flows 4
For the Nine Months Ended
September 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 9-14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
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 Nine Months Ended
September 30, September 30,
(As Restated)* (As Restated)*
1998 1997 1998 1997
Sales $44,606 $42,420 $134,109 $126,522
Cost of sales 28,100 25,466 86,051 76,361
------ ------ ------ ------
Gross profit 16,506 16,954 48,058 50,161
Less:
Selling, general
and administrative 11,406 10,461 31,787 30,383
Research, development
and engineering 2,636 2,676 7,483 8,235
Special charges - - 7,988 -
------ ------ ------ ------
Income (loss) from operations 2,464 3,817 800 11,543
Other income (expense) (1,054) (616) (2,611) (694)
------ ------ ------ ------
Income (loss) from continuing
operations before income taxes 1,410 3,201 (1,811) 10,849
Income taxes 433 905 331 3,526
------ ------ ------ ------
Income (loss) from continuing 977 2,296 (2,142) 7,323
operations
Recovery on discontinued operations - - - 325
------ ------ ------ ------
Net income (loss) $ 977 $ 2,296 $(2,142) $ 7,648
====== ====== ====== ======
Earnings per share - basic
Income (loss) from
continuing operations $ 0.07 $ 0.16 $ (0.15) $ 0.52
Net income $ 0.07 $ 0.16 $ (0.15) $ 0.51
Earnings per share - assuming dilution
Income (loss) from
continuing operations $ 0.07 $ 0.16 $ (0.15) $ 0.54
Net income $ 0.07 $ 0.16 $ (0.15) $ 0.53
Average shares outstanding
Basic 13,982 13,920 13,964 14,064
Assuming dilution 14,192 14,285 13,964 14,360
*See Restatement of Quarterly Financial Statements in notes to the
condensed consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
September 30, December 31,
1998 1997
-------- --------
ASSETS (As Restated)*
Current assets
Cash and cash equivalents $ 2,666 $ 4,872
Marketable securities 14,415 17,004
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,127 in 1998, and $888 in 1997 32,129 28,969
Inventories 32,031 35,228
Deferred tax assets 7,127 1,413
Other current assets 2,023 1,639
-------- --------
Total current assets 90,391 89,125
Property and equipment, at cost
Land and land improvements 5,581 5,535
Building 30,455 29,278
Machinery and equipment 68,474 62,770
-------- --------
104,510 97,583
Less accumulated depreciation (49,055) (42,550)
55,455 55,033
Other assets 50,544 20,325
-------- --------
Total assets $196,390 $164,483
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,296 $ 9,728
Notes payable and current portion
of long-term debt 31,734 16,174
Other accrued liabilities 17,105 17,950
-------- --------
Total current liabilities 58,135 43,852
-------- --------
Long-term debt 33,316 13,792
Other liabilities 47 25
Deferred income taxes 4,148 4,439
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000 shares
Issued -- 1998: 13,999,240 and
1997: 13,943,544 shares 140 140
Capital in excess of par value 20,888 20,261
Retained earnings 77,986 80,128
Unrealized gain on marketable securities 1,786 2,180
Foreign currency translation adjustments (56) (334)
-------- --------
Total liabilities and shareholders' equity $196,390 $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)
Nine Months Ended
September 30,
1998 1997
-------- --------
(As Restated)*
Cash flows from operations:
Net income (loss) $ (2,142) $ 7,648
Non-cash items included in net income:
Depreciation and amortization 5,923 4,118
Deferred income taxes (2,609) 434
Gain on sale of investments (171) (628)
Special charges 9,988 -
Changes in assets and liabilities
(net of business acquisitions)
Accounts receivable (1,136) (3,005)
Inventories and other current assets 3,418 2,785
Accounts payable and accrued liabilities (7,165) (2,634)
------- -------
Net cash provided by operations 6,106 8,718
------- -------
Cash flows from investing activities:
Business acquisitions
(net of cash acquired including purchased R&D) (40,713) (11,970)
Purchase of investments (576) (1,658)
Sale of investments 2,729 2,271
Purchase of property and equipment (4,879) (5,167)
Sales of property and equipment 110 374
Other 193 120
------- -------
Cash used in investing activities (43,136) (16,030)
------- -------
Cash flows from financing activities:
Proceeds from notes payable and debt 38,000 12,204
Reduction of debt (4,081) (2,169)
Issuance of common stock 627 800
Purchase of company stock - (5,249)
------- -------
Net cash provided by financing activities 34,546 5,586
------- -------
Effect of exchange rate changes on cash 278 311
Decrease in cash and cash equivalents (2,206) (1,415)
Cash and cash equivalents - beginning of year 4,872 5,392
------- -------
Cash and cash equivalents - end of quarter $ 2,666 $ 3,977
======= =======
*See Restatement of Quarterly Financial Statements in notes to the
condensed consolidated financial statements.
