-----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, WAdn1/qIfvvUtuF8zUZQATw1q/LaJ/OjxiTFxjejMYVoKRydA1y75IPpyjXyIewV 34KRIm6mNlWRpM6nzJSFpQ== 0000075049-99-000008.txt : 19990330 0000075049-99-000008.hdr.sgml : 19990330 ACCESSION NUMBER: 0000075049-99-000008 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990329 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/A SEC ACT: SEC FILE NUMBER: 001-12714 FILM NUMBER: 99575579 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A /X/ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1998 OR Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to ---- ---- Commission File No. 1-12714 OSMONICS, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0955759 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 5951 CLEARWATER DRIVE, MINNETONKA, MN 55343 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 933-2277 N/A Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At February 28, 1999, 14,008,163 shares of the issuer's Common Stock, $0.01 par value, were outstanding. OSMONICS, INC. INDEX PART I. FINANCIAL INFORMATION PAGE ITEM I. FINANCIAL STATEMENTS Consolidated Statements of Operations - 2 For the Three and Six Months Ended June 30, 1998 (as restated) and 1997 Consolidated Balance Sheets - 3 June 30, 1998 (as restated) and December 31, 1997 Consolidated Statements of Cash Flows - 4 For the Six Months Ended June 30, 1998 (as restated) and 1997 Notes to Consolidated Financial Statements - 5-8 ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12 ITEM 5. A. ISO 9001 CERTIFICATION 13 B. ADVANCE NOTICE REQUIREMENT 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13 SIGNATURES 14 OSMONICS, INC. PART I FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS OSMONICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Data) Three Months Ended Six Months Ended June 30, June 30, -------------------- --------------- (As Restated) * (As Restated) * 1998 1997 1998 1997 ------ ------ ------ ------ Sales $47,353 $41,789 $89,503 $84,102 Cost of sales 31,908 24,931 57,951 50,895 ------ ------ ------ ------ Gross profit 15,445 16,858 31,552 33,207 Less: Selling, general and administrative 10,507 10,205 20,381 19,922 Research, development and engineering 2,519 2,773 4,847 5,559 Special charges 7,988 - 7,988 - ------ ------ ------ ------ Income (loss) from operations (5,569) 3,880 (1,664) 7,726 Other income (expense) (981) 23 (1,557) (78) ------ ------ ------ ------ Income (loss) from continuing operations before income taxes (6,550) 3,903 (3,221) 7,648 Income taxes (1,267) 1,310 (102) 2,621 ------ ------ ------ ------ Income (loss) from continuing operation (5,283) 2,593 (3,119) 5,027 Recovery on discontinued operations - - - 325 ------ ------ ------ ------ Net income (loss) $(5,283) $2,593 $(3,119) $5,352 ====== ====== ====== ====== Earnings per share - basic Income (loss) from continuing operations $ (0.38) $ 0.18 $ (0.22) $ 0.36 Net income $ (0.38) $ 0.18 $ (0.22) $ 0.38 Earnings per share _ assuming dilution Income (loss) from continuing operations $ (0.38) $ 0.18 $ (0.22) $ 0.35 Net income $ (0.38) $ 0.18 $ (0.22) $ 0.37 Average shares outstanding Basic 13,962 14,071 13,956 14,137 Assuming dilution 13,962 14,362 13,956 14,450 * See Restatement of Quarterly Financial Statements in notes to the condensed consolidated financial statements. OSMONICS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Data) June 30, December 31, 1998 1997 -------- -------- ASSETS (As Restated) * Current assets Cash and cash equivalents $ 3,899 $ 4,872 Marketable securities 15,632 17,004 Trade accounts receivable, net of allowance for doubtful accounts of $1,001 in 1998, and $888 in 1997 30,767 28,969 Inventories 34,391 35,228 Deferred tax assets 7,227 1,413 Other current assets 2,142 1,639 ------- ------- Total current assets 94,058 89,125 ------- ------- Property and equipment, at cost Land and land improvements 5,606 5,535 Building 30,304 29,278 Machinery and equipment 68,802 62,770 ------- ------- 104,712 97,583 Less accumulated depreciation (48,681) (42,550) ------- ------- 56,031 55,033 Other assets 51,369 20,325 ------- ------- Total assets $201,458 $164,483 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 12,960 $ 9,728 Notes payable and current portion of long-term debt 32,156 16,174 Other accrued liabilities 18,888 17,950 ------- ------- Total current liabilities 64,004 43,852 ------- ------- Long-term debt 33,819 13,792 Other liabilities 21 25 Deferred income taxes 4,296 4,439 Shareholders' equity Common stock, $0.01 par value Authorized -- 50,000,000 shares Issued -- 1998: 13,971,873 and 1997: 13,943,544 shares 140 140 Capital in excess of par value 20,612 20,261 Retained earnings 77,009 80,128 Unrealized gain on marketable securities 1,924 2,180 Foreign currency translation adjustments (367) (334) ------- ------- Total liabilities and shareholders' equity $201,458 $164,483 ======= ======= * See Restatement of Quarterly Financial Statements in