UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 41-0955959
(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)
(612) 933-2277
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, par value New York Stock Exchange
$0.01 per share (Name of each exchange on which
(Title of each class) registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
or any amendment to this form 10-K. [X].
As of March 17, 1999, 14,008,163 Common Shares were
outstanding. The aggregate market value of the Common
Shares held by non-affiliates of the Registrant on such date
(based upon the closing price of such shares on the New York
Stock Exchange on March 17, 1999) was $112,065,304.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the
fiscal year ended December 31, 1998 (the "Annual Report to
Shareholders"), are incorporated by reference into Parts II
and IV. Portions of the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 12, 1999
(the "Proxy Statement"), and to be filed within 120 days
after the Registrant's fiscal year ended December 31, 1998,
are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
The following discussion contains certain information
and other forward-looking statements that involve a number
of risks and uncertainties. The actual results of Osmonics
could differ materially from the Company's historical
results of operations and those discussed in the forward-
looking statements. See "Certain Factors" and other
portions of this Form 10-K for discussion of some of these
risks and uncertainties.
Osmonics, Inc., founded in 1969, and its wholly-owned
subsidiaries (the "Company") design, manufacture and market
a wide range of products used in the filtration, separation
and processing of fluids. The Company classifies its
products into two segments, namely Consumables and Equipment.
Filtration processes cover a broad spectrum ranging
from those which separate discrete molecules and ions to
those which separate particles visible to the naked eye.
Historically, the Company specialized in Consumables and
Equipment utilizing crossflow filtration processes designed
to separate particles in the molecular range. Through
acquisitions and internal product developments, the Company
now manufactures a full line of filtration Consumables and
Equipment.
DEVELOPMENT OF BUSINESS
In addition to developing the Company's product line
through internal research and development, the Company has
expanded its business through a series of acquisitions.
Recent primary acquisitions include:
AUTOTROL - In October 1993, the Company acquired Autotrol
Corporation, founded in 1962, a manufacturer of
controllers for water softening and filtration equipment.
In addition, Autotrol manufactures other fluid control
and measuring devices such as a totalizing flow meter and
dosing system to assure proper treatment of cooling tower
water. Most of Autotrol's products are sold to OEM's who
then utilize them as a component in a water conditioning
device which is then sold to consumers.
LAKEWOOD INSTRUMENTS - In November 1994, the Company
acquired substantially all of the assets of Lakewood
Instruments, a Phoenix-based manufacturer of instruments,
sensors and analyzers used in the measurement of fluid
characteristics in the chemical water treatment and pure
water industries.
WESTERN FILTER COMPANY - In October 1995, the Company
acquired the assets and operations of Western Filter
Company, a supplier to the beverage and bottled water
industry for over 50 years. Western Filter has extensive
experience in providing the beverage market with
conventional water treatment technologies and membrane
water treatment.
DESALINATION SYSTEMS - In July 1996, the Company acquired
Desalination Systems, Inc. ("Desal"), a manufacturer of
crossflow filtration membrane and membrane elements that
are marketed worldwide. Desal, which has facilities in
Vista, California, has products that extend the range of
membranes and membrane elements previously offered by the
Company. The acquisition extended the Company's
distribution network for such products.
AQUAMATIC - In February 1997, the Company acquired
AquaMatic, Inc., a Rockford, Illinois-based company
offering a line of specialty valves and controllers for
the water conditioning market, which are sold through the
Company's existing distribution channels.
PURIFICATIONS PRODUCT COMPANY - In December 1997, the
Company acquired the assets of Purifications Products
Company ("PPC"), a manufacturer of a line of reverse
osmosis membrane elements and related products for
purifying home drinking water and producing high-quality
water for other applications. In addition, the PPC
division offers a line of Silt Density Index instruments
and a line of UV sterilization products. These products
are sold through the Company's existing distribution
channels.
MICRON SEPARATIONS, INC. - In February 1998, the Company
acquired Micron Separations, Inc. ("MSI"), a Westborough,
Massachusetts-based developer and manufacturer of
microfilter membrane and membrane products for diagnostic,
laboratory and industrial use. These products expand the
Company's range of nylon and cellulosic membrane
applications. The products are sold through the Company's
existing distribution channels.
MEMBREX CORP. - In April 1998, the Company acquired
Membrex Corp. of Fairfield, New Jersey. The acquisition
gives the Company the most hydrophilic UF membrane in the
market. This patented membrane is primarily used to
separate oil from water and is also used in a variety of
applications in biotechnology, laboratory and
petrochemical processes. Membrex also has a patented
machine using its UF membrane which separates oil from
aqueous chemical cleaners used in parts cleaning and other
industrial and commercial applications. Some Membrex
products are sold through an exclusive agreement with
Safety-Kleen Corp. and the remainder through the Company's
existing distribution channels.
PRODUCTS
The Company's products are divided into two primary
categories, namely, Consumables and Equipment.
CONSUMABLES GROUP:
The Company's Consumables consist primarily of
membranes, filter media, membrane elements and filter
cartridges. The filtration media and membrane used in the
Company's Consumables are produced primarily from polymers
or polymer-based compounds; however, other Consumables
utilize various inorganic compounds, metals and ceramics.
MEMBRANES AND ELEMENTS: Membranes are generally sheets
of material which, due to their unique characteristics, can
separate various materials from a fluid. Membrane elements
are the combination of membrane, support materials and
connections which allows the membrane to be broadly
utilized.
Membrane elements are typically replaced every 6 to 60
months, depending upon the severity of the application. The
Company manufactures the membrane material and membrane
elements used in its own systems, and also manufactures
membrane and membrane elements for other original equipment
manufacturers (OEM's) who include them as component parts in
their products.
The Company's membranes are used in many bioengineering
processes such as the production of high fructose corn
sugar, enzyme purification, and purification of
pharmaceuticals produced by biological processes. Other
uses include water purification applications in
hemodialysis, semiconductor manufacturing, production of
pure water for beverages, production of ultrapure
pharmaceutical and boiler feed water, industrial water
purification and waste removal for pollution control
compliance.
In addition, the Company sells its home reverse osmosis
(HRO) membrane elements to OEM's who package them into
systems for use in homes, offices and retail vending
establishments to produce purified drinking water. The
Company is registered with the United States Food and Drug
Administration for the manufacture and sale of certain
membrane elements used in biological preparations. The
Company is also registered with the U.S. FDA for the
manufacture of Class II medical devices used to purify water
for hemodialysis.
The Company markets its microfiltration normal flow
membrane for use in a variety of laboratory and medical
diagnostic applications. Numerous applications exist for
the Company's microfilters because of unique features,
including use in diagnostics, air monitoring and in
laboratory procedures for cancer and other research.
FILTER CARTRIDGES: The Company markets several types
of replaceable cartridge filters. Cartridge filters consist
of the various membranes and filtration media manufactured
by the Company and third parties together with various end
caps and other parts that allow them to be used and replaced
in filtration equipment and systems. These cartridge
filters include depth cartridge filters, pleated cartridge
filters, and rolled cartridge filters.
Cartridge filters are manufactured in a range of pore
sizes and particulate retention ratings. Cartridge filters
are designed to retain particles in the filters. As a
result, cartridge filters are typically replaced at
intervals of eight hours to four weeks, depending on the
particular application.
The Company's ceramic cartridge filters are marketed
for use in microfiltration and particulate filtration.
Ceramic cartridge filters are used to sterilize
pharmaceutical solutions and are used in laboratory
applications, where many analytic and diagnostic procedures
require purification or sterilization.
The Company also markets separation elements and
equipment used in coalescing filtration. Applications of
coalescing filtration include removal of contaminants from
compressed air and gas lines, dewatering of solvents and jet
fuel, and removal of trace oil from waste water prior to
disposal.
EQUIPMENT GROUP:
The Company manufactures a broad range of equipment
products ranging from large independent fluid treatment
systems custom designed for a particular customer and its
related filtration requirements to instruments used to
determine the amount of a particular substance in a fluid.
The Company's filtration equipment utilizes a wide range of
filtration techniques including: crossflow filtration
(which includes reverse osmosis, nanofiltration,
ultrafiltration and microfiltration), normal filtration
(which includes microfiltration and particle filtration),
coalescing filtration, ion exchange, clarification,
chromatography, ozonation and distillation. As a result,
the Company's Equipment is used in a broad range of
applications from complete fluid processing systems used in
beverage production to sensors for detecting the presence of
various levels of materials. The Company's Equipment
products are divided into three categories: Equipment and
Pumps, Fluid Controls and Valves, and Systems. The
Company's Equipment products are manufactured in multiple
locations throughout the United States.
EQUIPMENT AND PUMPS:
To provide a complete line of products for the
production of pure water, the Company manufactures
distillation equipment, both single-effect and more energy
efficient multi-effect. The Company's distillation product
lines range from laboratory stills to elaborate 5000-gallon-
per-hour multi-stage purifiers. The Company markets
distillation and related water purification equipment used
primarily in the laboratory and pharmaceutical industries.
The Company markets equipment to generate ozone from
electricity using corona discharge. Ozone is becoming
increasingly important as a bactericide and water purifier
because it kills bacteria, virus and giardia cysts 10 to
300 times faster than chlorine. Ozone is also effective in
oxidizing trace organic materials in water which are
precursors of the carcinogenic trihalomethanes. Ozone can
also be used to purify solvent-contaminated groundwater and
is often used to de-color water and wastewater.
In 1997, the Company announced a partnership with Fuji
Electric Co., Ltd., Japan and Fuji Electric Corp. of America
(Fuji) to manufacture high concentration ozone generators
using proprietary Fuji technology and components. This
partnership will provide the Company a strong entry into the
municipal water treatment market, as well as pulp and paper
and other large-scale oxidation applications. As part of
the agreement, the Company has the rights to manufacture and
sell such equipment world-wide except for Japan and Korea.
Other types of equipment manufactured by the Company
include centrifugal, diaphragm, and bellows pumps;
electronic controllers to operate precision valves for water
conditioning; flow control and measuring devices and
instrumentation; and housings and specialty holders and
devices for containing and retaining various membranes and
filters.
The Company markets a line of multi-stage centrifugal
pumps. These pumps were developed by the Company to meet
the need for dependable high pressure pumps and are
available in 60 standard sizes with flows ranging from 3
gallons per minute to 500 gallons per minute and pressure
capabilities from 25 pounds per square inch (psi) to
500 psi. The pumps are capable of operating in series to
obtain 1000 psi for seawater desalting and other high
pressure applications.
CONTROLS AND VALVES:
The Company is a leader in the manufacture of the
controllers and valves used to effect ion exchange
technology. The most used ion exchange process is for water
softening where the ions of calcium and magnesium are
replaced with sodium to reduce soap usage, improve boiler
operation and improve cleaning. Another ion exchange
application is to polish ultrapure water for electronics
manufacture and high-pressure boiler feed.