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.
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.
Operating results for the three months and nine months ended September 30,
1998, are not necessarily indicative of the results that may be expected for
the full year 1998.
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:
Nine Months Ended
September 30,
1998 1997
------ ------
Net income (loss) $(2,142) $ 7,648
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments 278 (260)
Unrealized gains/(losses) on securities (394) 32
------ ------
Other comprehensive income (loss), before tax (116) (228)
Income tax expense related to items of
other comprehensive income (loss) (35) (74)
------ ------
Other comprehensive income (loss), net of tax (81) (154)
------ ------
Comprehensive income (loss) $(2,223) $ 7,494
====== ======
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 of 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 years 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, second and third
quarter of 1998 was not material.
RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS:
Subsequent to the issuance of the Company's September 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, 1998
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 September 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 Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
As Previously As As Previously As
Reported Restated Reported Restated
Selling, general and $11,258 $11,406 $31,491 $31,787
and administrative
Special charges - - 25,706 7,988
Income (loss) from operations 2,612 2,464 (16,622) 800
Income (loss) from continuing
operations before income taxes 1,558 1,410 (19,233) (1,811)
Income taxes 467 433 (3,671) 331
Income (loss) from continuing
operations 1,091 977 (15,562) (2,142)
Net income (loss) 1,091 977 (15,562) (2,142)
EPS Basic $ 0.08 $ 0.07 $(1.11) $(0.15)
EPS Diluted $ 0.08 $ 0.07 $(1.11) $(0.15)
At September 30, 1998
As Previously
Reported As Restated
--------- ---------
Other assets $ 37,124 $ 50,544
Total assets 182,970 196,390
Shareholder's equity 87,324 100,744
Total liabilities and shareholders' equity 182,970 196,390
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 membrane 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 WasteWizard 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 Waste Wizard is scheduled to be
completed and introduced in Q2 1999. The Mini WasteWizard unit 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. MANAGEMENTS 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 nine months ended September 30, 1998 and
1997.
Percent of Sales Percent of Sales
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.0 60.0 64.2 60.4
---- ---- ---- ----
Gross profit 37.0 40.0 35.8 39.6
Selling, general and administrative 25.6 24.7 23.7 24.0
Research, development and engineering 5.9 6.3 5.6 6.5
Special charges - - 6.0 -
---- ---- ---- ----
Operating expenses 31.5 31.0 35.3 30.5
Income (loss) from operations 5.5 9.0 0.5 9.1
Other income (expense) (2.4) (1.5) (1.9) (0.6)
---- ---- ---- ----
Income (loss) from continuing
operations before income taxes 3.1 7.5 (1.4) 8.5
Income taxes 0.9 2.1 0.2 2.8
---- ---- ---- ----
Income (loss) from continuing operations 2.2 5.4 (1.6) 5.7
Recovery on discontinued operations - - - 0.3
---- ---- ---- ----
Net income (loss) 2.2% 5.4% (1.6)% 6.0%
==== ==== ==== ====
SALES
Sales for the third quarter ended September 30, 1998 were $44,606, which is
a 5.2% increase from the third quarter of 1997. Year-to-date sales through
September 1998 were $134,109, which is a 6.0% increase over the
corresponding 1997 level. Acquisitions accounted for all of the third
quarter and year-to-date sales increases. Internal sales were affected by a
slowdown in capital equipment sales, and in components sold to our OEM
customers. Sales also slowed to customers primarily in the Asian and
Eastern European markets and partially in the United States.
GROSS MARGIN
Gross margin for the third quarter of 1998 was 37.0% of sales versus 40.0%
for the corresponding period in 1997. The gross margin for the nine months
ended September 30, 1998 was 35.8%, compared to 39.6% in 1997. Current
year-to-date gross margins include a 1.5 percentage point unfavorable impact
related to a second quarter special charge for slow moving inventory. The
decrease in gross margins is also due to lower utilization of certain
production facilities, and to selective price reductions on some products to
maintain market share. The Company has taken action to reduce its
manufacturing capacity and improve gross margins. On August 21, 1998, the
Company announced a plan to reduce employment by 10% and close four
manufacturing facilities by the end of the calendar year.
