-----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, RU8U+DmEOSdN26D9ukE+XNn/rXxmlqcJPP0S2wzcYhw4ggF2zpcco/8BoKa17i/O fPHxwC4QYY3zvEi+kp9e7Q== 0000075049-98-000012.txt : 19980817 0000075049-98-000012.hdr.sgml : 19980817 ACCESSION NUMBER: 0000075049-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 001-12714 FILM NUMBER: 98688269 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-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended JUNE 30, 1998 OR / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 1-12714 OSMONICS, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0955759 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5951 CLEARWATER DRIVE MINNETONKA, MINNESOTA 55343 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 933-2277 NOT APPLICABLE Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes ___X___ No ______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At July 31, 1998, 13,982,102 shares of the issuer's Common Stock, $0.01 par value, were outstanding. OSMONICS, INC. INDEX PAGE(S) PART I. FINANCIAL INFORMATION ------- ITEM I. FINANCIAL STATEMENTS Consolidated Statements of Operations for the three and six months ended June 30, 1998 and 1997 2 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 4 Notes to Consolidated Financial Statements 5 ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-9 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9 ITEM 5. A. ACQUISITION OF COMPANY 10 B. ISO 9001 CERTIFICATION 10 C. ADVANCE NOTICE REQUIREMENT 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11 SIGNATURES 12 OSMONICS, INC. PART I FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS OSMONICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars In Thousands, Except Per Share Data) (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- -------- -------- -------- Sales $ 47,353 $ 41,789 $ 89,503 $ 84,102 Cost of sales 31,908 24,931 57,951 50,895 -------- -------- -------- -------- Gross profit 15,445 16,858 31,552 33,207 Less: Selling, general and administrative 10,359 10,205 20,233 19,922 Research, development and engineering 2,519 2,773 4,847 5,559 Special charges 25,706 - 25,706 - -------- -------- -------- -------- Income (loss) from operations (23,139) 3,880 (19,234) 7,726 Other income (expense) (981) 23 (1,557) (78) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (24,120) 3,903 (20,791) 7,648 Income taxes (5,303) 1,310 (4,138) 2,621 -------- -------- -------- -------- Income (loss) from continuing operations (18,817) 2,593 (16,653) 5,027 Recovery on discontinued operations - - - 325 -------- -------- -------- -------- Net income (loss) $(18,817) $ 2,593 $(16,653) $ 5,352 ======== ======== ======== ======== Earnings per share - basic Income (loss) from continuing operations $(1.35) $0.18 $(1.19) $0.36 Net income $(1.35) $0.18 $(1.19) $0.38 Earnings per share - assuming dilution Income (loss) from continuing operations $(1.35) $0.18 $(1.19) $0.35 Net income $(1.35) $0.18 $(1.19) $0.37 Average shares outstanding Basic 13,962 14,071 13,956 14,137 Assuming dilution 13,962 14,362 13,956 14,450 OSMONICS, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Share Data) (Unaudited) JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ ASSETS Current assets Cash and cash equivalents $ 3,899 $ 4,872 Marketable securities 15,632 17,004 Trade accounts receivable, net of allowance for doubtful accounts of $1,001 in 1998, and $888 in 1997 30,767 28,969 Inventories 34,391 35,228 Deferred tax assets 7,227 1,413 Other current assets 2,142 1,639 -------- -------- Total current assets 94,058 89,125 -------- -------- Property and equipment, at cost Land and land improvements 5,606 5,535 Building 30,304 29,278 Machinery and equipment 68,802 62,770 -------- -------- 104,712 97,583 Less accumulated depreciation (48,681) (42,550) -------- -------- 56,031 55,033 Other assets 37,835 20,325 -------- -------- Total assets $187,924 $164,483 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 12,960 $ 9,728 Notes payable and current portion of long-term debt 32,156 16,174 Other accrued liabilities 18,888 17,950 -------- -------- Total current liabilities 64,004 43,852 -------- -------- Long-term debt 33,819 13,792 Other liabilities 21 25 Deferred income taxes 4,296 4,439 Shareholders' equity Common stock, $0.01 par value Authorized -- 50,000,000 shares Issued -- 1998: 13,971,873 and 1997: 13,943,544 shares 140 140 Capital in excess of par value 20,612 20,261 Retained earnings 63,475 80,128 Unrealized gain on marketable securities 1,924 2,180 Foreign currency translation adjustments (367) (334) -------- -------- Total liabilities and shareholders' equity $187,924 $164,483 ======== ======== OSMONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) (Unaudited) SIX MONTHS ENDED JUNE 30, 1998 1997 -------- -------- CASH FLOWS FROM OPERATIONS: Net income (loss) $(16,653) $ 5,352 Non-cash items included in net income: Depreciation and amortization 3,621 2,632 Deferred income taxes (6,638) 111 Gain on sale of investments (180) (560) Special charges 27,706 - Changes in assets and liabilities net of business acquisitions) Accounts receivable 226 (1,057) Inventories and other current assets 939 3,450 Accounts payable and accrued liabilities (1,743) (5,884) -------- -------- Net cash provided by operations 7,278 4,044 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (net of cash acquired including purchased R&D) (40,713) (10,203) Purchase of investments (457) (461) Sale of investments 1,615 1,251 Purchase of property and equipment (3,821) (3,498) Sales of property and equipment 110 57 Other (147) 86 -------- -------- Cash used in investing activities (43,413) (12,768) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and debt 37,000 12,284 Reduction of debt (2,156) (103) Issuance of common stock 351 545 Purchase of company stock - (5,249) -------- -------- Net cash provided by financing activities 35,195 7,477 -------- -------- Effect of exchange rate changes on cash (33) 270 Decrease in cash and cash equivalents (973) (977) Cash and cash equivalents - beginning of year 4,872 5,392 -------- -------- Cash and cash equivalents - end of quarter $ 3,899 $ 4,415 ======== ======== OSMONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands) The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which establishes standards for the reporting of comprehensive income and its components. The Company has the following components of comprehensive income: SIX MONTHS ENDED JUNE 30, 1998 1997 -------- -------- Net income (loss) $(16,653) $ 5,352 OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX: Foreign currency translation adjustments (33) (270) Unrealized gains/(losses) on securities: Unrealized holding losses arising during period (436) (1,132) Less: reclassified adjustment for gains included in net income (loss) 180 (256) 560 (572) ---- ---- ----- ---- Other comprehensive income (loss), before tax (289) (842) Income tax expense related to items of other comprehensive income (loss) (98) (286) ------ ----- Other comprehensive income (loss), net of tax (191) (556) ------- -------- Comprehensive income (loss) $(16,844) $ 4,796 ======== ======== Operating results for the three months and six months ended June 30, 1998, are not necessarily indicative of the results that may be expected for the full year 1998. These statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report to shareholders and Form 10-K for the year ended December 31, 1997. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars In Thousands, Except Share Data) As an aid to understanding the Company's operating results, the following table shows the percentage of sales that each income statement item represents for the three months and six months ended June 30, 1998 and 1997. PERCENT OF SALES PERCENT OF SALES THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ------ ------ ------ ------ Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 67.4 59.7 64.7 60.5 ------ ------ ------ ------ Gross profit 32.6 40.3 35.3 39.5 Selling, general and administrative 21.9 24.4 22.6 23.7 Research, development and engineering 5.3 6.6 5.4 6.6 Special charges 54.3 - 28.7 - ------ ------ ------ ------ Operating expenses 81.5 31.0 56.7 30.3 Income (loss) from operations (48.9) 9.3 (21.5) 9.2 Other income (expense) (2.0) - (1.7) (0.1) ------ ------ ------ ------ Income (loss) from continuing operations before income taxes (50.9) 9.3 (23.2) 9.1 Income taxes (11.2) 3.1 (4.6) 3.1 ------ ------ ------ ------ Income (loss) from continuing operations (39.7) 6.2 (18.6) 6.0 Recovery on discontinued operations - - - 0.4 ------ ------ ------ ------ Net income (39.7)% 6.2% (18.6)% 6.4% ====== ====== ====== ====== SALES Sales for the second quarter ended June 30, 1998 of $47,353 increased 13.3% from sales for the second quarter of 1997. Year-to-date 1998 sales through June increased 6.4% over the corresponding 1997 level. Sales of replaceable products increased to 53% and equipment decreased to 47% of second quarter sales. Comparing same business activity before acquisitions, sales were 6.3% higher in second quarter of 1998 than second quarter of 1997 and were 8.6% over sales for the first quarter of 1998. This increase in sales was primarily the result of several large capital equipment orders being shipped during the second quarter. Domestic market pricing is very competitive. International sales have been down in the Asia/Pacific and Latin America markets; however, Euro/Africa sales were strong enough to offset the Asia/Pacific weakness. GROSS MARGIN Gross margin for the second quarter of 1998 was 32.6% versus 40.3% for the corresponding period in 1997. The gross margin for the six months ended June 30 was 35.3% in 1998 compared to 39.5% in 1997. In the second quarter of 1998, the Company recorded a special charge of $2.0 million for slow moving inventory. This charge accounted for 4.2 and 2.2 percentage points of the second quarter 1998 and year-to-date 1998 gross margin declines, respectively. Gross margins for the second quarter 1998 were also negatively affected by several large capital equipment sales, lower utilization rates at several production facilities and general pricing pressures in most markets. OPERATING EXPENSES Operating expenses were recorded at 81.5% of sales for the second quarter of 1998 compared to 31.0% in the second quarter of 1997. In the second quarter of 1998, the Company recorded a special charge of $25.7 million as operating expense (see Special Charge discussion below). Operating expenses, excluding special charges, decreased to 27.2% in the second quarter of 1998 from 31.0% in the second quarter of 1997. On a year-to-date basis, excluding