The Company markets totalizing flow meters and
electronic controllers made of corrosion resistant Noryl
plastic, as well as a line of Teflon PTFE fluid control
products including valves, fittings and flow meters used in
the electronics, pharmaceutical and chemical industries.
The Company markets both analog and digital products
for chemical water treatment and monitoring. The
instruments are used to measure and control conductivity,
pH, ORP, chlorine, specific ions, trihalomethanes (THM's)
and solvents in water, such as trichloroethylene. The
instruments are capable of being used in local operating
network (LON) communications and data acquisition.
CUSTOM EQUIPMENT AND SYSTEMS:
The Company also manufacturers crossflow and normal
filtration machines. Such machines are comprised of one or
more membrane elements, cartridge filters, pumps, valves,
controls, transformers, heat exchangers, pipes and a steel
frame on which the components are mounted. The size and
number of membrane elements and filters can vary greatly.
Pumps, pipes and frames of various sizes can be combined and
configured to accommodate the membrane elements or filters
required for various fluid handling or separation tasks.
The systems sold by the Company are comprised of one or
more machines or pieces of equipment designed and
manufactured by the Company as well as ancillary equipment,
such as additional pumps, heat exchangers and holding tanks.
The type, size and number of machines and the ancillary
equipment included in a system will vary with the nature and
size of the fluid separation task.
REPLACEABLE AND EQUIPMENT SALES
The following table shows the percentage of net sales
during the past five years attributable to the Company's
fluid processing and handling equipment compared to its
replaceable components:
Year Ended Replaceable
December 31 Equipment Components
----------- --------- -----------
1998 48% 52%
1997 46% 54%
1996 49% 51%
1995 48% 52%
1994 51% 49%
1993 49% 51%
As a result of a Company-wide reorganization on July 1, 1998
and to meet new SEC reporting requirements, the above sales
comparison will no longer be reported. Instead, business
results will be reported based on the two segments previously
discussed (Consumables and Equipment).
For the last six months of 1998, the Consumables Group
was 41% of total sales and the Equipment Group made up 59%
of sales. Although we will discontinue our previous method
of reporting, it is still our goal to have an equal balance
of replaceable sales to equipment sales.
SALES AND MARKETING
As a result of our broad range of Equipment and
Consumables, the Company's Equipment and Consumables are
used in the purification of water and industrial solutions,
dewatering and recycling of commercial and industrial
fluids, pollution control and seawater desalting. The
Company's principal domestic and international markets, from
which it derives more than 50% of its sales, include the
potable water, health care, biotechnology, food and
beverage, electronics, chemical processing and power
generation industries.
The Company focuses the marketing of its products through
four selling groups:
1. Custom equipment and systems.
2. Components and product sales.
3. Catalog and telephone sales.
4. International
These sales groups are supported by application engineers
and market support personnel.
The Company markets its custom machines and systems
through its direct sales force. The Company's standard
products are marketed to a network of independent
distributors with the help of Company district managers.
These distributors provide world-wide installation service
and stocking of a wide range of the Company's standard
products. Some sales are made directly to certain of the
Company's largest customers and to other manufacturers of
filtration equipment and systems.
The Company's marketing activities include appearances
at trade shows, direct mail campaigns, advertisements in
professional and trade journals and appearances before
professional organizations. The Company participates with
its customers in planning the systems in which its products
are to be used, particularly if new applications are
involved. In some cases, the sale of a system designed for
a particular customer may result from an engineering and
service relationship which has extended over several years.
RESEARCH AND DEVELOPMENT
Research and development activities emphasize product
development and applied research, with the goal of
developing proprietary products. Such expenditures totaled
$9,913,000 in 1998, $10,635,000 in 1997, and $10,937,000 in
1996.
PATENTS AND TRADEMARKS
The Company has been granted domestic and certain
foreign trademarks on numerous product names, and on its
logo-types. The Company holds domestic and foreign patents
on certain of its filter media, filters, controlling valves,
machine designs and other products. Although the Company
believes that its patents have value, the Company's business
is not dependent on any patent or group of related patents.
The Company considers its technological position to be
based primarily on its proprietary manufacturing methods,
innovative engineering and marketing expertise.
EMPLOYEES
As of December 31, 1998, the Company employed 1,360 persons
including 213 holding engineering or technical degrees.
COMPETITION
The Company experiences competition from a variety of
sources with respect to virtually all of its products,
although the Company knows of no single entity that competes
with it across the full range of its products and systems.
Competition in the markets served by the Company is based on
a number of factors, which may include price, technology,
applications experience, know-how, availability of
financing, reputation, product warranties, reliability,
service and distribution.
With respect to the Company's membrane and related
water treatment equipment business activity, there are a
number of companies, including several sizable chemical
companies, that manufacture membranes, but not equipment.
There are numerous smaller companies, primarily fabricators,
that build water treatment and desalination equipment, but
which generally do not have their own proprietary membrane
technology. A limited number of companies manufacture both
membranes and equipment. In ozone and distillation
equipment, there are both large and small competitors with
no single dominant competitor. In water softener controls
and valves, the Company has three primary and numerous
secondary competitors. Some competitors sell only
controller valves and some sell complete softeners. The
Company has numerous competitors in its conventional water
treatment and filtration products business activities.
With respect to the Company's disposable filter and lab
products, two companies, Pall and Millipore, dominate the
industry with several smaller companies competing in
selected product lines.
With respect to the Company's pump and fluid handling
products, there are numerous competitors of larger size and
with greater resources than the Company. Some competitors
have significantly broader product lines than the Company.
The Company is unable to state with certainty its
relative market position in all aspects of its business.
Many of its competitors have financial and other resources
greater than those of the Company.
RAW MATERIALS
The principal raw materials used by the Company are
various plastic materials including polyvinyl chloride,
polypropylene, Noryl PPO, Nylon cellulose acetate,
polycarbonate, polyester, polysulfone, and PTFE; ceramic and
glass materials, stainless steel, steel, brass, copper,
titanium, silver and various other synthetic materials, all
of which are normally available from sources within the
continental United States. Most raw materials used by the
Company are available from multiple sources of supply. A
limited number of materials are proprietary products of
major chemical companies which, if not available, would have
a material effect on the Company's sales and profits. The
Company believes it could find substitutes for these
materials if they should become unavailable, but has no
assurance that the substitute would perform as well or be
priced as favorably.
To date, the Company has experienced no difficulty in
securing any of its needed raw materials and components.
CUSTOMERS
No one customer accounted for 10 percent or more of the
Company's consolidated revenue in 1998, 1997, or 1996.
BACKLOG
The dollar amount of the Company's backlog of orders
considered to be firm at December 31, 1998, was $21.6
million. The comparable backlog at December 31, 1997, was
$28.2 million. The Company expects that nearly all orders
included in the backlog at December 31, 1998, will be filled
during the 1999 fiscal year. The Company does not believe
that its backlog at any time is necessarily indicative of
annual sales. The business of the Company is not subject to
significant seasonal variations.
GOVERNMENTAL REGULATION
Certain applications of the Company's reverse osmosis
and ultrafiltration products and distillation equipment are
subject to governmental regulation. Products used for
fractionation of cheese whey for human consumption are
subject to regulation by the United States Department of
Agriculture. Reverse osmosis, ultrafiltration and
distillation systems used in medical applications,
particularly the systems used in artificial kidney dialysis
equipment and pharmaceutical water for injection, are
subject to regulation by the United States Food and Drug
Administration. Ultrafiltration and microfiltration
products used for biological separations are subject to
regulation by the United States Food and Drug
Administration.
To date, compliance with federal, state and local
provisions relating to the protection of the environment has
had no material effect upon the capital expenditures,
earnings or competitive position of the Company.
FOREIGN OPERATIONS
Substantially all of the Company's operations and
assets are located in the United States. The Company has
sales offices and distribution facilities in France,
Thailand, Switzerland, Germany, Hong Kong, Japan, Singapore
and China. Limited assembly is conducted in Europe and
Asia. The profitability of domestic and foreign sales is
substantially equal. Sales to Canada are made on the same
trade terms as are available to U.S. customers.
Large export sales are primarily made on the basis of
confirmed irrevocable letters of credit or time drafts to
selected customers in U.S. dollars. Therefore, the Company
believes that currency fluctuation or political and economic
instability do not constitute substantial risks. See Note
13 of Notes to Consolidated Financial Statements for a
breakdown of the Company's foreign operations and export
sales by geographic area.
CERTAIN FACTORS
In addition to the factors discussed elsewhere in the
Company's Annual Report to Shareholders or this Form 10-K,
such as intellectual property and other technological risks,
regulatory risks, environmental risks and Year 2000 risks,
the following are some important factors that could cause
actual results or events to differ materially from those
contained in any forward-looking statements made by or on
behalf of the Company.
EARNINGS VARIATIONS:
The sale of capital equipment within the water
purification and fluid filtration industry is cyclical and
influenced by various economic factors including interest
rates and general fluctuations of the business cycle. A
significant portion of the Company's revenues are derived
from capital equipment sales. While the Company sells
capital equipment to customers in diverse industries and in
global markets, cyclicality of capital equipment sales and
instability of general economic conditions, including those
in Asia and Latin America and certain other markets, could
have a material adverse effect on the Company's revenues and
profitability.
Operating results from the sale of water purification
and fluid filtration industry also can be expected to
fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the
timing of new contracts, possible deferrals or cancellations
of existing contracts and the evolving and unpredictable
nature of the markets for water purification systems. As a
result of these and other factors, the Company's operating
results may be subject to quarterly or annual fluctuations.
There can be no assurance that at any given time the
Company's operating results will meet or exceed stock market
analysts' expectations.
COMPETITION:
All of the markets in which the Company competes are
highly competitive, and most are fragmented, with numerous
regional and local participants. There are competitors of
the Company in certain markets that are divisions or
subsidiaries of companies that have significantly greater
resources than the Company. Competitive factors include
price, technical expertise, product quality and
responsiveness to customer needs, including service and
technical support. The Company competes not only with a
large number of independent wholesalers and with other
distribution chains similar to the Company, but also with
manufacturers who sell directly to customers. The Company's
HRO business also competes with companies with national
distribution networks, businesses with regional scope, and
local product assemblers or service companies, as well as
retail outlets. The Company believes that there are
thousands of participants in the residential water business.
The HRO business competes principally on the basis of
price, product quality and "taste," service, distribution
capabilities, geographic presence and reputation.
Competitive pressures, including those described above, and
other factors could cause the Company to lose market share
or could result in significant price erosion, either of
which could have a material adverse effect upon the
Company's financial position, results of operations and cash
flows.