notes to the condensed consolidated financial statements. OSMONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended June 30, 1998 1997 -------- -------- (As Restated) * Cash flows from operations: Net income (loss) $ (3,119) $ 5,352 Non-cash items included in net income: Depreciation and amortization 3,769 2,632 Deferred income taxes (2,602) 111 Gain on sale of investments (180) (560) Special charges 9,988 - Changes in assets and liabilities (net of business acquisitions) Accounts receivable 226 (1,057) Inventories and other current assets 939 3,450 Accounts payable and accrued liabilities (1,743) (5,884) ------- ------- Net cash provided by operations 7,278 4,044 ------- ------- Cash flows from investing activities: Business acquisitions (net of cash acquired including purchased R&D) (40,713) (10,203) Purchase of investments (457) (461) Sale of investments 1,615 1,251 Purchase of property and equipment (3,821) (3,498) Sales of property and equipment 110 57 Other (147) 86 ------- ------- Cash used in investing activities (43,413) (12,768) ------- ------- Cash flows from financing activities: Proceeds from notes payable and debt 37,000 12,284 Reduction of debt (2,156) (103) Issuance of common stock 351 545 Purchase of company stock - (5,249) ------- ------- Net cash provided by financing activities 35,195 7,477 ------- ------- Effect of exchange rate changes on cash (33) 270 Decrease in cash and cash equivalents (973) (977) Cash and cash equivalents - beginning of year 4,872 5,392 ------- ------- Cash and cash equivalents - end of quarter $ 3,899 $ 4,415 ======= ======= * See Restatement of Quarterly Financial Statements in notes to the condensed consolidated financial statements. OSMONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 1998, are not necessarily indicative of the results that may be expected for the full year 1998. These statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report to shareholders and Form 10-K for the year ended December 31, 1997. COMPREHENSIVE INCOME: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income which establishes standards for the reporting of comprehensive income and its components. The Company has the following components of comprehensive income: Six Months Ended June 30, 1998 1997 ------ ------ Net income (loss) $(3,119) $5,352 Other comprehensive income (loss), before tax: Foreign currency translation adjustments (33) (270) Unrealized gains/(losses) on securities (256) (572) ------ ------ Other comprehensive income (loss), before tax (289) (842) Income tax expense related to items of other comprehensive income (loss) (98) (286) ------ ------ Other comprehensive income (loss), net of tax (191) (556) ------ ------ Comprehensive income (loss) $(3,310) $4,796 ====== ====== SEGMENT INFORMATION In June 1997, The Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company believes the required segment information disclosure under SFAS No. 131 will be more comprehensive than previously provided, including expanded disclosure income statement and balance sheet items. The Statement is effective for fiscal years beginning after December 15, 1997; however, application is not required for interim periods in the initial year of its application. The Company adopted the Statement effective January 1, 1998. ACQUISITION OF COMPANIES: The Company announced during the first quarter of 1998 the acquisition for cash of all the equity interest in Micron Separations, Inc. (MSI) of Westborough, Massachusetts, for a total consideration of approximately $25,000. MSI develops, manufactures and markets microfilter membrane products for diagnostic laboratory and industrial use. The Company believes that these products are complementary to the cartridge filters Osmonics manufactures for the pharmaceutical, beverage and ultrapure water filtration markets. Also, the Company believes that MSI's line of diagnostic and laboratory membrane products will complement the Company's Poretics track-etch membrane and give Osmonics a broader portfolio of products to offer the laboratory and analytical testing market. MSI's products will be sold through existing Osmonics distribution channels. The revenues of MSI were less than $15,000 in each of the last three years. The acquisition was recorded under the purchase method of accounting. The Company announced during the second quarter of 1998 the acquisition for cash of all the equity interest in Membrex Corp. (Membrex) of Fairfield, New Jersey. The acquisition was approved by Membrex shareholders on April 15, 1998 and was recorded under the purchase method of accounting. Total consideration of the acquisition approximated $16,000 plus assumed net liabilities of approximately $3,000. Membrex sales in 1997 were less than $10 million and would not have had a material impact on Osmonic's earnings. Membrex, a 13-year-old, privately held company, designs and manufactures membrane products and fluid treatment systems for industrial