-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsS8FUfr51GBNqBIgcdpT2zqQfbaBVZ9nVfzncyAab2pD+P+XEZCaHCqakXMKGtV mTlnRACvGjnzkNLP6hQMFg== 0000075049-96-000024.txt : 19960802 0000075049-96-000024.hdr.sgml : 19960802 ACCESSION NUMBER: 0000075049-96-000024 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960801 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OSMONICS INC CENTRAL INDEX KEY: 0000075049 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 410955759 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08282 FILM NUMBER: 96602301 BUSINESS ADDRESS: STREET 1: 5951 CLEARWATER DR CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129332277 MAIL ADDRESS: STREET 1: 5951 CLEARWATER DRIVE CITY: MINNETONKA STATE: MN ZIP: 55343 10-K/A 1 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 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________ to ________ Commission File No. 0-8282 OSMONICS, INC. (Exact name of registrant as specified in its charter) Minnesota 41-0955759 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5951 Clearwater Drive, Minnetonka, Minnesota 55343 (Address of principal executive offices) (Zip Code) (612) 933-2277 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Common Shares, par value $0.01 per share New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [X]. As of March 1, 1996, 12,802,582 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 1, 1996) was $162,774,788. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1995 (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 9, 1996 (the "Proxy Statement"), and to be filed within 120 days after the Registrant's fiscal year ended December 31, 1995, are incorporated by reference into Part III. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS COMMON STOCK DATA The Company's common stock trades on the New York Stock Exchange under the symbol "OSM". Shareholders of record on February 22, 1996 numbered 2387. The Company estimates that an additional 2500 shareholders own stock held for their account at brokerage firms and finanacial institutions. 1995 1994 Quarterly Prices* High Low High Low First Quarter 16 5/8 13 1/4 16 1/8 14 3/8 Second Quarter 18 1/4 15 1/2 16 5/8 14 1/2 Third Quarter 17 7/8 15 1/2 15 1/2 13 3/4 Fourth Quarter 21 1/4 16 5/8 15 1/4 13 1/2 * Adjusted for splits "Notes to Consolidated Financial Statements," pages 19-23 of the Annual Report to Shareholders, are incorporated herein by reference. As of March 14, 1996 there were 2,363 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, 1995, approximately $24,742,000 of retained earnings was restricted under this covenant. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) (1) Financial Statement The consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report to Shareholders, are incorporated by reference in Item 8, and are also incorporated herein by reference. (a) (2) Financial Statement Schedules Reports of Independent Public Accountants on Supplemental Schedules to the Consolidated Financial Statements. Valuation and qualifying accounts. Schedules not listed above have been omitted because they are either not applicable, not material or the required information has been given in the financial statements or in the notes to the financial statements. (3)A. Certificate of Incorporation of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-2, File No. 33-336.) Certificate of Amendment. (Incorporated herein by reference to Exhibit (3)A on Form 10-K for fiscal year ended December 31, 1987, File No. 0-8282.) B. By-Laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-2, File No. 33-336.) (4)A. Note Purchase Agreement dated July 12, 1991. (Incorporated herein by reference to Annual Report on Form 10-K for fiscal year ended December 31, 1991.) (10)A.* 1993 Stock Option Plan and related form of stock option agreement. (Incorporated herein by reference to Annex C of the Registrant's Joint Proxy Statement/Prospectus dated September 10, 1993.) B. Stock Option Agreement with Michael L. Snow, Director. (Incorporated herein by reference to Annual Report on Form 10-K for fiscal year ended December 31, 1993.) C.* 1983 Stock Option Plan and related form of stock option agreement. (Incorporated herein by reference to Exhibit 10.2 to Registration Statement on Form S-2, File No. 33-336.) D. 1995 Employee Stock Purchase Plan. (Incorporated herein by reference to the Registrant's Proxy Statement dated March 27, 1995.) E.* 1995 Director Stock Option Plan. (Incorporated herein by reference to the Registrant's Proxy Statement dated March 27, 1995.) * Denotes Executive Compensation Plan. (13) 1995 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, 1995. 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: February 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signatures Title Date /s/ L. Lee Runzheimer Chief Financial Officer February 27, 1996 L. Lee Runzheimer and Vice President Administration (Principal Finance and Accounting Officer) /s/ Howard W. Dicke Vice President Human February 27, 1996 Howard W. Dicke Resources and Corporate Development, and Treasurer /s/ Ruth Carol Spatz Director February 28, 1996 Ruth Carol Spatz /s/ Michael L. Snow Director February 27, 1996 Michael L. Snow /s/ Ralph E. Crump Director February 28, 1996 Ralph E. Crump /s/ Verity C. Smith Director February 28, 1996 Verity C. Smith Director Charles W. Palmer /s/ D. Dean Spatz President, Chairman of February 28, 1996 D. Dean Spatz the Board and Director (Principal Executive Officer) EX-13 2 OSMONICS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data)