RISKS RELATED TO ACQUISITIONS:
The Company has, since 1987, acquired a number of
United States-based companies and product lines. The
Company plans to continue to consider and potentially pursue
acquisitions that expand the segments of the water and
wastewater treatment and water-related industries in which
it participates, complement its technologies, products or
services, broaden its customer base and geographic areas
served and/or expand its global distribution network, as
well as acquisitions which provide opportunities. The
Company's acquisition strategy entails the potential risks
inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities and potential profitability
of acquisition candidates and in integrating the operations
of acquired companies. Although the Company believes that
it has generally been successful in pursuing acquisitions,
there can be no assurance that acquisition opportunities
will continue to be available, that the Company will have
access to the capital required to finance potential
acquisitions, that the Company will continue to acquire
businesses or that any business acquired will be integrated
successfully or prove profitable.
PROFIT UNCERTAINTY IN FIXED-PRICE CONTRACTS:
A significant portion of the Company's revenues are
generated under fixed price contracts. To the extent that
original cost estimates are inaccurate, scheduled deliveries
are delayed or progress under a contract is otherwise
impeded, revenue recognition and profitability from a
particular contract may be adversely affected.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES:
The Company sells a significant amount of its product
in markets outside the United States. While these
activities may provide important opportunities for the
Company to offer its products and services internationally,
they also entail the risks associated with conducting
business internationally, including the risk of currency
fluctuations, slower payment of invoices, the lack in some
jurisdictions of well-developed legal systems,
nationalization and possible social, political and economic
instability.
ITEM 2. PROPERTIES
The executive offices and principal manufacturing facilities
of the Company are located in Minnetonka, Minnesota, a
suburb of Minneapolis.
A summary of the Company's main operating facilities is
as follows:
LOCATION STATUS SIZE FUNCTION
-------- ------ ---- --------
Minnetonka, MN Owned 309,600 sq ft Sales, Manufacturing,
Warehouse
Vista, CA Owned 110,000 sq ft Sales, Manufacturing,
Warehouse
Milwaukee, WI Owned 103,700 sq ft Sales, Manufacturing,
Warehouse
Rockford, IL Owned 58,400 sq ft Sales, Manufacturing,
Warehouse
Phoenix, AZ Owned 57,600 sq ft Sales, Manufacturing,
Warehouse
Syracuse, NY Owned 48,500 sq ft Sales, Manufacturing,
Warehouse
Westborough, MA Leased 46,800 sq ft Sales, Manufacturing,
Warehouse
Rockland, MA Leased 38,200 sq ft Sales, Manufacturing,
Warehouse
Fairfield, NJ Leased 23,800 sq ft Research & Development
Upland, CA Leased 22,000 sq ft Sales, Manufacturing,
Warehouse
Denver, CO Owned 20,700 sq ft Warehouse
Escondido, CA Leased 20,000 sq ft Manufacturing
Ft. Lauderdale, Leased 20,000 sq ft Sales, Warehouse
Le Mee, France Owned 18,300 sq ft Sales, Manufacturing,
Warehouse
Emmetsburg, IA Leased 8,800 sq ft Manufacturing, Warehouse
Bryan, TX Owned 2,500 sq ft Manufacturing, Warehouse
Total Owned 729,300 sq ft
Total Leased 179,600 sq ft
Total Owned and Leased 908,900 sq ft
Certain borrowings of the Company are collateralized by
real property of the Company.
The current manufacturing facilities are adequate for
intermediate-term operations. In addition, the Company
leases space in Thailand, China, Germany, Japan, Hong Kong,
Switzerland and Singapore that is used primarily for sales
activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in several lawsuits
incidental to its business. Management does not believe that
any of the lawsuits will have a material adverse effect on
the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's
security holders during the fourth quarter of the fiscal
year that ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER
NAME AND AGE POSITION WITH COMPANY SINCE
-------------------- ----------------------- -------
D. Dean Spatz (54) Chief Executive Officer 1969
and Chairman of the Board
Ruth Carol Spatz (54) Secretary 1969
Howard W. Dicke (61) Vice President Human Resource 1978
and Corporate Development,
and Treasurer
L. Lee Runzheimer (56) Chief Financial Officer 1988
Roger S. Miller (40) Sr. Vice President Corporate 1998
Sales & Marketing
Kenneth E. Jondahl (42) Vice President Commercial 1991
Development
Andrew T. Rensink (42) Vice President Quality and
Regulatory Affairs 1991
Phillip M. Rolchigo (37) Vice President Research & 1998
Development
Kenton C. Toomey (51) Executive Vice President 1997
Operations
Bjarne N. Nicolaisen (55) Vice President International 1998
All of the executive officers have been officers of the
Company for more than five years except the following:
Mr. Miller joined Osmonics in 1993 as a product manager
for pumps. Previously, Mr. Miller managed sales and
marketing for a machine tool manufacturer and for a capital
equipment manufacturer in the water treatment industry.
Mr. Nicolaisen came to Osmonics with the merger with
Desalination Systems, Inc. in 1996. Mr. Nicolaisen began
his career as a chemical engineer and regional sales manager
for Radiometer A/S in Denmark. He then joined DDS Group as
a sales manager in the reverse osmosis division, eventually
moving to the U.S. as sales director for dairy equipment in
1980. Mr. Nicolaisen became vice president of sales and
marketing for Desalination Systems in 1987.
Dr. Rolchigo came to Osmonics from Membrex Corp., which
Osmonics acquired in 1998. Dr. Rolchigo is the principal
inventor of advanced vortex flow filtration technology. His
technical expertise spans diverse industries from
environmental waste to pharmaceutical processing. He has
served as a research affiliate in chemical engineering for
MIT, and belongs to numerous industry organizations.
Mr. Toomey joined Osmonics in April of 1997 as Vice
President Operations. Prior to that he had been the Vice
President of Operations for DeZurik, a unit of General
Signal. Previously, throughout his 26 years with 3M
Company, Mr. Toomey held numerous director and management
positions in several 3M business units including plant
manager of the Dental Products Division.
All executive officers are elected annually by, and
serve at the direction of, the Board of Directors. D. Dean
Spatz and Ruth Carol Spatz are husband and wife.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
"Common Stock Data," and "Notes to Consolidated
Financial Statements," pages 16-21 of the Annual Report to
Shareholders, are incorporated herein by reference. As of
March 17, 1999 there were 2,313 shareholders of record.
The Company has not paid cash dividends on its common
shares. The Board of Directors currently intends to retain
its earnings for the expansion of the Company's business.
The Company has issued promissory notes which contain a
covenant limiting the payment of dividends to shareholders.
At December 31, 1998, approximately $5,000,000 of retained
earnings was restricted under this covenant.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data," page 29 of the Annual Report
to Shareholders, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial
Condition and Results of Operations," pages 22-25 of the
Annual Report to Shareholders, is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial information of the
Registrant and its subsidiaries, included in the Annual
Report to Shareholders, is incorporated herein by reference:
Page(s)
-------
Consolidated Statements of Income . . . . . . . . 12
Consolidated Balance Sheets . . . . . . . . . . . 13
Consolidated Statements of Cash Flows . . . . . . 14
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . 15
Notes to Consolidated Financial Statements . . 16-21
Independent Auditors' Report . . . . . . . . . . 25
Quarterly Income Data . . . . . . . . . . . . . . 26
PART III
ITEM 10. DIRECTORS
The information required by this item is incorporated
herein by reference to the definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year ended
December 31, 1998 and forwarded to stockholders prior to the
Company's 1999 Annual Meeting of Stockholder (the "1999
Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated
herein by reference to the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated
herein by reference to the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated
herein by reference to the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated financial statements of the
Registrant and its subsidiaries, included in
the Annual Report to Shareholders, are
incorporated by reference in Item 8, and are
also incorporated herein by reference.
(a) (2) Financial Statement Schedule
Reports of Independent Public Accountants on
Supplemental Schedule to the Consolidated
Financial Statements.
Valuation and qualifying accounts.
Schedules not listed above have been omitted
because they are either not applicable, not
material or the required information has
been given in the financial statements or in
the notes to the financial statements.
(2) Agreement and Plan of Merger among
Desalination Systems, Inc., Osmonics, Inc.
and DSI Acquisition Corp. dated
May 17, 1996. (Incorporated herein by
reference to Exhibit 2 to Registration
Statement on Form S-3, File No. 33-05029.)
(3)A. Certificate of Incorporation of the
Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to
Registration Statement on Form S-2,
File No. 33-336.) Certificate of
Amendment. (Incorporated herein by
reference to Exhibit (3)A on Form 10-K
for fiscal year ended December 31, 1987,
File No. 0-8282.)
B. By-Laws of the Registrant.
(Incorporated herein by reference to
Exhibit 3.2 to Registration Statement
on Form S-2, File No. 33-336.)
(4)A. Note Purchase Agreement dated July 12,
1991. (Incorporated herein by
reference to Annual Report on Form 10-K
for fiscal year ended December 31, 1991.)
(10)A.* 1993 Stock Option Plan and related
form of stock option agreement.
(Incorporated herein by reference to
Annex C of the Registrant's Joint
Proxy Statement/Prospectus dated
September 10, 1993.)
B. Stock Option Agreement with Michael L.
Snow, Director. (Incorporated herein
by reference to Annual Report on Form
10-K for fiscal year ended
December 31, 1993.)
D. 1995 Employee Stock Purchase Plan.
(Incorporated herein by reference to
the Registrant's Proxy Statement dated
March 27, 1995.)
E.* 1995 Director Stock Option Plan.
(Incorporated herein by reference to
the Registrant's Proxy Statement dated
March 27, 1995.)
* Denotes Executive Compensation Plan.
(13) 1998 Annual Report to Shareholders.
(Only those portions incorporated
herein by reference shall be deemed
filed with the Commission.)
(21) Subsidiaries of the Registrant.
(23) Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSMONICS, INC.