OPERATING EXPENSES
Operating expenses in the third quarter were 31.5% of sales compared to
31.0% in the third quarter of 1997. For the nine months ended September 30,
1998 operating expenses, excluding a special charge in the second quarter,
were 29.3% of sales, compared to 30.5% for the same period of 1997. The
increase in third quarter operating expenses relates primarily to the
implementation of the SAP information system and consulting fees that are
being expensed as incurred, as required by recent accounting rule changes,
instead of being capitalized as they had been in previous quarters.
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 included
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 included 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 in the third quarter was $1,054, versus $616 for the third
quarter of 1997. The increase is primarily the result of interest expense
of $375 and $325 on 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.
INCOME TAXES
The effective tax rate for third quarter 1998 was 30.7%. The effective tax
rate for the nine months ended September 30, 1998 was 18.3%. In the same
period of 1997 the effective tax rate was 32.5%. This rate decrease is 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
Net income for the quarter ended September 30, 1998 was $977 or $0.07 per
basic and diluted share. For the comparable 1997 quarter, net income was
$2,296 or $0.16 per basic and diluted share. The September 30, 1998 year-
to-date net loss was $(2,142) or $(0.15) per basic and diluted shares,
compared to net income of $7,648 or $0.54 per basic share and $.053 per
diluted share for the same period of 1997. The current year net loss is due
to a second quarter special charge. Without the charge, year-to-date net
income would have been $5,427 or $0.39 per basic and $0.38 per diluted
shares.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash, cash equivalents and
marketable securities of $17,081 versus $21,876 at December 31, 1997. The
current ratio was 1.6 at September 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
$33,316 at September 30, 1998. This increase was the result of entering
into a new $20,000 long-term loan from an insurance company in March 1998.
The Company's current debt increased from $16,174 at December 31, 1997 to
$31,734 at September 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.
YEAR 2000 READINESS DISCLOSURE
STATE OF READINESS:
Osmonics is currently working to fully determine and resolve the potential
impact of the Year 2000 on the processing of date-sensitive information by
its computerized information systems. The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to
define the applicable year. Any of Osmonics' programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000, which could result in miscalculations or system
failures.
Osmonics' Year 2000 Project (the Project) began in 1994 with reviews of the
Company's business information systems. The objective was to improve access
to business information through an integrated, company-wide system which is
also Year 2000 compliant.
The Company is using a multi-step approach in conducting the Project. These
steps include: needs analysis, resource requirements, remediation and
testing, and implementation. The Project plan identified the major issues
and alignment of priorities, resources, and contingency plans. The
remediation and testing phases will continue through third quarter 1999.
The Project scope includes all computing systems hardware, software, IT
infrastructure (such as networks and telecommunications), and all third-
party suppliers and vendors. The Company has completed the needs analysis
phase of the Project. The Company has not yet completed, corrected and/or
tested for all possible Year 2000 compliance issues. The Company is
utilizing the services of consulting firms to assist in dealing with Year
2000 issues.
An integral part of the Project is the implementation of SAP, a company-wide
integrated business information and accounting system. The Company began
implementing SAP as its primary information system in 1996. SAP is being
implemented in a two-phase approach. Phase I, the conversion of the
previous primary computing system at the Company's headquarters and primary
manufacturing facility, in Minnetonka, MN was completed in 1997. Phase II
is the business process re-engineering within SAP, and the rollout to other
plants. The existing software at three other plants has also been upgraded
with Year 2000 compliant versions on an interim basis. As of September 30,
1998, the Company is approximately 75% complete on converting or upgrading
its systems to be Year 2000 compliant. The remaining three plants are
scheduled to be completed by September 30, 1999.
Very few of the Company's products contain software or embedded
microprocessors. The Company has reviewed all of these products and
identified only a very few that will be impacted by the year 2000. In all
cases, the effect will be in the retrieval and display of logged data and
not in the correct operation of the product. A solution for each of the
products identified has either been made available, or will made available
to our customers prior to the year 2000.
Customers and vendors could be disrupted with their own Year 2000 issues,
which could affect their ability to buy Osmonics products or supply Osmonics
with raw materials. However, the Company believes this is unlikely, since
no single customer or vendor represents more than 5% percent of the
Company's present business. Alternative sources of supply are also
currently available and the Company believes will be available if needed.