Year ended December 31, 1995 1994 1993 Sales $111,610 $96,180 $89,043 Cost of sales 63,213 52,841 49,272 Gross profit 48,397 43,339 39,771 Operating expenses: Selling, general and administrative 26,415 23,480 21,839 Research, development and engineering 7,779 7,174 6,795 Embezzlement recovery (Note 3) - - (562) Merger and transition expenses - - 1,644 34,194 30,654 29,716 Income from operations 14,203 12,685 10,055 Other income (expense), net (Note 4): Interest income 1,649 1,543 1,279 Interest expense (1,061) (747) (943) Other 1,100 142 401 1,688 938 737 Income before income taxes 15,891 13,623 10,792 Income taxes (Note 9) 4,679 3,668 2,897 Net income $ 11,212 $ 9,955 $ 7,895 Net income per share $ 0.88 $ 0.79 $ 0.63 Average shares outstanding 12,745,000 12,668,000 12,624,000
OSMONICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, 1995 1994 ASSETS Current assets Cash and cash equivalents $ 4,361 $ 9,453 Marketable securities (Note 4) 26,307 27,623 Trade accounts receivable, net of allowance for doubtful accounts of $1,127 in 1995 and $1,259 in 1994 20,501 15,536 Inventories (Note 5) 26,227 19,428 Deferred tax assets (Note 10) 3,719 3,284 Other current assets 1,851 1,303 Total current assets 82,966 76,627 Property and equipment, at cost Land and land improvements 2,310 1,951 Buildings 15,557 12,300 Machinery and equipment 36,645 32,756 Construction in progress 5,970 818 60,482 47,825 Less accumulated depreciation and amortization (27,923) (25,262) 32,559 22,563 Goodwill, net of accumulated amortization of $289 in 1995 and $170 in 1994 7,655 1,695 Other assets, net of accumulated amortization of intangible assets of $230 in 1995 and $145 in 1994 1,878 1,150 Total assets $125,058 $102,035 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 12,247 $ 6,459 Notes payable and current portion of long-term debt (Note 7) 1,695 744 Accrued compensation and employee benefits 4,231 4,154 Reserve for discontinued operations 1,957 2,088 Other accrued liabilities (Note 6) 8,612 7,187 Total current liabilities 28,742 20,632 Long-term debt (Note 7) 12,441 14,050 Deferred income taxes (Note 10) 4,954 2,913 Other liabilities 450 689 Commitments and contingencies (Note 12) - - Shareholders' equity Common stock, $0.01 par value Authorized -- 20,000,000 Issued -- 1995: 12,773,184 and 1994: 12,701,041 129 127 Capital in excess of par value 21,709 21,000 Retained earnings 52,620 41,408 Unrealized gain on marketable securities (Note 4) 3,694 1,038 Cumulative effect of foreign currency translation adjustments 319 178 Total shareholders' equity 78,471 63,751 Total liabilities and shareholders' equity $125,058 $102,035
OSMONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31, 1995 1994 1993 Cash flows from operations: Net income $11,212 $ 9,955 $ 7,895 Non-cash items included in net income: Depreciation and amortization 3,222 3,048 3,080 Deferred income taxes (91) (341) 281 Gain on sale of land and investments (810) - (499) Changes in assets and liabilities (net of business acquisitions) Reserve for VAT tax - (1,605) (1,030) Accounts receivable (4,232) (1,463) 181 Inventories (6,085) (2,584) 2,785 Other current assets (507) 1,475 (302) Accounts payable and accrued liabilities 4,292 1,499 209 Reserve for deferred compensation (432) (78) 72 Reserves for losses of discontinued operations - - (471) Net cash provided (used) by operations 6,569 9,906 12,201 Cash flows from investing activities: Business acquisitions (net of cash acquired) (5,380) (673) Purchase of investments (6,633) (17,467) (15,253) Maturities and sales of investments 13,228 11,225 8,680 Purchase of property and equipment (12,568) (3,435) (3,257) Proceeds from sale of subsidiary - - 613 Other (315) 190 (111) Net cash provided (used) for investing activities (11,668) (10,160) (9,328) Cash flows from financing activities: Notes payable and current debt (299) 282 (376) Reduction of long-term debt (311) (521) (552) Issuance of common stock 711 680 295 Net cash provided (used) in financing activities 101 441 (633) Effect of exchange rate changes on cash (94) (444) 143 Increase (decrease) in cash and cash equivalents (5,092) (257) 2,383 Cash and cash equivalents - beginning of year 9,453 9,710 7,327 Cash and cash equivalents - end of year $ 4,361 $ 9,453 $ 9,710
OSMONICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data)