customers. Applications include recycling machine tool coolant and cleaners, and minimizing oily waste water. Membrex has developed what the Company believes is the most hydrophilic ultrafiltration (UF) membrane on the market today. The patented, solvent-resistant membrane separates oil from water and recyclable cleaners at least five times faster than competitive products, without fouling. The technology allows service stations, repair facilities and manufacturing plants to cost-effectively clean oily parts, meet stricter environmental regulations and reuse valuable cleansing agents. Other potential markets for the membrane include high fouling applications in biotechnology, laboratory operations and chemical processes. To finance the acquisition, the Company expanded its revolving line of credit with a commercial bank to $35,000. Pro forma 1997 combined financial results of Osmonics, Inc., MSI and Membrex would be as follows: 1997: Osmonics MSI Membrex Combined ---- -------- ------ ------- -------- Sales $164,905 $ 10,038 $ 6,333 $181,276 Income from operations 13,359 244 (1,920) 11,683 Net income 9,793 (1,233) (3,237) 5,323 Net income per share - assuming dilution $0.68 $0.37 1997 financial results of MSI include $3,200 of non-recurring charges associated with the settlement of a patent infringement lawsuit. The pro forma combined impact on financial results for first and second quarter of 1998 was not material. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS: Subsequent to the issuance of the Company's June 30, 1998 condensed consolidated financial statements, the Securities and Exchange Commission (SEC) issued new guidance on its views regarding the valuation methodology used in determining purchased in-process technology expensed on the date of acquisition. The Company has not been contacted by the SEC; however, the Company has modified its methods used to value the purchased in-process technology related to the acquisitions of Micron Separations, Inc. and Membrex Corporation. The revised valuation is based on methods prescribed in a letter dated September 9, 1999 from the SEC on purchased in-process technology sent to the American Institute of Certified Public Accountants. The letter sets forth the SEC's views regarding the valuation methodology to be used in allocating a portion of the purchase price to acquired in-process research and development at the date of acquisition. As a result of the revised valuations, the Company's financial statements for the period ended June 30, 1998 have been restated to reduce the amount of purchase price allocated to in- process technology by $17,718 and to increase intangible assets by $17,718. The change had no impact on net cash flows from operations. The following table outlines the revisions to previously published condensed consolidated financial statements (in thousands, except per share amounts): Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 As Previously As Previously Reported As Restated Reported As Restated -------- ----------- -------- ----------- Selling, general and administrative $10,359 $10,507 $20,233 $20,381 Special charges 25,706 7,988 25,706 7,988 Income (loss) from Operations (23,139) (5,569) (19,234) (1,664) Income (loss) from continuing operations before income taxes (24,120) (6,550) (20,791) (3,221) Income taxes (5,303) (1,267) (4,138) (102) Income (loss) from continuing operations (18,817) (5,283) (16,653) (3,119) Net income (loss) (18,817) (5,283) (16,653) (3,119) EPS Basic $ (1.35) $ (0.38) $ (1.19) $ (0.22) EPS Diluted $ (1.35) $ (0.38) $ (1.19) $ (0.22) At June 30, 1998 As Previously Reported As Restated ----------- ----------- Other assets $ 37,835 $ 51,369 Total assets 187,924 201,458 Shareholder's equity 85,784 99,318 Total liabilities and shareholders' equity 187,924 201,458 MANAGEMENTS DISCUSSION AND ANALYSIS OF IN-PROCESS R&D CHARGES: The In-Process R&D acquired with the acquisition of Micron Separations, Inc. was determined to have a fair value of $1.9 million based on the Percent Complete Method. Out of nine on-going projects, there are three major programs involving development of specialized membranes for microporous filtration, diagnostics and genetic research. The first major project, judged to be 20% complete at acquisition, could result in a class of membranes that could replace a sole source product at approximately half the cost. If successful, this will generate 5-10% margin improvement on products assembled with this membrane. A patent has since been applied for and the savings are expected to accrue in third quarter 1999. The second major project, 40% complete at acquisition, has also resulted in a patent application. This development allows the tailoring of membrane to provide unique surface characteristics for biotech, diagnostic and filtration applications. A patent disclosure has also been filed on results of a companion project which successfully allows the treatment of certain membranes