By /s/ D. Dean Spatz
------------------------
D. Dean Spatz, President
Dated: March 30, 1999
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signatures Title Date
-------------------- ---------------------- --------------
/s/L. Lee Runzheimer Chief Financial March 30, 1999
L. Lee Runzheimer Officer
(Principal Finance and
Accounting Officer)
/s/Howard W. Dicke Vice President Human March 30, 1999
Howard W. Dicke Resources and
Corporate Development,
and Treasurer
/s/Ruth Carol Spatz Director March 30, 1999
Ruth Carol Spatz
/s/Michael L. Snow Director March 30, 1999
Michael L. Snow
/s/Ralph E. Crump Director March 30, 1999
Ralph E. Crump
/s/Verity C. Smith Director March 30, 1999
Verity C. Smith
/s/Charles W. Palmer Director March 30, 1999
Charles W. Palmer
/s/William Eykamp Director March 30, 1999
William Eykamp
/s/D. Dean Spatz President, Chairman of March 30, 1999
D. Dean Spatz the Board and Director
(Principal Executive
Officer)
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Year ended December 31,
1998 1997 1996
-------- -------- --------
Sales $177,819 $164,905 $155,946
Cost of sales 114,718 99,860 92,523
Gross profit 63,101 65,045 63,423
Operating expenses:
Selling, general and
administrative 43,487 39,603 35,079
Research, development and
engineering 9,913 10,635 10,937
Special charges 7,988 1,448 -
61,388 51,686 46,016
Income from operations 1,713 13,359 17,407
Other income (expense), net:
Interest income 668 913 1,023
Interest expense (4,288) (2,226) (1,594)
Other 829 344 3,072
(2,791) (969) 2,501
Income (loss) from
continuing operations
before income taxes (1,078) 12,390 19,908
Income taxes (benefit)
(Note 11) (25) 3,927 6,441
Income (loss) from
continuing operations (1,053) 8,463 13,467
Recovery on discontinued
operations
(less income tax of $617) - 1,330 -
Net income (loss) $(1,053) $ 9,793 $ 13,467
Earnings (loss) per share -
basic (Note 16)
Income (loss) from
continuing operations $(0.08) $0.60 $0.95
Net income (loss) $(0.08) $0.70 $0.95
Earnings (loss) per share -
assuming dilution (Note 16)
Income (loss) from
continuing operations $(0.08) $0.59 $0.93
Net income (loss) $(0.08) $0.68 $0.93
The accompanying notes are an integral part of the
consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 576 $4,872
Marketable securities (Note 3) 14,271 17,004
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,057 in 1998 and $888 in 1997 34,767 28,969
Inventories (Note 4) 28,123 35,228
Deferred tax assets (Note 12) 6,610 1,413
Other current assets 5,034 1,639
Total current assets 89,381 89,125
Property and equipment, at cost:
Land and land improvements 5,606 5,535
Buildings 30,568 29,278
Machinery and equipment 69,510 62,770
105,684 97,583
Accumulated depreciation (48,871) (42,550)
56,813 55,033
Cash restricted for purchase and
construction of equipment (Note 5) 560 1,130
Goodwill, net of accumulated
amortization of $2,214 in 1998 and
$960 in 1997 43,927 15,257
Long-term investments 1,016 1,016
Other assets, net of accumulated
amortization of intangible assets of
$709 in 1998 and $412 in 1997 2,352 2,922
Total assets $194,049 $164,483
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,156 $ 9,728
Line of credit advances (Note 6) 26,000 14,012
Notes payable and current portion of
long-term debt (Note 9) 2,177 2,162
Accrued compensation and employee
benefits 4,475 6,125
Other accrued liabilities (Note 8) 13,597 11,825
Total current liabilities 55,405 43,852
Long-term debt (Note 9) 31,665 13,792
Deferred income taxes (Note 12) 4,806 4,439
Other liabilities 18 25
Commitments and contingencies (Note 14)
Shareholders' equity (Note 10):
Common stock, $0.01 par value
Authorized -- 50,000,000 shares
Issued -- 1998: 13,991,291 and 1997:
13,943,544 shares 140 140
Capital in excess of par value 20,733 20,261
Retained earnings 79,075 80,128
Other comprehensive income 2,207 1,846
Total shareholders' equity 102,155 102,375
Total liabilities and shareholders'
equity $194,049 $164,483
The accompanying notes are an integral part of the
consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1998 1997 1996
------- ------- -------
Cash flows from operations:
Net income (loss) $(1,053) $ 9,793 $13,467
Non-cash items included in net
income:
Depreciation and amortization 7,964 5,791 4,874
Deferred income taxes (2,059) 1,176 1,849
Gain on sale of land and (1,285) (573) (3,396)
investments
Special charges 9,988 1,448 -
Recovery on discontinued
operations - (1,947) -
Changes in assets and liabilities
(net of business acquisitions):
Accounts receivable (3,774) 1,370 (4,648)
Inventories 7,367 1,806 (3,349)
Other current assets (3,052) 457 155
Accounts payable and accrued
liabilities (5,994) (2,553) (3,216)
Net cash provided by operations 8,102 16,768 5,736
Cash flows from investing
activities:
Business acquisitions (net of cash
acquired) (39,880) (13,992) -
Purchase of investments (808) (902) (1,418)
Maturities and sales of
investments 4,480 2,478 9,570
Purchase of property and equipment (7,808) (6,609) (15,658)
Sales of property and equipment 110 456 2,535
Pending acquisition costs - (1,200) -
Other 424 (245) (169)
Net cash used in investing
activities (43,482) (20,014) (5,140)
Cash flows from financing
activities:
Proceeds from notes payable and
current debt 32,000 16,967 882
Reduction of long-term debt (2,264) (10,394) (2,219)
Cash restricted for purchase and
construction of Equipment 570 830 74
Issuance of common stock 472 934 1,324
Purchase of common stock - (5,249) -
Net cash provided by financing
activities 30,778 3,088 61
Effect of exchange rate changes on
cash 306 (362) 6
Increase (decrease) in cash and cash
equivalents (4,296) (520) 663
Cash and cash equivalents -
beginning of year 4,872 5,392 4,729
Cash and cash equivalents - end of
year $ 576 $4,872 $ 5,392
The accompanying notes are an integral part of the
consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Capital Accum-
in ulated
Excess Ret- Other Total
of ained Compre- Share-
Common Stock Par Earn- hensive holders
Shares Amount Value ings Income(2) Equity
Balance -
January 1,
1996 14,086,007 $141 $21,805 $58,314 $4,013 $84,273
Comprehensive
income
Net income - - - 13,467 - 13,467
Other
compre-
hensive
income(1)
Trans-
lation
adjustment - - - - (291) (291)
Marketable
securities
adjustment
(3) - - - - (830) (830)
Other
comprehensive
income - - - - (1,121) (1,121)
Total
comprehensive
income - - - - - 12,346
Employee
stock
purchase
plans 107,232 1 1,323 - - 1,324
Balance -
December 31,
1996 14,193,239 142 23,128 71,781 2,892 97,943
Comprehensive
income
Net income - - - 9,793 - 9,793
Other
compre-
hensive
income(1)
Trans-lation
adjustment - - - - (362) (362)
Marketable
securities
adjustment (3) - - - - (684) (684)
Other
comprehensive
income - - - - (1,046) (1,046)
Total
comprehensive
income - - - - - 8,747
Purchase of
common stock (316,100) (3) (3,800) (1,446) - (5,249)
Employee stock
purchase plans 66,405 1 933 - - 934
Balance -
December 31,
1997 13,943,544 140 20,261 80,128 1,846 102,375
Comprehensive
income (loss)
Net loss - - - (1,053) - (1,053)
Other
compre-
hensive
income(1)
Translation
adjustment - - - - 306 306
Marketable
securities
adjustment (3) - - - - 55 55
Other
comprehensive
income - - - - 361 361
Total
comprehensive
income (loss) - - - - - (692)
Employee stock
purchase plans 64,819 - 664 - - 664
401(k) stock
match 23,468 - 234 - - 234
Recovery of
common stock (40,540) - (426) - - (426)
Balance -
December 31,
1998 $13,991,291 $140 $20,733 $79,075 $2,207 $102,155
(1) All items included in other comprehensive income are shown net
of taxes. The tax effect for the marketable securities
adjustment was $22, $(265), and $(315) for 1998, 1997 and 1996,
respectively.
(2) Accumulated other comprehensive income is comprised of
accumulated currency translation of $(28), $(334) and $28; and
marketable securities adjustment of $2,235, $2,180 and $2,864 at
December 31, 1998, 1997 and 1996, respectively.
(3) Marketable securities reclassification adjustment for gains
realized in net income (net of tax) was $859, $573 and $2,766
for 1998, 1997 and 1996, respectively.
FIVE-YEAR RESULTS
(In thousands, except per share amounts)
INCOME DATA: (Restated for poolings-of-interests)
Year ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Sales $177,819 $164,905 $155,946 $130,783 $112,908
Income (loss)
rom continuing
operations (1,053) 8,643 13,467 11,879 10,454
Net income
(loss) (1,053) 9,793 13,467 11,879 10,454
Earnings (loss)
per share -
basic (Note 16)
Income (loss)
from continuing
operations $(0.08) $0.60 $0.95 $0.84 $0.75
Net income
(loss) $(0.08) $0.70 $0.95 $0.84 $0.75
Earnings (loss)
per share -
assuming
dilution
(Note 16)
Income (loss)
from continuing
operations $(0.08) $0.59 $0.93 $0.83 $0.74
Net income
(loss) $(0.08) $0.68 $0.93 $0.83 $0.74
Average shares
outstanding
Basic 13,976 14,031 14,145 14,058 13,941
Assuming
dilution 13,976 14,313 14,458 14,365 14,206
BALANCE SHEET DATA: (Restated for poolings-of-interests)
Total assets $194,049 $164,483 $152,176 $142,419 $110,715
Long-term debt 31,665 13,792 15,900 20,919 14,475
QUARTERLY FINANCIAL DATA
(In thousands, except per share amounts)
Quarterly Financial Data - 1998
Quarter Ended
March 31 June 30(b) September 30 December 31
-------- ---------- ------------ -----------
Sales $42,150 $47,353 $44,606 $43,710
Gross profit 16,107 15,445 16,506 15,043
Net income (loss) 2,164 (5,283) 977 1,089
Net income (loss)
per share - $0.16 $(0.38) $0.07 $0.08
basic (a)
Net income (loss)
per share -
assuming $0.15 $(0.38) $0.07 $0.08
dilution(a)
Quarterly Financial Data - 1997
Quarter Ended
March 31(b) June 30 September 30 December 31
----------- ------- ------------ -----------
Sales $42,313 $41,789 $42,420 $38,383
Gross profit 16,349 16,858 16,954 14,884
Net income 2,759 2,593 2,296 2,145
Net income per
share - $0.19 $0.18 $0.16 $0.15
basic (a)
Net income per
share - assuming $0.19 $0.18 $0.16 $0.15
dilution(a)
(a) Income per share has been restated to reflect the
adoption of the Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128).
See Note 16 of the consolidated financial statements.
(b) Special charges of $9,988 ($0.54 per share after taxes
assuming dilution) were recorded during the second
quarter of 1998. Special charges of $1,448 ($0.07 per
share after taxes) were recorded during the fourth
quarter of 1997. Recovery from discontinued operations
of $325 ($0.02 per share) and $1,005 ($0.07 per share)
were recorded in first and fourth quarters of 1997,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. Summary of Significant Accounting Policies
Osmonics, Inc. is a manufacturer and marketer of high
technology water purification, fluid filtration, fluid
separation, and fluid transfer equipment and
instruments, as well as the replaceable components used
in purification, filtration, and separation equipment.
These products are used by a broad range of industrial,
commercial, consumer and institutional customers.
The consolidated financial statements include the
accounts of Osmonics, Inc. and its wholly and majority
owned subsidiaries (the Company). Significant
intercompany accounts and transactions have been
eliminated.
Sales are recorded when the product is shipped or the
service is provided.