Unrealized Capital Gain on Cumulative in Excess Retained Marketable Translation Common Stock Par Value Earnings Securities Adjustment Shares Amount Balance - January 1, 1993 12,607,707 $126 $20,026 $23,558 $ - $133 Net income - - - 7,895 - - Translation adjustment - - - - - 37 Employee stock purchase plans 29,766 - 295 - - - Balance - December 31, 1993 12,637,473 126 20,321 31,453 - 170 Net income - - - 9,955 - - Translation adjustment - - - - - 8 Unrealized gain on marketable securities - - - - 1,038 - Business combinations (Note 2) 7,000 - 102 - - - Employee stock purchase plans 56,568 1 577 - - - Balance - December 31, 1994 12,701,041 127 21,000 41,408 1,038 178 Net income - - - 11,212 - - Translation adjustment - - - - - 141 Unrealized gain on marketable securities - - - - 2,656 - Employee stock purchase plans 72,143 2 709 - - - Balance - December 31, 1995 12,773,184 $129 $21,709 $52,620 $3,694 $319
TEN-YEAR RESULTS (In thousands, except per share amounts) INCOME DATA: (Restated) (CAPTION> Year ended December 31, 1995 1994 1993 1992 1991 Sales $111,610 $96,180 $89,043 $84,017 $77,253 Income from continuing operations 11,212 9,955 7,895 3,255 5,371 Income from continuing operations per share $0.88 $0.79 $0.63 $0.26 $0.43 Average shares outstanding 12,745 12,668 12,624 12,561 12,491
BALANCE SHEET DATA: (Restated) Total assets $125,058 $102,035 $88,826 $82,874 $81,102 Long-term debt 12,441 14,050 13,913 14,630 15,715
INCOME DATA: (As Reported)
Year ended December 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 Sales $111,610 $96,180 $89,043 $50,541 $46,738 $43,553 $36,223 $31,058 $20,464 $15,472 Gross profit 48,397 43,339 39,771 21,507 19,805 18,985 16,213 13,554 8,384 6,689 Pretax income 15,891 13,623 10,792 5,963 5,804 5,444 6,075 4,420 1,616 1,166 Income taxes 4,679 3,668 2,897 1,855 1,902 1,730 2,028 1,430 465 330 Net income 11,212 9,955 7,895 4,528(F1) 3,902 3,714 4,047 2,990 1,151 836 Net income per share $0.88 $0.79 $0.63 $0.50(F1) $0.43 $0.40 $0.34 $0.25 $0.10 $0.08 Average shares outstanding 12,745 12,668 12,624 9,065 8,999 9,246 11,853 11,820 11,801 10,773 Includes an increase in earnings of $420 ($0.05 per share) as a result of adopting the Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
BALANCE SHEET DATA: (As Reported) Total assets $125,058 $102,035 $88,826 $60,300 $54,931 $54,370 $45,884 $43,430 $37,715 $33,328 Working capital 54,224 55,995 45,281 29,471 25,955 21,692 21,117 15,707 13,836 17,660 Long-term debt 12,441 14,050 13,913 13,221 13,697 13,761 3,788 3,664 3,753 3,618 Shareholders' equity 78,471 63,751 52,070 33,793 28,891 24,720 33,067 28,909 25,598 24,664
QUARTERLY INCOME DATA (In thousands, except per share amounts) Quarterly Income Data - 1995
Quarter Ended March 31 June 30 September 30 December 31 Sales $26,870 $26,796 $27,176 $30,768 Gross profit 11,912 11,958 11,484 13,043 Net income 2,800 2,671 2,625 3,116 Net income per share $0.22 $0.21 $0.21 $0.24
Quarterly Income Data - 1994
Quarter Ended March 31 June 30 September 30 December 31 Sales $23,534 $24,843 $23,383 $24,420 Gross profit 10,478 10,916 10,499 11,446 Net income 2,371 2,503 2,289 2,792 Net income per share $0.19 $0.20 $0.18 $0.22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies The Company is a manufacturer and marketer of high technology water purification, fluid filtration, fluid separation, and fluid transfer equipment, as well as the replaceable components used in purification, filtration, and separation equipment. These products are used by a broad range of industrial, commercial and institutional customers. The consolidated financial statements include the accounts of Osmonics, Inc. and its wholly and majority owned subsidiaries (the Company). Significant intercompany accounts and transactions have been eliminated. Sales are recorded when the product is shipped. The estimated fair value for cash and cash equivalents, trade accounts receivable, accounts payable, 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 prepayment risks involved. The Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Inventories are stated at lower of cost (FIFO method) or market for all operations except the Autotrol subsidiary domestic operations which have historically valued inventory on the LIFO method. Depreciation and amortization of property and equipment are provided on the straight-line method over estimated lives of 3 to 40 years. Deferred income taxes have been provided for income and expenses which are recognized in different accounting periods for financial reporting purposes than for income tax purposes. The Company accrues for the estimated cost of warranty and start-up obligations at the time revenue is recognized. The excess of cost over the fair market value of assets acquired in acquisitions is amortized over not more than 40 years, with the majority at 30 years. The carrying values of these intangibles are reviewed quarterly based on the sales and profitability of the acquired assets. Other intangibles are carried at cost and amortized using the straight-line method over their estimated lives of 5 to 17 years. Net income per share is based on the weighted average number of shares outstanding during each year. The exercise of stock options would not have a material effect on net income per share. 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. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." The Company will evaluate adoption of SFAS 123 in 1996. Certain reclassifications have been made to prior year amounts to conform with current year presentations. 2. Business Acquisitions Potential Acquisition: The Company announced in December 1995 the execution of an agreement in principle to merge with Desalination Systems Inc. (DESAL) in a stock transaction valued at approximately $30,000. The outstanding shares of DESAL will be exchanged on a share-for-share basis for the Company's common stock. The transaction is structured to qualify as a tax-free exchange and a "pooling-of-interests" for accounting purposes. The transaction is expected to add over $20,000 to Osmonics' 1996 sales. The transaction will require the approval of a definitive merger agreement by both companies, regulatory approvals, and the satisfaction of customary closing conditions. Completed Acquisitions: On October 4, 1995, the Company acquired the assets and operations of Western Filter Co., Denver, Colorado. The purchase price was approximate $7,000 and included $5,780 of intangible assets. Western Filter products will be sold through the existing Osmonics distribution channels, offering a more complete line of water and waste water treatment options. Revenues of Western Filter were less than $10,000 in 1994 and 1995. The purchase method of accounting was used. On November 18, 1994, the Company acquired the assets of Lakewood Instruments, Inc. The Company also obtained noncompetition agreements from two previous Lakewood directors. The purchase method of accounting was used. On January 1, 1994, the Company acquired the 18% minority shareholder interest of its majority-owned subsidiary, Poretics. The Company owns 100% of Poretics' shares after the transaction. The purchase method of accounting was used. These acquisitions had no significant pro forma effect on the Company's sales, net income, or net income per share in 1995 or 1994. On October 15, 1993, Autotrol Corporation (Autotrol) merged with Osmonics through an exchange of 0.77 of a share of Osmonics common stock for each share of Autotrol common stock. The exchange ratio and share amounts, when revised to reflect Osmonics' 3-for-2 stock split on March 21, 1994, equate to an exchange of 1.155 shares of Osmonics common stock for each of the 3.0 million shares of Autotrol common stock. The transaction was accounted for as a pooling-of- interests. Autotrol's principal business is the manufacture and marketing of controls, valves and measuring devices related to water conditioning. 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. Before pooling, results for the first nine months of 1993 for Osmonics were net sales of $41,213 and net income of $3,678, and for Autotrol were sales of $25,272 and net income of $2,076. 3. Embezzlement In February 1993, Autotrol, prior to acquisition by Osmonics, discovered that a former employee of its French subsidiary had been embezzling funds for several years. The funds were embezzled through the issuing of fraudulent checks by the former employee and falsifying of value added tax (VAT) returns and diverting the funds received from the French government. Autotrol's investigation of the embezzlement revealed that approximately $4,750 was embezzled from 1988 to 1992. The prior years' financial statements reflect embezzlement losses in the year the embezzlement initially occurred. The Company had net recoveries of $562 in 1993 from insurance and reductions in VAT payable. 4. Marketable Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities," which requires the Company to report certain marketable securities at fair market value. The Company considers all of its marketable securities available-for-sale. Marketable securities at December 31, 1995 consisted of the following:
Fair Amortized Unrealized Unrealized Market Cost Gain (Loss) Value U.S. government securities 0-5 year maturity $ 4,784 $ 60 $ (23) $ 4,821 6 year or greater maturity 648 24 - 672 Municipal bonds 0-5 year maturity 2,320 112 - 2,432 6 year or greater maturity 4,777 211 - 4,988 Corporate debt securities and other 0-5 year maturity 1,505 24 (43) 1,486 6 year or greater maturity 699 16 - 715 Equity securities 5,616 5,681 (104) 11,193 Total before tax effect $20,349 6,128 (170) $26,307 Deferred tax effect of unrealized (gain) loss (2,329) 65 Unrealized gain (loss) on marketable securities $3,799 $(105)
Marketable securities at December 31, 1994 consisted of the following:
Fair Amortized Unrealized Unrealized Market Cost Gain (Loss) Value U.S. government securities 0-5 year maturity $ 6,479 $ - $ (318) $ 6,161 6 year or greater maturity 1,748 - (101) 1,647 Municipal bonds 0-5 year maturity 1,977 100 - 2,077 6 year or greater maturity 6,348 28 (374) 6,002 Corporate debt securities and other 0-5 year maturity 3,764 15 - 3,779 6 year or greater maturity 599 - (44) 555 Equity securities 5,104 2,319 (21) 7,402 Total before tax effect $26,019 2,462 (858) $27,623 Deferred tax effect of unrealized (gain) loss (869) 303 Unrealized gain (loss) on marketable securities $1,593 $ (555) Market values are based on quoted market prices.