special charges, operating expenses were 28.0% for the six months ended June 30, 1998 versus 30.3% for the same period last year. The second quarter and year-to-date improvement in operating expenses is the result of continued expense control efforts. SPECIAL CHARGES In second quarter 1998, the Company recorded special charges of $27,706 ($21,217 net-of-tax or $1.52 per share assuming dilution). Charges include a $23,940 charge to operating expense for purchased research and development related to the acquisitions of Micron Separations, Inc. ($8,620) and Membrex Corp. ($15,320) and a $2,000 charge to cost of sales for slow moving inventory. The special charges also include operating expense charges of $875 for corporate restructuring and consolidation of operations, and $891 for re-engineering costs and write-downs of assets in connection with the Company's implementation of a global information system. The special charges are summarized below: In-process R&D $ 23,940 Corporate restructuring 875 SAP / Re-engineering costs 891 Slow moving inventory 2,000 -------- Gross special charges $ 27,706 Less slow moving inventory - in COS (2,000) -------- Special charge in Operating Expense $ 25,706 OTHER EXPENSE Other expense increased by approximately $1,000 in the second quarter of 1998 versus the same period for 1997. The increase is primarily the result of an increase in interest expense of $375 and $225 for the additional borrowing of $20,000 and $18,000 for the acquisitions of Micron Separations, Inc. during the first quarter of 1998 and Membrex Corp. during the second quarter of 1998. Also, gains recorded on the sale of investments during the second quarter of 1998 decreased $485 in comparison to the same period in 1997. INCOME TAXES The effective tax rate for the six months ended June 30, 1998 was 34.0% based on the forecast for the full year. This rate represents an increase over the 31.7% rate incurred for calendar year 1997, due primarily to lower R&D tax credits. Under purchase accounting for a nontaxable business combination, the Micron Separations, Inc. purchased research and development special charge of $8,620 was expensed on a gross basis (not tax-effected). RECOVERY ON DISCONTINUED OPERATIONS The Company recognized $325 ($0.02 per share assuming dilution) in after tax income in the first quarter of 1997 from a reduction in the reserve for discontinued operations from the Autotrol merger. There was no similar recovery in 1998. NET INCOME Net income for the quarter ended June 30, 1998 was $(18,817). Excluding special charges, net income was $2,400 versus $2,593 for the quarter ended June 30, 1997. Net income per common share assuming dilution for the quarter was $(1.35) or $0.17 excluding special charges, versus $0.18 for the same period last year. Year-to-date net income was $(16,653) or $4,564 excluding special charges, versus $5,352 for the same period last year. Net income per common share assuming dilution year-to-date was $(1.19) or $0.32 excluding special charges, versus $0.37 in 1997. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company had cash, cash equivalents and marketable securities of $19,531 versus $21,876 at December 31, 1997. The current ratio was 1.5 at June 30, 1998 as compared to 2.0 at year end 1997. The Company's long-term debt increased from $13,792 at December 31, 1997 to $33,819 at June 30, 1998. This increase was the result of entering into a new $20,000 long-term loan from an insurance company in March. The company's current debt increased from $16,174 at December 31, 1997 to $32,156 at June 30, 1998. The increase was the result of the Company using its revolving line of credit to fund the Membrex Corp. acquisition during the second quarter. The Company believes that its current cash and investments position, its cash flow from operations, and amounts available from bank credit will be adequate to meet its anticipated cash needs for working capital, capital expenditures, and potential acquisitions during the foreseeable future. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed with the Securities and Exchange Commission (as well as information included in statements made or to be made by the Company) contains statements that are forward looking. Such statements may relate to plans for future expansion, business acquisition and development activities, capital spending, financing, or the effects of regulation and competition. Such information involves important risks and uncertainties that could significantly affect results in the future. Such results may differ from those expressed in any forward-looking statements made by the Company. These risks and uncertainties include, but are not limited to, those relating to product development, computer systems development, dependence on existing management, global economic and market conditions, and changes in federal or state laws. OSMONICS, INC. PART II OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on May 13, 1998. The following members were elected to the Company's Board of Directors to hold office for the ensuing three years: Nominee In Favor Withheld ------- -------- -------- William Eykamp 11,771,260 250,754 Michael L. Snow 11,770,165 251,849 R. Carol Spatz 11,776,547 245,467 Also, the matter of amending the Osmonics 1993 Stock Option and Compensation Plan to increase the