The estimated fair value for notes payable and long-term
debt approximates carrying value due to the relatively
short-term nature of the instruments and/or due to the
short-term floating interest rates on the borrowing.
The estimated fair value of notes receivable
approximates the net carrying value, as management
believes the respective interest rates are commensurate
with the credit, interest rate, and repayment risks
involved.
The Company considers highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents.
Inventories are stated at lower of cost (first-in, first-
out method) or market for all operations except for two
plants which have historically valued inventory on the
last-in, first-out method.
Depreciation and amortization of property and equipment
are provided on the straight-line method over estimated
lives of 3 to 40 years.
Deferred income taxes have been provided for income and
expenses which are recognized in different accounting
periods for financial reporting purposes than for income
tax purposes.
The Company accrues for the estimated cost of warranty
obligations at the time revenue is recognized.
The excess of cost over the fair market value of assets
acquired in acquisitions is amortized over not more than
40 years, with the majority at 30 years. In accordance
with Statement of Financial Accounting Standards (SFAS)
No. 121 on impairment of long-lived assets, the carrying
values of these intangibles are reviewed quarterly for
impairment using discounted cash flows when events or
circumstances warrant such a review. Other intangibles
are carried at cost and amortized using the
straight-line method over their estimated lives of 5 to
20 years.
In 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income; SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information
(Note 13); and SFAS No. 132, Pension and Other Post-
Retirement Disclosures which did not have a material
impact on operating results or financial position.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates that affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year
amounts to conform with current year presentations.
2. Business Acquisitions
On February 17, 1998, the Company acquired all of the
equity interest of Micron Separations, Inc. (MSI) of
Westborough, Massachusetts. The purchase price was
approximately $25,000 which included $1,902 of in-
process research and development (R&D) and $13,600 of
goodwill, which is being amortized on the straight-line
method over 30 years. MSI products are being sold
through existing Osmonics distribution channels,
complementing the Company's existing cartridge filter
products and providing a broader portfolio of diagnostic
and laboratory membrane products to the laboratory and
analytical testing markets. Revenues of MSI were less
than $15,000 in 1997 and 1996. The acquisition was
recorded under the purchase method of accounting.
The results of operations of MSI are included in the
consolidated statements of operation from the date of
acquisition.
On April 29, 1998, the Company acquired all of the equity
interest of Membrex Corp. ("Membrex") of Fairfield, New
Jersey. The purchase price was approximately $16,000
plus assumed net liabilities of approximately $3,000.
The price included $4,320 of in-process R&D and $15,700
of goodwill, which is being amortized on the straight-
line method over 30 years. Membrex products are
primarily related to membrane products and oil/water
separating systems for commercial and industrial
customers. Revenues of Membrex were less than $10,000
in 1997 and 1996. The acquisition was recorded under
the purchase method of accounting.
The results of operations of Membrex are included in the
consolidated statements of operations from the date of
acquisition.
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 (loss) 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
1998 was not material.
On February 25, 1997, the Company acquired all of the
equity interest of AquaMatic, Inc. of Rockford,
Illinois. The purchase price was approximately $15,000
and included $7,600 of goodwill which is being amortized
on the straight-line method over 40 years. AquaMatic
products are being sold through existing Osmonics
distribution channels, offering a more complete line of
specialty valves and controllers. Revenues of AquaMatic
were less than $15,000 in 1996 and 1995. The
acquisition was recorded under the purchase method of
accounting.
The results of operations of AquaMatic are included in
the consolidated statements of operations from the date
of acquisition.
On July 24, 1996, Desalination Systems, Inc. (DSI) merged
with the Company through an exchange of 1,312,827 shares
of the Company's common stock for the Class A common
stock and Class B common stock of DSI. The transaction
was accounted for as a pooling-of-interests. DSI's
principal business is the manufacture of membranes used
for reverse osmosis, nanofiltration, ultrafiltration and
microfiltration. The historical financial statements of
the Company have been restated to give effect to the
acquisition as though the companies had operated
together from the beginning of the earliest period
presented. Separate results of operations of the
combined entities for the six months ended June 30, 1996
were as follows:
Six Months
Ended June 30, 1996
-------------------
Sales:
Osmonics $ 64,405
DSI 11,642
Eliminations (269)
Combined $ 75,778
Net income:
Osmonics $ 5,975
DSI 721
Combined $ 6,696
The eliminations represent sales between the combined
entities prior to the combination. The sales
elimination had no significant effect on net income in
the years presented.
3. Marketable Securities
The Company considers all of its marketable securities
available-for-sale. Marketable securities at December
31, 1998 consisted of the following:
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
U.S. government
securities
0-5 year
maturity $1,640 $ 36 $ (1) $1,675
Municipal bonds
0-5 year
maturity 3,847 222 - 4,069
6 year or
greater maturity 1,009 47 - 1,056
Corporate debt
securities
and other
0-5 year
maturity 478 2 (3) 477
Equity securities 3,602 3,723 (331) 6,994
Total before-tax
effect $10,576 4,030 (335) $14,271
Deferred tax
effect of
unrealized
(gains) losses (1,592) 132
Net unrealized
gains (losses)
on marketable
securities $2,438 $(203)
Marketable securities at December 31, 1997 consisted of the
following:
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
U.S. government
securities
0-5 year
maturity $3,835 $ 28 $ (15) $3,848
6 year or
greater maturity 400 - (1) 399
Municipal bonds
0-5 year
maturity 3,517 175 - 3,692
6 year or
greater maturity 998 91 - 1,089
Corporate debt
securities
and other
0-5 year
maturity 707 2 (7) 702
6 year or
greater maturity 100 4 - 104
Equity securities 3,887 3,432 (149) 7,170
Total before-tax
effect $13,444 $3,732 $ (172) $17,004
Deferred tax
effect of
unrealized
(gains) losses (1,447) 67
Net unrealized
gains (losses)
on marketable
securities $2,285 $ (105)
In 1998, proceeds from sales of available-for-sale
securities were $2,253. The gains and losses on these
sales were $949 and $90, respectively, determined on the
specific identification method.
Market values are based on quoted market prices.
In 1997, proceeds from sales of available-for-sale
securities were $1,678. The gains and losses on these
sales were $614 and $41, respectively, determined on the
specific identification method.
4. Inventories
Inventories consist of the following:
December 31,
1998 1997
-------- --------
Finished goods $ 9,455 $ 9,757
Work in process 5,156 7,544
Raw materials 15,479 19,832
30,090 37,133
Adjustment to reduce
inventories of $10,700 and
$12,446 to the last-in,
first-out method
(See Note 1) (1,967) (1,905)
$28,123 $35,228
5. Restricted Cash
Cash restricted for purchase and construction of
equipment at December 31, 1998 and 1997 represents
proceeds received from the issuer of Industrial
Development Revenue Bonds (see Note 9) restricted to the
purchase and construction of property and equipment used
in one of the Company's operations.
6. Line of Credit
The Company, at December 31, 1998, had an unsecured
revolving line of credit of $35,000 for working capital
needs. The revolving line of credit matures on March
31, 2003 and borrowings bear a variable interest rate
related to LIBOR. The terms of the credit agreement
contain certain restrictions related to financial
ratios, indebtedness, tangible net worth and capital
expenditures. As of December 31, 1998, the Company was
not in compliance with all debt covenants; however, a
debt compliance waiver was obtained (Note 9). As of
December 31, 1997, the Company was in compliance with
all debt covenants. At December 31, 1998, the Company
had borrowings outstanding under the line of $26,000,
and the interest rate was 7.08%. At December 31, 1997,
the Company had borrowings outstanding under the line of
$14,012, and the interest rate was 6.27%.
7. Discontinued Operations
In September 1982, Autotrol Corporation (Autotrol), which
has since been merged with the Company, discontinued its
wastewater business. In subsequent years Autotrol
incurred certain expenses related to the wastewater
products and accrued for contingent liabilities. The
Company determined in 1997 that the reserve was no
longer required and recognized $1,330 ($0.09 per
share.assuming dilution) of after-tax income as a
recovery on discontinued operations.
8. Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1998 1997
------- -------
Warranty and start-up $ 2,098 $ 1,900
Professional fees and other
accruals 4,390 2,123
Deferred acquisition-related
payments 2,827 3,000
Customer deposits 4,282 4,802
$13,597 $11,825
9. Debt
Long-term debt is as follows:
December 31,
1998 1997
------- -------
Promissory notes; interest
payable quarterly at the
three-month LIBOR plus 80
b.p.; due through 2001. The $ 5,725 $ 7,150
interest rate on December
31, 1998 was 6.24%.
Industrial development revenue
bonds (IDRB's), principal
due in varying annual
payments over 30 years;
interest payable monthly at
a variable rate determined 7,450 7,950
periodically by the bond
remarketing agent (5.35% at
December 31, 1998).
Promissory notes; interest
payable quarterly at fixed 5,000 -
rate of 6.72%; due through
2008.
Promissory notes; interest
payable quarterly at the
three-month LIBOR plus
75 b.p.; due through 2008. 15,000 -
The interest rate on
Decembber 31, 1998 was 6.19%.
Mortgage notes payable to two
French banks; interest
payable monthly at PIBOR
plus 40 b.p. The interest 402 502
rate on December 31, 1998
was 3.25%.
Other notes 265 352
33,842 15,954
Current portion (2,177) (2,162)
$31,665 $13,792
The IDRB debt and mortgage notes payable to French banks
are collateralized by real and personal property of the
Company.
Aggregate maturities of long-term debt outstanding at
December 31, 1998 are:
1999 - $2,177; 2000 - $2,253; 2001 - $2,253; 2002 -
$5,146; 2003 - $3,679; beyond 2003 - $18,334.
The promissory notes contain a covenant which limits the
payment of dividends to shareholders. At December 31,
1998, approximately $5,000 of retained earnings were
restricted under this covenant. In addition, the
Company's various debt agreements contain certain
restrictions related to financial ratios, indebtedness,
tangible net worth and capital expenditures.
As a result of financial results in 1998, the Company was
out of compliance with the Leverage Ratio requirement
related to its revolving line of credit at various
measurement dates throughout the year and the Fixed
Charge Coverage ratio related to its long-term debt at
December 31, 1998. The Company has received a waiver
from the lenders in regard to these covenants. In
addition, the Company entered into a loan amendment with
the revolving line of credit lender in February 1999
which reduces the Leverage Ratio requirement. As of
December 31, 1998 and 1997, the Company was in
compliance with all other debt covenants.
The Company also has an unsecured standby letter of
credit of $5 million with a large financial institution.
As of December 31, 1998, no amount was outstanding.
Cash payments for interest related to all debts of the
Company were $4,037, $2,033, and $1,551, for the years
ended December 31, 1998, 1997, and 1996, respectively.