In 1995, proceeds from sales of available-for-sale securities were $7,037. The net gain on these sales was $919, determined on the specific identification method. In 1994, proceeds from sales of available-for-sale securities were $2,846. There were no material gross realized gains or losses on these sales, as determined on the specific identification method. 5. Inventories Inventories consist of the following:
December 31, 1995 1994 Finished goods $ 4,111 $ 2,578 Work in process 6,964 5,312 Raw materials 15,801 12,187 26,876 20,077 Less adjustment to reduce inventories of $4,728 and $3,475 to last-in, first-out method (See Note 1) (649) (649) $26,227 $19,428
6. Other Accrued Liabilities Other accrued liabilities consist of the following:
December 31, 1995 1994 Warranty and start-up $1,688 $1,942 Professional fees and other accruals 3,466 2,377 Customer deposits 1,748 1,007 Accrued property taxes, income taxes and other taxes 1,710 1,861 $8,612 $7,187
7. Debt
Long-term debt is as follows: December 31, 1995 1994 Promissory Notes; interest payable quarterly at the three month LIBOR rate plus 80 b.p.; due 1996 through 2001. The interest rate on December 31, 1995 was 6.64%. $10,000 $10,000 Industrial revenue bonds (IRB's); interest payable at LIBOR plus 45 to 95 b.p. depending on collateral deposited with the lender; due in 1997. The interest rate on December 31, 1995 was 6.29%. 2,800 2,800 Mortgage notes payable to two French banks; interest payable monthly at PIBOR plus 40 b.p. The interest rate on December 31, 1995 was 5.43%. 928 993 Term notes payable to municipalities in varying installments through October 15, 1995. - 421 Notes Payable; interest payable annually at the prime rate; due 1996 through 1999. The interest rate on December 31, 1994 was 8.5%. 258 341 Other notes 150 239 14,136 14,794 Less current portion (1,695) (744) $12,441 $14,050
The IRB debt and mortgage notes payable to French banks are collateralized by real and personal property of the Company. The aggregate maturities of outstanding long-term debt are: 1996 - $1,695; 1997 - $4,459; 1998 - $1,659; 1999 - $1,659; 2000 - $1,600; beyond 2000 - $3,064. The interest rate on the IRB's is determined in part by the amount of collateral held by the lender. At December 31, 1995, $2,000 of collateral was held by the lender, resulting in an interest rate of LIBOR plus 45 b.p. The $2,000 of collateral is included in marketable securities. The Company has a $1,000 line of credit with a bank, with interest at the bank reference rate (8.5% at December 31, 1995) and which requires a 5% compensating cash balance. The line of credit was unused at year end and the $50 compensating balance is included in the balance of cash and cash equivalents. The promissory notes contain a covenant which limits the payment of dividends to shareholders. At December 31, 1995, approximately $24,742 of retained earnings was restricted under this covenant. In addition, the promissory notes and IRB debt contain certain restrictions related to financial ratios, indebtedness, tangible net worth and capital expenditures. Cash payments for interest related to all debts of the Company were $1,021, $735, and $955, for 1995, 1994, and 1993, respectively. 8. Stock Options At December 31, 1995, the Company had reserved 86,206 common shares for issuance to key employees under a 1983 stock option plan. Options are issued at a price not less than market value on date of grant and become exercisable over a five-year period, after which they expire. The following is a summary of activity under the 1983 stock option plan. No additional options can be granted under the 1983 plan.
Year ended December 31, 1995 1994 1993 Options held by employees at December 31 86,206 121,126 143,850 Exercise price range on $ 6.45 to $ 3.63 to $ 3.63 to options held at December 31 $13.50 $13.50 $13.50 Number of options exercised during the year 34,920 22,724 1,875 Price range of options $ 3.63 to $ 3.63 to $10.16 to exercised during the year $10.16 $10.16 $10.16 Exercisable options held at December 31 84,330 97,500 83,289 Exercise price range of $ 6.45 to $ 3.63 to $ 3.63 to exercisable options $13.50 $13.50 $13.50
The Company also has reserved 299,313 common shares at December 31, 1995 for issuance to key employees under a 1993 Stock Option Plan. Options are granted at a price not less than market value on the date of the grant and become exercisable over a period of up to ten years, after which they expire. The following is a summary of activity under the 1993 Stock Option Plan.