to insure their utility in applications that require membrane wettability. Commercialization of this project is expected by mid-1999. The third major project, 50% complete at acquisition, resulted in a competitive membrane useful in genetic research and protein analysis. It is expected to be commercialized in late 1998. The other six projects are expected to result in new or improved products, and an improved production process that will reduce product costs. No material changes from historical pricing, margin and expense levels are anticipated. A risk-adjusted discount rate of 18% was applied to the projected cash flows to determine the fair value of the In-Process R&D. Less than $1 million of funding is projected to complete these projects, including capital expenditures. The fair value of the In-Process R&D acquired with Membrex was valued at $4.3 million by the Percent Complete Method. Two products contributed to the total value: 1) WasteWizard fluid separation units valued at $3.2 million, and 2) Mini WasteWizard units valued at $1.1 million. The WasteWizard unit is an ultrafiltration system used for recycling of various aqueous based fluids including hard surface cleaners and metal cutting fluids. The new product could provide significant process cost savings by minimizing chemical usage and wastewater generation. The Mini WasteWizard unit is a smaller version of the of the WasteWizard unit with a process capacity of less than 50 gallons per day. Both are protected by 5 U.S. patents pending. At the time of the acquisition, the WasteWizard unit and Mini WasteWizard unit were 85% and 50% complete, respectively. The WasteWizard unit is scheduled to be completed and introduced in Q2 1999 with full sales impact anticipated in Q3 1999. The Mini WasteWizard is scheduled for field trials through Q4 1999 and market introduction in Q1 2000. Less than $1 million of funding is projected to complete these projects, including capital expenditures for molds and other tooling. No material changes from historical pricing, margin and expense levels are anticipated. A risk-adjusted discount rate of 20% was applied to the projected cash flows to determine the fair value of the In-Process R&D. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except share data) The Company has restated its financial statements as disclosed in the notes to the financial statements. As an aid to understanding the Company's operating results, the following table shows the percentage of sales that each income statement item represents for the three months and six months ended June 30, 1998 and 1997. Percent of Sales Percent of Sales ---------------- ---------------- Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1998 1997 1998 1997 ---- ---- ---- ---- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 67.4 59.7 64.7 60.5 ----- ----- ----- ----- Gross profit 32.6 40.3 35.3 39.5 Selling, general and administrative 22.2 24.4 22.8 23.7 Research, development and engineering 5.3 6.6 5.4 6.6 Special charges 16.9 - 8.9 - ----- ----- ----- ----- Operating expenses 44.4 31.0 37.1 30.3 Income (loss) from operations (11.8) 9.3 (1.8) 9.2 Other income (expense) (2.0) - (1.7) (0.1) ----- ----- ----- ----- Income (loss) from Continuing operations before income taxes (13.8) 9.3 (3.5) 9.1 Income taxes (2.7) 3.1 - 3.1 ----- ----- ----- ----- Income (loss) from continuing operations (11.1) 6.2 (3.5) 6.0 Recovery on discontinued operations - - - 0.4 ----- ----- ----- ----- Net income (11.1)% 6.2% (3.5)% 6.4% ===== ===== ===== ===== SALES Sales for the second quarter ended June 30, 1998 of $47,353 increased 13.3% from sales for the second quarter of 1997. Year- to-date 1998 sales through June increased 6.4% over the corresponding 1997 level. Sales of replaceable products increased to 53% and equipment decreased to 47% of second quarter sales. Comparing same business activity before acquisitions, sales were 6.3% higher in second quarter of 1998 than second quarter of 1997 and were 8.6% over sales for the first quarter of 1998. This increase in sales was primarily the result of several large capital equipment orders being shipped during the second quarter. Domestic market pricing is very competitive. International sales have been down in the Asia/Pacific and Latin America markets; however, Euro/Africa sales were strong enough to offset the Asia/Pacific weakness. GROSS MARGIN Gross margin for the second quarter of 1998 was 32.6% versus 40.3% for the corresponding period in 1997. The gross margin for the six months ended June 30 was 35.3% in 1998 compared to 39.5% in 1997. In the second quarter of 1998, the Company recorded a special charge of $2.0 million for slow moving inventory. This charge accounted for 4.2 and 2.2 percentage points of the second quarter 1998 and year-to-date 1998 gross margin declines, respectively. Gross margins for the second quarter 1998 were also negatively affected by several large capital equipment sales, lower