10. Stock Options
In 1998, the Board of Directors approved an amendment to
the 1993 Stock Option Plan which expanded reserved
common shares to 800,000 from 298,863. The expansion of
this plan is intended to facilitate ownership and
increase the interest of key employees in the growth and
performance of the Company, thus enhancing the value of
the Company for the benefit of the shareholders.
Options are granted at a price not less than market
value on the date of the grant and become exercisable
over a period of up to ten years, after which they
expire. The 1993 Stock Option Plan terminates on
September 1, 2003.
The Company's 1995 Director Stock Option Plan provides
that each director of the Company shall automatically
receive, as of the date of each Annual Meeting of
Shareholders, a non-qualified option to purchase 3,000
shares of the Company's common stock. The options have
a ten-year term and are exercisable one year after the
grant date at an exercise price equal to the fair market
value of the shares on the grant date. The 1995
Director Stock Option Plan terminates on May 17, 2005.
Shares reserved for future issuance under all of the
Company's plans totaled approximately 1.855 million at
December 31, 1998.
The Company applies Accounting Principals Board (APB)
Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for
its plans. No compensation cost has been recognized for
its stock-based compensation plans as the exercise price
of the stock option grants was equal to the fair market
value of the shares on the grant date. Had compensation
costs been determined based on the fair value of the
1998, 1997, and 1996 stock option grants consistent with
the requirements of SFAS No. 123 "Accounting for Stock-
Based Compensation" (SFAS 123), net income and earnings
per share would have been reported as the following pro
forma amounts:
1998 1997 1996
-------- ------ -------
Net income (loss)
As reported $(1,053) $9,793 $13,467
Pro forma $(1,468) $9,613 $13,422
Earnings (loss)
per share _
assuming dilution
As reported $ (0.08) $ 0.68 $ 0.93
Pro forma $ (0.11) $ 0.67 $ 0.93
The fair value of the stock options used to calculate the
pro forma net income and earnings per share amounts
above is estimated using the Black-Scholes options
pricing model with the following weighted average
assumptions:
1998 1997 1996
----- ----- -----
Dividend yield 0% 0% 0%
Expected
volatility 42.5% 24.2% 22.5%
Risk-free
interest rate 6.0% 6.0% 6.1%
Expected life 5.0 5.0 5.0
Information related to stock options at December 31 under
the aforementioned stock option plans is as follows:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Options (000) Price (000) Price (000) Price
------------- ------ -------- ------ -------- ------ --------
Outstanding at
beginning of
year 653 $ 9.9 505 $ 7.8 470 $ 6.9
Granted 379 11.9 154 17.2 35 19.7
Exercised - - - - - -
Forfeited 85 15.5 6 17.5 - -
Outstanding at
end of year 947 10.2 653 9.9 505 7.8
Options
exercisable
at year-end 486 7.4 410 6.7 329 6.0
Weighted
average
fair value of
options
granted
during the
year $5.48 $5.81 $6.59
The following table summarizes information about stock
options outstanding at December 31, 1998:
Options
Options Outstanding Exercisable
------------------------------ -----------------
Shares Shares
Outstandi Remaining Weighted Exercis- Weighted
Range of ng at Con- Average able at Average
Exercise 12/31/98 tractual Exercise 12/31/98 Exercise
Prices (000) Life Price (000) Price
------------- --------- -------- -------- -------- --------
2.23 - 6.72 373 3.7 yrs $ 4.95 373 $ 4.95
8.95 - 13.42 286 9.0 yrs 10.41 45 12.33
13.43 - 17.90 253 8.5 yrs 16.42 50 16.68
17.91 - 22.38 35 7.5 yrs 19.57 18 19.57
In 1998, the Company adopted a Stock Match Plan under
which the Company matches, in the form of Company common
stock, certain eligible U.S. employee savings plan
contributions. Employees are vested in the shares
immediately. Shares issued under the Stock Match Plan
approximated 23,468 shares in 1998 at a cost of
approximately $234,000. At December 31, 1998, there
were approximately 176,500 shares reserved for future
issuance.
The Company has an Employee Stock Purchase Plan which
allows eligible employees to purchase common shares of
the Company at 85% of market price. During 1998,
approximately 64,819 shares were issued at prices
ranging from $7.18 to $14.08 per share. During 1997,
approximately 59,000 shares were issued at prices
ranging from $12.40 to $17.58 per share. During 1996,
approximately 41,000 shares were issued at prices
ranging from $16.10 to $20.03 per share. At December
31, 1998, there were approximately 213,000 shares
reserved for future issuance.
The Company had 500,000 authorized and unissued shares of
preferred stock at December 31, 1998 and 1997.
11. Income Taxes
Income tax expense consists of:
Year ended December 31,
1998 1997 1996
------- ------- -------
Current:
Federal $ 213 $2,741 $3,556
State 261 (39) 395
Foreign 395 666 640
Deferred:
Depreciation 298 351 370
Amortization of
intangibles (1,387) 261 47
Net operating loss usage 508 - -
Allowance for doubtful
accounts, start-up,
warranty, inventory and
other accruals (347) 100 462
Other 34 (153) 971
Total continuing
operations $ (25) $3,927 $6,441
Discontinued operations,
deferred - 617 -
Total provision $ (25) $4,544 $6,441
Cash payments for income taxes were $3,624, $3,728, and
$5,204, for the years ended December 31, 1998, 1997, and
1996, respectively.
At the point when the Company acquired MSI on February
17, 1998, MSI had incurred $11,827 of tax losses, which
had not yet been offset against previous or subsequent
years' taxable income of MSI. Subsequent to the period
reported herein, MSI filed a refund request that offset
$8,684 of these losses against income of MSI for the
years from 1988 to 1995, under the "Claim of Right"
rule. $1,329 of the remaining losses were offset
against MSI income in 1998. The balance of the losses,
amounting to $1,814, will be offset against future
years' income. These loss carryforwards expire after
the year 2017.
A reconciliation of the income taxes computed at the
Federal statutory rate to the Company's income tax
expense is as follows:
Year ended December 31,
1998 1997 1996
------- ------ ------
Taxes at Federal rate (35%) $ (377) $4,337 $6,950
Increase (decrease)
resulting from:
State taxes, net of Federal
tax benefit 216 132 397
Foreign Sales Corp. benefit (503) (546) (361)
Tax credits (307) (249) (197)
Tax-exempt
interest/dividend
deduction (123) (123) (128)
Effect of foreign
affiliates with different
tax rates or net losses 91 167 30
Nondeductibility of
intangible write-offs and
amortization 851 35 (15)
Uncollectible account
write-off - - (442)
Other 127 174 206
Total continuing operations $ (25) $3,927 $6,440
Discontinued operations - 617 -
Total provision $ (25) $4,544 $6,440
12. Deferred Tax Assets and Liabilities
Temporary differences which give rise to deferred tax
assets and liabilities are as follows as of December 31:
1998 1997
------ ------
Current assets:
Allowance for doubtful
accounts, start-up,
warranty, inventory and $3,966 $2,955
other accruals
Unrealized gain on
marketable securities (1,410) (1,380)
Inventory costs 122 81
capitalized for tax
Net operating losses
available for carryback 4,051 -
or carryforward
Other (119) (243)
Total current deferred
Assets $6,610 $1,413
Noncurrent liabilities:
Depreciation $4,098 $3,718
Other 708 721
Total non-current
deferred tax liabilities $4,806 $4,439
13. Sales and Segment Information
The Company designs, manufactures and markets equipment,
systems and components used in the processing and
handling of fluids. The Company markets through five
marketing units made up of related product lines.
Certain marketing units have similar economic
characteristics and have been aggregated under Statement
of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related
Information,"(SFAS No. 131). As a result of aggregation,
the Company has two reportable business segments,
Consumables and Equipment.
The Consumables segment, comprised of two marketing
units, includes products such as filter cartridges,
membrane elements, membrane, instruments, and laboratory
products. The Equipment segment, comprised of three
marketing units, includes products such as pumps,
housings, valves, controls, reverse
osmosis/ultrafiltration (RO/UF) machines, ozonators,
stills, and water treatment systems. Each segment is
currently supported by several manufacturing facilities,
a similar sales force and various corporate functions.
The segments do not have separate accounting, customer
service, administration, or purchasing functions.
The marketing unit structure was established to provide
strategic leadership for related products. It was
implemented on July 1, 1998. As a result, six months of
financial results are available to report under SFAS No.
131. Restatement of prior period results under this
method of reporting has been deemed impracticable due to
the anticipated costs and unavailability of such
financial information.
Sales include external sales only. Inter-segment sales
primarily occur with Consumables products being included
in Equipment products which could be significant. The
reportable segment information for the six-month period
ended December 31, 1998 is as follows:
Consumables Equipment Consolidated
Total
----------- --------- ------------
Sales $36,631 $51,685 $ 88,316
Cost of sales 22,342 34,425 56,767
Gross profit 14,289 17,260 31,549
Gross margin % 39.0% 33.4% 35.7%
Selling, general &
administrative 9,527 13,579 23,106
Research, development
& engineering 1,904 3,162 5,066
Operating expenses 11,431 16,741 28,172
Operating income $ 2,858 $ 519 $ 3,377
Other income (expense) (1,234)
Income before taxes 2,143
Income taxes 77
Net income $ 2,066
Currently, management does not report or analyze the
balance sheet or any cash-generating measurements by such
segments.
All continuing operations for which geographic data is
presented below are in one principal industry (design,
manufacture and marketing of machines, systems,
instruments and components used in the processing of
fluids).
1998 1997 1996
-------- -------- --------
Sales to unaffiliated
customers from:
United States $163,908 $150,753 $141,124
Foreign operations 13,911 14,152 14,822
Transfers from (to)
geographic areas:
United States 8,780 7,818 7,890
Foreign operations (8,780) (7,818) (7,890)
$177,819 $164,905 $155,946
Income (loss) from
continuing operations
before income taxes:
United States $( 1,926) $10,847 $18,225
Foreign operations 848 1,543 1,683
$ (1,078) $12,390 $19,908
Identifiable assets:
United States $185,814 $155,592 $144,609
Foreign operations 8,235 8,891 7,567
$194,049 $164,483 $152,176
NOTE: Transfers are made at fair market value.
Sales by United States operations to unaffiliated
customers in foreign geographic areas are as follows:
Year ended December 31,
1998 1997 1996
------- ------- -------
Asia/Pacific $15,967 $20,030 $14,661
Euro/Africa 17,710 14,536 9,181
Americas 11,227 11,678 9,222
$44,904 $46,244 $33,064
Total international sales for the Company were as follows:
1998 - $58,815; 1997 - $60,396; and 1996 - $47,886.
14. Commitments and Contingencies
The Company leases facilities for sales, service or
manufacturing purposes in Wisconsin, Massachusetts,
California, New Jersey, Florida, Iowa, Switzerland,
Germany, Hong Kong, Japan, China, Singapore, and
Thailand.