Year ended December 31, 1995 1994 1993 Options held by employees at December 31 34,163 12,633 2,250 Exercise price range on $13.67 to $13.67 to $13.67 options held at December 31 $18.25 $14.50 Number of options exercised during the year 500 187 0 Price range of options $14.38 to $13.67 to N/A exercised during the year $14.38 $13.67 Exercisable options held at December 31 2,463 375 0 Exercise price range of $13.67 to $13.67 to N/A exercisable options $14.50 $13.67
The Company also had a 1985 Employee Stock Purchase Plan. No additional shares may be issued under the 1985 Plan. The following is a summary of shares issued under this plan:
1985 Plan 1995 1994 1993 Number of shares 14,548 34,048 23,380 Average price per share $13.58 $12.80 $10.62
The 1985 Plan was superseded by the 1995 Employee Stock Purchase Plan, approved by the shareholders at the 1995 Annual Meeting and effective June 1, 1995. Employees may purchase common shares of the Company at 85% of market price. In 1995, 22,175 shares were issued under the 1995 Plan at an average price per share of $14.79. At December 31, 1995, 377,825 shares remain unissued in the 1995 Plan. The Company had 500,000 authorized and unissued shares of preferred stock at December 31, 1995 and 1994. In 1993, the Company granted a director an option to purchase 45,000 shares of common stock at an exercise price of $12.33 per share. This option vests over a five-year period. In 1995, the Board of Directors adopted a 1995 Director Stock Option Plan. The plan provides that each director of the Company shall automatically receive, as of the date of each Annual Meeting of Shareholders, a non-qualified option to purchase 3,000 shares of the Company's common stock. The options have a ten year term and are exercisable one year after the grant date at an exercise price equal to the fair market value of the shares on the grant date. In 1995, options to purchase 18,000 shares at a price of $17.13 were issued under this plan. No options were exercisable at December 31, 1995. 9. Income taxes Income tax expense consists of:
Year ended December 31, 1995 1994 1993 Current: Federal $3,975 $3,506 $2,632 State 423 354 134 Foreign 372 156 (250) Deferred: Depreciation 30 (229) (157) Valuation allowance adjustment (197) 0 0 Allowance for doubtful accounts, start-up, warranty, inventory and other accruals 310 (247) 10 Discontinued operations 228 350 524 Other (462) (222) 4 $4,679 $3,668 $2,897
Cash payments for income taxes were $5,079, $3,062, and $2,935, for 1995, 1994, and 1993, respectively. A reconciliation of the income taxes computed at the Federal statutory rate to the Company's income tax expense is as follows:
Year ended December 31, 1995 1994 1993 Taxes at Federal rate (35% in 1995 and 1994 and 34% in 1993) $5,562 $4,768 $3,670 Increase (decrease) resulting from: Valuation allowance adjustment (471) (608) (350) State taxes, net of Federal tax benefit 203 220 66 Foreign Sales Corp. benefit (190) (167) (159) Tax credits (271) (272) (209) Tax exempt interest/dividend deduction (200) (193) (176) Effect of foreign affiliates with different tax rates or net losses 245 (324) (446) Nondeductibility of merger costs - - 363 Other (199) 244 138 $4,679 $3,668 $2,897
During 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," which requires the Company to adjust its deferred tax assets and liabilities to reflect current tax rates. Osmonics, Inc. and its subsidiaries adopted the provision of SFAS 109 in reporting its financial results for 1992, prior to the merger of Osmonics, Inc. and Autotrol Corporation. Autotrol Corporation and its subsidiaries adopted SFAS 109 in 1993, prior to the merger of Osmonics, Inc. and Autotrol Corporation. As a result of the adoption of SFAS 109, Autotrol Corp. increased its current deferred tax assets from $0 to $4,328 and its long-term deferred tax assets from $0 to $14. These increases in deferred tax assets were accompanied by increases in offsetting valuation reserves for the same amounts, thus creating no increase or decrease in income for the year ended December 31, 1993. As a result of the merger between Osmonics, Inc., and Autotrol Corp. in 1993, value was created for the deferred tax assets of Autotrol Corp., due to the deductibility of Autotrol expenses on future consolidated tax returns. This increased Autotrol Corp.'s equity value by $2,081 above its previously stated book value prior to the merger. The combination of adopting SFAS 109, and the merger in 1993, resulted in increased tax expense from continuing operations for Autotrol Corporation of $384 for the year ended December 31, 1993. 10. Deferred Tax Assets and Liabilities Temporary differences which give rise to Deferred Tax Assets and Liabilities are as follows as of December 31:
1995 1994 Current assets: Allowance for doubtful accounts, start-up, warranty, inventory and other accruals $3,674 $3,506 Net operating loss and credit carryforwards 61 335 Other (16) (30) Less valuation allowance - (527) Total current deferred assets $3,719 $3,284 Noncurrent liabilities: Depreciation $2,360 $2,395 Unrealized gain on marketable securities 2,264 566 Other 330 (48) Total non-current deferred tax liabilities $4,954 $2,913
The Company had outstanding net operating loss carryforwards and tax credit carryforwards of $61 and $633 at December 31, 1995 and 1994, respectively. The carryforwards will expire in the years of 2008 to 2009. The valuation reserve decreased by $527 to $0 during the year ended December 31, 1995. This decrease was due to the use of net operating loss carryforwards and credits during the year, as offsets against taxable income, and to the determination that the remaining deferred tax assets are more likely than not to confer future tax benefits to the Company. The carryforwards outstanding at December 31, 1994 have been fully offset by valuation reserves. 11. Sales and Segment Information All continuing operations for which geographic data is presented below are in one principal industry (design, manufacture and marketing of machines, systems, and components used in the processing of fluids).