However, the demand upon such alternative suppliers could result in the
unavailability of some products. The Company is in the process of seeking
assurances from its material suppliers that their ability to sell to the
Company will not be materially impacted by any Year 2000 issue. The
Company does not at this time see the need to develop additional contingency
plans to deal with this aspect of the Year 2000 problem.
COST
As of September 30, 1998, the Company has invested over $5,000 during the
years 1995-1998 to upgrade its information systems. The remaining cost
associated with required modifications just to become Year 2000 compliant is
not expected to be material to the Company's financial position. The
estimated total external cost to accelerate the replacement of certain
hardware, software, and infrastructure is not expected to exceed $500. The
remaining SAP implementation costs and the related business process
improvements, which would be incurred in any case, are excluded from the
figure above.
RISKS
Although the Company believes that it will be able to correct all material
Y2K problems prior to January 1, 2000, the failure to correct a material
Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could
materially and adversely affect the company's results of operations,
liquidity and financial condition. For example, the failure to update its
business information system could result in delayed performance on
contracts, loss of contracts, or lawsuits for failure to perform.
The Project is expected to significantly reduce the Company's level of
uncertainty regarding the Year 2000 problem. The Company believes that,
with the implementation of new business systems and completion of the
Project as scheduled, the possibility of significant interruptions of normal
operations should be minimal.
The failure of the Company's customers to be Year 2000 Compliant could
materially reduce or delay the Company sale of water systems because of
budget constraints and the diversion of customer resources to fixing the
customers' Year 2000 problems. At this time, the Company does not believe
that its customers' Year 2000 problems will materially impact the Company's
business.
Readers are cautioned that forward-looking statements contained in the Year
2000 update should be read in conjunction with the company's disclosures
under the heading - "Private Securities Litigation Reform Act" - that
follows.
CONTINGENCY PLANS
The Company has developed and put in place contingency plans to address
internal and external issues specific to the Year 2000 problem, to the
extent practicable. The Company believes that due to the widespread nature
of potential Year 2000 issues, the contingency planning process may require
further modifications as the Company obtains additional information
regarding: (1) the Company's internal systems and equipment during the
remediation and testing phases of its Year 2000 program; and (2) the status
of third party Year 2000 readiness.
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, the Company's cost and
expectations as to when it will complete the remediation and testing phases
of the Year 2000 readiness project, 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 1. LEGAL PROCEDINGS
Not Applicable
Item 2. CHANGE IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
A) Research Grant to Develop Membrane Systems
In the third quarter, the National Institute of Standards and
Technology (NIST) awarded Osmonics and Cargill, Inc. jointly a five-
year, $3.75 million research grant from its Advanced Technology
Program (ATP). The grant will fund the development of solvent-
resistant membrane systems for separation applications that
currently rely on energy-intensive distillation.
The grant will allow Osmonics to develop new polymeric membranes and
system designs with widespread applications in food, pharmaceutical,
and petrochemical processing. Because membranes typically require
90% less energy than distillation, these new membrane applications,
if commercialized, could help U.S companies save tens of millions in
energy costs annually. They may also reduce costs associated with
controlling airborne and wastewater emissions.
Osmonics will focus on technology development, and collaborate with
Cargill on commercial applications. Cargill is an international
marketer, processor, and distributor of agricultural, food,
financial and industrial products with 80,600 people at offices and
facilities in 1,000 locations in 65 countries.
B) Subsequent Event
In October, Osmonics announced that it signed an agreement with
Johns Manville to purchase its HYPURE liquid cartridge filter
business. The sale includes a cash purchase of the assets to
manufacture the products, as well as a long-term supply agreement
for the basic glass fiber. Johns Manville's 1997 sales of
cartridges were less than $5 million.
The HYPURE fiberglass disposable filters are high performance,
replaceable cartridges with excellent dirt holding capacity. They
are used for general industrial liquid filtration, coatings, high-
temperature and high-viscosity applications, and organic solvent
purification.
With the addition of HYPURE disposable filters to the existing
Hytrex, Purtrex, and Selex lines, Osmonics will offer one of the
broadest selections of replaceable depth filter cartridges in the
industry. HYPURE filters will be manufactured at Osmonics'
Minnetonka, MN facility.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) (27) Financial Data Schedule
(B) During the quarter ended September 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>
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<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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