utilization rates at several production facilities and general pricing pressures in most markets. OPERATING EXPENSES Operating expenses were recorded at 44.4% of sales for the second quarter of 1998 compared to 31.0% in the second quarter of 1997. In the second quarter of 1998, the Company recorded a special charge of $7,988 as operating expense (see Special Charge discussion below). Operating expenses, excluding special charges, decreased to 27.5% in the second quarter of 1998 from 31.0% in the second quarter of 1997. On a year-to-date basis, excluding special charges, operating expenses were 28.2% for the six months ended June 30, 1998 versus 30.3% for the same period last year. The second quarter and year-to-date improvement in operating expenses is the result of continued expense control efforts. SPECIAL CHARGES * In second quarter 1998, the Company recorded special charges of $9,988 ($7,569 net-of-tax or $0.54 per share assuming dilution). Charges include a $6,222 charge to operating expense for purchased research and development related to the acquisitions of Micron Separations, Inc. ($1,902) and Membrex Corp. ($4,320) and a $2,000 charge to cost of sales for slow moving inventory. The special charges also include operating expense charges of $875 for corporate restructuring and consolidation of operations, and $891 for re-engineering costs and write-downs of assets in connection with the Company's implementation of a global information system. The special charges are summarized below: In-process R&D * $ 6,222 Corporate restructuring 875 SAP / Re-engineering costs 891 Slow moving inventory 2,000 ------- Gross special charges $ 9,988 Less slow moving inventory in COS (2,000) ------- Special charge in Operating Expense $ 7,988 ======= * See Restatement of Quarterly Financial Statements in notes to the condensed consolidated financial statements. OTHER EXPENSE Other expense increased by approximately $1,000 in the second quarter of 1998 versus the same period for 1997. The increase is primarily the result of an increase in interest expense of $375 and $225 for the additional borrowing of $20,000 and $18,000 for the acquisitions of Micron Separations, Inc. during the first quarter of 1998 and Membrex Corp. during the second quarter of 1998. Also, gains recorded on the sale of investments during the second quarter of 1998 decreased $485 in comparison to the same period in 1997. INCOME TAXES The effective tax rate for the six months ended June 30, 1998 was 3.2%. This rate represents a decrease from the 31.7% rate incurred for calendar year 1997, due primarily to the non- deductibility of the Micron Separations, Inc. in-process R&D that was written off in second quarter 1998 and to lower R&D tax credits. Under purchase accounting for a nontaxable business combination, the Micron Separations, Inc. purchased research and development special charge of $1,902 was expensed on a gross basis (not tax-effected). RECOVERY ON DISCONTINUED OPERATIONS The Company recognized $325 ($0.02 per share assuming dilution) in after tax income in the first quarter of 1997 from a reduction in the reserve for discontinued operations from the Autotrol merger. There was no similar recovery in 1998. NET INCOME (LOSS) Net income (loss) for the quarter ended June 30, 1998 was $(5,283). Excluding special charges, net income was $2,400 versus $2,593 for the quarter ended June 30, 1997. Net income per common share assuming dilution for the quarter was $(0.38) or $0.17 excluding special charges, versus $0.18 for the same period last year. Year-to-date net income (loss) was $(3,119) or $4,564 excluding special charges, versus $5,352 for the same period last year. Net income per common share assuming dilution year-to-date was $(0.22) or $0.32 excluding special charges, versus $0.37 in 1997. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company had cash, cash equivalents and marketable securities of $19,531 versus $21,876 at December 31, 1997. The current ratio was 1.5 at June 30, 1998 as compared to 2.0 at year end 1997. The Company's long-term debt increased from $13,792 at December 31, 1997 to $33,819 at June 30, 1998. This increase was the result of entering into a new $20,000 long-term loan from an insurance company in March. The company's current debt increased from $16,174 at December 31, 1997 to $32,156 at June 30, 1998. The increase was the result of the Company using its revolving line of credit to fund the Membrex Corp. acquisition during the second quarter. The Company believes that its current cash and investments position, its cash flow from operations, and amounts available from bank credit will be adequate to meet its anticipated cash needs for working capital, capital expenditures, and potential acquisitions during the foreseeable future. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act provides a safe harbor for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed with the Securities and Exchange Commission (as well as information included in statements made or to be made by the Company) contains statements that are forward looking. Such statements may relate to plans for future expansion, business acquisition and development activities, capital spending, financing, or the effects of regulation and competition. Such information involves important risks and uncertainties that could significantly affect results in the future. Such results may differ from those expressed in any forward-looking statements made by the Company. These risks and uncertainties include, but are not limited to, those relating to product development, computer systems development, dependence on existing management, global economic and market conditions, changes in federal or state laws, and revisions in accounting industry methodology. OSMONICS, INC. PART II OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on May 13, 1998. The following members were elected to the Company's Board of Directors to hold office for the ensuing three years: Nominee In Favor Withheld ------- -------- -------- William Eykamp 11,771,260 250,754 Michael L. Snow 11,770,165 251,849 R. Carol Spatz 11,776,547 245,467 Also, the matter of amending the Osmonics 1993 Stock Option and Compensation Plan to increase the shares reserved from 300,000 to 800,000 was approved by the shareholders. Vote results were as follows: In Favor Withheld Abstain -------- -------- ------- Amend 1993 Stock Option and Compensation Plan 9,595,493 2,347,24 179,280 Item 5. OTHER INFORMATION A. ISO 9001 Certification The Company announced that its Minnetonka Operation has received ISO 9001 Certification. The operation is Osmonics' worldwide headquarters and primary design and manufacturing facility for filters, membrane elements, pumps, and machines used in fluid purification and separation. The Certificate of Registration issued by SGS International Certification Services, Inc., Rutherford, New Jersey, certifies that the Osmonics Quality Management System followed by the facility's employees conforms to ANSI-ASCQ-9001/ISO 9001. ISO 9001 is an internationally recognized quality certification program which originated with the International Organization for Standardization in Geneva, Switzerland. It is administered and audited by accredited registrars throughout the world. ISO 9001 is a standard that covers over 20 elements in a quality system that includes design, development, manufacturing, installation, and servicing activities. The registrars establish that management is involved in the quality system and that detailed procedures and instructions are documented for all operations within the company that affect quality and that employees are trained to carry out every operation. An on-site audit of the complete Quality System is then conducted to verify ISO 9001 compliance. B. Advance Notice Requirement Discretionary Proxy Voting Authority / Shareholder Proposals On May 21, 1998 the Securities and Exchange Commission adopted an amendment to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934. The amendment to Rule 14a-4(c-1) governs the Company's use of its discretionary proxy voting authority with respect to a shareholder proposal which the shareholder has not sought to include in the Company's proxy statement. The new amendment provides that if a proponent of a proposal fails to notify the company at least 45 days prior to the month and day of mailing of the prior year's proxy statement, then the management proxies will be allowed to use their discretionary voting authority when the proposal is raised at the meeting, without any discussion of the matter in the proxy statement. With respect to the Company's 1999 Annual Meeting of Shareholders, if the Company is not provided notice of a shareholder proposal, which the shareholder has not previously sought to include in the Company's proxy statement, by February 20, 1999, the management proxies will be allowed to use their discretionary authority as outlined above. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) (27) Financial Data Schedule (b) During the quarter ended June 30, 1998 the Registrant did not file a Form 8-K report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: March 29, 1999 -------------- OSMONICS, INC. ---------------------------------- (Registrant) /s/ L. Lee Runzheimer ------------------------------------- L. Lee Runzheimer Chief Financial Officer /s/ Howard W. Dicke ------------------------------------- Howard W. Dicke Treasurer and Vice President Corporate Development /s/ D. Dean Spatz ------------------------------------- D. Dean Spatz Chief Executive Officer 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. 6-MOS DEC-31-1998 JUN-30-1998 3,899 15,632 31,768 1,001 34,391 94,058 104,712 48,681 201,458 64,004 33,819 0 0 140 99,178 201,458 89,503 89,503 57,951 57,951 33,216 0 1,557 (3,221) (102) (3,119) 0 0 0 (3,119) ($0.22) ($0.22)
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