1995 1994 1993 Sales to unaffiliated customers from: United States $ 97,791 $ 83,904 $ 77,212 Foreign operations 13,819 12,276 11,831 Transfers from (to) geographic areas: United States 7,936 6,699 7,139 Foreign operations (7,936) (6,699) (7,139) $111,610 $ 96,180 $ 89,043 Pretax income from continuing operations: United States $ 15,248 $ 12,311 $ 10,273 Foreign operations 643 1,312 519 $ 15,891 $ 13,623 $ 10,792 Identifiable assets: United States $117,047 $ 94,504 $ 79,457 Foreign operations 8,011 7,531 9,369 $125,058 $102,035 $ 88,826
NOTE: Transfers are made at market value. Sales by United States operations to unaffiliated customers in foreign geographic areas are as follows:
Year ended December 31, 1995 1994 1993 Asia/Pacific $ 8,745 $ 7,460 $ 6,488 Europe 3,100 3,193 2,611 Rest of the World 8,403 6,211 6,470 $20,248 $16,864 $15,569
Total international sales for the Company were as follows: 1995 - $34,067; 1994 - $29,140; and 1993 - $27,400. 12. Commitments and Contingencies The Company leases facilities for sales, service or manufacturing purposes in Minnesota, Wisconsin, Massachusetts, California, Iowa, Arizona, Switzerland, Hong Kong, Japan, Singapore, Indonesia, and Thailand. Future minimum lease payments on all operating leases of $3,245 are as follows: 1996 - $1,064; 1997 - $539; 1998 - $378; 1999 - $281; 2000 - $256; and beyond 2000 - $727. Rent expense for the past three years was: 1995 - $1,322; 1994 - $1,262; and 1993 - $1,463. 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. The Company may be required to make additional payments of up to $2,000 over the period ending December 1998, contingent upon the sales and gross margins of Western Filter Co. 13. Stock Split On February 18, 1994, the Company approved a three-for-two stock split in the form of a 50% stock dividend for shareholders of record March 4, 1994. All share and per share amounts have been restated to reflect the stock split. 14. 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 $846, $982, and $816 in 1995, 1994, and 1993, respectively. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Osmonics, Inc. Minnetonka, Minnesota We have audited the consolidated balance sheets of Osmonics, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1994 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 4 to the financial statements, in 1994 the Company adopted Statment of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Minneapolis, Minnesota February 9, 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Dollars in thousands, except per share amounts) As an aid to understanding the Company's operating results, the following table indicates the percentage of sales that each income statement item represents, and the percentage increase or decrease in such items for the years indicated.
Year ended December 31, (Decrease) 1995 1994 1993 1994 1993 Sales 100.0% 100.0% 100.0% 16.0% 8.0% Cost of sales 56.6 54.9 55.3 19.6 7.2 Gross profit 43.4 45.1 44.7 11.7 9.0 Operating expenses: Selling, general and administrative 23.7 24.4 24.5 12.5 7.5 Research, development and engineering 7.0 7.5 7.6 8.4 5.6 Embezzlement recovery - - (0.6) - - Merger & transition expenses - - 1.9 - - 30.7 31.9 33.4 11.5 3.2 Income from operations 12.7 13.2 11.3 12.0 26.2 Other income (expense), net: Interest income 1.5 1.6 1.4 6.9 20.6 Interest expense (1.0) (0.8) (1.1) 42.0 (20.8) Other income (expense) 1.0 0.1 0.5 674.7 (64.6) 1.5 1.0 0.8 80.0 27.3 Income from continuing operations before income taxes 14.2 14.2 12.1 16.6 26.2 Income taxes 4.2 3.8 3.3 27.6 26.6 Net income 10.0% 10.4% 8.9% 12.6% 26.1%
RESULTS OF OPERATIONS Sales: Sales for 1995 increased by 16% over 1994 and sales for 1994 increased by 8% over 1993. The Company's sales are composed of capital equipment and replaceable components. The ratio of equipment sales compared to replaceable component sales as a percent of total sales was at 56% in 1995 compared to 60% for both 1994 and 1993. International sales increased at the same rate as domestic sales in 1995, due to improved markets and selling efforts in the Asia/Pacific and Americas areas. The 1995 sales growth also benefited from the October 1995 acquisition of Western Filter and the November 1994 acquisition of Lakewood Instruments. The increase in sales for 1994 was strongly influenced by an increase in crossflow filtration equipment and systems activity, with lesser influence from growth in the sales of certain replaceable component product lines. Osmonics' core product lines showed sales increases of 13% for the year, while Autotrol product sales were flat with 1993. In 1995, Autotrol began selling Osmonics' products through their existing sales organization. The dollar amount of the Company's backlog of orders considered to be firm at December 31, 1995 was $20,600. The comparable backlog at December 31, 1994 was $15,700. The Company believes that its backlog at any time is not necessarily indicative of annual sales. The business of the Company is not subject to significant seasonal variations. Selective price increases averaged less than 1% from 1994 to 1995, and less than 1% from 1993 to 1994. Gross Margins: Gross margins for 1995 decreased to 43.4% of sales, due to an increased mix of sales of lower margin products, increased material costs, and more aggressive pricing. Gross margins for 1994 had increased to 45.1% of sales compared to 44.7% in 1993 as a result of better management of costs on system sales, value engineering of equipment, reduced manufacturing costs on replaceable products and improved plant utilization rates on the higher sales volume. Operating Expenses: Selling, general and administrative expenses in both 1995 and 1994 increased in dollars from the preceding year's level. Increases were attributable to increased marketing programs and