shares reserved from 300,000 to 800,000 was approved by the shareholders. Vote results were as follows: In Favor Withheld Abstain -------- -------- ------- Amend 1993 Stock Option and Compensation Plan 9,595,493 2,347,241 79,280 Item 5. OTHER INFORMATION (Dollars in Thousands) A. ACQUISITION OF COMPANY The Company announced during the second quarter of 1998 the acquisition for cash of all the equity interest in Membrex Corp. ("Membrex") of Fairfield, New Jersey. The acquisition was approved by Membrex shareholders on April 15, 1998 and was recorded under the purchase method of accounting. Total consideration of the acquisition approximated $16,000 plus assumed debt of approximately $2,000. Membrex sales in 1997 were less than $10 million and would not have had a material impact on Osmonic's earnings. Membrex, a 13-year-old, privately held company, designs and manufactures membrane products and fluid treatment systems for industrial customers. Applications include recycling machine tool coolant and cleaners, and minimizing oily waste water. Membrex has developed what the Company believes is the most hydrophilic ultrafiltration (UF) membrane on the market today. The patented, solvent-resistant membrane separates oil from water and recyclable cleaners at least five times faster than competitive products, without fouling. The technology allows service stations, repair facilities and manufacturing plants to cost-effectively clean oily parts, meet stricter environmental regulations and reuse valuable cleansing agents. Other potential markets for the membrane include high fouling applications in biotechnology, laboratory operations and chemical processes. To finance the acquisition, the Company expanded its revolving line of credit with a commercial bank to $35,000. B. ISO 9001 CERTIFICATION The Company announced that its Minnetonka Operation has received ISO 9001 Certification. The operation is Osmonics' worldwide headquarters and primary design and manufacturing facility for filters, membrane elements, pumps, and machines used in fluid purification and separation. The Certificate of Registration issued by SGS International Certification Services, Inc., Rutherford, New Jersey, certifies that the Osmonics Quality Management System followed by the facility's employees conforms to ANSI-ASCQ-9001/ISO 9001. ISO 9001 is an internationally recognized quality certification program which originated with the International Organization for Standardization in Geneva, Switzerland. It is administered and audited by accredited registrars throughout the world. ISO 9001 is a standard that covers over 20 elements in a quality system that includes design, development, manufacturing, installation, and servicing activities. The registrars establish that management is involved in the quality system and that detailed procedures and instructions are documented for all operations within the company that affect quality - and that employees are trained to carry out every operation. An on-site audit of the complete Quality System is then conducted to verify ISO 9001 compliance. C. ADVANCE NOTICE REQUIREMENT Discretionary Proxy Voting Authority / Shareholder Proposals On May 21, 1998 the Securities and Exchange Commission adopted an amendment to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934. The amendment to Rule 14a-4(c-1) governs the Company's use of its discretionary proxy voting authority with respect to a shareholder proposal which the shareholder has not sought to include in the Company's proxy statement. The new amendment provides that if a proponent of a proposal fails to notify the company at least 45 days prior to the month and day of mailing of the prior year's proxy statement, then the management proxies will be allowed to use their discretionary voting authority when the proposal is raised at the meeting, without any discussion of the matter in the proxy statement. With respect to the Company's 1999 Annual Meeting of Shareholders, if the Company is not provided notice of a shareholder proposal, which the shareholder has not previously sought to include in the Company's proxy statement, by February 20, 1999, the management proxies will be allowed to use their discretionary authority as outlined above. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) (27) Financial Data Schedule (b) During the quarter ended June 30, 1998 the Registrant did not file a Form 8-K report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 1998 ----------------- OSMONICS, INC. ------------------------------------- (Registrant) /s/ L. Lee Runzheimer ------------------------------------- L. Lee Runzheimer Chief Financial Officer /s/ Howard W. Dicke ------------------------------------- Howard W. Dicke Treasurer and Vice President Corporate Development /s/ D. Dean Spatz ------------------------------------- D. Dean Spatz Chief Executive Officer EX-27 2
5 This schedule contains summary financial information extracted from Form 10-Q for the quarter ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 USD 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 3,899 15,632 31,768 1,001 34,391 94,058 104,712 48,681 187,924 64,004 33,819 0 0 140 85,644 187,924 89,503 89,503 57,591 57,591 50,786 0 1,557 (20,791) (4,138) (16,653) 0 0 0 (16,653) (1.19) (1.19)
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