Future minimum lease payments on all operating leases of
$5,195 are payable as follows: 1999 - $1,423; 2000 -
$1,015; 2001 - $862; 2002 - $605; 2003 - $390; and
beyond 2003 - $180. Rent expense for the three years
ended December 31 was: 1998 - $1,794; 1997 - $1,633;
and 1996 - $1,100.
The Company is involved in certain legal actions arising
in the ordinary course of business. In the opinion of
management, based on the advice of legal counsel, such
litigation and claims will be resolved without a
material effect on the Company's financial position or
results of operations.
15. Employee Benefit Plans
The Company has a noncontributory discretionary profit
sharing plan covering certain employees meeting age and
length of service requirements. The Company contributes
annually to the plan an amount established at the
discretion of the Board of Directors.
Total expense recognized by the Company under these plans
amounted to $687, $1,300, and $1,435 in 1998, 1997, and
1996, respectively.
16. Earnings Per Share
Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). The following
table reflects the calculation of basic and diluted
earnings per share from continuing operations.
1998 1997 1996
-------- ------ -------
Earnings (loss) per share -
basic
Income (loss) from continuing
operations available to
common stockholders $(1,053) $8,463 $13,467
Weighted average shares
outstanding 13,976 14,031 14,145
Income (loss) from continuing
operations per share - basic $(0.08) $ 0.60 $ 0.95
Earnings (loss) per share -
assuming dilution
Income (loss) from continuing
operations available to
common stockholders $(1,053) $8,463 $13,467
Weighted average shares
outstanding 13,976 14,031 14,145
Dilutive impact of stock
options outstanding - 282 313
Weighted average shares and
potential dilutive shares
outstanding 13,976 14,313 14,458
Income (loss) from continuing
operations per
share - assuming dilution $ (0.08) $ 0.59 $ 0.93
Options to purchase approximately 285,000 shares of
common stock were outstanding during 1998, but were not
included in the computation of diluted earnings per
share because they would have been antidilutive.
Additionally, options to purchase 334,000 shares of
common stock at a range of $13.67 to $22.38 were
outstanding during 1998 but were not included in the
computation of diluted earnings per share because the
options' exercise price was greater than the average
market price of the common share.
17. Special Charges
In 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 in-process research and development (Note 2)
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.
Corporate restructuring and consolidation of operations
costs of $875 primarily includes work force reduction
severance and facility closing/consolidation costs.
June 30, 1998 employment of 1,559 was reduced to 1,360
at December 31, 1998. Facility-related costs relate to
closing three manufacturing facilities and relocating
manufacturing-related activities to other existing
locations. Two additional facilities are expected to be
closed in 1999. Expenditures will be funded with cash
generated from operations and were $200 for work force
reductions and $140 for facilities in 1998.
18. Subsequent Event
In February 1999, the Company entered into a Letter of
Intent agreement to acquire all assets of another
company. Revenues of such company were less than $15
million in 1998 and 1997. Upon finalization, the
acquisition will be recorded under the purchase method
of accounting.
INDEPENDENT AUDITORS' REPORT
Osmonics, Inc. Board of Directors and Shareholders
Minnetonka, Minnesota
We have audited the accompanying consolidated balance sheets
of Osmonicis, Inc. and Subsidiaries (the Company) as of
December 31, 1998 and 1997 and the related consolidated
statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Osmonics, Inc. and Subsidiaries at
December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years
in the period ending December 31, 1998, in conformity with
generally accepted accounting principles.
Deloitte and Touche LLP
Minneapolis, Minnesota
March 3, 1999
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes included in this report.
RESULTS OF OPERATIONS:
The following table sets forth certain statements of operations data as a
percentage of net sales for the periods indicated.
Years Ended December 31, Increase (Decrease)
1998 vs 1997 vs
1998 1997 1996 1997 1996
---- ---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 7.8% 5.7%
Cost of goods sold 64.5 60.6 59.3 14.9 7.9
Gross profit 35.5 39.4 40.7 (3.0) 13.0
Selling, general and
administrative 24.5 24.0 22.5 9.8 12.9
Research, development and
engineering 5.6 6.4 7.0 (7.1) (2.8)
Special charges 4.5 0.9 - N/A N/A
Operating profit 1.0 8.1 11.2 (87.2) (23.3)
Other income/(expense) (1.6) (0.6) 1.5 (188.0) (138.7)
Recovery from discontinued
operations - 0.8 - N/A N/A
Income taxes - 2.4 4.1 (100.6) (39.0)
Net income (loss) (0.6) 5.9 8.6 (110.8) (27.3)
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997:
Net Sales for 1998 increased $12,914 or 7.8% to $177,819 as compared to net
sales of $164,905 for 1997. The 1998 sales increase was attributed to the
acquisition of Micron Separations Inc. (MSI) during the first quarter of 1998
and Membrex Corp. during the second quarter of 1998. Existing business sales
were essentially flat in 1998 due to slow sales of capital equipment, and of
components sold to OEM customers. Overall, sales slowed to customers in
Asia/Pacific, and partially in the United States market.
Gross Profit decreased $1,944 or 3.0% to $63,101 as compared to $65,045 in
1997. As a percentage of net sales, gross profit decreased to 35.5% from
39.4% in 1997. 1998 gross profit includes a $2,000 or 1.1% of net sales
impact related to a second quarter special charge for slow moving inventory.
The decrease in gross profit is also due to lower utilization of certain
production facilities and competitive pricing pressures. In the third quarter
of 1998, the Company took action to reduce its manufacturing capacity and
improve its gross margins. Employment on June 30, 1998 of 1,559 was reduced
to 1,360 at December 31, 1998. Three manufacturing facilities were closed by
December 31, 1998 and two additional facilities are expected to be closed in
1999.
Selling, General and Administrative Expenses increased $3,884 or 9.8% to
$43,487 in 1998 as compared to $39,603 in 1997. As a percentage of sales,
SG&A expenses increased to 24.5% from 24.0% in 1997. The 1998 increase is
attributed to costs of implementing a new enterprise resource planning (ERP)
system, costs related to the 1998 restructuring, and costs added in the
acquisition of two companies in the first half of 1998.
The Company's marketing priority is to get its products into distribution as
soon as possible. The Company has worked to centralize its sales groups to
focus responsibility for customer relationships for all products through
expanded local sales offices and to provide technical sales support from the
appropriate product manufacturing site. In addition, the Company has invested
in a world wide web site. The Company believes that these actions have
enhanced customer service and will increase market penetration in the future;
however, in 1998 no significant sales benefit was achieved and marketing
expenses increased.
Research, Development and Engineering Expenses decreased $722 or 6.8% to
$9,913 in 1998, compared to $10,635 in 1997. As a percentage of sales, the
R&D expenses decreased to 5.6% from 6.4% in 1997. The Company has worked to
centralize its R&D efforts and to eliminate any duplication of activity at
different locations. The Company believes the current level of funding may
still be higher than required to support its product development priorities.
Special Charges of $9,988 ($7,569 net-of-tax or $0.54 per share assuming
dilution) were recorded in the second quarter of 1998. Charges included a
$6,222 charge to operating expense for in-process 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 Note 2 - Business Acquisitions footnote for further analysis.
This compares to a special charge of $1,448 or 0.9% of sales ($0.07 per share
assuming dilution) in 1997. These non-recurring charges were for the write-
offs of certain impaired assets and expenses related to recent acquisitions.
Other Income/(Expense) decreased $1,822 to $(2,791) in 1998, compared to
$(969) in 1997. The 1998 change is primarily the result of interest expense
of $1,300 and $950 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, respectively.
Recovery on Discontinued Operations of $1,330 (net of taxes) was recorded
during 1997. This gain of $0.09 per share assuming dilution resulted from the
reversal of a warranty reserve for discontinued operations, which was deemed
no longer necessary.
Income Taxes (Benefit) was $(25) in 1998. The benefit is less than might be
anticipated due to the non-deductibility of the Micron Separations, Inc. in-
process R&D that was written off in the second quarter of 1998. The 1997
effective tax rate was 31.7%.
Net Income/(Loss) decreased $10,846 to a loss of $1,053 ($0.08 loss per share
assuming dilution) in 1998, compared to income of $9,793 ($0.68 per share
assuming dilution) in 1997. The current year net loss is due to second
quarter special charges. Without the special charges, 1998 net income would
have been $6,516 ($0.46 per share assuming dilution).
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996:
Net Sales for 1997 increased $8,959 or 5.7% to $164,905 as compared to net
sales of $155,946 for 1996. The 1997 sales increase was attributed to the
acquisition of AquaMatic during the first quarter of the year. Existing
business sales were relatively flat in 1997 due to a decline in large
equipment sales both domestically and in Asian markets.
Gross Profit increased $1,622 or 2.6% to $65,045 as compared to $63,423 in
1996. As a percentage of net sales, gross profit decreased to 39.4% from
40.7% in 1996. The reduction in gross profits for 1997 was due to a less
favorable sales mix, more aggressive market pricing in certain product lines,
and a lower level of plant utilization at several locations.
Selling, General and Administrative Expenses increased $4,524 or 12.9% to
$39,603 in 1997, compared to $35,079 in 1996. As a percentage of sales, SG&A
expenses increased to 24.0% from 22.5% in 1996. The 1997 increase is
attributed to costs committed in anticipation of a higher level of sales which
did not materialize, and the ongoing implementation of a new integrated
information system.
The Company's marketing priority is to get its products into distribution as
soon as possible. As a result of the Company's acquisitions, the Company
inherited a number of separate sales forces selling individual products. In
1996, the Company reorganized and centralized its sales groups to focus
responsibility for customer relationships for all products through expanded
local sales offices and to provide technical sales support from the
appropriate product manufacturing site. This reorganization resulted in some
increased costs in 1997; however, the Company believes these changes have
enhanced customer service and will increase market penetration in the future.
Research, Development and Engineering Expenses decreased $302 or 2.8% to
$10,635 in 1997, from $10,937 in 1996. As a percentage of sales, R&D expenses
decreased to 6.4% from 7.0% in 1996. The Company believes the current level
of funding is adequate to support its product development priorities.
Special Charges of $1,448 or 0.9% of sales were recorded during the fourth
quarter of 1997. These non-recurring charges of $0.07 per share after taxes
assuming dilution were for the write-offs of certain impaired assets and
expenses related to recent acquisitions.
Other Income/(Expense) decreased $3,470 to $(969) in 1997, compared to $2,501
in 1996. The 1997 change is primarily due to lower gains on the sale of
investments than in previous years, and the increased utilization of an
existing line of credit for the acquisition of AquaMatic.
Recovery on Discontinued Operations of $1,330 (net of taxes) was recorded
during 1997. This gain of $0.09 per share assuming dilution resulted from the
reversal of a warranty reserve for discontinued operations, which was deemed
no longer necessary.