expanded domestic and international selling efforts. As a percent of sales, the ratio declined slightly in 1995, as a result of continued cost savings in the administrative area as recent acquisitions into Osmonics are assimilated. Research, development and engineering expense increased in each of the past three years at a rate lower than the increase in sales. For 1995, RD&E was $7,779 or 7.0% of sales, RD&E expense was $7,174 or 7.5% of sales, and $6,795 and 7.6% of sales in 1994 and 1993, respectively. During 1993, the Company incurred $1,644 of merger and transition expenses related to the acquisition of Autotrol which are non-recurring in nature, and were not capitalizable in a pooling-of-interests merger. During late 1993, the Company obtained $562 net recovery of embezzlement losses incurred at Autotrol's French subsidiary in years prior to the acquisition by the Company. Other Income (Expense): During 1995 and 1994, interest income increased due to increasing interest rates. Other Income in 1995 includes $104 of currency translation and exchange losses, compared to $325 of such gains in 1994. Other income in 1993 includes a $295 gain on the sale of land claimed by a municipality. Other income was also affected in 1995 and 1993 by the sale of certain investments at net pretax gains of $919 and $204, respectively. No such net gains occurred in 1994. Income Taxes: The Company's effective tax rates during 1995, 1994, and 1993, were 29%, 27%, and 27%, respectively. The increase in the effective tax rate in 1995 as compared to 1994 and 1993, is primarily due to the deduction of French embezzlement losses in 1993 and the use of loss carryforwards and credits at Autotrol and its subsidiaries in 1993 and 1994. These tax benefits were not repeated in 1995. R&D tax credits and Foreign Sales Corporation (FSC) tax benefits have increased in 1994 and 1995. Liquidity and Capital Resources: At December 31, 1995, the Company had cash and cash equivalents of $4,361 and marketable securities of $26,307 versus $9,453 and $27,623, respectively, at December 31, 1994. The net decrease in cash, cash equivalents and marketable securities resulted primarily from capital expenditures and acquisitions increases exceeding the cash flows generated from operations in 1995. The current ratio decreased to 2.9 as of December 31, 1995 from 3.7 as of December 31, 1994. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." The effect of SFAS 115 was to increase marketable securities by $1,604 on investment with a cost of $26,019 in 1994. The current ratio increased to 3.7 as of December 31, 1994 compared to 3.3 as of December 31, 1993, primarily due to the increased levels of cash and marketable securities. Net cash provided from operations in 1995, 1994, and 1993 amounted to $6,569, $9,906, and $12,201, respectively. The Company's capital expenditures in 1995 were $12,568 compared to $3,435 in 1994 and $3,257 in 1993. During 1995, the Company purchased its previously-leased Milwaukee facility for $3,100 and invested $4,557 in the expansion of its Minnetonka facility. The Company believes that its current cash and investment position, its cash flow from operations, and amounts available from bank credit will be adequate to meet its anticipated cash needs for working capital, capital expenditures, and potential acquisitions during 1996 and 1997. 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. Factors Affecting Future Performance: The Company announced in December of 1995, an agreement in principle to merge with Desalination Systems, Inc. (DESAL) in a stock transaction valued at $30,000. The transaction is expected to add over $20,000 to Osmonics' 1996 sales. The Company believes that in most cases it has been and will be able to increase selling prices in response to increases in the cost of raw materials on a timely basis. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company will evaluate adaption of SFAS 123 in 1996. EX-99 3 INDEPENDENT AUDITORS' REPORT Osmonics, Inc. We have audited the consolidated financial statements of Osmonics, Inc. (the Company) as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 and have issued our report thereon dated February 9, 1996. Such financial statments and report are included in the Company's 1995 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. OSMONICS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands) Years Ended December 31, 1995, 1994 and 1993
Column A Column B Column C Column D Column E Additions Balance Charged Charged Balance at to to at Beginning Cost and Other End of Description of Period Expensed Accounts Deductions Period Year Ended December 31, 1995: Current Operations: Allowance for Doubtful Accounts $1,213 $ 21 $109 $ 216 $1,127 Warranty and Start-up Reserve $1,942 $1,002 $1,256 $1,688 Discontinued Operations: Allowance for Doubtful Accounts $ 46 $ 46 $ 0 Warranty Reserve $1,961 $ 4 $1,957 Reserve for Discontinued Operations $ 127 $ 127 $ 0 Year Ended December 31, 1994: Current Operations: Allowance for Doubtful Accounts $1,195 $ 50 $ 32 $1,213 Warranty and Start-up Reserve $1,921 $1,023 $1,002 $1,942 Discontinued Operations: Allowance for Doubtful Accounts $ 87 $ 41 $ 46 Warranty Reserve $1,972 $ 10 $1,961 Reserve for Discontinued Operations $ 240 $ 113 $ 127 Year Ended December 31, 1993: Current Operations: Allowance for Doubtful Accounts $ 707 $ 501 $ 13 $1,195 Warranty and Start-up Reserve $1,773 $1,018 $ 870 $1,921 Discontinued Operations: Allowance for Doubtful Accounts $ 149 $ 62 $ 87 Warranty Reserve $2,134 $ 162 $1,972 Reserve for Discontinued Operations $ 549 $ 309 $ 240 Uncollectible accounts charged against allowance. Actual warranty claims and start-up costs charged against reserve. Addition due to acquisition.
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