Income Taxes (Benefit) effective tax rates for the years ended December 31, 1997
and 1996 were 31.7% and 32.4%, respectively. The 1997 decrease in the effective
tax rate is primarily due to an increased proportion of foreign sales and the
extension of certain research-related tax credits.
Net Income (Loss) decreased $3,674 or 27.3% to $9,793 ($0.68 per share assuming
dilution) for 1997, compared to $13,467 ($0.93 per share assuming dilution) for
1996. As a percentage of net sales, net income was 5.9% and 8.6% for 1997 and
1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 1998, the Company had cash and marketable securities of
$14,847 as compared to $21,876 at December 31, 1997. The reduction in cash
and marketable securities was primarily the result of investment maturities
being utilized to help fund 1998 acquisitions and other investments in capital
assets.
Cash provided by operations was $8,102, $16,768, and $5,736 for the years
ending December 31, 1998, 1997 and 1996, respectively. The decrease in cash
provided by operating activities during 1998 was principally due to increased
working capital requirements to support the manufacturing facilities acquired
in 1998. The increase in cash provided by operating activities during 1997
was principally due to the improved management of the inventory and accounts
receivable balances of the Company.
Capital expenditures for the years ending December 31, 1998, 1997 and 1996
were $7,808, $6,609, and $15,658, respectively. In 1998, the Company's
capital expenditures were comparable to 1997 amounts and significantly lower
in comparison to 1996 amounts. The 1998 and 1997 lower level of capital
expenditures is the result of the Company not incurring significant facility
expansion and reconfiguration costs similar to those in 1996.
In 1998, the Company negotiated an increase in its unsecured revolving line of
credit to $35,000 for working capital needs and to help fund acquisitions.
The revolving line of credit is for five years with a variable interest rate,
which is related to LIBOR. The revolving line of credit replaced a $22,000
line of credit. At December 31, 1998, the Company had $9,000 available under
the revolving line of credit.
In 1998, the Company entered into a new $20,000 long-term, ten-year loan from
an insurance company. This loan contains $15,000 with a variable interest
rate related to LIBOR and $5,000 which is fixed at 6.72%. Interest is payable
quarterly. The loan was obtained to finance the acquisition of Micron
Separations, Inc. in 1998.
In March 1998, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of CPAs issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for costs of internal-use
computer software. The Company is in the process of evaluating the impact of
this statement.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued recently. The
Company anticipates no material impact on operating results or financial
position.
The Company's operating cash requirements consist principally of working
capital requirements, capital expenditures and scheduled payments of principal
on outstanding indebtedness. The Company believes that its cash and
marketable securities, cash flow from operating activities and borrowings
under its bank facility will be adequate to meet the Company's liquidity and
capital investment requirements in the foreseeable future.
The Company expects to continue to grow internally and through strategic
acquisitions within the industry in which it operates. As shown in the
Supplementary Data, the Company has experienced significant long-term growth
in sales and financial position including the two acquisitions in the last
five years accounted for as poolings.
MANAGEMENT'S 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 $1,902 based on the "Percent Complete"
method. Out of nine ongoing 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 the third quarter of
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 ensure their utility in applications that require membrane
wettability.
The third major project, 50% complete at acquisition, resulted in a
competitive membrane useful in genetic research and protein analysis. It was
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
$4,320 by the "Percent Complete" method. Two products contributed to the
total value: (1) WasteWizard fluid separation units valued at $3,220, and (2)
Mini WasteWizard units valued at $1,100.
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 unit with a process capacity of
less than 50 gallons per day. Both products are protected by five U.S.
patents with two 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 the second quarter of 1999. The Mini
WasteWizard unit is scheduled for field trials through the fourth quarter of
1999 and market introduction in the first quarter of 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.
REVIEW OF INDUSTRY SEGMENTS:
As discussed in Note 13 to the consolidated financial statements, the Company
established a five-unit marketing structure on July 1, 1998. These marketing
units are made up of related product lines. In accordance with Statement of
Financial Standards (SFAS No. 131), these five marketing units have been
aggregated into two reportable business segments - "Consumables" and
"Equipment." Comparable information is not available for the two reportable
business segments for prior periods.
Consumables Equipment Consolidated Total
----------- --------- ------------------
Sales $36,631 $51,685 $88,316
Cost of sales 22,342 34,425 56,767
------ ------ ------
Gross profit 14,289 17,260 31,549
Gross margin % 39.0% 33.4% 35.7%
Operating expenses 11,431 16,741 28,172
------ ------ ------
Operating income $ 2,858 $ 519 $ 3,377
Sales by United States operations to unaffiliated customers in foreign
geographic areas are as follows:
Year ended December 31,
1998 1997 1996
---- ---- ----
Asia/Pacific $15,967 $20,030 $14,661
Euro/Africa 17,710 14,536 9,181
Americas 11,227 11,678 9,222
------- ------- -------
$44,904 $46,244 $33,064
Total international sales for the Company were as follows:
1998 - $58,815; 1997 - $60,396; and 1996 - $47,886.
Due to lower plant utilization, pricing pressures and slow sales in
Asia/Pacific, the gross margin and operating income for Equipment was less
than Consumables. The standard equipment marketing unit is the only marketing
unit which incurred an operating loss for the six-month period ended December
31, 1998. This loss of $(1.4) million was principally due to lower
utilization of certain production facilities and costs incurred related to the
products acquired in the Membrex acquisition.
The products acquired in the MSI acquisition are included in the "Consumables"
segment and were additive to earnings in 1998. The products acquired in the
Membrex acquisition are included in the "Equipment" segment and were dilutive
to earnings in 1998. The net impact of these acquisitions on 1998 results was
approximately a $(0.03) per share loss. Both acquisitions are expected to be
additive to earnings in 1999.
YEAR 2000 READINESS DISCLOSURE:
STATE OF READINESS
The Company 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 the Company's 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.
The Company's 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, 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 of 1999.
The Project scope includes all computing systems hardware, software,
information technology (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 December 31,
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 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 be 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 products or supply the Company 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. 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 December 31, 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 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
Year 2000 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 interruptions or failures
could materially and adversely affect the Company's results of operations 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 minimized.
The failure of the Company's customers to be Year 2000 compliant could
materially reduce or delay the Company's 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 this Year
2000 readiness disclosure 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 Annual Report
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 development activities, capital
spending, financing, or the effects of regulation, competition and Year 2000
compliance. 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.
SUBSIDIARIES OF OSMONICS, INC.
Percentage
Ownership
100% VAPONICS, INC. A Massachusetts Corp.
100% PORETICS CORPORATION A Delaware Corporation
100% OSMONICS ASIA/PACIFIC LTD. A Kong Kong Corporation
100% OSMONICS EUROPA, S.A. A Switzerland Corp.
100% OZONE RESEARCH & EQUIPMENT CORP. An Arizona Corporation
100% GHIA, INC. A Nevada Corporation
100% AUTOTROL CORPORATION A Wisconsin Corporation
100% NIPPON OSMONICS LTD. A Japan Corporation
100% AUTOTROL S.A. A France Corporation
100% OSMONICS INTL SALES CORP. A Virgin Islands Corp.
100% MICROL SYSTEMS, LTD. An England Corporation
100% DESALINATION SYSTEMS, INC. A California Corp.
50% NIPPON AUTOTROL K.K. A Japan Corporation
100% AQUAMATIC, INC. A Delaware Corporation
100% MEMBREX, INC. A Delaware Corporation
100% MICRON SEPARATIONS, INC. A New York Corporation
100% MICRON SEPARATIONS
INTERNATIONAL, INC. A Virgin Islands Corp.
INDEPENDENT AUDITORS CONSENT
Osmonics, Inc.
We consent to the incorporation by reference in Registration Statements
No. 33-25228 and No. 33-537 of Osmonics, Inc. on Form S-8 and Registration
Statement No. 33-05029 filed on Form S-3 of our reports dated March 3, 1999
appearing and incorporated by reference in this Annual Report on Form 10-K
of Osmonics, Inc. for the year ended December 31, 1998.
DELOITTE AND TOUCHE LLP
Minneapolis, Minnesota
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 576
<SECURITIES> 14,271
<RECEIVABLES> 35,824
<ALLOWANCES> 1,057
<INVENTORY> 28,123
<CURRENT-ASSETS> 89,381
<PP&E> 105,684
<DEPRECIATION> 48,871
<TOTAL-ASSETS> 194,049
<CURRENT-LIABILITIES> 55,405
<BONDS> 31,665
0
0
<COMMON> 140
<OTHER-SE> 102,015
<TOTAL-LIABILITY-AND-EQUITY> 194,049
<SALES> 177,819
<TOTAL-REVENUES> 177,819
<CGS> 114,718
<TOTAL-COSTS> 114,718
<OTHER-EXPENSES> 61,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,288
<INCOME-PRETAX> (1,078)
<INCOME-TAX> (25)
<INCOME-CONTINUING> (1,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,053)
<EPS-PRIMARY> ($0.08)
<EPS-DILUTED> ($0.08)
</TABLE>
OSMONICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Years Ended December 31, 1998, 1997 and 1996
Column A Column B Column C Column D Column E
Additions
Balance Charged Charged Balance
At to to at
Beginning Cost and Other Deduct- End of
Description of Period Expensed Accounts tions Period
--------------- --------- -------- -------- ------ ------
Year Ended
December 31, 1998:
Current Operations:
Allowance for
Doubtful Accounts $ 888 $ 502 $ 153 $ 486(A) $1,057
Warranty and Start-
Up Reserve $1,900 $2,046 - $1,848(B) $2,098
Year Ended
December 31, 1997:
Current Operations:
Allowance for
Doubtful Accounts $ 907 $ 139 $ 158(A) $ 888
Warranty and Start-
Up Reserve $1,802 $2,343 $2,245(B) $1,900
Discontinued Operations:
Warranty Reserve $1,957 $1,957(D) -
Year Ended
December 31, 1996:
Current Operations:
Allowance for
Doubtful Accounts $1,177 $ 59 $ 329(A) $ 907
Warranty and Start-
Up Reserve $1,868 $2,414 $2,480(B) $1,802
Discontinued Operations:
Warranty Reserve $1,957 $1,957
(A) Uncollectible accounts charged against allowance.
(B) Actual warranty claims and start-up costs charged against reserve.
(C) Addition due to acquisition.
(D) Company determined that the reserve was no longer required.
INDEPENDENT AUDITORS REPORT
Osmonics, Inc.
We have audited the consolidated financial statements of Osmonics, Inc. (the
Company) as of December 31, 1998 and 1997 and for each of the three years in
the period ended December 31, 1998 and have issued our report thereon dated
March 3, 1999. Such financial statements and reports are included in the
Company's 1998 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of the
Company, listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibilty is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material aspects, the information set forth
therein.
DELOITTE AND TOUCHE LLP
Minneapolis, Minnesota
March 30, 1999
